The entrance of a third major telecoms provider set to break the duopoly in the Philippines

 

The country’s call for a third telecoms player stems from low competition and underinvestment in the industry, beginning with the more than 65-year monopoly held by PLDT. The stipulations required of the third provider are expected to see all players increase coverage rates, improve mobile internet speeds and offer more attractive packages.

Early Forces

In the late 1980s, amid 10-year waiting times to secure a telephone line, the government embarked on reforms that resulted in the 1993 creation of the National Telecommunications Commission (NTC), the new industry regulator. While ostensibly opening the market to new entrants, the regulator’s policies limited PLDT’s competitors to contracts in 11 regional services areas, while PLDT retained the only national franchise and ownership of all backbone infrastructure. The incumbent provider cemented its dominant position in 2000 when it integrated its two mobile units: Pilipino Telephone Corporation and Smart Communications.

Globe Telecom, a joint venture between local conglomerate Ayala Corporation and Singapore Telecommunications, emerged as PLDT’s foremost challenger, solidifying its secondary position in 2001 when it acquired smaller partner Islacom. Globe and PDLT were challenged in 2003 by local firm Digitel, when it offered unlimited call and text packages through its mobile subsidiary Sun Cellular. This triggered a price war that overloaded network infrastructure as consumers rushed to take advantage. PLDT ultimately acquired Digitel in 2011, allowing Sun Cellular to continue operating alongside its own Smart brand.

The Philippines has subsequently lagged behind international peers in moving from 2G to 3G coverage, a legacy evident today in the country maintaining the weakest cell tower density in the Asian Pacific. Change seemed to be on the horizon when the Philippines’ San Miguel Corporation and Australian carrier Telstra were in negotiations in the second half of 2015 to operate the former’s coveted 700-MHz spectrum, which is viewed as an optimal medium for providing faster and more widespread mobile internet. However, the deal fell through in March 2016 when the firms announced that an agreement could not be reached. Two months later the NTC reallocated the spectrum to Globe and PLDT.

Policy Shift

Government policy failing to provide a healthy, competitive environment, coupled with underinvestment on behalf of Globe and PLDT, characterised the industry leading up to the mid-2016 election of President Rodrigo Duterte. One of his campaign promises was to dismantle the duopoly and introduce a third major telecoms operator to the country. The decision was driven by factors such as the companies returning a collective P535bn ($10bn) in cash dividends to shareholders between 2000 and 2016 instead of adequately reinvesting in telecoms infrastructure. The Philippines ranks among the worst in the region in terms of mobile network coverage and internet speeds.

According to Akamai Technologies’ 2017 “State of the Internet/Connectivity” report, the Philippines was last out of 15 countries surveyed in the region and 100th out of 149 nations globally for average connection speed, which was 5.5 Mbps in the country compared to 7.2 Mbps internationally.

For these reasons, President Duterte directed the Department of Information and Communications Technology (DICT) to open bidding on a third national franchise to operate 3G, 4G and 5G services. The DICT drew up bidding terms that named national coverage the most important stipulation, requiring the new player to provide a minimum coverage rate of 50% of the population in five years. In the process, the selected company would deploy a minimum investment of P40bn ($744m) in the first year of operations and P25bn ($465m) each year thereafter. The minimum broadband speed was set at 5 Mbps.

Furthermore, bidders were required to have minimum paid-in capital of P10bn ($186m), at least 10 years of experience in delivering telecommunications services on a nationwide scale, no relationship to Globe or PLDT, and no outstanding liabilities with regulators. To ensure bidders had the financial resources for such an undertaking, the DICT also required P700m ($13m) as a participation security and P14bn-24bn ($260.4m-446.4m) as a performance security. Firms would also be charged a P10m ($186,000) non-refundable fee for appeals.

Weighing Entry

According to local media, more than 10 firms paid P1m ($18,600) to view the bidding requirements before the DICT and NTC began accepting offers in early November 2018. These included local Converge ICT and AMA Telecommunications, as well as Norway’s Telenor Group and India’s Surya Telecom. Another interested party, local provider NOW Telecom, challenged the DICT and NTC in court on the basis that its terms were “onerous, confiscatory and potentially extortionary”, but was unsuccessful.

The consortium led by Converge ICT ultimately decided not to bid, saying in a statement that companies are required to pay “an inordinate amount of funds and carry out commitments at a pace that is not required of the current dominant service providers”. Concerns were also raised over the presence of China Telecom in the bidding race constituting unfair competition, particularly as President Duterte has urged Chinese companies to invest in the Philippines.

In the end just three consortia submitted bids, with China Telecom indeed emerging victorious as part of the Dito Telecommunity consortium, which was formally known as Mislatel. China Telecom, which holds the maximum 40% equity stake allowed by a foreign entity in a public utility, serves over 300m subscribers in China. Its domestic partner is Udenna, a diversified Davao-based holding company headed by the Filipino entrepreneur Dennis Uy. Udenna holds a 35% stake in Dito Telecommunity, while Uy’s listed firm Chelsea Logistics accounts for the remaining 25% share. The other two bidders, locals Sear Telecommunications consortium and Philippine Telegraph and Telephone (PT&T), were disqualified from the running due to deficiencies in their submissions. PT&T tried to appeal by arguing against the NTC’s decision that it did not have the technical capability and experience to execute the project, and Sear vowed to correct its failure to pay the P700m ($13m) participation security. Sear also brought to the selection committee’s attention that Dito Telecommunity was already engaged in an exclusive contact with one of Sear’s own affiliate companies, DigiPhil Technology.

The NTC ultimately rejected both appeals, and Dito Telecommunity was awarded a certificate of public convenience and necessity to operate radio frequency bands of 700 MHz, 2100 MHz, 2000 MHz, 2.5 GHz, 3.3 GHz and 3.5 GHz. During a Senate hearing in January 2019 to confirm Dito Telecommunity as the country’s third major provider, it was noted that the company did not fulfil its requirements when it was granted a telecommunications franchise in 1998. Nevertheless, the next month the Senate approved a transfer of ownership of Dito Telecommunity to the China Telecom-Udenna consortium.

Next Steps

Regulatory bodies are now tasked with redistributing spectrum from the two incumbents so that Dito Telecommunity will be able to compete. “Our role is to ensure that the third player can offer its services nationwide. Thus, we are considering a better way to allocate the spectrum, especially the lower band, which the new player can use for coverage,” Edgardo V Cabarios, deputy commissioner of the NTC, told OBG. “We are also considering measures to minimise reluctance among the incumbents.”

In April 2019 Udenna and China Telecom inked a $5.4bn investment deal to formally recognise the Chinese company’s involvement in Dito Telecommunity, which is committed to rolling out commercial services in late 2020. The group has promised to deliver internet speeds of 27 Mbps in its first year and 55 Mbps from the second year onwards, while covering up to 84% of the country’s population in the initial five-year period. This is estimated to require a total investment of P257bn ($4.8bn). While the incumbents have questioned Dito Telecommunity’s claims that it can match their services in three years, both Globe and PLDT have responded by increasing their capital expenditure commitments for 2019 (see overview). Meanwhile, the NTC is also working on a plan first introduced in December 2018 that will compel mobile operators to unlock subscribers’ phones after their contracts expire, allowing consumers a no-cost means of switching their provider should they choose. “The legislation is very clear: there should be no additional costs to subscribers. The incumbents will have to figure out how they will handle the cost,” Cabarios said. The measure aims to provide greater flexibility for consumers while fostering competition and innovation for companies.

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The Report: Philippines 2019

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