Consumers and operators in the Philippines benefit from ICT structural changes

With one of the most connected online populations in the region, the Philippines offers many areas of potential growth for telecoms companies, both in terms of selling services and devices. With the introduction of a new operator in 2016, the competition to capture market share is going to increase.

Meanwhile, government action to roll out new infrastructure – both on the ground via laying cables and in the airwaves via opening up more bandwidth – will create more opportunities for all involved in the sector. A prime driver of sector growth is the introduction of less costly smartphones and their rapid adoption, as well as an increased take-up of data plans, all of which could see industry revenues grow 2-4% per year, according to a Standard and Poor’s (S&P) report. This is despite the pressure on margins, likely to be caused by structural changes in revenue mix, because highly profitable legacy voice services are being replaced by less-profitable broadband and data services, all while rising costs constrict industry profits. However, S&P expects post-paid subscriber growth to relieve this constriction in the medium-term.

Mobile Penetration

With data showing 87.2% mobile phone penetration, it is likely that many users either have two phones or use two SIM cards in a dual-chip handset. Although smartphone penetration was only 28% in 2014, it is estimated to have reached up to 40% at the end of 2015. Whether or not users are actually taking full advantage of smart-phones capabilities is another question. According to S&P, only a third of the smartphone users use wireless data plans due to their perceived costliness. Indeed, 96% of all mobile users were on a pre-paid plan in 2014, according to GMSA Intelligence.

Internet Users

The Asia-Pacific region is home to more than a billion internet users, or over 46% of all users globally, according to the Asia Digital Marketing Association and Internet World statistics. The Philippines ranks second in South-east Asia and sixth in all of Asia in terms of usage. The most recent data from the International Telecommunications Union estimates almost 40% of the population were using the internet in 2014. Data from global advertising agency We Are Social shows Filipinos come first in the world when average amount of time spent accessing the internet via laptops and desktops. In the fourth quarter of 2015, Filipinos spent an average of five hours and 12 minutes per day accessing the internet via laptops or tablets and three hours and 14 minutes per day via mobile devices.

SMS: Texting is one of the most popular communication methods and the country was once dubbed the ‘texting capital of the world,’ with an estimated 10% of global SMS volume being generated in the Philippines. During the second quarter of 2014, Filipinos sent more than 520 SMS messages per connection per month over the Smart Communications network – which is owned by the Philippine Long Distance Telephone Company (PLDT) – compared to 371 per connection per month for XL Indonesia, a local telecoms operator. All this texting translates into revenue for the telecoms firms, with messaging accounting for 37% of operator recurring revenue, a high proportion compared to other South-east Asian operators. However, the increase in mobile internet usage appears to be decreasing the SMS volume. Smart reported a 20% drop in SMS volume between the second quarter 2013 and second quarter 2014, according to GMSA, and both Smart and Globe Telecom have reported a 3-5% decrease in the contribution of SMS to service revenue since 2014.

As texting declines in popularity, social networks have become the preferred messaging tool. About 47% of Filipinos have active social media accounts, according to a November 2015 We Are Social report, and more than 94% of internet users use Facebook. Filipinos spend close to four hours per day on social media sites, the highest amount in the entire Asia-Pacific region. Between 2009 and 2014 the Philippines’ internet population grew by 531% – the fastest rate in the world, according to digital market research firm GlobalWebIndex. However, the country’s broadband penetration rate is only 10% and the average internet connection speed is 2.8 Mbps, compared to a global average of 5.1 Mbps, according to the Akamai State of the Internet Report for the third quarter of 2015. The lack of fast and well-distributed broadband has driven mobile internet adoption, which extended to 62% of all subscribers in the third quarter of 2014, according to GMSA. This follows on the heels of increased adoption of smartphones and upgraded telecoms network connectivity, factors that have increased 3G and 4G mobile broadband penetration to 37% – a higher percentage than all the other countries benchmarked by GMSA in its report.

Major Players Compete

Mobile operators and local mobile phone brands are key drivers of mobile internet penetration and smartphone adoption. The country’s telecoms industry is currently controlled by Globe and Smart and the industry’s robust growth trajectory and many opportunities for improvement have drawn considerable investment and intense competition to the sector. The largest operator, Smart, made 61% of all connections in the third quarter of 2014, followed by Globe with 39%. Three other operators – Now Telecom, Express Telecom and wi-Tribe – together made up less than 1% of connections. “We consider the competitive intensity in the Philippine market to be moderate to high, despite being a two-player market. The market is price sensitive, and subject to periodic bouts of intense price competition,” S&P said.

Competition is set to become more intense when Globe and Smart are joined by a new entrant in 2016 (see analysis). This will disrupt the duopoly that has existed since 2012, when PLDT paid P69.2bn ($1.5bn) for a majority share in rival operator Digitel.

Perhaps in an effort to stave off the coming competition, in November 2015 it was announced that PLDT and Globe were talking about signing an IP peering agreement that would improve internet services across the country. PLDT and Globe have signed other interconnection agreements recently. In October 2015, CommsUpdate reported that interconnection agreements in the provinces of Nueva Vizcaya and Cagayan would become active. These agreements enable customers to make fixed calls to one another’s network without incurring additional charges. Under the new agreement, PLDT callers enter a seven-digit dial code to connect with Globe, and vice versa. To date, PLDT and Globe have signed similar interconnection arrangements across the archipelago. These interconnection agreements should drive down costs across the board.

Overall, the market is very competitive. Globe’s profits surged by 27%, driven by record-breaking revenues from its data and broadband services during the first half of 2015, while PLDT posted a 5% drop in its net income over the same period.

In terms of mobile market share, Globe’s pre-paid value brand, TM, and PLDT’s Sun Cellular were equal in terms of consolidated revenue market share in the fourth quarter of 2014. Globe’s consolidated prepaid customer base reached 47.8m as of the third quarter of 2015, and its TM arm comprised 22.5m of its subscribers in 2014. However, PLDT wireless subsidiaries Smart and Sun Cellular together led the market both in terms of subscriber base – 72.8m – and combined revenues – P92bn ($2bn) in 2014. In the post-paid business, Globe leads the pack, with 58% of the revenue market share. It has consolidated its lead recently with the introduction of a new plan that makes core services –calls and texts – part of its basic unlimited service, with charges applicable for various data plans and bundles. Mobile internet has been the leading revenue generator for both brands. PLDT saw a 20.6% year-on-year (y-o-y) rise in its mobile internet revenue between the first half of 2014 and the first half of 2015, and Globe had a 53.3% increase during the same period.

Home-Grown Smartphones

The Philippines has a growing domestic supply – and an enthusiastic local market – for smartphones made in the country. Philippine-made Cherry Mobile is the most popular smartphone, ahead of Samsung. “Samsung used to be the smartphone king in the country but they were dethroned by Cherry Mobile in 2013,” said IDC Philippines, a market research firm, in an April 2015 press briefing. IDC noted that the Philippines and Indonesia are the only countries in South-east Asia where domestic smartphone brands outsell those of large, global firms. International smartphone vendors have seen their market share in the Philippines plummet from nearly 100% in the first quarter of 2012 to less than 30% in the fourth quarter of 2014. Meanwhile, local vendors have experienced the opposite trend, with sales starting at almost zero in the first quarter of 2012 to reach more than 60% in the fourth quarter of 2014. The remainder was made up of Chinese vendors. According to IDC data, in the fourth quarter of 2013 Cherry Mobile overtook Samsung as the country’s smartphone sales leader. This was despite recently experiencing brisk competition for the lead spot from another domestic brand, MyPhone. MyPhone briefly took the lead in the third quarter of 2014 with 15% of the market share, leaving Cherry Mobile right behind with 14%, and Samsung next with 13%. All that changed in the fourth quarter of 2014, however, when Cherry Mobile rose to 26% of market share, leaving MyPhone with 10%, Samsung with 9% and Chinese brand Lenovo with 6%. For the full year of 2014 there were a total of 26.8m smartphone shipments, up 47% on 2013, according to IDC. Cherry Mobile’s phones made up 21.9% of the market share, followed by Samsung with 13.3%, and MyPhone with 11.2%. IDC said it expects the country’s domestic smartphone market to continue to grow.

Pre-Paid Data

As of the third quarter of 2015 PLDT had 64.08m pre-paid subscribers compared to Globe’s 47.75m. Both companies have made moves to leverage the increasing popularity of social networking and communications apps that were slimming margins received from voice and text services by encouraging users to use internet data plans. This strategy has taken the form of giving away access to some of the most popular apps and websites to drive mobile data usage. In 2013 Globe gave its customers free access to Facebook, following up in 2015 with free use of the Viber voice-call and messaging service. In response PLDT made internet access free to its subscribers for a limited time. From September 2014 to February 2015 PLDT offered a daily allocation of 30 MB of free data to all pre-paid, postpaid, and broadband subscribers of Smart, Talk ‘N Text and Sun. In addition, PLDT gave subscribers of these subsidiaries free Facebook and Wikipedia access. During the five-month period, more than 6m wireless subscribers signed up to PLDT services, about 70% of whom were first-time mobile internet users. As a result of this move, Smart’s network saw its mobile data usage increase 188% to 21,598 TB in the first quarter of 2015. During the same period, Smart and Sun Cellular saw their revenue from mobile internet usage rise 19% to P2.2bn ($48.8m), up from P1.9bn ($42.2m) in the first quarter of 2014.

To encourage the mobile data usage trend, subscribers of PLDT’s pre-paid packages for voice and text messaging still receive 30 MB of free Internet access per day at a cost of P10 ($0.22) per day.

Globe announced in November 2015 that it had partnered with Cherry Mobile to increase smart-phone adoption among low-income consumers, with Cherry Mobile launching a low-cost pre-paid wireless service using Globe’s network. The service targets the almost 96% of the nation’s mobile phone users who use pre-paid plans. Cherry Mobile already sells the cheapest handsets on the market, and with Globe’s new service, Cherry phones packaged with Globe services will be priced between P399 ($8.86) and P1699 ($37.72). Globe expects the Cherry service to have 2m subscribers within two years of launching. To see this expansion succeed, Globe is expecting to pay out $850m on capital expenditures in 2016. “Data growth has been tremendous and we need to keep on building,” Ernest Cu, president of Globe, told Bloomberg, adding that he expects smartphone adoption in the Philippines to rise to 90% of mobile phone subscribers within five years. However, a recently announced move by the national government could ultimately limit data revenue for PLDT and Globe. In September 2015 the government announced that it was planning to provide free Wi-Fi services to half the country’s urban areas, with nationwide coverage to follow by the end of 2016, at a cost of about P1.5bn ($33.3m) per year.

The free Wi-Fi service – to be available in public areas like hospitals, airports and schools – is expected to lower data charges and force Globe and PLDT to spend more on their network infrastructure to offer customers faster download speeds. The free service is expected to be good for consumers, who now pay about $18 Mbps compared to the global average of $5, according to IDC.

Crisis Communications

The Philippines is prone to natural disasters, and when they hit, the most important tools survivors need are real-time information from governmental agencies and crisis response teams, and the ability to communicate with family and friends. Recognising that pre-disaster preparation is vital, the national government mandated, in Section 9 of the Republic Act 10121, the establishment of standard operating procedures among provinces, cities, municipalities and barangays (districts). It also required local government units to set up disaster management councils to create warning systems and collate and disseminate information before, during and after disasters.

In 2015 the Office of Civil Defence created an emergency telecommunications team to improve disaster initiatives in the country. The Rapid Emergency Telecommunications Team (RETT) brings together government agencies, the private sector and volunteers tasked with creating a structure to improve information dissemination. In addition, it called for the creation of a framework for the deployment of national government assets, specifically emergency telecommunications, to establish and support emergency operations centres across the country. RETTs are units that provide communications, electronics and information system assistance. A RETT was called into action during Typhoon Lando, which hit the Philippines on October 27, 2015. The RETT “digital infantry” team was equipped with a broadband global area network-enabled mobile communications van, a base radio and transceiver, a power supply, telephone extender, generator and more to help assist the victims of the typhoon.

In 2014, to fortify its network against disaster, Globe rolled out a backup fuel cell system that will provide power during crises. Fuel cell systems are methanol-fuelled back-up power systems that can operate during extreme weather events, when the electric grid goes offline. The installation of fuel cell systems will ensure Globe customers have access to network services during emergencies.

Testing, Testing

The telecoms sector regulator, the National Telecommunications Commission (NTC), is responsible for the provision of “high quality, safe, reliable, secured, compatible and inter-operable telecommunications facilities and services” under the Public Telecommunications Policy Act of the Philippines. In June 2015 the NTC signed a memorandum of agreement with the Department of Trade and Industry (DTI) to bolster consumer protection laws regarding “deceptive, unfair and unconscionable sales acts and practices in the telecommunications industry”. Under the Consumer Act of the Philippines, the DTI is obligated to protect end-user rights and interests.

In September 2015 the NTC carried out pilot testing on the fixed-line broadband speeds provided by the country’s four internet service provider (ISPs). The testing found that all the ISPs’ data connection speeds fell within the NTC’s standard parameter of 256 kbps to qualify as fixed-line broadband services. However, the NTC found that Bayantel – a subsidiary of Globe – registered the slowest connection at 563 kbps for fixed broadband service, despite advertising speeds of up to 2 Mbps. In response to the testing outcomes, Bayantel cited latency error, signal loss, and the proximity of network equipment as factors that may have affected the speed of its service during the testing period. The penalty for providing substandard speeds is not harsh. For the first violation, the NTC issues a verbal warning, and for succeeding breaches, ISPs are fined P200 ($4.44) per day until speeds are brought into compliance.

In June 2015 the House of Representatives approved legislation, the Consumer Protection on Mobile Communication Service Contract, that would enable consumers to unlock mobile wireless devices prior to the expiration of the “lock-in period” set by mobile operators, and therefore allow users to avoid roaming charges as well as benefit from competitive offers available by different service operators.

In a similar vein, authorities from the Department of Justice have called on telecoms to install an emergency shutdown mechanism in mobile phones to protect the security and privacy of users in case of device theft or loss. Legislation to mandate “kill switch” software in mobile phones is pending in the House of Representatives, although telecoms have said installing the kill switch software is the responsibility of manufacturers. Furthermore, they argued, many phones already have anti-theft and data-wipe features that users can enable themselves.

Outlook

The telecoms sector in the Philippines experienced substantial activity and investment in 2015, but the sector has some way to go before it reaches its full potential. It is certain that 2016 will prove to be a pivotal year in the annals of the telecoms industry, and how it reacts to the entry of a third player will be closely watched by all.

Despite slow connection speeds and a slow governmental response to the problem, consumers have reason to be optimistic about the trends. As competition heats up in 2016, operators will have to improve infrastructure, services and costs on the local and national levels to remain relevant. If these reforms and upgrades are successfully carried out, consumers and telecoms alike will stand to benefit.

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The Report: The Philippines 2016

IT & Telecoms chapter from The Report: The Philippines 2016

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