Supported by rapid expansion of the business process outsourcing (BPO) industry and new investment in mobile broadband and fibre-optic networks, the Philippines’ IT sector has undergone significant growth in recent years. At the same time, internet speed and quality remains low, and costs high, challenges exacerbated by the country’s geography.
The creation of a standalone department to oversee ICT development bodes well for expansion of a planned national broadband network, with the private sector set to play an important role in future service expansion.
Red tape and high costs have previously hindered new cell tower construction, while an ongoing legal dispute over spectrum allocation could delay future construction. However, rising capital expenditure (capex) to expand high-speed coverage will see the country’s two primary telecoms operators, PLDT and Globe Telecom, complete the pivot towards digital-driven revenue growth, ensuring long-term expansion of IT services and supporting the sector’s growth going forward.
Usage & Penetration
Estimates of internet usage in the Philippines vary. The National Telecommunications Commission (NTC), the industry regulator, reports that at the end of 2014 there were 8.95m internet subscribers in the country, while the number of registered internet service providers on the NTC’s books rose by 82% in the same year to 728 from 400 in 2013. According to Internet World Stats, the total number of internet users in the country increased from 2m in 2000 to 33.6m in 2011 and 54m in 2016, while the World Bank reports that internet penetration grew from 9% in 2009 to 25% in 2010, and hit 40.7% in 2015.
In December 2015 that year’s ICT Development Index from the International Telecommunication Union (ITU) found that the Philippines’ IT sector had improved in its global rankings of IT markets, rising to 98th place out of 167 economies surveyed, compared to 103rd place in 2013, 102nd place in 2012 and 105th place in 2010. The report, titled “Measuring the Information Society”, uses a composite index combining 11 indicators into one benchmark measure, with countries ranked based on ICT access, use and skills. According to the ITU, 37% of the population use the internet, 21% of households have computers and 27% are connected to the internet. Mobile penetration is high, with 111.2 mobile cellular subscriptions per 100 people, of which 28% have active mobile broadband subscriptions, and most new internet users are accessing services via mobile phones. However, the country continues to lag behind many of its neighbours, and ranked 15th out of 32 Asian countries surveyed – behind Hong Kong (ninth), Japan (11th) and Singapore (19th), but above Vietnam (102nd), Indonesia (108th) and Cambodia (130th).
Developing an expansive, long-term IT development strategy has become an important government priority, with the newly created Department of Information and Communications Technology (DICT) expected to improve internet services in the country, bolstering internet penetration, IT connectivity and literacy, and employment in the powerhouse BPO sector.
In May 2016 former President Benigno Aquino III signed a law splitting the functions of the Department of Transportation and Communications, and creating a standalone Department of Information and Communications Technology. Stakeholders welcomed the new department, which is expected to deliver clear national policies for IT development (see Telecoms analysis). Its new secretary, Rodolfo Salalima, has background in the private sector – he acted as chief legal counsel and senior advisor at Globe Telecom, and was also senior vice-president for corporate and regulatory affairs, as well as managing director at Ayala Corporation, raising hopes for stronger industry input in public IT policy.
“A department is better than an office or government agency, because it can really plan and execute important initiatives pertaining to regulations, funding and promotional activities,” Jojo Uligan, corporate secretary at the Call Centre Association of the Philippines, told OBG. “This dedicated agency will listen to any industry concerns, and we are expecting to have a very good collaboration between industry and the government through the new department.”
The DICT will face a number of challenges in rolling out an ambitious IT development agenda. The country’s disparate geography comprises more than 7000 islands and 300,000 sq km of territory, which has hindered establishment of fixed networks. The government charges high fees for new cell sites, according to a February 2016 Forbes report, while PLDT and Globe Telecom control the majority of internet infrastructure, which has kept consumer tariffs high. High-speed fixed internet service costs $57 per month on average, higher than in the US, a price which has hindered subscription growth. Furthermore, PLDT charges other mobile virtual network operators that share its infrastructure, while the country lacks wide-scale internet peering, which has kept broadband speeds low.
The Philippines has some of the slowest internet speeds in Asia, according to a February 2016 report published by UK-based wireless mapping firm OpenSignal, with an average coverage of 43% and an average LTE download speed of 6 Mbps. OpenSignal reports that among the 148 countries with LTE technology, the global average is 13 Mbps. PLDT subsidiary Smart Communications has the fastest average internet speeds in the country, at 7 Mbps, according to the report, compared to Globe’s 4 Mbps.
Slow adoption of next-generation 4G and LTE has also kept speeds low, with most subscribers on 2G and 3G networks – an estimated 1% of mobile connections use LTE networks, compared to the Asian average of 12%, according to market research firm IDC. Added to that is the lack of investment in new technology and infrastructure. Forbes reports that most fixed-line internet subscribers are still using old systems, such as xDSL, instead of fibre-to-the-home (FTTH) technology, which is deployed in more digitally developed markets. Just 2% of fixed internet connections in the Philippines were FTTH in 2015, according to IDC, compared to the Asian average of 33%, excluding Japan.
Cell Tower Conditions
In early November 2016 Rodolfo Salalima, secretary of the DICT, told local media internet speeds in the Philippines remain slow because there are not enough cell towers, and because spectrum has been misallocated and underutilised. According to Salalima, most homeowners’ associations in metro areas prohibit cell tower construction within the subdivision due to misplaced health concerns. The process is also complicated because cell tower construction requires permits from local government units, which are expensive and often mired in red tape, driving up total construction costs. “Operators are asking the national government to come up with a standardised set of permits and processing times,” Jose Mari S Fajardo, director of investor relations at Globe, told OBG. “It takes 25 permits and eight months to deploy infrastructure for a cell site, and a new tower costs an average of $200,000, including equipment.”
Challenges in allocating unused frequency have also been hindering development. The country’s two largest telecoms operators, PLDT and Globe Telecom, have been locked in a legal battle with the Philippine Competition Commission (PCC) over the acquisition of telecom assets previously owned by San Miguel Corporation (SMC), which abandoned a bid to form a joint venture with Australia’s Telstra in March 2016. The venture would have established a third major telecoms operator in the country. In May 2016 PLDT and Globe each announced plans to acquire a 50% stake in SMC subsidiary, Vega Telecom, in a deal valued at P69.1bn ($1.5bn). It included significant amounts of new spectrum, which the NTC re-allocated to PLDT and Globe in the same month (see Telecoms overview) while a substantial chunk of spectrum was returned to the government. The PCC launched legal challenges to the acquisition, arguing it qualifies as unfair competition.
Although the NTC has announced that it will auction SMC’s spectrum to a third operator, excluding PLDT and Globe from bidding, the companies’ legal dispute with the PCC remains unresolved, and any auction will require final approval from the DICT. The department’s path forward will be difficult. On one hand, consumer rights groups argue that lack of competition in the market has been major challenge, reducing the impetus for Globe and PLDT to improve their services or bring down prices. On the other hand, a spectrum option and third player market entrance could delay implementation of the department’s National Broadband Plan.
In November 2016 the DICT announced it had submitted its plan for a national broadband network to President Rodrigo Duterte, with implementation expected to begin in 2017 and wrap up by January 2020, providing near-universal internet access at a cost of between P80bn ($1.7bn) and P200bn ($4.2bn), depending on the type of network and management structure. The DICT is recommending either a fibre-optic cable or satellite network. The department is also considering working with the National Grid Corporation of the Philippines, opening the possibility of a broadband network running along existing power lines.
Salalima told reports he had met with the president in October to discuss the plan, and recommended that the government build and manage the network, then lease it to private operators. This would reduce high capex requirements and allow telcos to maintain profitability, while ensuring a robust return on investment and associated macroeconomic growth. The World Bank reports that among low- and middle-income countries, a 10% expansion in broadband penetration can yield as much as a 1.38% increase in annual GDP growth.
A second development option has also been floated, in which the government would build and manage the national broadband network, in addition to acting as a full third-party operator competing with the existing duopoly of PLDT and Globe. Regardless of the structure, Salalima said the government is committed to seeking private sector partners for network deployment.
Expansion of next-generation mobile broadband services is a priority for the private sector, with mobile data rising to become the fastest-growing revenue stream for both major telecoms operators.
According to PLDT, legacy businesses including voice and text are in decline, with the company looking to focus its efforts on prepaid wireless business through Smart Communications, as part of an ongoing “digital pivot”, a three-year modernisation programme launched in June 2016. The company reported in 2016 that it will “forego 25% of core net income in the next two to three years because of high capex”. The strategy is paying off, as PLDT reported that in 2016 mobile data increased by 20% from the previous year and now accounts for 34% of total service revenue. 3G/4G LTE EXPANSION: Through Smart Communications, PLDT has made major inroads in next-generation deployment. In April 2014 the company announced it would achieve 100% 3G coverage by the third quarter of 2014, after the company completed a 650-km submarine cable link connecting Palawan province to the rest of the national backbone, a P861m ($18.2m) project spanning more than 78,000 km.
In July 2014 Smart Communications announced it will roll out 5000 new 4G base stations, part of a plan which will deploy a mixture of fixed-wireless time division duplex LTE towers, as well as gully mobile infrastructure. Months earlier, the firm had launched its first LTE services, called Home Bro Ultera, in Cagayan province and Davao del Sur. At the time, the company said it hoped to expand LTE services to cover 50% of the country.
Smart Communications began testing LTE-Advanced (LTE-A) networks across the country in August 2013 and launching an LTE-A service on its 4G network one year later. The company has adopted innovation in its LTE-A offerings, launching LTE-A services at Boracay in April 2015 by combining three different frequencies using carrier aggregation. The network offers speeds greater than 100 Mbps. In October 2016 Smart Communications said it had completed a successful trial of LTE-A technology. PLDT also plans to launch LTE-A base stations under a three-year agenda to expand LTE coverage to 95% of the population, potentially through LTE-700 services using frequencies shared with Globe.
Next-generation deployment is supported by construction of new fibre and high-speed DSL fixed-line technologies. In October 2015 PLDT launched the country’s fastest broadband service to date, deployed via fibre network. The company claimed its “Home Fibr” services offered speeds of up to 1 Gbps, enabled by a service upgrade. The new symmetrical speed service is deployed via an FTTH network spanning 100,000 km nationwide, and was available at more than 1600 fibre-connected districts across the country in 2015.
PLDT’s fibre services have received a positive consumer response. In June 2016 online gaming publication B2G reported that Home Fibr is popular among consumers because the baseline price for an unlimited package is set at P2899 ($61.33) per month and includes a landline while offering internet speeds of 50 Mbps.
Globe Telecom, for its part, announced in October 2016 that it obtained board approval for an additional $300m of capex to fast-track the roll out of its high-speed network, which would boost total annual capex to $1bn in 2016, matching its rival. The company reported it had spent $350m of its $750m of planned expenditure, but after acquiring SMC frequencies, was hoping to accelerate nationwide deployment of new services. Under a three-year rollout plan submitted to the NTC in August 2016, Globe expects to extend 4G services to 95% of municipalities and cities, or 1551 locations, by the end of 2018, as mandated by the terms of the SMC spectrum acquisition. By 2017 the firm plans to have upgraded 30% of its 2200 cell sites to support LTE service rollouts in Metro Manila, Metro Cebu and Metro Davao, according to a report by market researcher TeleGeography. As of December 2015 it had deployed 28,336 base station, 18,300 of which were 4G-enabled. Although Globe plans to roll out 4500 software-defined networking-equipped multiband, multimode base stations, and to upgrade capacity on existing infrastructure, its plans to deliver new services on the 700-MHz spectrum remain disputed by the PCC.
Globe Mobile Broadband
Having started its network modernisation programme as early as 2011, Globe’s mobile broadband network is already expansive; the company announced it had upgraded 100% of its network to support 3G technology in July 2014, and said it had plans to further enhance its existing infrastructure with faster HSPA+ equipment by the end of that year. In September 2014 Globe expanded its LTE-FDD/LTE-TDD footprint to cover the Visayas and Mindanao regions. Thus far, the company has the largest 4G network footprint and widest coverage of LTE nationwide. Fibre upgrades are also a priority for Globe, and in March 2016 the company announced that the majority of its capex in 2016 would be allocated to fibre network expansion. The company’s annual capital investment programme aims to boost fibre-optic coverage and capacity across 20,000 barangays (village, district or ward), connecting 2m homes by 2020. It will see fibre capacity improved to support fixed and wireless technologies, and is expected to involve replacing legacy copper wire infrastructure in many areas.
IT upgrades will help support the expanding BPO industry, a major employer and one of the largest segments of the country’s service economy, with revenues estimated to have reached $22.9bn in 2016 (see BPO chapter). New national broadband connections will play a critical role in supporting the Next Wave Cities initiative, launched by industry stakeholders including the Department of Science and Technology, which aims to decentralise BPO investment.
With investment and capex in the telecommunications industry set to have reached new heights in 2016, spurring growth of high-speed internet services, the IT sector is on track to witness growth in broadband penetration, fibre-optics, and IT-related training and employment; however, geography, high build costs, and ongoing legal battles over spectrum allocation will continue to challenge stakeholders.