Complicated and continuously evolving, the local telecommunications market ended 2011 with only two mobile players in operation. The current state of the industry is the result of a number of mergers and acquisitions that culminated in 2011 with the absorption of the country’s third-largest mobile operator, Digitel’s Sun Cellular, by the Philippine Long Distance Telephone Company (PLDT), the market leader.

Despite the lingering effects of the price war between the major mobile firms, which drove down average revenue per user (ARPU), the country’s telecoms sector remains the most lucrative in the region, with profit margins regularly exceeding 60%. Total 2010 revenues for the sector amounted to P149.3bn ($3.39bn), with the total in 2011 hitting some P113.3bn ($2.57bn) by the end of the third quarter.

Enhanced data services like 3G are slowly but steadily growing as they make inroads into a telecoms sector still dominated by traditional SMS communication and voice services. Despite their current low penetration rate, the competition for these frequencies remains fierce, as data services are widely viewed to be crucial for future revenue growth.

PENETRATION RATE: After starting from a relatively low penetration rate just a decade ago, mobile phone subscriptions in the country have increased dramatically, reaching a high of 92.8m subscribers in the third quarter of 2011, according to data from PLDT. This marks a 5.45% increase over the 88m registered in the first quarter of the year, and an impressive 106.68% rise over the 44.9m subscribers registered in the first quarter of 2007.

Mobile phone penetration rates have also experienced a similar increase over the same time period, with a high of 97% achieved in third-quarter 2011, up from 92% at the end of 2010 and just 63% in 2007. The actual rate of usage for the population is estimated to be in the 72-80% range, due to the usage of multiple SIM cards by a high proportion of customers. Fixed-line connections, on the other hand, continue to decline, with only 3.4m subscribers as of September 2011, down from 3.9m at the end of 2008.

With the country’s relatively young population driving an increasing demand for data services and mobile internet content, fixed broadband subscriptions now outpace those of traditional fixed-line telephony, achieving a total of 4.3m subscriptions by the third quarter of 2011. This market is being driven by the growing prevalence of personal computers in the home, which are found in approximately 18% of all urban households and roughly 7% of all households nationwide. In addition, there are also around 5m mobile broadband subscribers.

TABLE FOR TWO: The two remaining mobile service providers are PLDT, which held 69% of the market, and Globe Telecommunications, which controlled the remaining 31%. Like the market itself, PLDT has had an eventful ride since its inception, changing from a majority American-owned public utility to a Philippine-owned one under the administration of Ferdinand Marcos in the 1960s and then to its current structure, in which First Pacific Group of Hong Kong and NTT DoCoMo of Japan own significant stakes, along with several Filipino investors.

Having successfully acquired Sun Cellular – Digitel’s mobile service provider – in October 2011, PLDT became the dominant force in the mobile market. With its roots dating back to the early 20th century, PLDT is the largest provider of traditional fixed-line service in the country. The company also boasted 2.3m broadband internet subscribers as of third-quarter 2011, up 14% over the total at year-end 2010. In addition to the 3G frequencies it has collected, PLDT also has a distinct advantage when it comes to transmitting higher volumes of data traffic through its network due to its well-established infrastructure.

On top of its voice and data services, PLDT is also one of the largest business processing outsourcing (BPO) providers in the country through its subsidiary SPi Technologies and its call centres provided by ePLDT Ventus, which combined employ around 11,000 people. In addition, the company also operates a range of smaller BPO businesses in China, India, Vietnam, Europe and the US.

PLDT is not only a strong performer in the telecoms industry, but it also generates some of the highest revenue streams across all sectors. The company’s total service revenues for the first three quarters of 2011 were P103.2bn ($2.34bn), down 3% from the P106.7bn ($2.42bn) recorded over the same period in 2010, according to company data. Year-on-year core net income also declined 3% over the same period, from P31.4bn ($712.78m) to P30.6bn ($694.62).

Like PLDT, Globe Telecom has a long history in the Philippines, beginning with its 1928 inception as Globe Wireless, a long-distance wireless communication operator owned by US investors. The company later became known as Globe Mackay Cable and Radio Corporation, and eventually merged with Islacom. The current ownership structure consists of locally based Ayala Corporation with 31% and Singapore Telecommunications with 47%, while public investors hold the remaining 22%.

The company’s net profits for the first half of 2011 increased to P5.5bn ($124.85m), up nearly 9% on the P5.06bn ($114.86m) recorded in the same period the previous year. Globe also reported a rebound in its subscriber base, to 28.4m users through June 2011, up from 27.3m in March of that year. Because incumbent PLDT has control of the existing ground-based infrastructure, Globe decided to forgo the costly laying of new fibre and its associated regulatory requirements in favour of developing a wireless WiMAX system, according to Jose Fajardo, the company’s head of investor relations.

PRICE WARS: Price wars between Globe and PLDT have resulted in falling rates for both voice and other telecoms services. The predictable result for both players is a decline in ARPUs, although the firms still enjoy some of the highest profit margins in the world.

The only other competitor in the sector is Bayan Telecommunications (BayanTel), which operates mainly in niche sectors. Although BayanTel was awarded a cellular mobile telephone system service licence in 2000, which has subsequently been renewed twice and will remain valid until 2013, the company has yet to roll out full services. This has drawn the ire of the sector regulator, the National Telecommunications Commission (NTC), which issued a warning in 2011 for the company to make progress on its mobile infrastructure or face “stiff” sanctions.

Majority owned by the Lopez Group, BayanTel was first incorporated in 1961 as the International Communications Group. The company offers local exchange carrier services that include international gateway facilities, domestic and international leased lines, public trunk radio and public calling offices. Bayan also holds an 83% share in the National Digital Transmission Network, which provides an alternative telecoms backbone for the sector. According to a report filed to the NTC by Bayan in July 2011, the company stated it had installed 428 cell sites nationwide, signed 178,552 subscribers and was planning to implement 4G long-term evolution service.

FULL CIRCLE: With PLDT and Globe remaining the principle service providers in 2011, the telecoms sector has come full circle. Both firms were formed in 1928 and have evolved along with the industry to become the last two competitors standing – for now, at least. In the years following the inception of the country’s communications sector, numerous factors – including a widespread geographical distribution and lack of political will and investment – limited the reach of communications technologies outside of the country’s main urban areas.

Real progress in terms of granting access to telecoms services did not begin in earnest until the government of Corazon Aquino replaced the Marcos administration in the early 1990s. Under the new government there was an effort to increase access to telecoms among the wider population, which was served by a teledensity of less than 1% as of 1992. The government’s solution to this problem was to implement a new Service Area Scheme (SAS) that granted telecoms operators access to the lucrative and rapidly growing urban markets, with the caveat that they would then be obliged to develop public service obligations in rural regions of the country.

In addition to the SAS, the government also encouraged the expansion of services through licensing requirements, mandating that any company seeking to obtain an international gateway through which to place attractive international calls must install a minimum of 300,000 landlines. Mobile licence requirements were even more stringent, with operators directed to install 400,000 landlines to qualify.

The plan was an immediate success in terms of attracting new players into the telecoms sector and beginning the long road towards universal access to modern communications. By 1998 telephony penetration rate had risen to 9.08%, while the sector had a total of six competing service providers in the form of incumbent PLDT, Globe, Digitel, Smart, Bayantel and the Pilipino Telephone Corporation.

The mandatory landline provisions, however, were eventually dropped when it became apparent that the obsolete technology was proving more costly to employ than newer mobile technology. The upside to starting the roll-out of mass telecoms infrastructure late in the game is that the country has largely been able to leapfrog over traditional, more expensive and less efficient copper landlines and move directly to mobile telephony, which enables higher penetration for the same cost. As a result, market forces have proven remarkably successful in increasing the nation’s penetration rate on their own, reaching nearly 100% as of the end of 2011.

CONSOLIDATION PHASE: In the ensuing years, market competition became fierce among the six rivals, and the inevitable consolidation phase of the market began. Bolstered by the backing of deep-pocketed parent companies, competitors lowered prices to attract the flood of new mobile subscribers in the 1990s. Globe was one of the first to employ this strategy early in that decade when it began aggressively slashing its rates. Price wars and the resulting drop in ARPU took its toll, with the smaller players being the first and hardest hit by the cash flow squeeze. Piltel subsequently sold its landline business to PLDT in June 2008, and then its GSM brand Talk ‘N Text to its rival, PLDT-controlled Smart, in July 2009. When the dust cleared, average tariffs for international calls had plummeted from more than $3 per minute to approximately $0.40 per minute.

Along with PLDT and Globe, Digitel was one of the remaining successful companies in the early going, achieving P14bn ($317.8m) in revenues from 13m subscribers by 2009. This customer base was accumulated through a 30-year contract signed with the Department of Transportation and Communications to manage its telecoms systems on Luzon Island, as well as the launch of its mobile arm in 2003 under the Sun Cellular brand. The company’s largest shareholder was the JG Summit Group (48%), run by the powerful Gokongwei family. However, continued price wars, falling ARPUs and a strong offer from PLDT eventually proved too much for Digitel, which was bought out by the market leader in 2011.

OUTSIDER: The consolidation of the sector to two main players is not by any means final, however, and there may well be room for growth. There is, for example, the San Miguel Corporation (SMC), which many expect will enter the telecoms fray at some point in the future. Already one of the Philippines’ biggest conglomerates, a move by SMC would hardly be surprising given the group’s diversification forays into several industries unrelated to its original core competency as a food and beverage producer. In recent years it has branched out into electrical power generation and mining operations, among others.

SMC has indicated a disposition towards the telecoms market in the past, and the industry’s 60% profit margins may well prove too difficult to resist. In January 2011 Vega Telecom, a subsidiary, acquired 38% of Eastern Telecommunications Philippines Inc (ETPI) – which offers data and internet service to corporate subscribers – for $35m, bringing SMC’s total share in the company to 78%. ETPI is also in the midst of developing a 240-km fibre-optic network that will open access to customers in several industrial parks and special economic zones in the provinces of Tagaytay, Cavite, Laguna and Batangas. After years of speculation, SMC appeared to be approaching finalisation on a deal to gain control of indebted mobile operator Extelcom as of December 2011. The company also maintains a 41.48% stake in WiMAX broadband provider Liberty Telecoms Holdings, as well as part ownership of Bell Telecommunications Philippines.

BARRIERS TO ENTRY: Yet any new player looking to elbow its way into the market will still find some imposing barriers to entry. First and foremost, the country’s penetration rate is nearing 100%, meaning that any new entrant will have to carve out market share by attracting customers from existing operators. Historically, this has been done by offering lower rates – a strategy that would prove difficult in the Philippines, given that the sector has already seen a price war – and the resulting squeeze on profit margins. Secondly, there are currently no tower-sharing agreements. This means that even after acquiring a licence, any new mobile provider will have to develop nationwide infrastructure from scratch, which is both an expensive and time-consuming proposition.

NEW WAVE: In response to the growing demand for mobile services, the government opened the first round of bidding for five new 3G licences in 2005. A total of four 3G licences (and the accompanying bandwidth allocation) had been awarded by the NTC as of late 2011. One licence was granted to PLDT’s Smart; another to Sun of Digitel, which has since been acquired by PLDT; the third to Connectivity Unlimited Resource Enterprise (CURE), which must be reverted back to the NTC according to the merger agreement; and the fourth to Globe Telecom. The fifth licence has yet to be awarded due to an ongoing appeal by Bayantel.

Despite the fierce competition for these licences, the service has yet to reap significant profits for their owners because uptake has been slow. One 2009 report from research and consulting firm Frost and Sullivan indicated that less than 5% of mobile phones in the country were equipped to handle 3G, though there existed a real possibility that the technology could be adopted by millions in the near future. In Australia and the Asian tiger economies of Japan, South Korea, Singapore and Hong Kong, for instance, the penetration rate for 3G services exceeds 50%.

The original CURE 3G licence has been used by operator Red Mobile since the company was bought out by Smart in November 2008, but is scheduled to go on the auctioning block as early as 2012, with a number of potential firms waiting to bid. Globe is an obvious choice, as the extra bandwidth would lower capital expenditure for the company over time, providing greater efficiencies and capabilities.

Recognising the shift in the way consumers use telecoms, Globe Telecom has recently embarked on a comprehensive network renovation. The improved network will reflect the evolution of traditional infrastructure (which has historically been geared towards voice and SMS services) to a system that is built to handle the increasing amounts of data associated with the use of broadband internet applications.

The network switch, which will include revamping the telecoms infrastructure and back-office IT systems, will cost the firm some $790m over a period of two to three years. According to Globe, this will allow it to move beyond playing catch-up with capacity upgrades and give it a two-year head start on the estimated growth in capacity demand.

In addition to limited 3G licences, market players are employing other mobile connectivity technologies. Both Smart and Globe have rolled out substantial WiMAX services, while PLDT subsidiary Piltel began developing broadband-over-powerline services for its parent company in July 2009, following its purchase of a 20% stake in the Manila Electric Company.

TEXT MESSAGING: As the unofficial texting capital of the world, SMS traffic is huge in the Philippines. According to NTC data, Filipino mobile users send a combined daily average of 1bn text messages. Because the product offers a cheap, short service compared to voice calls, it harmonises well with the local tendency towards single-serving purchases, in large part due to the relatively low income levels of much of the population.

The practice is so widespread that text messaging has become a standard form of communication, even within the more formal business community. It is not even uncommon to see the heads of companies or government entities quoted in respected international publications via text message.

With SMS playing such a prominent role in the communications industry, there have been rumours in recent years that the government may alter SMS tariffs. One 2009 proposal that was passed the House of Representatives – but ultimately never enforced – sought to impose a new tax on the sector that would charge P0.05 ($0.001) for each SMS sent. As of late 2011 mobile service providers were resisting an order from the NTC to lower SMS tariffs.

More recently, a new shift is slowly taking place in consumer usage towards instant messaging and other forms of communication via web-enabled mobile devices. Although SMS usage is still strong and continues to grow, the slow but steady rise of these new technologies will likely outpace that of texting in the long run, particularly as smartphone usage becomes more widespread in the country.

OUTLOOK: Following global trends, the Philippines will continue its move away from conventional land-line usage and towards mobile communication, including mobile broadband. The profitability of the sector will likely induce at least one new competitor to join the existing two in the near term. The arrival of a new entrant would be likely to bring downward pressure on prices. Now that the penetration rate is nearing 100% and prices have stabilised somewhat, the focus of the two current key operators is now to protect their subscriber base and increase ARPU levels. This shift should result in a greater variety of products and service plans offered to customers, who will also benefit from a reduction of interconnection fees that is being considered by the regulatory authorities.