With a large, young and social media savvy population approaching 100m, a fast growing economy that is forecast to become the world’s 16th largest by 2050, and a relatively affordable labour pool with strong English proficiency, the Philippines boasts many exploitable assets that could establish the country as a regional IT powerhouse. One of the biggest opportunities is in the business process outsourcing (BPO) space – for which the country has gained global prominence – and learning how to better leverage this attribute to transition from lower-value call centre and transaction offshoring to more IT-centric components of the value chain. For the sake of diversification and local capacity building, a more robust domestic market where both the government and private sector invest in and exploit IT further is also needed.
A significant inhibitor is that Filipino consumers and corporates are currently deemed to be paying more for their telephony needs than elsewhere in the region, while internet speeds are considerably slower. However, price and quality is improving as undersea cables continue to land and the providers invest in network modernisation. Those in more remote parts, meanwhile, stand to benefit from government and NGO efforts aimed at exploiting unused TV “white space” spectrum and other technologies to provide connections in harder to access places. With ASEAN integration expected in 2015, the poaching of top Philippine talent will increase, as will the need for the country’s IT ecosystem to match its regional peers to ensure that its firms remain competitive.
CURRENT RANKINGS: In the International Telecommunication Union’s (ITU) ICT Development Index for 2013, the Philippines placed 103rd globally. This was a one-spot drop from the previous year’s survey in which it placed 102nd. Despite the drop, the country’s score improved slightly from 3.91 to 4.02.
For comparative purposes, Denmark was the top rated country at 8.86, while the Central African Republic bottomed the table with a score of 0.96. Out of the 29 Asian Pacific countries evaluated, the Philippines was at 17th, between Vietnam and Indonesia.
SLOW BROADBAND: In the “State of the Internet” report released by cloud computing provider Akamai in the second quarter of 2014, the Philippines, was ranked 103rd globally for internet speed, with an average speed of 2.5 Mbps, and 13th on the table of Asia Pacific countries. While the average recorded speed for the period showed an improvement of 59% year-on-year, the proportional gain matched the regional average’s improvement, resulting in the country remaining second from last amongst Asia Pacific countries, trailing only Indonesia and tied with India.
Similar to Indonesia, the Philippines is at a major geographic disadvantage when it comes to broadband provision. As compared to smaller, single land mass countries like Hong Kong and Singapore, its citizens reside throughout a long archipelago comprising over 1700 islands. Achieving national broadband delivery requires connecting islands via costly submarine cables, which results in higher average prices to offset the costlier investment outlays. “If internet service was only offered in Metro Manila, price and quality would be comparable to elsewhere,” Edgardo Cabarios, director of the Regulation Branch at the government sector regulator, the National Telecommunication Commission (NTC), told OBG.
PEER PRESSURE: Geography, however, is not the sole culprit behind the country’s relatively slow speeds. The Philippines’ two largest telecoms firms, the Philippine Long Distance Telephone Company (PLDT) and Globe Telecom, do not practice IP peering. Peering is a concept referring to two networks exchanging traffic with each other freely by providing access to their caches. Peering typically results in faster connections and better quality overall for end-users, as local traffic does not have to be diverted to an exchange point outside of the country. “Most service providers believe that this is a regulatory and competitive issue,” Cyril Rocke, CEO of cloud provider DataOne Asia, told OBG.
Since Philippine law continues to regard the internet as a “value-added” service and not a “necessity”, as was legislated with text messaging, the NTC does not currently have the authority to intervene and make peering mandatory. The decision to do so, therefore, is left up to the service providers’ commercial discretion. “We hope to be able to make a distinct ruling on peering in the near future, as addressing the issue of slow internet speeds and high bandwidth prices is now our top priority,” Cabarios said. “Traffic is unnecessarily leaving and returning to the country, which leads to excess bandwidth being used.”
Compulsory peering is a cause being championed by influential politician Senator Paolo Benigno “Bam” Aquino IV, who has been particularly vocal in his disapproval of slow and costly internet and the detrimental impact this is having on the ease of doing business in the country. Over the course of senate hearings in May 2014, Aquino stated that the average Filipino consumer spends about P1000 ($22) a month on internet service that receives speeds of up to only 2 Mbps. Whereas for the same cost outlay, consumers in Thailand and Singapore receive 12 Mbps and 15 Mbps service, respectively.
CREATIVE SOLUTIONS: According to Cabarios, while IP peering would certainly assist matters, there is no one silver bullet when it comes to resolving the country’s internet woes. “Peering would only address about 20% of the problem. Estimates are that as a country we need to invest around P800bn ($18bn) on broadband infrastructure, and the private sector is only investing P60bn-70bn ($1.4-1.6bn) a year,” Cabarios said. Unable to throw vast public expenditure at the problem, interim solutions that the NTC is exploring to free up bandwidth include encouraging particularly popular content to locate in the Philippines as a means of reducing international traffic, as well as moving government agencies onto a single network to free up bandwidth for use by consumers.
WHITE SPACE: In lieu of the challenges and costs associated with delivering last mile connectivity to remote areas, Microsoft, in partnership with the Department of Science and Technology’s Information and Communication Technology Office (ICTO), has been engaged in a trial to assess the viability and commercial potential of unused TV white space. Microsoft has been undergoing similar commercial trials in a number of African and Asian markets, and according to Dondi Mapa, National Technology Officer at Microsoft Philippines, once the Philippines’ trial expands to other regions of the country beyond the earthquake stricken island of Bohol, it will lay claim to the largest deployment of white space of any country in the world. “We will be sharing our results with other developing countries looking to emulate our approach,” Monchito Ibrahim, deputy executive director at the ICTO, told OBG. “We are pioneers for the region and a lot is riding on the programme’s success.”
Although using TV white space makes some sacrifices in terms of speed, the pros associated with the technology over deploying point-to-point fibre or 3G and long-term evolution (LTE) technology is that it is a far more cost effective solution, and requires less base stations and towers. In addition, ultra high-frequency signals can more easily penetrate through dense foliage and difficult terrains, making it more amenable to non-urban landscapes. “As long as empty white space spectrum is going unused and can help decongest other networks, there is a strong commercial impetus to exploit it,” Mapa said. “Rural customers tend to have lower broadband requirements and do not want to pay high rates for 3G and 4G that they wont properly benefit from.”
For the time being, the trial, which was initially set up for disaster relief efforts, is focusing on public over commercial broadband delivery. Free public access points for citizens have been set up in underserved communities, and capacity is being provided to local government unit’s health and education departments. “Once the trial is concluded and digital migration frees up even more white space, we will consider going commercial with the technology,” Ibrahim said.
DIGITAL DIVIDEND: The NTC has stated that the switch to digital terrestrial television will occur over the next three to five years and implemented based on Japan’s integrated service digital broadcasting-terrestrial standards. Once the migration is completed, because digital television uses up spectrum far more efficiently than analogue transmissions, the technology switch should free up excess digital dividend spectrum that could then be re-allocated to telecoms operators. “The roadmap and rules for digital migration should be released by the end of 2014. Migration is being phased and will start in populated centres. The speed of completion all depends on the speed in which the price of set-top boxes can be lowered. There are an estimated 20m households with televisions, and as the government we do not have the funds to subsidise digital receiver boxes for all of them,” Cabarios told OBG.
AVAILABLE SPECTRUM: According to Ibrahim, the current plan is for the newly available digital dividend spectrum to be used by the government for e-health, e-government and disaster risk mitigation. There are, however, additional sources that could become available to private telecoms firms.
Following PLDT’s purchase of Digitel in 2011 and Globe Telecom’s takeover of Bayan Telecommunications in 2013, contestations have risen over what to do with the acquired firm’s vacated spectrum. In PLDT’s case, the take-over approval was conditional on Digitel’s spectrum being re-auctioned by the NTC to outside parties. However, this has been delayed due to an inability on the part of the NTC and PLDT to reach an agreement over financial compensation. While Globe Telecom’s acquisition of Bayan did not include a similar provision, the firm has so far not been able to take ownership of Bayan’s spectrum – measuring around 50MHz – following a restraining order filed by PLDT to the NTC. With 2015 shaping up as an election year, it is unlikely both legal matters will draw to a conclusion any time soon, and there is no clarity on the bidding rules to be applied if and when any of the spectrum is eventually put up for public auction.
UNDER THE SEA: When considering that demand for ultra-high speed bandwidth is largely limited to major urban centres where capacity rollout of LTE is already taking place, bottlenecks in issuing further spectrum are not considered a major impediment. The Philippine’s internet speeds, while still lagging others in the region, has been showing a steady path of improvement in recent years, assisted by a slew of undersea cable landings. In 2006 an undersea earthquake offshore of Taiwan severely disrupted internet services for many countries in the region, demonstrating the vulnerability from an over-dependence on only a few links. “We now have eight undersea cables serving the country, providing sufficient redundancy and alternate back up routes if needed,” Donald Felbaum, managing director at ICT consulting firm Optel, told OBG. Adding to the mix, PLDT is in the midst of constructing a new 25,000 km line connecting Asia, the Middle East, East Africa and Europe, while Globe Telecom has joined an international consortium that is constructing a $250m, 15,000-km system connecting South-east Asia directly with the US.
CLIENT MIX: Possessing robust and diverse cable links is essential to the country’s ambitions of retaining its position as a top global offshoring destination. “BPO firms are major enterprise clients and have a lot of connectivity requirements. Other big spenders are financial service providers and retail chains,” Jomari Fajardo, investor relations director at Globe Telecom, told OBG. In 2013 the BPO sector generated $9bn in exports and made up 5% of GDP, according to the Information Technology and Business Process Association of the Philippines (IBPAP). Gillian Joyce Virata, former executive director at IBPAP, points out that a unique trait of the Philippine’s BPO industry is that office space is concentrated in compact commercial districts with firms co-locating in high-rise towers. “This helps ensure that companies are well served by network connectivity. The private telecoms firms tend to focus their enterprise efforts on serving BPOs as they demand good infrastructure and are willing to pay for it”. The government, under an initiative titled Next Wave Cities, is looking to create more ICT hubs outside of Metro Manila. While IT-BPO firms are being enticed by incentives, lower operating costs and available talent, insufficient access to the required telecoms infrastructure would likely prove a deal breaker for any firm considering relocation.
SME ADOPTION: As is the case in many developing economies, there is a large chasm between the degree to which blue chip corporates and small and medium-sized enterprises (SME) invest in and exploit ICT within their operations. “IT spending and the application of IT to improve productivity by Filipino companies is still lagging behind counterparts in Malaysia and Indonesia, but rapidly catching up” Rocke said. According the Department of Trade and Industry (DTI), SMEs account for as much as 99.7% of all registered business establishments, pointing to a large untapped opportunity should adoption rates increase. “With the ASEAN Economic Community (AEC) coming on stream, Filipino SMEs will be forced to compete with their regional counterparts and this will place pressure on them to become more efficient and cost effective” Mapa said. “There is a lot of competition for SME accounts, and SMEs can increasingly take advantage of attractive packages”.
INTO THE CLOUD: The advent of cloud-based technology allows SMEs to pay for server use on-demand, rather than as a fixed expense. According to the Cloud Readiness Index from the Asia Cloud Computing Association (ACCA), which measures 14 countries in the region on their preparedness for cloud computing, the Philippines improved from being bottom of the ranking in 2011 to 10th place in 2014. “Three years ago there was a reluctance to move into the cloud over security concerns. Now, more companies realise that it is safe and reliable, as firms like Google and Amazon offer it. Due to data sovereignty issues, local cloud providers are picking up new business from organisations like law and accounting firms,” Rocke explained.
According to ACCA data, since 2011 the number of Filipino companies migrating to the cloud has more than doubled, while ICT spending for 2014 is expected to come in 11% higher than in 2013. In addition to efficiency gains, an added motivation for Filipino firms to move their data hosting off premise is the cost and instability of power supply in the Philippines, with brownouts a fairly common occurrence during peak electricity demand periods (see Energy chapter).
GOVERNMENT SPEND: For a number of IT software and solutions providers, selling to the government has proven a complex and cumbersome proposition in the past. “Government procurement laws have traditionally been designed for spending on hard infrastructure. There has been a lack expertise in drawing up requests for proposals for IT systems,” Virata said.
Part of the reluctance on the part of IT providers to take on government work has been a perception of inconsistent and disjointed bidding and selection requirements between agencies and departments. In response, in January 2013 the ICTO, in collaboration with the Department of Budget and Management (DBM), launched the Medium-Term Information and Communications Technology Harmonisation Initiative (MITHI). Under MITHI, any government agency looking to allocate budget towards IT must receive prior ICTO approval. In addition to harmonising standards, an added benefit of centralised procurement is the ability to benefit from bulk purchases, says Ibrahim.
E-GOV: In the UN’s E-Government Development Index, the Philippines was ranked 95th out of the 193 countries surveyed. With a weighted score of 0.4768, the country fared well when measuring human capital (0.7051), was rated about average on online service (0.4803), and evaluated poorly on telecoms infrastructure (0.2451). That said, the dedicated e-government (e-gov) strategy aimed at enhanced government transparency and the ICTO’s Philippines Digital Strategy 2011-16 aim to boost the efficient delivery of online social services as a key strategic thrust. Other priority areas include: e-business, which involves applying ICT to improve the competitiveness of strategic industries, creating a start-up ecosystem for technology companies and promoting e-commerce; esociety, which strives for digital inclusiveness and looks to empower citizens and communities to more fully benefit from ICT; and digital security.
As part of the e-gov initiative, the gov.ph domain is set to become the hosting portal for all government agency websites. Moving forward, all government agencies will adopt the .gov address for email protocols, and all agency data and project management systems will be moved and consolidated into a single data centre and information system. “As our online services and data handling requirements increase, our preference is to outsource where possible. There will be many opportunities for the private sector to bid on work, ” Ibrahim said.
IT TALENT: As the economy grows, and with it so too does the demand for IT services and systems, the education system will need to increasingly produce qualified and industry-ready graduate talent. As part of recent reforms to the education system, an extra two years of secondary education has been added. “The extra years of schooling will definitely help improve things. All IT companies are asking from schools is to produce good critical and systematic thinkers, and from there the companies can train them up on coding language and computer systems. It is hard for any education system to keep pace with industry IT requirements,” Virata said.
A perennial challenge facing the Philippines labour pool is that top-tier talent is lured to places like the Middle East and Singapore where they can fetch higher salaries. Once the AEC comes on stream in 2015, this problem could be exacerbated further as restrictions on labour movement between member countries is liberalised. “The AEC will worsen the brain drain as there are already many Filipino IT professionals working in Malaysia and Singapore. The only way to lessen the impact of the brain drain is to graduate more talent to begin with,” Ibrahim told OBG.
OUTLOOK: If harnessed effectively, the Philippines’ possesses a number of ingredients that position it to emerge as a globally competitive tech hub. While large corporates and BPO companies are still the mainstay when it comes to ICT spenders, efforts are under way to integrate and transform government agencies to more effectively deploy IT in delivering public services. The competitive pressures from ASEAN integration and the greater affordability and customisability offered by the cloud is providing the impetus to SMEs to adopt ICT platform and solutions. The Philippines’ telecoms infrastructure, especially broadband provision, remains a significant impediment to the country’s ambitions of emerging as a global destination for more value-added BPO services. Although improvements in internet cost and speed are seen in some main business centres, industry and the government must continue to collaborate on more creative and cost-effective solutions to deliver broadband access.
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