Growth of Internet commerce as well as social media sites have helped fuel demand for faster Internet services in the Philippines. (AFP)

Growth of Internet commerce as well as social media sites have helped fuel demand for faster Internet services in the Philippines. (AFP)

by Krista Angela M. Montealegre, National Correspondent

Hopes for a third player in the market hungry for faster Internet services were dashed when Philippine Long Distance Telephone Co. (PLDT) and Globe Telecom, Inc. bought out San Miguel Corp.’s (SMC) Vega Telecom, Inc. in a deal that preserved the duopoly in the telecommunications sector.
The centerpiece of the $1.5-billion transaction was the highly coveted 700-Megahertz (MHz) spectrum, which is known for its wide coverage, in-building penetration, and its compatibility with 4G telecoms services. The diversified conglomerate was using that prized asset to lure a foreign partner for its startup telco venture until talks with Australia’s Telstra Corporation Limited collapsed in March.
Consumers have been clamoring for better Internet connectivity, hoping that a new entrant will pressure the telcos to improve their services. The Philippines has one of the slowest Internet speeds in Asia, placing 21st out of 22 countries, according to analytics firm Ookla.
The deal, which PLDT and Globe had said would significantly improve Internet and data services, is facing scrutiny from the newly formed antitrust agency Philippine Competition Commission (PCC). But with SMC selling out its telco assets to the incumbents, can a viable third player still enter the highly competitive market?

A former monopoly, the Philippine Long Distance Telephone Co. is the leading telecommunications company in the country. (AFP)

A former monopoly, the Philippine Long Distance Telephone Co. is the leading telecommunications company in the country. (AFP)

High barrier of entry?

Experts believe it may be difficult for a challenger to compete for now, maybe even for good, unless a drastic change in policy happens.
“Any third player will have a hard time taking market share away from Smart and Globe. Sun Cellular had to shell out huge amounts of money just to enter. You’re not really creating a new user base. You have to steal market share from existing telecom players,” Alexander Adrian O. Tiu, senior equity analyst at AB Capital Securities, Inc., said in a telephone interview.
“[T]he duopoly now effectively controls nearly all mobile spectrum, the fractured bits of spectrum they are ‘returning’ are insufficient for a new entrant and, thus, restrict competition,” Winthrop Yap Yu, chairman of Internet Society Philippines, said in an e-mail.
After taking over the 700-Mhz spectrum network from San Miguel, PLDT and Globe had said they will return certain other radio frequencies to the government, allowing for a new competitor to begin operations.
Mary Grace Mirandilla-Santos, a research fellow at regional information and communication technology policy think-tank LIRNEasia, however, noted that what the incumbents gave up are “not optimal for this day and age of mobile broadband.”
The three-way deal highlighted the failure of the National Telecommunications Commission (NTC), tasked to regulate the telecoms industry, in managing spectrum allocation — deemed one of its most important functions, Ms. Santos said. Prior to the deal, SMC cornered 90% of the 700-MHz frequency, which has remained idle until the buyout.
The spectrum, which operates as a highway to transmit data from the base station to cellular phones, should be distributed in a “proportionate” way while reserving some for a new player, Ms. Santos said.
In its letter to the PCC dated June 22 that focused on the technical aspect of the SMC telco deal, Internet Society Philippines noted that Singapore, which has one of the world’s fastest Internet services, still reserves spectrum for potential entrants, even providing it to new players at a discount vis-a-vis incumbents.
In other jurisdictions, a spectrum band is auctioned off for billions of dollars whereas in the Philippines, the NTC merely “assigns” it to the telcos.
“There is really a lack of planning and foresight on the part of NTC when it comes to spectrum allocation. That’s the job of the state. The government should not just let the private companies decide what they can have and what they can return,” Ms. Santos said.

Balisacan: "The challenge is to make our growth more inclusive so that poverty reduction will be faster."

The newly-created Philippine Competition Commission, headed by Arsenio M. Balisacan, is currently looking into the spectrum acquisition. (Bernard Testa, InterAksyon.com)

Regulatory framework for the internet

Apart from reallocating the spectrum, the NTC should set the tone for the development of a regulatory framework for Internet. The Philippines has outdated laws, with the 1995 Public Telecommunications Act, the 1936 Public Service Act, and the charter of the NTC failing to address the demands and challenges of the broadband age, Ms. Santos said.
“Our existing laws are anchored on basic telecoms. The regulation for Internet, if there’s any, is just emerging,” she said.
But history has shown that change, particularly in the telecom sector, may come within the highest echelon of power, Ms. Santos said. Prior to the deal, President Rodrigo R. Duterte had warned that he may relax rules on foreign ownership of firms to fuel one of Asia’s fastest-growing economies.
To recall, the liberalization of the telecommunications industry started when former President Fidel V. Ramos signed Executive Order (EO) 109 that improved the provision of local exchange carrier service and EO 59 that set the policy guidelines for compulsory interconnection of authorized public telecom carriers.
PLDT used to have a monopoly of the Philippine telecom market before it was opened up in the 1990s. The Gokongwei family’s Digital Telecommunications Philippines, Inc. (Digitel), which used to operate Sun Cellular, had short-lived success as a third player behind PLDT and Globe with its game-changing limited texting and calling offering before being acquired by the dominant telco in 2011.
“That’s the kind of disruption we need. Do you think that would have happened without Sun Cellular? Look at what’s happening today. They (PLDT and Globe) are just cruising along,” Ms. Santos said.

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Telcos should be encouraged to share cell towers

To bring down the cost and accelerate the roll out of cell sites, the government can encourage telcos to share cellular towers and utility corridors in partnership with local government units. Globe President Ernest L. Cu had blamed red tape for getting in the way of the company’s expansion plans, noting that it takes eight months for the telco to obtain 25 permits to build a single cell site.
“If you have a market where there are several players without one dominant player having the bigger chunk of the market, there is more incentive for you to cooperate,” Ms. Santos said.
Other countries boast of a national broadband network — a passive infrastructure owned by the government that can be leased out to other players on a non-discriminatory basis, but that may not work in the Philippines.
“It’s difficult here because you don’t have a government network to connect to and the provider of your largest nationwide infrastructure is a private company. How do you compel that company to allow other players to connect to it on a fair, reasonable and non-discriminatory manner?” Ms. Santos said.
Even without a third player, PLDT and Globe will continue to feel the pinch of margin squeezes as a result of the consumers’ shift to online platforms that offer free messaging and calls.
The past five years proved to be difficult for PLDT, churning out lower core earnings — which strips out the impact of foreign exchange gains/losses and other non-recurring income. The dominant telco is forecasting an even gloomier year ahead, with core profit expected to hit P28 billion, the lowest since 2004.
PLDT is recalibrating its business strategy with a broader shift toward Internet services and away from its legacy business of landline and text messaging. PLDT Chairman Manuel V. Pangilinan had warned that the digital pivot will be painful and difficult, estimating it will take three years to make a complete turn.
“It’s technological change; the pressure will never be off. I don’t see the likes of Viber being replaced. But I guess 10 years from now, SMS and voice calls will be a lower percentage of the total bill requirement. It will be Internet moving forward. We will be hooked to the Internet 24/7,” AB Capital’s Mr. Tiu said.
Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls.

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Krista Angela M. Montealegre (@_kmontealegre on Twitter) has been writing about the corporate scene for nearly a decade, the last year or so for BusinessWorld. Margarita Samantha Gonzales (@famamfa on Twitter) designed the chart.

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