Telcos hope for turnaround, better year ahead

The country’s two telecommunications players are bracing for more challenges in 2017 following a year full of surprises that included the end of San Miguel Corp.’s (SMC) telco ambitions.

The transition from services like traditional calls and texting to internet-powered apps and social media, otherwise called the digital shift, only accelerated in 2016, as consumer preferences changed and as data-hungry smartphones became cheaper.

This remained an area where both PLDT Inc. and Globe Telecom were fighting for customers, but currently split almost evenly between both players in terms of mobile subscriber count.

But adding a new layer of uncertainty— and margin pressure—was the election of President Duterte, who assumed office on June 30, 2016.

His constant calls for better and cheaper services have had a direct influence on price declines on the mobile side of the business, industry observers noted.

Duterte’s threat was to open up the industry to more foreign players—a situation that PLDT and Globe, which count foreign telcos as shareholders, and even ratings agencies agreed would crimp earnings further.

Both PLDT and Globe are also setting aside larger capital spending sums, a trend seen to continue in the near-term. In 2016, they spent about $1 billion each mainly to upgrade network infrastructure to meet the increasing demands of consumers.

Tough situation

PLDT chair and CEO Manuel V. Pangilinan gave a frank account of what to expect in 2017.

“It will be a tough year, especially on the wireless side,” Pangilinan said in December.

PLDT, which still has a significant presence in terms of legacy services, has been taking the brunt of the transition pain.

The telco, backed by Japan’s NTT Group, Hong Kong-based First Pacific Co. Ltd. and Gokongwei-led JG Summit Holdings, is expected to report a core profit of P28 billion in 2016, although Pangilinan said the actual figure should be about P20 billion, when taking out exceptional items like the sale of part of its power assets. PLDT booked a P35.2 billion core profit in 2015.

The company also lost about 17 million subscribers in the last three years to Globe, which made the transition to data services much earlier.

Pangilinan previously called 2016 “annus horribilis,” or a horrible year, while saying 2017 would be a turnaround period, or “annus mirabilis.”

He said PLDT was “more optimistic” on the fixed line segment for businesses and homes.

“I think we are going to show double digit growth in revenues [for fixed line],” he said.

Globe, owned by Ayala Corp. and Singapore Telecommunications, has been charting a different path. In contrast to the declines suffered by PLDT, Globe had been on a growth trend.

However, price pressures have caught up, as Globe saw core profit drop 8 percent to P11.7 billion from January through September last year even as revenues rose 7 percent.

Fitch Ratings said its 2017 Philippines telco sector outlook was revised to negative from stable.

“We expect telecom operators to offer cheaper data pricing and higher handset subsidies—alongside an accelerated 4G rollout—to drive data adoption in a predominantly prepaid market,” a report last October showed.

Fitch said capital spending by both telcos would also remain elevated.

The need to spend more follows a rare alliance between PLDT and Globe to buy SMC’s telco unit Vega Telecom on May 30, 2016 for close to P70 billion, including liabilities.

Crucial asset

Vega’s main asset was its control over a large slice of valuable 3G and 4G mobile frequencies, including a near monopoly in the 700 megahertz spectrum, good for penetrating building walls and covering wide areas.

SMC intended to roll out a nationwide LTE service “better and cheaper” than existing players, but that bid collapsed after talks with potential partner Telstra Corp. Ltd. of Australia failed. PLDT and Globe eventually secured those frequencies via a co-use agreement, followed by the Vega buyout.

The period that followed was marked by a dramatic run-in with the newly created Philippine Competition Commission (PCC), which wanted to investigate that deal for possible violations of the Philippine Competition Act.

The PCC was concerned about the haste and timing of the transaction, which came days before the PCC’s implementing rules were released, incomplete information given, and the concentration of frequency assets now held by PLDT and Globe.

Indeed, the deal’s harshest critics said both incumbents, which now control about 80 percent of all telco frequencies in the country, merely wanted to extend their hold over the market as the industry shifts to more data services and LTE.

New players unwelcome?

They further argued that the fact that two rivals can team up to buy out a potential rival, apart from the existing regulatory environment that favors existing players, sends a powerful message: that new players are not welcome in the Philippines.

Recent developments have also benefited PLDT and Globe. Both sought intervention from the Court of Appeals, which then temporarily blocked any review by the PCC. This also meant that PLDT and Globe could continue the rollout of SMC’s frequencies across their networks.

Both telcos countered that SMC failed to utilize its spectrum assets, and the deal was merely aimed at improving internet services.

Results have been uneven, thus far, with at least one third-party study showing mobile internet speeds improving significantly. A report by United States-based Akamai Technologies covering the third quarter of 2016 said the Philippines mobile market was No. 1 in Asia-Pacific.

Less certain, however, were details on reliability and coverage as complaints over either remained rampant. The same report also showed that average broadband speed actually declined during the period, and the Philippines was near the bottom with India.

Industry observers are also watching how PLDT and Globe would utilize their new frequencies, given that the deal was launched at a time when few devices were running on the acquired spectrum assets, such as the 700 MHz.

Both telcos said they were in talks with handset makers to broaden the use of the acquired frequencies, including those in the 700 MHz. Some mobile phone manufacturers have indeed cited “pressure” being exerted by the telcos since the SMC deal was launched.

Improving internet speed

With court cases regarding the SMC deal pending, events to be closely watched in 2017 included updates on the progress telcos are making to improve internet speed and reliability, both in terms of mobile and fixed-line platforms.

The creation of the Department of Information and Communications Technology, or DICT, was also seen as a commitment by government to improve public services in this area.

Among the DICT’s initiatives is the revival of a National Broadband Network, an initial proposal of which was shelved during the Arroyo administration due to corruption issues. The new direction was for government to support broadband infrastructure to provide telco services to far-flung areas in the Philippines. This still required the approval of Mr. Duterte.

Other key initiatives include crucial reforms to outdated regulations, streamlining of permitting processes and cutting bureaucratic red tape— a constant complaint of the telcos, which said this slowed down the construction of crucial new cell sites.

For the National Telecommunications Commission, the first ever auction of telco frequencies is being prepared for 2017. Spectrum assets to be auctioned off mainly include a portfolio of 3G and 4G frequencies returned to government across two merger deals in the last five years, according to the NTC.

The auction—criticized since assets being bid out were small relative to those held by incumbents—would only be opened to new players.