High consumer spending and the young population create ICT opportunities in the Philippines

With strong economic growth and rising incomes – partly driven by a leading global IT-business process outsourcing (BPO) industry – IT in the Philippines has long been a government priority. The sector has sustained double-digit growth in recent years, riding the wave of increased smartphone adoption and other mobile choices by consumers, as well as the desire from companies and government departments to boost spending on IT and develop new services. This, however, is placing a strain on the country’s existing internet backbone, and challenges also exist in finding the human resources to meet demand. Further investment is also needed in innovation, with government and private-sector schemes seeking to boost various opportunities for start-ups and established ventures, to take their technology to the next level.

Sector Bodies

A range of government institutions have important roles within the IT industry, such as the Department of Science and Technology (DOST), the National Computer Centre (NCC) and the National Telecommunications Commission (NTC). Within the DOST, the Information and Communications Technology Office (DOST-ICTO) is currently the lead implementation agency for all government ICT initiatives, from e-government to IT infrastructure rollout. The NTC, meanwhile, is responsible for regulating the ICT environment, including IT, telecommunications, radio and TV. The NCC also now comes under the DOSTICTO and works on national policy and planning for computer education and training.

This structure is about to undergo some changes, however, with congress passing a bill in October 2015 to create a Department of ICT (DICT), which will be the primary government entity to promote and help develop the ICT sector. Under the bill, the new department will have authority to address internet connectivity, as well as to design, implement and ensure the protection of an integrated ICT infrastructure system. Cybersecurity will also come under its remit, as will promoting digital literacy and competitiveness nationwide. As of March 2016, the establishment of the DICT has still yet to take place.

In September 2015 the president gave an executive order to form the National Cybersecurity Interagency Committee to perform a thorough survey of vulnerabilities within the country’s existing cybersecurity systems. A data privacy law was also passed in 2012, although a National Privacy Commission (NPC) – called for under the law – has still yet to be formed. The delay has led to calls for the NPC to be appointed immediately, as it is tasked with monitoring and enforcing the law. This has been a concern for BPO companies in particular, with the law providing checks against the mishandling of personal data.

In the private sector the two main internet providers are Globe Telecom and the Philippine Long Distance Telephone Company (PLDT). This could, however, be disrupted with the entrance of a third telecoms provider created by San Miguel, a Philippine conglomerate mostly involved in food, beverage and packaging. A joint venture between San Miguel and Australia’s largest telco, Telstra, was set to take place, but failed to eventuate after Telstra pulled out in March 2016. However, according to Ramon Ang, San Miguel’s president and COO, Telstra will provide “technical work design and consultancy support”.

Internet Speeds

Although the Philippines has a global reputation as a centre for IT-based services, it has achieved this with one of Asia-Pacific’s least-developed internet backbones. According to Akamai’s third quarter 2015 “State of the Internet” report, the Philippines ranks 108th globally in terms of average connection speeds, only above India in the Asia-Pacific region. That quarter, average connection speeds were 2.8 Mbps, lower than Malaysia’s 4.9 Mbps and far behind regional leader South Korea’s 20.5 Mbps. The overall broadband adoption rate was also low in the Philippines – just 10% of the population had broadband with a connection speed above 4 Mbps, the lowest in the region. Less than 1% of the population had speeds over 10 Mbps, the slowest again, and at speeds over 15 Mbps, the percentage dropped to only 0.3% of the population, although on this metric Vietnam was lowest with 0.1%.

Internet Penetration

The most recent data from the International Telecommunications Union (ITU) estimates that almost 40% of the population were using the internet in 2014 – up from 37% in 2013, and 36% in 2012. The number of fixed broadband subscriptions at the end of 2014, however, was given by the ITU at 23.24m, or 23.22% of the population, up from 17.88m and 18.17% the year before. There is, therefore, considerable growth happening – with mobile broadband also a key factor. A DOST-ICTO report from October 2015 stated that there were 109m mobile phone subscriptions in 2014, which is a 87.2% household mobile phone penetration rate. The report also stated that 55.4% of all cities and municipalities had broadband access, either fixed or mobile.

Despite this, the country’s numbers are low in comparison to regional peers, making this the subject of a growing number of government programmes aimed at addressing the ICT gap. In the social media sphere, data from global advertising agency We Are Social suggests that out of a population of 101.47m in January 2016, there were some 48m active social media users, up 20% on January 2015. According to the data, Filipinos spend an average of five hours and 12 minutes online per day, of which three hours and 42 minutes are spent using social media via any device. Facebook is the most popular, with users claiming 26% of their reported online activity spent on the site. Facebook Messenger came in second with 23%, followed by Google+ (17%), Skype (16%), Viber (14%), Twitter (13%), Instagram (12%) and LinkedIn (11%).

Getting It Together

With its network rollout, the new telco may be able to improve access numbers while also leveraging Telstra’s relationship with Ericsson to bring in 4G LTE networks, enhancing broadband speed. This additional competition, promising faster services, has had an effect on the existing players, who have begun to talk about one of the principal hindrances of the system – the lack of an IP peering arrangement between Globe and PLDT. “There also needs to be more engagement by technopreneurs on the research and innovation front of ICT. One way to encourage this is through access to global knowledge, allowing technopreneurs to have a feel not only from a local perspective, but also from worldwide best practices. This can be achieved through partnerships with multinationals that are already established here in the Philippines,” Raul Santiago III, CEO and country president of Fujitsu Philippines.

A peering arrangement is the data equivalent of a telephone interconnection agreement. In the absence of one, subscribers to one company cannot access data hosted at the other’s centres. Thus, while around 20% of all internet traffic in the country is local, some 70% of this has to be routed outside the country before returning to the Philippines. This slows down connection speeds and incurs an extra IP charge, increasing costs for consumers.

Indeed, internet charges in the Philippines are also amongst the highest in the region. A recent survey by broadband testers Ookla ranked the country 61st in the world in terms of broadband charges, at an average cost of $18.19 per Mbps, against a global average of $5.21. The country was also 59th in the world in terms of relative costs of broadband subscriptions, at $31.55. On IP peering, however, changes may be on their way. In August 2015 PLDT offered to open talks with Globe on a peering arrangement. Globe responded unenthusiastically, saying that what was on offer fell short of its demand for unconditional peering. Meanwhile, PLDT did make an agreement with the DOST to link the telco to the department’s Philippine Open Internet Exchange (PHOpenIX), while in return providing rack space for a third PHOpenIX node at PLDT’s VITRO Data Centre. While this should ease some of the congestion issues, it still does not address the problem of peering between the two main telcos. With the possible arrival of a third provider in 2016, however, there may be more pressure for a comprehensive peering arrangement to be worked out. The PHOpenIX could also act as a neutral exchange if the telcos allow it. Meanwhile, the high cost and slow speeds have galvanised one sector – internet user groups, who are vocal in their lobbying for improvements. In September 2015, the NTC site was hacked in protest over slow speeds.

Smarter Philippines

Boosting connectivity and usage of IT is one of the main objectives of a range of programmes administered by the DOST-ICTO. One of these is an umbrella science and technology programme called Smarter Philippines. Launched in 2013, it comprises nationally and regionally oriented elements and has six main focus areas – smarter government, smarter economy, smarter environment, smarter mobility, smarter living and smarter people.

Under the first of these, the iGovPhil initiative – with a total project budget of P2.53bn ($56.2bn) for the 2013-16 period – aims to enhance the government’s IT infrastructure and boost connectivity and efficiency within government departments, as well as with the general public. This initiative, launched in 2012, is part of the e-Government Master Plan 2013-16 and complements the five-year Philippine Digital Strategy, launched in 2011. This project also involves the Department of Budget and Management (DBM), the Department of Transport and Communications, and the presidency. The DBM, the DOST and the National Economic Development Authority are also convening the Medium-Term Information and Communications Technology Harmonisation Initiative (MITHI). This initiative seeks to ensure interoperability between the ICT systems of different government agencies and is running from FY14 to FY16. In 2016 MITHI will undergo an evaluation to prepare for its next stage. The DOST-ICTO also acts as an umbrella for the Smart Cities and Smart Countryside programmes.

Hardware Boost

Part of the Smarter Philippines initiative is the Smarter Industries scheme, which seeks to further develop the country’s semiconductor and electronics industry. The Philippines has been a global centre for this since the 1970s, when mainly Western multinational companies set up in the country to leverage lower wage costs and gain access to regional markets. In 1984 the Semiconductor Electronics Industry Foundation was established, which aimed to bring executives from both local and foreign companies together to lobby for the sector’s interests. In 1998 this became the Semiconductor and Electronics Industries of the Philippines Inc (SEIPI).

According to SEIPI, the sector is largely based in free zones in Metro Manila, Cebu, Calabarzon, and Northern and Central Luzon. These are locations that give it access to international gateways for exports, as Manila is within four hours’ flying time of most of the other East and South-east Asian capitals. The main market for the sector is therefore other Asian countries – which take around 70% of sector exports – followed by the US and EU with a combined 22%.

Electronic products are now the Philippines’ top export, with September 2015 figures showing that the sector is responsible for 54.3% of all export revenue, or $2.34bn. Components and devices ( semiconductors) took the largest share of these exports, at around 40.2%, or $1.8bn, a figure 8.5% up on the $1.6bn of September 2014. Semiconductors dwarfed all other segments, with the second-largest export group, electronic data processing, responsible for $362.6m of exports, or 8.2% of the total. The sector also imports considerable quantities of parts and raw materials for the manufacture of these exports. In September 2015 some $1.03bn, or 16.6% of the total import bill, was made up of these items. Some of the global names located in the country currently include Texas Instruments, Toshiba Information Equipment, Fairchild Semiconductor (Philippines), Cypress, IMI Electronics, Amkor and HGST. The most recent statistics available from the Department of Trade and Industry (DTI), for the first quarter of 2013, show that the sector contained over 424 companies, with around 73% of them providing semiconductor manufacturing services and 27% providing electronic manufacturing services. The DTI figures also show the sector responsible for employing 2.2m workers.

The Smarter Cities initiative aspires to improve on these numbers, the DOST aiming to make semiconductors and electronics into a $50bn industry by the end of 2016. It has already taken one key step towards this with the establishment of an advanced device materials and testing laboratory. Located in Taguig City, this facility works with the sector to test and analyse sample hardware. Previously, this had to be done outside the country, adding to the expense and also to the time taken for testing new products.

Retail Surge

Not all the electronics manufactured by the sector are exported, however. Recent years have seen an increase in domestic sales of computers and peripherals, among smart devices smartphones are by far the most popular. Indeed, of the 15m units of smart devices shipped in the country in 2014, 81% were smartphones and 19% were tablets, according to research by IT analysts IDC. However, tablets have been proving popular, with the latest IDC figures showing a 55.1% rise in numbers shipped, year-on-year, in the fourth quarter of 2014. This increase – and that of smartphones – has caused a slowdown of PC sales, with 1.9m units shipped domestically in 2014, and the IDC also projecting a flat year for the market in 2015. One highlight was the arrival of Bingbooks – low-cost notebooks using Microsoft’s Windows 8.1 for Bing – which have helped keep PC sales going.

The country has a range of IT equipment retail chains, with the largest being Electroworld. Others include PC Express and Gigahertz. The Computer Manufacturers, Distributors and Dealers Association of the Philippines brings together many private-sector outfits in the industry, including multinationals such as Hewlett-Packard and Microsoft Philippines.

Let The Games Begin

One growing area for PC usage is in gaming, with eSports – competitive video gaming – a developing trend in the country. eSports have proved so popular that in 2013 an organising body was formed, the National Electronic Sports Commission. Filipinos not only play against each other but in international events, including Steam’s Dota 2, – the world’s largest multiplayer online battle arena – which has a prize pool of around $10m and in which Filipino team Mineski is a global leader. The ASEAN region is the growth engine for the online gaming sector, with revenues crossing the $1bn mark in 2014. The country has developed a number of online gaming outfits, with PhilWeb a sector leader, recording revenues of P411.44m ($9.1m) in the first half of 2015.

Outside The Box

Online gaming has also been a driver for innovation in the local software development industry. To encourage this, the government announced in December 2015 plans for the creation of a national innovation centre, which will see the DOST and DTI collaborate with other government agencies and IdeaSpace – an incubator and accelerator programme for start-ups and entrepreneurs. This hub aims to bring together universities, government agencies, and private-sector investors and companies to develop and commercialise new ideas. Currently, there are around 20 accelerators, incubators and venture capitalist outfits in the country, with around 100 tech start-ups already in the field. Boosting this number – and the value of these new companies – is the aim of the DOST-ICTO’s “seed.PH” initiative, which tries to promote “IT preneurship” as a viable career option for young graduates. Under this, the Philippine Roadmap for Digital Start-ups was drawn up and launched at the 2015 “Geeks on a Beach” tech conference in Boracay, now an annual event. The roadmap aims to spawn 500 start-ups – with an estimated cumulative value of $2bn by 2020 and was drawn up in collaboration with some key stakeholders in the IT sector including IdeaSpace, the Philippine Software Industry Association, the Philippine Development Foundation, TechTalks.ph and Kickstart Ventures, which is Globe’s seed capital outfit.

Outlook

With the Philippine economy continuing to see robust growth – GDP grew 6.1% in 2014 and 5.8% for 2015, while projected at 6% in 2016 and 6.2% in 2017, according to the IMF – the domestic IT sector is likely to also see strong growth ahead. Consumer spending is a major driver behind GDP growth, with Filipinos spending more on hardware and software as the standard of living improves. The export market, on the other hand, will be affected by global forces, such as the Chinese slowdown, the effects of the US rate rise on emerging market currencies and international political uncertainties. At the same time, the country’s youth gives it a dynamic and tech-savvy population. One significant barrier, however, is the IT infrastructure of the country, which needs to improve in speed, coverage and cost. The need for change is well recognised by both the government and the private-sector, and 2016 promises to be a busy year.

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