Assessment of the Structure, Conduct, and Performance of the

Philippine Telecommunications Industry

Epictetus E. Patalinghug1
Professor Emeritus
University of the Philippines
Diliman, Quezon City 1101
Philippines
eep@up.edu.ph
+632 928 4573

Wilfred S. Manuela Jr.

Associate Professor
Asian Institute of Management
Makati City, Philippines

Regina Manzano-Lizares
Assistant Professor
University of the Philippines
Diliman, Quezon City, Philippines

Jason C. Patalinghug
Assistant Professor
Southern Connecticut State University
New Haven, CT, USA

January 2017

1
Corresponding author

Electronic copy available at: https://ssrn.com/abstract=2912238

 TABLE OF CONTENTS

List of Tables ................................................................................................................................................................. iv

List of Figures ............................................................................................................................................................... vi
List of Abbreviations .................................................................................................................................................. vii
Executive Summary ................................................................................................................................................... x
I. Introduction ....................................................................................................................................................... 1
II. Brief History....................................................................................................................................................... 2
In the News: Cotabato City Council Denounces PLDT’s Poor Internet Service ........................... 7
Policy and Practice: 2015: A Banner Year for Globe............................................................................ 10
III. Market and Competitive Analysis ............................................................................................................ 11
1. Market Definition ................................................................................................................................ 11
Policy and Practice: Relevant Market for Philippine Telecom Services ............................ 12
Concepts in Context: Various Approaches in Identifying the Market ................................ 14
2. Structure-Conduct-Performance (SCP) Analysis ................................................................... 16
2.1 Structure ....................................................................................................................................... 18
2.1.1 Industry Concentration ............................................................................................ 19
Concepts in Context: Measuring Market Structure ........................................... 20
2.1.2 Barriers to Entry .......................................................................................................... 26
2.2 Conduct ......................................................................................................................................... 30
2.2.1 Pricing and Product Offering .................................................................................. 31
Concepts in Context: Pricing Cellular Phone Service ........................................ 37
2.2.2 Customer Retention ................................................................................................... 45
2.2.3 Innovation ...................................................................................................................... 46
2.2.4 Service Quality .............................................................................................................. 48
2.2.5 Mergers and Acquisitions ........................................................................................ 51
Policy and Practice: HHI and Antitrust Case in the U.S. Soft
Drink Industry ................................................................................................................ 53
2.3 Performance ................................................................................................................................ 54
Concepts in Context: Measuring Performance ................................................................. 54
3. Is There a Need for a Third Player? .............................................................................................. 60
3.1 Concentration and Number of Competitors .................................................................. 60
3.2 The Appropriate Way to Assess Market Power and Competition ........................ 62
3.3 Will a Third Player Matter? ................................................................................................... 66
In the News: NTC Wants 3rd Telco Player Within Duterte Term .............................. 68

ii

Electronic copy available at: https://ssrn.com/abstract=2912238

 IV. Spectrum Management Analysis ............................................................................................................... 69
1. The Nature of Radio Frequency Spectrum and Why It Has to be Managed
Well ........................................................................................................................................................... 69
2. Spectrum Allocation Methods ....................................................................................................... 69
Policy and Practice: The Spectrum Auction: How Economists Saved the Day................ 71
3. Spectrum Management in the Philippines ............................................................................... 72
4. Spectrum Management in the United States ........................................................................... 74
5. Implications of Improved Spectrum Management for the Philippines ........................ 75
V. Broadband Policy Analysis .......................................................................................................................... 77
1. The Importance of Broadband to the Economy ...................................................................... 77
2. Internet Speed ....................................................................................................................................... 78
In the News: Globe Telecom Expands Network, To Build Over 500 LTE700
Sites ........................................................................................................................................................... 79
3. Philippine Broadband: A Policy Brief .......................................................................................... 83
4. Analysis of the Policy Brief’s Major Recommendations and Globe
Telecom’s Counterarguments ......................................................................................................... 89
4.1 Adopt an Open Access Broadband Internet Service Model ..................................... 89
In the News: Globe Submits 3-Year Rollout Plan to NTC .............................................. 93
4.2 Update and Upgrade Information and Communication Technology
(ICT) Laws and Policies .......................................................................................................... 93
In the News: Globe Gives Side on SMC Telco Deal ........................................................... 95
4.3 Level the Playing Field for All Industry Players ........................................................... 95
4.4 Update the Philippines’ ICT Strategy and Plan ............................................................. 97
4.5 Improve the Spectrum Management ................................................................................ 99
In the News: Globe Completes TV White Space Trial .....................................................100
4.6 Ensure and Protect the Competitiveness of the Country’s
Telecommunications Industry ............................................................................................101
In the News: Globe Telecom Data Traffic Surges 35% .................................................103
VI. Conclusions .......................................................................................................................................................104

References ...........................................................................................................................................................107

iii
 LIST OF TABLES

Table 1 Definition of Telecommunication Markets............................................................................ 16

Table 1A Service Revenue: 2011-2015 (in million pesos) ................................................................. 20
Table 2 Service Revenue Market Share: 2011-2015 (in percent) ................................................ 21
Table 3 Cellular Subscriber Base: 2011-2015 ...................................................................................... 21
Table 4 Broadband Subscriber Base: 2011-2015 ............................................................................... 22
Table 5 Fixed Line Subscriber Base: 2011-2015................................................................................. 22
Table 6 Capital Expenditures to Service Revenue Ratio in Various Countries:
2014-2015 (%) ................................................................................................................................. 29
Table 7 Basic Postpaid Fixed Line Rates: PLDT and Globe ............................................................. 32
Table 8 Fixed Line + DSL: PLDT and Globe............................................................................................ 32
Table 9 Fixed Line + DSL + Entertainment: PLDT and Globe......................................................... 33
Table 10 TM Prepaid Mobile Rates.............................................................................................................. 33
Table 11 TNT Prepaid Mobile Rates ........................................................................................................... 34
Table 12 Comparison of PLDT/Smart vs Globe Samsung Galaxy Note 7
Postpaid Plans ................................................................................................................................... 35
Table 13 ICT Price Basket and Sub-Baskets, 2014 ................................................................................ 39
Table 14 Fixed Telephone Sub-Basket, 2014 .......................................................................................... 40
Table 15 Mobile Telephone Sub-Basket, 2014 ....................................................................................... 40
Table 16 Fixed Broadband Sub-Basket, 2014 ......................................................................................... 41
Table 17 Mobile Broadband Prices: Postpaid Handset-Based, 500 MB, 2014 .......................... 42
Table 18 Mobile Broadband Prices: Prepaid Handset-Based, 500 MB, 2014 ............................ 42
Table 19 Mobile Broadband Prices: Postpaid Computer-Based, 1 GB, 2014 ............................. 43
Table 20 Access and Usage Indicators, 2014........................................................................................... 44
Table 21 4, 10, and 15 Mbps Broadband Adoption in Asia-Pacific Region ................................. 45
Table 22 Average Connection and Peak Speed (1PV4) in Asia-Pacific Region ......................... 49
Table 23 Average Page Load Times Based on Real User Monitoring of Selected
Asia-Pacific Countries .................................................................................................................... 50
Table 24 Average Cellular Mobile Data Speed in Asia-Pacific Region........................................... 51
Table 25 Lerner Indices for Globe, PLDT, and Digitel: 2008-2015 ................................................ 59
Table 26 Lerner Indices : 2002-2015 ......................................................................................................... 61
Table 27 Four Classes of Market Structure and the Intensity of Competition .......................... 61
Table 28 HHI By Type of Service, 2016 ..................................................................................................... 61
Table 29 Concentration and Market Structure in ASEAN .................................................................. 62
Table 30 Profitability Indicators: 1991-2013 ......................................................................................... 64

iv
Table 31 Comparative Profitability Indicators: 1997-2014.............................................................. 65
Table 32 EBITDA Margins, Capital Intensity, and Cash Margins: 2002-2015 ........................... 66
Table 33 First Quarter 2016 Average Connection Speed in Asia Pacific Region ...................... 80
Table 34 First Quarter 2016 Peak Connection Speed in Asia Pacific Region ............................. 81
Table 35 Second Quarter 2016 Average and Peak Connection Speed in Asia
Pacific Region .................................................................................................................................... 82
Table 36 Second Quarter 2016 Mobile Connection Speed in Asia Pacific Region.................... 83

v
 LIST OF FIGURES

Figure 1 SCP of the Philippine Telecommunications Market....................................................... 17

Figure 2 Market Share by Service Revenue, as of End 2015 ........................................................ 24
Figure 3 Market Share by Subscriber Base, as of End 2015 ......................................................... 25
Figure 4 Monthly ARPU Among Different Brands ............................................................................ 36
Figure 5 Monthly CHURN Among Different Mobile Services ....................................................... 46
Figure 6 Revenue Growth: 2011-2015.................................................................................................. 55
Figure 7 EBITDA Margin: PLDT and Globe: 2011-2015................................................................. 56
Figure 8 Comparison of EBITDA Margin vis-a-vis Globe, as of End 2015 .............................. 56
Figure 9 Comparison of Return Ratios: 2011-2015......................................................................... 57
Figure 10 Comparison of Return Rates vis-a-vis Globe, as of End 2015 .................................... 57
Figure 11 PLDT-Globe IP Peering .............................................................................................................. 99

vi
 LIST OF ABBREVIATIONS

ARPU Average Revenue Per User

BAYANTEL Bayan Telecommunications Incorporated
BT British Telecom
CAGR Compound Annual Growth Rate
CDN Content Delivery Network
CEO Chief Executive Officer
CICT Commission on Information and Communication Technology
CLA Critical Loss Analysis
CMTS Cellular Mobile Telephone Services
CRS Clavecilla Radio System
CURE Connectivity Unlimited Resource Enterprise
DICT Department of Information and Communication Technology
DIGITEL Digital Telecommunications Philippines Incorporated
DOTC Department of Transportation and Communications
DSL Digital Subscriber Line
EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization
EO Executive Order
ETPI Eastern Telecommunications Philippines Incorporated
EU European Union
FB Facebook
FCC Federal Communications Commission
FTC Federal Trade Commission
GB Gigabyte
GDP Gross Domestic Product
GLOBE Globe Telecom Incorporated
GMCR Globe-Mackay Cable and Radio Corporation
GNI Gross National Income
GSM Global System for Mobile Communications
GWL Globe Wireless Limited
HHI Hirschman-Herfindahl Index
HMT Hypothetical Monopoly Test
ICT Information and Communication Technology
IDA Infocomm Development Authority
IGF International Gateway Facility
IMF International Monetary Fund

vii
IPV4 Internet Protocol Version 4
IRR Implementing Rules and Regulations
ISDN Integrated Services Digital Network
ISP Internet Service Provider
ITU International Telecommunication Union
IXP Internet Exchange Point
LEC Local Exchange Carrier
LGU Local Government Unit
LTE Long Term Evolution
M&A Merger & Acquisition
MB Megabyte
Mbps Millions of bits per second
MHz Megahertz
MMS Multimedia Messaging Service
NBN National Broadband Network
NetCo Co-Owned Network Company
NRI Networked Readiness Index
NTC National Telecommunications Commission
OECD Organization for Economic Cooperation and Development
OTT Over-The-Top
PCC Philippine Competition Commission
PDS Philippine Digital Strategy
PHILCOM Philippine Global Communications Incorporated
PHOpenIX Philippine Open Internet Exchange
PhP Philippine Peso
PILTEL Philippine Telephone Corporation
PISO Philippine Internet Services Organization
PLDT Philippine Long Distance Telephone Company
PPP Purchasing Power Parity
PREWI Philippine Press Wireless, Inc.
PSE Philippine Stock Exchange
PSTN Public Switched Telephone Network
PTE Public Telecommunication Entities
QoQ Quarter to Quarter
QoS Quality of Service
ROA Return on Asset
ROE Return on Equity

viii
SAS Service Area Scheme
SCP Structure-Conduct-Performance
SMART Smart Communications Incorporated
SMC San Miguel Corporation
SMS Short Message Service
SSNIP Small but Significant Non-Transitory Increase
TESDA Technical Education and Skills Development Authority
TTPI Telecommunications Technologies Philippines Incorporated
UAF Universal Access Fund
UAS Universal Access Service
UK United Kingdom
USA United States of America
USAID United States Agency for International Development
USD United States Dollar
USF Universal Service Fund
VAS Value-Added Services
VOIP Voice Over Internet Protocol
WESM Wholesale Electricity Spot Market
WLL Wireless Local Loop
YoY Year to Year

ix
 EXECUTIVE SUMMARY

The telecommunication sector plays an important role in contributing directly to the

Philippine economy. Since 1928, the Philippine Long Distance Telephone Company (PLDT)

dominates the industry. Several new players entered in the 1990s after the government

deregulated the industry. The fragmentation and lack of economies of scale of the service area

scheme (SAS) led to a series of consolidations and mergers until its present structure where

Globe Telecom is the only player that can restrain PLDT’s dominance.

An application of the traditional structure-conduct-performance (SCP) paradigm shows

that the industry is highly concentrated with significant barriers to entry such as capital

requirements, subscriber base, and brand image. The market structure is likely strongly

influenced by the conduct of the incumbents such as Globe’s and PLDT’s buffet pricing, bundled

product offering, and innovations. And both market structure and conduct of the incumbent

impact the market performance industry EBITDA margins, ROEs and ROAs have been healthy.

An analysis of industry performance using metrics appropriate for an industry characterized

with sunk costs and economies of scale and scope shows that the industry players do not

exercise abusive market power.

The market is practically defined as national in geographic scope with the following

product markets: fixed voice, fixed mobile, wireless mobile, fixed broadband, wireless

broadband, and interconnection services.

The present two-player structure is characterized as fiercely competitive. However, the

market realities of capital intensity, sunk costs, and economies of network size prevent a

realistic entry of a private third player. Only a publicly-owned third player, that builds a “last-

mile” network that is financially not viable for private operators to build, can complement the

coverage gap in the present network.

Spectrum allocation process is important because the method chosen by the regulator

determines the resulting structure of the industry.

x
 The two commonly used spectrum allocation methods are: (1) the administrative

approach which evaluates applicants on the basis of some criteria that may not be consistent

and transparent, and (2) auction approach that is transparent and increasingly used by many

regulatory authorities in this time of excess demand compared to available frequencies. The

National Telecommunications Commission’s (NTC’s) preferred allocation method is the

administrative approach and NTC is being criticized for lack of transparency and for treating

spectrum licensing system as confidential. A transparent system is recommended by various

industry stakeholders, and that NTC must develop a spectrum management system in

coordination with them. In sum, an effective spectrum management system is needed in the

country.

Increasing broadband speed has the potential to add 0.3 percent to GDP growth and

increasing broadband speeds by 0.5 Mbps results in additional annual household income of USD

800. The internet revolutionized the way people work and live and how they create and share

ideas and information, accounting for as much as 21% of GDP.

Although mobile phone subscriptions and mobile broadband subscriptions have

increased, some stakeholders suggest that a national broadband policy is needed because of

high prices, slow speed, and unreliable service. While international comparisons show that the

Philippines ranks low in terms of average connection speed, the rate of change of speed is

increasing, and given new investments in network facilities, the gap is soon to be bridged.

The recommendations of the Philippine Broadband: A Policy Brief are analyzed. First,

the proposal to adopt an open access network infrastructure model requires a restructuring or

structural separation of the existing system. Moreover, the performance of the UK open-access

system is far from its expectations because British Telecom created its own company to

compete against BT wholesale which leads to high set up costs and low customer satisfaction;

and even the Singapore “open-access” system has aspects akin to the vertically integrated

system because its wholesale operator created to compete against SingTel was bought by the

latter. Second, the need to update ICT laws and policies is a recommendation which is difficult to

xi
disagree with. Third, promoting IP peering is reasonable, but infrastructure-sharing requires

government incentive scheme to encourage infrastructure investments by incumbents and

avoid a free-lunch behavior by new and small entrants. Fourth, updating of ICT strategy and

plan can be undertaken by the newly-created Department of Information and Communication

Technology (DICT). Long-term plans must be sustainable and cannot be driven by a flavor-of-

the-month shift from one model to another. The update should address the historical gap

between targets and performance. Fifth, spectrum management and allocation in the

Philippines can be improved, but it might require the institutional strengthening of NTC’s

capacity. And sixth, the policy brief characterizes the telecommunications industry as “less

competitive and effectively a duopoly.”* Our market and competitive analysis of the industry

points to fierce competition between Globe and PLDT, and the earnings by the incumbents over

the long run are not too high as to attract new players in less populated “last-mile” areas whose

infrastructure deployment cost is far higher compared to dense urban areas.

Competition exists in the present Philippine telecommunications industry which is

described as a two–player market. The valuable role played by Globe in the industry is to

gradually gain operational and financial viability in the long run, and then provide an effective

constraint against the exercise of market power by PLDT. The ability to exercise market power

by raising prices and reducing the quantity of service is not apparent. On the contrary, fierce

price competition and competition to install and upgrade facilities are equally intense. Although

globally most telecommunications markets are having 3 to 4 competitors, a third player may

have a difficult time attaining financial viability in the short run due to its late-mover

disadvantage and the need to penetrate undeveloped areas whose deployment cost is higher

than the almost saturated urban markets dominated by the incumbents. The only realistic third

player is the government, but its social value is its cost-insensitive capacity to pour investments

in “last-mile” and high costs areas, and to build “last-mile” network that complements with

*
Duopoly is defined as a market in which two firms compete with each other (Pindyck and Rubinfeld, 2009).

xii
existing networks. However, there are historical examples of government failures in direct

provision and operation of utility services.

xiii
 Assessment of the Structure, Conduct, and Performance of the Philippine
Telecommunications Industry

Epictetus E. Patalinghug, Wilfred S. Manuela Jr., Regina M. Lizares, and Jason C. Patalinghug**

I. Introduction

The telecommunications (telecom) sector plays a critical role in contributing directly to

the Philippine economy. In an International Telecommunication Union study (ITU, 2012), it

estimates that telecom revenues account for 2.5% (or USD 5.3 billion) of the country’s Gross

Domestic Product (GDP), contribute some USD 267 million annually to economic growth,

generate 1.0% of total tax collections, and employ 525,000 skilled workers and professionals.

Indirectly, the societal importance of telecoms is well accepted and broadly understood,

reflected in its near-ubiquitous penetration and use. One, it delivers a technological foundation

for communications, which plays a central role in the fundamental operations of a society - from

business to government to families. Two, it enables participation and development of people in

communities disadvantaged by geography. Third, it provides vital infrastructure for national

security- from natural disaster recovery, to communication of vital intelligence (Lucky &

Eisenberg, 2006).

This report aims to achieve the following objectives: (1) to analyze the structure,

conduct, and performance of the Philippine telecommunications industry; (2) to define the

relevant market; (3) to describe the intensity of competition in the industry, particularly

between the industry’s two national players, PLDT/Smart and Globe; (4) to analyze whether

there is a need for a third player to enter the industry; (5) to analyze the relationship between

**
Professor Emeritus, University of the Philippines; Associate Professor, Asian Institute of Management;
Assistant Professor, Virata School of Business, University of the Philippines; and Assistant Professor,
Department of Economics and Finance, Southern Connecticut State University, respectively. This report has
been prepared for Globe Telecom, Inc. (Globe). Although funded by Globe, this report represents the authors’
independent analysis and perspective and do not necessarily reflect the views of Globe Telecom, University of
the Philippines, Asian Institute of Management or any individual or organization. In assembling this report, the
authors used publicly available information and information in other reports. The accuracy and completeness of
information in other reports have not been subjected to independent verification. Thus, the results from the
analysis in this report are based on the authors’ professional judgment at the time of writing, using available
information.

1
the current internet situation and the allocation/utilization of spectrum resources; and (6) to

review the study entitled, “Philippine Broadband: A Policy Brief” (February 2016), with focus on

its six recommendations and taking into account Globe’s perspective on the recommendations.

The report is organized as follows. Section II gives a brief history of the industry. Section

III provides a market and competitive analysis using the structure-conduct-performance (SCP)

framework. Section IV describes the spectrum management analysis. Section V analyzes the

broadband policy by reviewing the study on “Philippine Broadband: A Policy Brief.” And Section

VI summarizes and concludes the report.

II. Brief History

The Spanish colonial government established the first telephone system in Manila in

1896. The most dominant player in this private-sector-driven industry2 is the Philippine Long

Distance Telephone Company (PLDT) which was granted a franchise in 1928. PLDT developed

and expanded the coverage of the telephone network from less than 100,000 in the 1960s to

more than a million in the 1990s through the acquisition of existing telephone systems in the

country. The government policy to restrict entry into the telephone services sector was based

on the natural-monopoly principle.3 Thus, it implemented the policy of one franchised carrier

for each defined exchange service area based on this principle.4 In 1981, the government

provided incentives for the merger or consolidation of public telecommunication entities (PTEs)

to enhance economies of scale and to promote capacity and financial stability of PTEs. This

policy enabled PLDT to acquire Pilipino Telephone Corporation (Piltel), Republic Telephone

Company, Zamboanga Telephone Company, and Pineda Telephone Company during this period

(USAID, 1992; Abrenica, 2000). PLDT was also given the authority to establish a nationwide

2
The Philippines is unique among developing countries for having a private-sector-provided telephone service.
Serafica (1998) concluded that this experience does not necessarily lead to satisfactory performance especially
by a monopoly which can abuse its position in the absence of a strong regulatory environment.
3
Natural monopoly means that a firm can produce the entire output of the market at a cost lower than what it
would be if there were several firms (Pindyck and Rubinfeld, 2009).
4
Serafica (1998) investigated whether PLDT was a natural monopoly and her test revealed that natural
monopoly properties did not exist in PLDT’s provision of toll and local service, and that at least two firms could
have provided the same level of outputs as PLDT without raising total industry cost.

2
long-distance network until 1989 when the National Telecommunications Communication

(NTC) approved the application of Eastern Telecommunications Philippines, Inc. (ETPI) and

Philippine Global Communications, Inc. (Philcom) for license to operate an international

gateway facility. These new entrants posed minimum competition vis-à-vis PLDT in this

market.5 During this period the market for cellular mobile telephone services was a two-player

market—comprising of Piltel and Express Telecommunications Company, Inc. (Extelcom). PLDT

was likewise then the sole owner and operator of a nationwide telephone backbone (USAID,

1992; Abrenica, 2000).

The private-sector provision of telephone service, under PLDT’s virtual monopoly,

focused telephone expansion in highly populated urban areas at the expense of sparsely-

populated rural areas. Nevertheless, PLDT failed to meet its public service commitments and

installed fixed-line teledensity stagnated at around 1.0 for two decades (Abrenica, 1999;

Salazar, 2007; Mirandilla-Santos, 2011b). PLDT was saddled with 800,000 telephone backlog

and poor quality of service in 1988. PLDT recorded 17 trouble complaints per 100 telephones

compared to Indonesia’s 9, Thailand’s 7, and the benchmark’s 5 (Abrenica, 1999). In 1992, PLDT

had 94% share of fixed telephone lines, while 50 small companies accounted for the remaining

6 percent (USAID, 1992).

Executive Order No. 109 (Universal Telephone Service Policy, issued on July 1993)

initiated the service area policy of the government. The government implemented the Service

Area Scheme (SAS) which divided the country into eleven service or franchise areas. Nine

carriers (either cellular operator or international operator or both) are assigned into these

service areas. Cellular operators were required to install a minimum of 400,000 telephone lines

within three years, while international operators were required to provide a minimum of 300

local exchange lines per one international switch termination and a minimum of 300,000

telephone lines in three years. The incumbent PLDT continued to operate in all service areas

and this asymmetry allowed PLDT to choose a level of capital that can reduce an entrant’s

5
ETPI’s and Philcom’s actual operation was delayed because PLDT sued on the ground that they were given
monopoly of the long-distance service in order to cross-subsidize local telephone service.

3
profitability. However, the new entrants reduced profit margins of incumbents and forced it to

downsize its organization in order to raise efficiency. SAS was designed to improve the

telephone density in the country through the availability of reliable and affordable

telecommunications service in urban as well as in rural areas (Serafica, 1997; Abrenica, 1999;

and Abrenica, 2000). New operators eventually merged with each other as the market size was

too small for 10 players which are too many given the market sizes of industrialized countries.

Moreover, the SAS kept firms small and they could not exploit gains from economies of scale to

reduce their cost of telephone service. Furthermore, having a small network of subscribers gave

them weak bargaining power in negotiating interconnection arrangements with the dominant

firm, PLDT (Serafica, 1997; Abrenica, 2000).

In contrast to PLDT, Smart and Globe were aggressive in their strategies in the mobile

phone market, they invested in both cities and provinces and had a lower average revenue per

unit (ARPU). They likewise built their own backbone. In May 2000, Globe had a 38% market

share, Smart had 39%, and Piltel had only 13%.

Telephone density was less than 1% from 1977 up to 1990. In 1992, when the Ramos

government assumed office, the country’s telephone density was 1.17%. When the government

opened to competition the cellular mobile telephone service in November 1992, Globe was one

of the three carriers to enter the market. As a result, Globe contributed greatly to the attainment

of the current telephone density of more than 100%.

The telecommunication industry policy reform process started with the liberal granting

of used to be restricted cellular mobile telecommunications services (CMTS) and international

gateway facility (IGF) markets followed by Executive Order No. 59 (Telecommunications

Interconnection Policy issued on February 1993) which mandated the interconnection of

authorized carriers; followed by Executive Order No. 109 (Policy to Improve Provision of Local

Telephone Service, issued on July 1993) which required IGF and CMTS operators to provide

local exchange service in unserved and underserved areas, and embodied the service area

policy; and by Republic Act No. 7925 (Public Telecommunications Policy Act, passed by

4
Congress on March 1995) which consolidated all existing telecommunications policies and

effectively de-monopolized the industry. Among the relevant provisions of the Act are: (1)

removing the 12 percent ceiling on the rate of return, (2) broadening ownership of

telecommunications systems by requiring carriers to make a public offering of their stocks, (3)

institutionalizing revenue sharing negotiations between carriers as the manner of settling

interconnection agreements; and (4) prohibiting a single franchise to engage in both

telecommunications and broadcasting either through the airways or by cable (Abrenica, 1999,

2000; Serafica, 2002).

Basically, the two remaining national players of the industry are: PLDT and Globe.

 PLDT

Philippine Long Distance Telephone Company (PLDT) remains to be the country’s

dominant supplier of domestic and international telecommunications services. It is authorized

since its founding in November 1928 to provide virtually every type of telecommunications

service until 2028. It was the first to establish a nationwide digital backbone in the country

which means that interconnection was critical for other carriers to operate effectively and

compete against PLDT’s monopoly. Although PLDT operated as a private monopoly for decades,

the controlling stake moved from General Telephone and Electronics Corporation to the

Antonio Cojuangco Group, and now to the First Pacific Group. The major reform measures,

discussed in the preceding paragraph, initiated by the Ramos administration lessened PLDT’s

dominant control of the industry. PLDT continues to expand and modernize its network to meet

the challenges of increasing competition, to cope with the growing demand for technologically

advanced telecommunications services, and to manage the erosion by over-the-top (OTT)

players and other web-based services of its legacy businesses. In 1998, the First Pacific Group

acquired controlling stake of PLDT, and in 2000, PLDT acquired 100% of Smart

Communications, Inc. (Smart).

In early 2011, PLDT started the process of acquiring initially 52 percent equity in Digital

Telecommunications Philippines, Inc. (Digitel) through a share-swap agreement, and on

5
October 26, 2011, NTC approved the merger on the ground that the acquisition “neither poses

any prejudice to the public interest and convenience nor will [it] make the service fail to operate

or function better” (NTC Case No. 2011-072, October 26, 2011).6In 2015, PLDT’s consolidated

revenues were stable at PhP 171.1 billion while its reported net income decline from PhP 34.1

billion in 2014 to PhP 22.1 billion in 2015 (2015 PLDT Annual Report). PLDT ended the first six

months of 2016 with a cellular subscriber base of 64.47 million, 6 percent lower compared to

the same period in 2015. PLDT’s reported net income for the first 6 months of 2016 fell to PhP

12.5 billion due to PhP 5.4 billion write off from its investment in Germany-based Rocket

Internet.7 In September 2016, PLDT established key alliances with internet TV firm Roku, Inc.,

global internet TV network Netflix, e-commerce giant Amazon, and ABS-CBN Corporation’s OTT

content platform iWantTV. This partnership gives ABS-CBN a platform to distribute content;

subscribers of PLDT and Smart can avail of packages that offer iWantTV (See “In the News”:

Cotabato City Council Denounces PLDT’s Poor Internet Service).

 Globe

Globe Telecom, Inc. (Globe) descended directly from Dollaradio, a ship-to-shore radio

and telegraph company in the 1920s which was later renamed Globe Wireless Limited (GWL).

Globe is also a scion of Philippine Press Wireless, Inc. (PREWI) and Clavecilla Radio

System (CRS). In 1980, Globe-Mackay Cable and Radio Corporation (GMCR) was formed from

the merger of GWL, PREWI, and Mackay Radio Telegraph. When GMCR sold 60% of its stocks to

the Ayala Corporation in 1974, it had already been strengthened by this colorful history of

partnerships. It eventually became the first telecom company to list its share in the Philippine

Stock Exchange (PSE).

6
NTC imposed some conditions for its approval: (1) Digitel shall continue to provide nationwide “unlimited”
types of services to the public, and (2) PLDT will divest itself of 10 MHz of 3G frequency through the sale by
Smart of all of its rights and interests in Connectivity Unlimited Resource Enterprises, Inc. (CURE) which held
the frequency. Until now NTC could not bid CURE’s frequencies, and PLDT remains in control of these
frequencies because PLDT imposed a minimum price called cost recovery amount to be determined by PLDT,
and a 50% share of the excess of the cost recovery amount, in the event the actual proceeds from the divestment
sale exceeds the cost recovery amount.
7
Miguel Camus, “PLDT Sees Tough Q3,” Manila Bulletin, September 12, 2016, p. B4.

6
 In 1992, Congress passed a law merging GMCR and CRS to form GMCR, Inc. which was

later renamed Globe Telecom, Inc. Globe was given license to offer both domestic and

international telecom services.

In 1993, a memorandum of understanding between Ayala Corporation and Singapore

Telecom International was signed to further strengthen Globe’s capabilities to serve the

broadening telecommunication needs of a growing economy. With additional capital and

expertise, Globe widened its reach through its various services and boosted the Philippines’

capacity to participate in the world wide traffic of information exchange. In the same year, Globe

was granted a provisional authority from the National Telecommunications Commission (NTC)

to offer nationwide Cellular Mobile Telephone System (CMTS) service based on Global System

for Mobile (GSM) communications. It then tapped Nokia Telecommunications of Finland as its

main GSM network supplier with the awarding of an initial US$30 million supply contract.

7
 In 1994, Globe obtained its provisional authority from NTC to operate an International

Gateway Facility (IGF) and signed a US$10 million supply contract for the acquisition of the

AT&T 5ESS digital international gateway exchange. NTC also assigned to Globe the following

service areas for its fixed-line telephone network: Makati City, Mandaluyong City, San Juan,

Pasig City, and Marikina City in the National Capital Region, and the provinces of Cavite,

Batangas, Lanao del Norte, Lanao del Sur, Maguindanao, Mindoro Occidental, Mindoro Oriental,

North Cotabato, Palawan, and Sultan Kudarat. Globe was likewise granted by NTC a provisional

authority to install, operate, and maintain an integrated local telephone system and domestic

toll service, with public payphone facilities and public calling offices. Later in this year, Globe

launched Globe Handyphone, the company’s fully-digital CMTS service, initially for Metro

Manila and Cebu City. It also started offering its international telephone services in the same

year.

Globe launched its G-Net internet access service in 1998 to become the first Philippine

Telecom company to offer such service. It formally launched its fixed-line telephone services

called Globelines in 1996, and by 1998 it received a certificate of confirmation from NTC for its

compliance with NTC’s 700,000 telephone lines target for Globe Telecom. Globe set-up 777,187

telephone lines in 1998, thus exceeding its assigned obligation.

In 1997, Globe completed its US$18 million nationwide transmission network or its

telecom backbone facility.

In 1999, Globe signed an agreement with CNN Interactive to make Globe Telecom the

first Philippine mobile phone operator to offer CNN news service. And in the same year, Globe

signed a memorandum of agreement with the Philippine Long Distance Telephone Company

(PLDT) to link up SMART’s and Globe’s mobile phone services and for PLDT to provide Globe

with additional interconnection facilities (Patalinghug, 2001).

In 2001, Globe merged with Isla Communications, Inc. (Islacom) which was the first to

launch in the Philippines the digital mobile communications using global system for

communication (GSM) technology in 1994.

8
 In 2011, Globe accomplished a complete network transformation program that paved

the way for its early adoption of data services. In so doing, it was able to position itself as the

purveyor of the Filipino digital lifestyle. It was the first to push the digital shift and to partner

with global iconic brands to provide content. These were key to its financial turnaround and

success in the marketplace, and earned its place as the top mobile brand in the country.

In 2013, Globe started the acquisition of Bayan Telecommunications, Inc. (Bayantel)

through a debt-to-equity deal. In 2015, the NTC approved the merger on the ground that the

agreement “neither poses any prejudice to the public interest and convenience nor will [it]

make the service fail to operate or function better” (NTC Case No. 2013-218, July 2, 2015).

Globe started redirecting 50% of their consumer product investments to customer

experience innovations in 2013, and in 2014 embarked on a customer experience

transformation program called Delivering the Next Act (DNA). In 2015, Globe empowered their

customers in resolving their concerns through their 150,000-strong Globe Community (2015

Globe Annual Report).

Globe’s consolidated service revenue in 2015 reached PhP 113.7 billion, a 15% increase

from the 2014 level of PhP 99 billion. Net income in 2015 increased to PhP 16.5 billion from its

2014 level of PhP 13.4 billion, a 23% increase.

Globe expanded their partnership with Google by offering Chromecast, which allows

media streaming from data-capable devices onto audio or video devices such as high definition

TVs or home audio systems via WiFi. It likewise partnered with Huawei to deliver SingleSON or

Self Optimizing Network technology, allowing automatic diagnosis and optimization of the

Globe network, the first telco in the world to deploy this technology (See “Policy and Practice”:

2015: A Banner Year for Globe).

9
10
III. Market and Competitive Analysis

1. Market definition

Market definition is the first step in most competition analysis. It involves defining the

market, and then it uses market shares in that market to make inferences about market power

and likely competitive effect. The output of this process—a collection of products and

geographic locations—is used to identify the firms that belong to this market. Competition

policy is aimed to limit the market power of large firms, and market power is referred to as the

ability to raise prices above the competitive level. In the early version of competition policy, the

ability to raise prices was deemed to be strongly linked to firm size, and firm size was measured

by market share. And the calculation of market shares requires a definition of the relevant

market.

Both the United States (US) and European Union (EU) competition authorities

developed guidelines on how market definition is to be performed. The Philippine Competition

Law (Republic Act No. 10667) likewise emphasizes the need for market definition. (See “Policy

and Practice”: Relevant Market for Philippine Telecom Services). However, the implementing

rules and regulations (IRR) of R.A. 10667, or any subsequent memorandum circulars issued by

the Philippine Competition Commission (PCC), do not explicitly provide guidelines on how

market definition is to be performed (e.g. what types of tests and forms of evidence are

necessary for antitrust market definition).

11
 In the absence of guidelines, practitioners can adopt a market definition approach

consistent with the approach in other jurisdictions (e.g. US and EU). A number of conceptual

approaches have been employed. From an economic perspective, a firm (or group of firms

acting collectively) possesses market power if the entity is able to profitably raise price by

reducing output. The first essential step in market definition is to address the empirical problem

of identifying the extent of demand or buyer substitution. This is essential to market definition.

A market qualifies as a relevant market if its participating firms would find it profitable to raise

price for some or all of their products, at some or all of their locations, after accounting for the

12
likely buyer response to a higher price.8 Another key question is whether demand grows less

elastic when price increases are coordinated across a more extensive scope of products or

locations (or whether a merger would create unilateral effects by lessening localized

competition). The quantitative approaches to identifying demand (buyer) substitution are: (1)

cross-price elasticity of demand, (2) residual demand analysis, (3) price correlations, (4)

product flows, and (5) hypothetical monopolist test or HMT (See “Concepts in Context”: Various

Approaches in Identifying the Market). HMT views a market as that product and geographic

space that can potentially be monopolized by the firms being investigated or the dominant firm.

The analyst defines the relevant geographic (or product) market by considering whether the

firm is capable of maintaining a price increase of 5% to 10% for a 12-month period without a

reduction in profits (this is referred to as a small but significant non-transitory increase in price

or SSNIP).9 This exercise can be repeated by adding other geographic areas (or product

markets) until a broad enough geographic (or product) market has been defined in which the

firm at issue could raise prices on a profitable and sustainable basis (Massey, 2000; Baker,

2007; Baker and Bresnahan, 2008; and Boshoff, 2013).

Other quantitative approaches are: (1) estimation of demand elasticities, (2)

comparison of prices across markets thought to be similar except for differences in market

structure, (3) gathering qualitative information about the distribution of product characteristics

and seller locations, and information on how much buyers value products that are exactly what

buyer wants relative to products that are not quite what buyers are looking for, (4) buyer

surveys to assess the likely response of buyers to price changes—surveys can be used to get a

sample of retail customers at shopping malls using a carefully constructed survey instrument,

and (5) business executives may provide qualitative evidence. For instance, experienced

marketing executives may be able to explain which price changes likely result primarily from

8
If the firm loses too much business to its competitors if it raises its price (its competitors are close demand
substitutes or because its competitors would respond too aggressively in competition), and if the firm chooses
not to raise price despite the increase in its costs, then the firm does not have market power (Baker and
Bresnahan, 1992).
9
This method is likewise called “Critical Loss Analysis” (CLA) if it is used to estimate the maximum sales loss
that could be sustained as a result of the price increase without making the price increase unprofitable.

13
shifts in supply, and whether buyer valuations of product characteristics are observable and

unchanging (Baker, 2007; Baker and Bresnahan, 2008).

Some analysts have argued that market definition is an inefficient way of assessing

market power because it is possible to directly measure market power. For instance, Kaplow

(2013, 2014) argues that market-definition paradigm is counterproductive because: (1) there is

no valid way to infer market power from market shares in non-homogeneous-goods markets,

14
and (2) one cannot choose which market definition is superior without already having in hand

one’s best estimate of market power. But Werden (2014) responds that Kaplow (1) mistakenly

presumes a single purpose for the relevant market and asserts that it is not needed for that

purpose, and (2) assumes that market power is gauged independently of the relevant market.

The traditional method of measuring market power is to infer power from market

concentration: a concentrated industry is susceptible to the collective exercise of market power.

Baker and Bresnahan (1992) suggest three econometric methods of measuring market power:

(1) empirical methods based on responses to variation in cost. It uses the residual demand

estimation method. The residual demand elasticity measures the extent to which a firm would

be able to raise price by reducing output, after taking into account the demand responses of

buyers and the supply responses of rivals. The residual demand curve is the horizontal

difference between the market demand curve and the total supply of all other firms. The steeper

(more inelastic) the residual demand curve, the greater the degree of market power; (2)

empirical methods based on responses to variation in the elasticity of demand: the percentage

markup of price over marginal cost will be the greatest when demand is the most inelastic; but

when industry demand is highly elastic, firms with market power behave similarly to those

without market power; and (3) empirical methods based on detecting multiple pricing regimes.

It asks whether the data are better explained by two regimes rather than one: (i) cooperative

pricing and (ii) occasional price wars.

Boshoff (2013) argues that market definition involves more than an exercise to calculate

market shares; underlying market definition is an analysis and ranking of substitutes based on a

broad set of evidence. Critics of formal market definition prefer a single encompassing

econometric model that can be used to measure competitive effects; but this approach faces

practical challenges such as data availability. Thus, market-definition (or indirect market power

estimation approach) is methodologically preferable to direct market power estimation

approach.

15
 In applying the market-definition approach to the Philippine telecommunications

industry, the study team faces stringent data constraints. Unlike consumer product industries

where price and quantity data are quite accessible, price and quantity data for all types of

telecommunication services (as shown in Table 1) and all geographic markets (defined as

national in scope) are not available or accessible. Among the buyer substitution methodologies

described above, only the price correlations method is doable for this study. The correlation of

price offers for prepaid mobile services between TM and TNT is 0.93, which means that these

services are close substitutes, and thus TM and TNT prepaid mobile services belong to the same

market.10 The market-definition analysis concludes that Globe and PLDT are competing in the

same telecommunication markets.

TABLE 1: DEFINITION OF TELECOMMUNICATION MARKETS

Retail Wholesale
 Mobile Services
–Prepaid
–Postpaid
 Fixed Voice Services
 Fixed Voice Services
 Fixed Broadband Services
 Fixed Broadband Services
 Mobile Broadband Services
 Mobile Broadband Services
 Interconnection Services

2. Structure-Conduct-Performance (SCP) Analysis

This section aims to assess the Philippine telecom industry using the Structure-Conduct-

Performance (SCP) framework.

The SCP paradigm suggests that the industry’s performance, the success of an industry

in producing benefits for consumers, depends on the conduct, behavior of sellers and buyers,

which depends on the structure of the market. The structure, in turn, depends on basic

conditions such as technology and demand for a product. Typically, structure is summarized by

10
During the October 11, 2016 interview by the Philippine Daily Inquirer, Globe President and CEO Ernest Cu
revealed that the intensity of price competition between Globe and PLDT is demonstrated by the steep reduction
of data plus unlimited texting for three days from PhP 50 for 350 MB in January 2016 to PhP 50 for 700 MB in
October 2016.

16
the number of firms or some other measure of the distribution of firms, such as the relative

market shares of the largest firms (Perloff, Karp, & Golan, 2007).

FIGURE 1: SCP OF THE PHILIPPINE TELECOMMUNICATIONS MARKET

Structure Conduct Performance

•Industry •Pricing and product •Revenue growth
concentration offering •EBITDA margin
•Number of players •Customer retention •Return on equity
•Market share •Innovation (ROE)
•Barriers to entry •Service quality •Return on asset
•Regulatory and •Mergers and (ROA)
legal acquisition (M&A) •Lerner index
•Economic
•Strategic non-
cooperative
behavior

The definition of the market of interest11 is key in SCP analysis. The markets of interest

for the telecom industry are the cellular and fixed line operators, providing voice and data

(broadband) services. Galla (2016) has asserted that Philippine telecom industry is heavily

dominated by mobile communications, and its players have shifted their business strategy from

voice and short messaging services to data and internet-connectivity services. To the extent

data is available discussion is further subdivided to cover the prepaid and the postpaid markets.

Due to level of data disclosed by the telecom companies (telcos), the market cannot be

subdivided into retail and wholesale. Lastly, the geographic scope of the market is national.

The SCP approach is criticized for its conceptual treatment of performance and

structure. One issue is whether long-run performance measures are used. The length of time for

11
Telecom industry encompasses multiple service providers, including telephone companies, cable system
operators, Internet service providers, wireless carriers, and satellite operators. It also now includes software-
based applications with a communications emphasis and intermediate layers of software incorporated into end-
to-end communication services. It also includes suppliers of telecoms equipment and software products sold
directly to consumers and also to service providers, as well as the telecoms service providers (Lucky &
Eisenberg, 2006).

17
profits to reach the long-run differs by industry and high profits often decline slowly in highly

concentrated industries. The other issue is whether structural variables are exogenous. SCP

approach assumes that concentration is exogenous which means that high concentration causes

high profits. If concentration is not an exogenous measure, it creates a simultaneity bias

problem. However, researchers who estimated the relationship between performance and

concentration using statistical techniques designed to eliminate the simultaneity bias problem

found little difference in the estimated relationship. The other interpretation by the Chicago

School economists is that only when a firm is efficient or innovative is it possible to expand in a

market and make the market concentrated (Carlton and Perloff, 2005).

The most significant criticism of the SCP approach is that concentration itself is

determined by the economic conditions of the industry and hence is not an industry

characteristics that can be used to explain pricing or other conduct (Carlton and Perloff, 2005).

Sutton (1991) develops an approach that builds on the SCP concept and at the same time

addresses the endogenous determination of entry (Carlton and Perloff, 2005).

The SCP approach focuses on the relationship between performance and structure. On

the other hand, the modern empirical approaches focus on measuring performance or market

power using models based on profit-maximizing behavior by firms, but their key disadvantage

is that many of these models require making detailed assumptions about the shapes of the

supply and demand curves and about oligopoly behavior (Carlton and Perloff, 2005).

This report employs the conventional SCP approach because this approach has

uncovered many stable, robust, empirical regularities; it has taught us much about how markets

look; and it can uncover robust empirical regularities through inter-industry studies

complemented by case studies and qualitative insights (Schmalensee, 1989).

2.1 Structure

Market structure is often characterized by the number and relative size of the firms

(industry concentration) and the ability of firms to enter the industry (barriers to entry). For

the former, the expectation is that firms will exercise more market power if there is only one or

18
a few firms or if a small number of firms are very large relative to the remaining firms. For the

later, in industries with significant long-run entry barriers, prices can remain elevated above

competitive levels.

Shepherd (2004), posits that to be genuinely effective, competition needs to have

intense, sustained mutual pressure among numerous competitors, with no monopoly or

collusion. For a high probability of good results, the practical basis is: 1) At least five (5)

"reasonably comparable" rivals. (That number may vary slightly with the situation, but the need

is for "enough" strong rivals.); 2) None of those firms must hold a dominant position, with 40%

of the market or more; and 3) Entry by new competitors must be easy to do. Jamison (2012), as

cited by Galla (2016, pages 3 and 26) has presumably restated the same conditions for

competition.

2.1.1 Industry concentration

The Philippine telecom market is highly concentrated with the two major telcos, Globe

and PLDT, comprising almost 100% of the market and with a Herfindahl-Hirschman Index

(HHI)12 of 5162. This industry concentration has increased over the last decade through a series

of mergers and acquisitions (M&As) in the market. Section 2.2.5 on Mergers and Acquisitions

gives further details. (See “Concepts in Context”: Measuring Market Structure.)

PLDT dominates the telecom market at the end of 2015 and for the period 2011 to 2015

for both service revenues (See Tables 1A and 2) and subscriber base (See Tables 3 to 5). In

terms of service revenue, at the end of 2015, PLDT’s market share is at 59%; this is below its

five year average (2011 to 2015) of 63% market share (See Table 2). PLDT dominates all sub-

segment of the telecom, except for mobile and other data for the whole period 2011-2105, and

for fixed line broadband in 2015 (See Table 2). Meanwhile, in terms of subscriber base, PLDT

has the largest share in all three segments of cellular, broadband and fixed line (See Tables 3 to

5).

12
Herfindahl-Hirschman Index (HHI), a measure of industry concentration, is the sum of the square of the share
of each firm in the market. In the United States, the U.S. Department of Justice considers a market with an HHI
of less than 1,500 to be a competitive marketplace, and an HHI of 2,500 or greater to be highly concentrated
marketplace (Perloff, Karp, & Golan, 2007; “Herfindahl-Hirschman Index – HHI,” 2016).

19
 TABLE 1A: SERVICE REVENUE, 2011 TO 2015 (in Million Pesos)
Globe PLDT
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Service 77,765 82,742 90,501 99,025 113,679 145,834 159,738 163,932 164,943 162,930
Revenue
Mobile 63,538 67,189 72,765 78,069 85,105 100,574 112,107 114,971 113,455 109,188
Voice 30,909 32,446 32,367 34,684 36,862 53,339 60,692 62,713 63,743 59,215
SMS 27,727 26,552 28,794 29,079 26,136 43,708 46,501 45,341 39,794 37,958
Mobile 4,902 8,191 11,604 14,306 22,107 3,527 4,914 6,917 9,918 12,015
Browsing &
Other Data
Fixed Line & 14,227 15,553 17,736 20,956 28,574 45,260 47,631 48,961 51,488 53,742
Broadband
Broadband 7,496 8,721 10,440 12,687 17,458 9,517 11,246 12,481 14,076 16,141
Fixed Line 3,792 4,167 4,691 5,480 7,698 6,909 7,729 8,596 9,645 11,029
Data
Fixed Line 2,939 2,665 2,605 2,789 3,418 28,834 28,656 27,884 27,767 26,572
Voice
Source: PLDT and Globe annual reports, 2011-2015.

20
 TABLE 2: SERVICE REVENUE MARKET SHARE: 2011-2015 (in percent)
Globe PLDT
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Service
Revenue 35 34 36 38 41 65 66 64 62 59
Mobile 39 37 39 41 44 61 63 61 59 56
Voice 37 35 34 35 38 63 65 66 65 62
SMS 39 36 39 42 41 61 64 61 58 59
Mobile
Browsing &
Other Data 58 63 63 59 65 42 37 37 41 35
Fixed Line &
Broadband 24 25 27 29 35 76 75 73 71 65
Broadband 44 44 46 47 52 56 56 54 53 48
Fixed Line
Data 35 35 35 36 41 65 65 65 64 59
Fixed Line
Voice 9 9 9 9 11 91 91 91 91 89
Source: PLDT and Globe annual reports, 2011-2015.

In the cellular sub-market13, PLDT has a market share of 61%in terms of revenue (See

Table 2) and 55% in terms of subscribers as of the end of 2015 (See Table 3). PLDT has lost

market share to Globe over the last five years, driven by its declining market share in the

prepaid market which comprises 95% of the total market as of end 2015.

TABLE 3: CELLULAR SUBSCRIBER BASE: 2011-2015

2011 2012 2013 2014 2015
Globe 30,040,400 33,119,035 38,475,130 44,040,844 52,933,455
PLDT 63,696,629 69,866,458 70,045,627 69,857,060 64,938,074
ABS CBN Convergence, Inc. 51,810 1,700,000 600,000

Total Subscribers 93,737,029 102,985,493 108,572,567 115,597,904 118,471,529

Population 94,501,233 96,017,322 97,571,676 99,138,690 100,699,395
CMTS Density, in % 99 107 111 117 118
Market Share, in %
Globe 32 32 35 38 45
PLDT 68 68 65 60 55
ABS CBN Convergence, Inc. 0 1 1
Total Subscribers 100 100 100 100 100
Source: PLDT and Globe annual reports, 2011-2015; Somosot (2016); Population, total (2016).

13
Cellular revenues comprise of mobile voice plus SMS revenues, broadband revenues comprise of mobile
browsing and other data plus broadband revenue, and fixed line revenues comprise of fixed line voice plus fixed
line data.

21
 In the broadband sub-market, PLDT has market share of at 42% in terms of revenue

(See Table 2) and 55% in terms of subscribers as of the end of 2015 (See Table 4). Wireless

broadband is the driver of growth in this segment, with revenues and subscriber base outpacing

wireline by a ratio of about 4:1. Similar to the earlier trend, PLDT has lost market share to Globe

in the last five years.

TABLE 4: BROADBAND SUBSCRIBER BASE: 2011-2015

Globe PLDT
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Broadband 1,411 1,672 2,032 2,778 4,318 2,931 3,269 3,433 4,092 5,189
Wireless 1,122 1,331 1,654 2,351 3,671 2,068 2,359 2,454 2,986 3,933
Wireline 289 341 378 427 647 862 910 979 1,105 1,256
Market Share, in %
Broadband 33 34 37 40 45 67 66 63 60 55
Wireless 35 36 40 44 48 65 64 60 56 52
Wireline 25 27 28 28 34 75 73 72 72 66
Source: PLDT and Globe annual reports, 2011-2015.

In the fixed line sub-market, PLDT continues its market dominance over the period 2011 to

2015 in fixed line, where it finds its root. Market share stands at 77% in terms of service

revenue (See Table 2) and 65% in terms of subscriber base as of the end of 2015 (See Table 5).

TABLE 5: FIXED LINE SUBSCRIBER BASE: 2011-2015

2011 2012 2013 2014 2015
Globe 491,000 491,000 875,322
PLDT 2,166,295 2,063,794 2,069,419 2,207,889 2,303,454
Bayantel, ETPI/TTPI and
other LECs 564,642 504,490 18,333
Total Subscribers 2,166,295 2,063,794 3,125,061 3,203,379 3,197,109
Population 94,501,233 96,017,322 97,571,676 99,138,690 100,699,395
Fixed Line Density, in % 2.3 2.1 3.2 3.2 3.2
Market Share, in %
Globe 16 15 27
PLDT 66 69 72
Bayantel, ETPI/TTPI
and other LECs 18 16 1
Total Subscribers 100 100 100
Source: PLDT and Globe annual reports, 2011-2015.

22
 Figures 2 and 3 summarize the market share by service revenue and subscriber base as

of end 2015.

The telecom industry, particularly the cellular sub-market, shows the same level of

industry concentration as in other countries; for instance, in the following countries, the three

largest players have the following market shares: Canada (96%), UK (73.2%), US (81.1%), and

Germany (86.7%). However, this concentration levels are not as high as that of the Philippines,

plus in the UK, US and Germany they have a fourth wireless operators with greater than 10%

market share (SECOR Consulting, 2010).

23
 FIGURE 2: MARKET SHARE BY SERVICE REVENUE, AS OF END 2015

Source: PLDT and Globe annual reports, 2011-2015

24
 FIGURE 3: MARKET SHARE BY SUBSCRIBER BASE, AS OF END 2015

Source: PLDT and Globe annual reports, 2011-2015; NTC annual reports, 2012-2014

25
 2.1.2 Barriers to entry

The telecom industry poses significant barriers to new entrants: regulatory and

legal, economic, and possible strategic actions from incumbents that increase entrant’s

costs. For instance, past studies (Abrenica, 1999; Serafica, 1997, 1998) have documented

PLDT’s strategic actions, most particularly, when it was still a monopolist. Congressional

franchise and license to operate, spectrum allocation14, and large fixed capital requirements

are long-term barriers to entry. Once these hurdles are surmounted, short-term challenges

present themselves such as decentralized local government unit (LGU) regulation for

permits and taxes, and possible strategic actions from incumbents (on access,

interconnection, product lock-in, etc.) that increases entrant’s costs (Hauge and Jamison,

2009). (See also Section 2.2 on Conduct for further details on incumbent behavior).Thus, the

industry lags behind in terms of contestability or the freedom of market entry and exit;

contestability is important as studies have shown that even the threat of a new entrant will

improve the quality of service and pricing of current market players (Baumol, 1982;

Baumol, Panzar, and Willig, 1982).

Regulation is the main lever by which governments can influence competition in the

telecom industry, increasing or decreasing the barriers to entry. The National

Telecommunications Commission (NTC), an attached agency of the newly formed

Department of Information and Communication Technology (DICT), is the regulatory body

for the Philippines. Its jurisdiction covers licensing, pricing, adoption of standards of

reliability and interoperability, frequency allocation and assessment, dispute resolution,

and consumer protection. As a quasi-judicial body, NTC’s orders and decisions are final and

can only be appealed to the Court of Appeals and the Supreme Court. However, it operates

14
Radio frequency spectrum is a scarce natural resource that is granted for telecoms and broadcasting
purposes. After obtaining a hard-to-get franchise from Congress, the operator will still have to get a license
to operate from the NTC called Certificate of Public Convenience and Necessity (CPCN).

26
predominantly as a passive licensing and administrative agency rather than a pro-active

policy formulating and implementing body (Patalinghug and Llanto, 2005).

The requirement for a Congressional franchise for a service provider, regardless of

whether the service is delivered directly to the general public, is unique to the Philippines.

The cumbersome and protracted process of securing a franchise from Congress, apart from

separate licenses and permits to operate from the regulator, various national government

agencies, and LGUs can be seen as a disincentive for new players to invest. (Mirandilla-

Santos, 2016)

The availability of a spectrum may be the current largest single barrier to entry. The

proposed PLDT and Globe PhP70 billion purchases of San Miguel’s assets will leave less

than a quarter of spectrum available for a third entrant; Globe claims this is sufficient to

enable a future telecom player (Genio, 2016). NTC also wants a third player within the term

of President Rodrigo Duterte. This deal is current the subject of legal battle as PLDT and

Globe insist that the deal is already "deemed approved" when they notified the PCC of the

transaction, citing PCC memorandum circulars as support. Meanwhile, PCC says the law

precedes any circular and the law empowers them to review a deal and its implications

(Jiao, 2016).

Furthermore, there are other issues in the current regulatory framework that

impacts competition overall. One, interconnection agreements of major providers are not

made available to the public on the argument that they are trade secrets; and the NTC is not

forcing them to do so. Two, NTC has not enforced unbundled access to network elements

since it has not yet established rates and settling procedures given they claim complexity;

also they assert that they lack the power to compel the telecom firms to submit necessary

information. Third, cross-subsidization is explicitly allowed in Public Telecommunications

Policy Act (Republic Act No. 7925) of unprofitable local exchange areas to meet universal

27
service goals; whether the benefits of universal service outweighs anticompetitive impact is

for debate. Lastly, NTC is unable to require number portability15 in the face of strong

opposition from incumbent operators (Habito, 2016a; USAID, 2016).

Economically, telecom requires massive capital requirements implying high barriers

to entry and exit especially since a significant portion of fixed cost incurred is sunk. For

instance, Globe spends about 30 percent of its revenues for capital expansion. It is also

characterized by a network of switches, transmission links, and terminal or distribution

points that give rise to economies of scale and scope. Furthermore, the sector enjoys

network externalities, with the benefits from telecoms increase with the number of users

that one is able to reach. Granted all this, perfect competition is unlikely in the sector, but

neither is it a natural monopoly. Being multi-product in nature, different portions of the

telecoms network can be opened to varying degrees of competition (Serafica, 2002).

Network infrastructure alone for the newcomer could cost as much as USD 2.5

billion, as quoted from Globe President and CEO Ernest Cu (Waring, 2015). NTC once

estimated that the requirement to bring 2 Mbps internet connection to the entire country is

at PhP 800 billion (Habito, 2016b). With a constitutional limit of 40% on foreign ownership,

this effectively limits the presence of companies that can inject fresh new capital, bring in

state-of-the art technology, and compete in the market.

In addition to the large up-front capital cost, large annual capital expenditures are

required to continually maintain, and upgrade the network infrastructure. Today, Philippine

telcos continue to invest in major infrastructure programs to improve the overall

broadband service in the country and this is expected to continue even beyond 2020 (Genio,

2016). Table 6 shows that capital expenditure for 2014 and 2015 amounted to 23% and

29%, respectively, of the telcos’ service revenues.

15
Ability of consumers to change from one provider to another without changing numbers

28
 TABLE 6: CAPITAL EXPENDITURE TO SERVICE REVENUE RATIO IN
VARIOUS COUNTRIES: 2014-2015, (%)
2014 2015
US 15 14
Japan 15 13
Korea 16 14
Hong Kong 14 13
Malaysia 12 13
Taiwan 16 14
India 16 17
Thailand 21 23
Indonesia 26 23
Singapore 22 26
Philippines 23 29
China 33 36
Source: Genio(2016).

Once these long-term barriers are surmounted, roll out of network encounters

issues on permits, clearances, right of way, site acquisition and broad discretion levels of

permitting agencies. On the LGU level, bureaucratic and bribery issues, arbitrary fees for

permits and clearances are reported. On the national level, national government agencies

also require telcos to secure clearances for various purposes. Apart from government,

exclusive villages and homeowners’ associations may give telcos a difficult time to set up in

their area (Mirandilla-Santos, 2016).

Lastly, incumbent telcos can engage in strategic non-cooperative actions, with past

instances showing that they have. On the operations side, this may be in the form of

delayed, insufficient or expensive16interconnection, unequal access settlements or dispute

on revenue-sharing arrangements (Patalinghug and Llanto, 2005). On the marketing side,

this may be in the form of customer product/contract lock-in, promotions that effectively

temporarily drop prices, or further increase in advertising intensity; in terms of advertising

expenditure, telcos are in the top (Nielsen, 2016).

16
Wholesale pricing and access charges are not regulated by NTC (Mirandilla-Santos, 2016).

29
 2.2 Conduct

Conduct refers to how players respond to market incentives and competitive

pressures. Key indicators of conduct include relative pricing and product offering, customer

retention, product innovation, service quality and M&A.

The market structure seems to influences the conduct of market players. Given the

telco two-player structure, Globe’s and PLDT’s conduct involve strategic considerations;

each firm must consider how its actions will affect its rivals, and how they are likely to react.

As such, it is typical to see both companies mirror each other in terms of their action.

Philippine telecom industry is characterized by complex buffet pricing and bundled

products. Prices, reflected by average revenue per user (ARPU), have dropped over the

years by as much as 8% p.a.17 for some cellular brands, to one of the lowest ARPU levels in

the world. Despite this, prices are relatively more expensive with ICT services in the

Philippines costing 5.9% of gross national income (GNI) per capita compared to the regional

average of 1.7%. This effectively serves as a barrier to usage. Churn also remains elevated,

at one of the highest level in the world (GSMA, 2014), challenging telcos to compete as well

on customer retention and innovation (on tariff structure, product and services). In

addition, in terms of service quality, the Philippines ranks low in connection speed (Akamai,

2016b).

Competitive conduct would quickly change if the number of incumbents increases as

shown by a study of Bresnahan and Reiss (1991). Using data on geographically isolated

monopolies, duopolies, and oligopolies, they analyze the relationship between the number

of firms in a market, market size, and competition. They find out, that in markets with five

or fewer incumbents, almost all variation in competitive conduct occurs with the entry of

17
For the period 2011-2015

30
the second or third firm. The Philippines, however, over the last decade has been on a path

of consolidation, increasing industry concentration through a series of M&A.

2.2.1 Pricing and product offering

Globe’s and PLDT’s pricing and product offering directionally are similar, despite

the many and at times complex buffet pricing and bundled products they offer. Tables 7, 8

and 9 show some comparison of pricing and product offerings of Globe and PLDT. Table 10

shows the various bundles offered by TM/Globe, and Table 11 shows the counterpart

bundles offered by TNT/Smart/Sun. Table 12 compares the Samsung Galaxy Note 7

Postpaid Plans between Globe and PLDT/Smart.). Despite the competitive pricing, which

has resulted in declining revenues per subscriber over the years of as much as 8% p.a. for

some brands, telecom costs in the Philippines remain relatively high, serving as a barrier to

usage. As per Tirole (1993), the observation of a market price speaks little about the

competitiveness of the corresponding industry unless one can observe prices in industries

with similar cost structures (for instance, different geographical markets), or can observe

temporal pattern of the industry price or can accurately measure firm’s marginal costs.

Telcos offerings are nearly identical, both on fixed line and broadband (See Tables 7

to 9), cellular (See Tables 10 and 11 for prepaid plans and Table 12 for postpaid plans).

Telcos have to continually come up with new tariff plans to attract more customers and

maintain client base (Cayanan & Suan, 2012), particularly in the cellular sub-segment. A key

area is flexibility, and both operators focus on customizable18. Economists call this practice

“price-discrimination” in order take advantage of differing demand elasticities among

customer segments (See “Concepts in Context”: Pricing Cellular Phone Service). Any

differential pricing scheme can be viewed as unfair, even if it makes customers, as a whole,

18
Bundle can be designed to suit the consumer’s budget, lifestyle and needs. Type, number of call minutes
and text, data allowance and duration of the bundle (day/s), month/s) are parameters that can be changed

31
better off. The effects of price discrimination on consumer welfare can either be positive or

negative, depending on the market and on the differentiation scheme. If the price

discrimination scheme does not increase supply, it cannot increase total consumer surplus.

Cellular users favor prepaid bundles (95% of total cellular subscribers) over postpaid

contract plans; Table 10 and 11 shows how many prepaid offering of just two of the brands

in the market. Multiple SIM ownership is common and users regularly swap SIMs (or even

own dual-SIM handsets) in order to take advantage of the best deals and promotions

regularly refreshed by the operators (GSMA, 2014).

TABLE 7: BASIC POSTPAID FIXED LINE RATES: PLDT and Globe

PLDT Globe
Landline (basic) PhP 700.00 per month PhP599 per month
Special features: call waiting, call forwarding, 3-way
conference, speed dialing and caller ID
Local calls Free and Unlimited Free and Unlimited
NDD (same network) PhP 5.10 per minute Free and Unlimited

NDD (other networks) PhP 5.10 per minute

Landline to Cellular PhP 14.00 per minute

IDD USD0.40 per minute

Source: PLDT and Globe websites, as September 2016.

TABLE 8: FIXED LINE + DSL: PLDT and Globe

PLDT Globe
1299 Speedster Plan Broadband Plan 1299
Maximum speed 10Mbps 10Mbps
Monthly data allowance 50 GB 50GB (LTE) / 100GB (DSL)
Others Comes with HOOQ and Netflix for 6 months
Router FREE 4-Port Router with WiFi
Phone Landline FREE Landline with Unlimited Calls to Globe/TM
Source: PLDT and Globe websites, as of September 2016.

32
 TABLE 9: FIXED LINE + DSL + ENTERTAINMENT: PLDT and Globe
PLDT Globe
Lite Plan 1899 Broadband Plan 1899
Maximum speed 50 Mbps 10Mbps maximum speed
Monthly data allowance 80 GB 300 GB
Entertainment Iflix and Chromecast
FOX Networks
Group
Router FREE 4-Port Router with WiFi
Phone Landline FREE Landline with Unlimited Calls to Globe/TM
Source: PLDT and Globe websites, as of September 2016.

TABLE 10: TM PREPAID MOBILE RATES

Type Price (PhP) Description
Call
Unlitawag 15/1 day Unlimited calls to TM/Globe
Text
Astigtext30 30/5 days Unlimited texts to TM/Globe
Dagdagtxt 5/1 day Add to Unlitawag, 100 ALLNET texts
Sulitxt5 5/2 days 25 texts to TM/Globe
Txt10 10/2 days Unlitext to TM/Globe + 15-minute calls
Txt5 5/1 day Add to Unlitawag, get Unlitext to TM/Globe
UnliallNet10 10/1 day Unlimited texts to ALL NETWORKS
Combo
Combo 15 15/3 days Unlimited all net texts; 60 mins call to TM/Globe
Combo 20 20/4 days Unlimited all net texts; 60 mins call to TM/Globe
ComboAll 10 10/1 day Unlimited call to TM/Globe; Unlitext to TM/Globe; 50 all
net texts
ComboAll 15 15/1 day Unlimited call to TM/Globe; Unlitext to TM/Globe; 50 all
net texts
ComboAll 20 20/3 days Unlimited call to TM/Globe; Unlitext to TM/Globe; 50 all
net texts
CU10 10/2 days Unlimited calls to TM/Globe; 100 all net texts
Mobile Internet
Easy Plan 150/15 days Unlimited calls to TM/Globe; Unlimited texts to ALL
Networks; FREE Facebook and Viber
Go Surf 15 15/2 days 40 MB, 300 MB for Spotify Basic
Go Surf 299 299/30 days 1.5 GB allocation, 1 GB Spotify Premium
Go Surf 50 50/3 days 350 MB, 400 MB for Spotify Basic
Go Surf 99 99/30 days 100 MB, 1 GB Spotify Basic
GoSurf 10 10/1 day 200 MB for Spotify Basic
GoSurf 30 30/1 day 100 MB, 200 MB for Spotify Basic
SuperSurf 200 200/5 days Unlimited mobile internet
SuperSurf 50 50/1 day Unlimited mobile internet
Top up 2/1 day Additional two pesos for each product, use You Tube, Clash
of Clans, Google, Twitter, Instagram, WeChat
Top up 5/2 days Additional five pesos for each product, Clash of Clans,
Twitter, Google
Source: TM websites, as of September 2016.

33
 TABLE 11: TNT PREPAID MOBILE RATES
Name Price (PhP) Description
Call and text
Aldenload 15 15/1 day Unlicall to TNT/Smart
GaanUnliTrio 20/2 days Unlitext to TNT/SMART/SUN + 20 mins of calls to
Plus 20 TNT/SMART
GaanUnliTxt 30/2 days Unlitext + 30 mins calls to TNT/SMART
Plus 30
PaTok-o-Tex 10 10/1 day 20 consumable texts or mins of calls to TNT/SMART
TP15 15/2 days Unlitext to TNT/Smart/Sun; 10 Minutes call to
TNT/Smart/Sun; 50 Texts to ALL NETWORKS
Unli Talk and 20/day Unli all net SMS and Unli tri-net calls
Text 20
Unlitext 150 150/30 days Unlitext to TNT/Smart/Sun
UnliTxt Plus 10 10/1 day Unlitext and 10 mins calls to TNT/SMART + 50 texts to all
networks
UnliTxt2All 20 20/2 days Unlitext to all networks
UnliTxtAll 300 300/30 days Unlitext to ALL NETWORKS + 300 call mins to
TNT/Smart/Sun
UnliTxtAll 60 60/7 days Unlitext to ALL NETWORKS + 60 call mins. To
TNT/Smart/SUN
Mobile Internet
All Day 20 20/1 day Internet access, excludes video streaming and video
downloads
Babadapps 5/1 day For each app for 1 day- Facebook, Clash of Clans, Wattpad,
Twitter, Viber, WeChat, Instagram, Boom Beach, Hay Day,
Clash Royale, YouTube, Google
Babadapps 10/3 day For each app for 3 days- Facebook, Clash of Clans,
Wattpad, Twitter, Viber, WeChat, Instagram, Boom Beach,
Hay Day, Clash Royale, YouTube, Google
BigByte 10 10/1 day 40MB Internet + 200 MB iFlix and Spinner
BigByte 15 15/2 days 40MB Internet + 300 MB Spinner
BigByte 50 50/3 days 350MB Internet + 600 MB iFlix and Spinner
Maine Load 30 30/5 days Unlitext to all Networks + free Facebook, Twitter, Viber
Surf Max 50 50/1 day 800 MB worth of data
Combo
Alden and 15/1 day Unlitext to TNT + 60 mins. calls for TNT/ Smart/ Sun +
Maine Load 15 100MB for Facebook, Twitter, Viber, Clash of Clans, and
Dubsmash
All Text 10 10/1 day 75 texts to all networks + 6MB volume data
Araw-Araw 30/3 days Unlitext to TNT/SMART + 10 mins calls to TNT/SMART +
Load 30 10 Mobile Internet mins
GaanUnliTxt 15/ 1 days Unlitext and 30 mins calls to TNT/SMART/SUN + Unli FB
Plus 15
Gaantxt 10 10/1 day Unlitext to all networks + free Facebook, Twitter, Viber
Gaantxt 20 20/2 days Unlitext to all network + free FB, Twitter, Viber

34
GU30 30/3 days Unlitext to all + 30 Minutes Call to TNT/Smart/Sun; Free
FB, Twitter, Viber
U20 20/3 days Unlitext to TNT/Smart/Sun; 50 Minutes call to
TNT/Smart/Sun; 50 Texts to ALL NETWORKS; - Free FB,
Twitter, Viber
Unli Text Plus 20/2 days Unlitext and 30 mins of calls to TNT/SMART/SUN + Unli
20 FB via Java App
Unli Txt 10 10/2 days Unlitext and 50 minutes of calls to TNT/Smart/Sun; 50
texts to ALL NETWORKS; 30MB pang Facebook, Twitter,
and Viber
Unlicalltext 15 15/2 days Unlicalls and texts to TNT/Smart/Sun + 50 texts to all
networks + 30 Mb of data
UnliTxt Plus 30 30/3 days Unlitext to all + 30 Minutes Call to TNT/Smart/Sun; Free
FB, Twitter, Viber
Source: TNT websites, as of September 2016.

TABLE 12: COMPARISON OF PLDT/SMART VS GLOBE SAMSUNG GALAXY NOTE 7

POSTPAID PLANS
PLDT/Smart Globe
Plan 599 999 1499 1999 2999 599 999 1499 1999 2499
Cash- 35,000 28,800 19,200 11,000 5,000 26,400 22,800 18,000 14,400 8,400
out on (5,800
24-mo (30
install mos)
ment
(PhP)
Data 200MB 5GB 7GB 9GB 10GB 200MB 5GB 10GB 10GB + 7GB +
PhP PhP
202 702
consu- consu-
mable mable
Calls Unli 30 60 150 300 Unli Unli Unli Unli Unli
On-net mins mins mins mins On-net On-net On-net On-net On-net
All-net All-net All-net All- + +
net consu- consu-
mable mable
Texts UnliTri 100 120 200 240 Unli Unli Unli Unli + Unli +
net All-net All-net All0net All- On-net On-net On-net All-net All-net
net 299 299
Perks One Free App per month Premium Spotify or HOOQ for 3 months (P599
with basic Spotify), 1 Month Gadget Care,
choice between Navigation/Fitness/Traveler
and 1GB cloud storage.
Source: Jardinico (2016), as of September 2016.

35
 The resulting pricing behavior of telcos is complex due to their bundling of products,

product strategies (e.g., entry discounts, device inclusion) and product differentiation (in terms

of service, quality, duration, usage and bandwidth). ARPUs19 has been declining, to one of the

lowest levels in the world (GSMA, 2014, See Figure 4).

FIGURE 4: MONTHLY ARPU (IN PESOS)

A. Prepaid B. Postpaid
180 1,600
171 1,510
160
166 1,400
140
120 109 122 1,200
1,139
115 1,223
100 1,000 1,035
80 101 84
65 73 800
60 66
40 600
447
20 445
400
-
2011 2012 2013 2014 2105 200

Globe TM 0
2011 2012 2013 2014 2105
Smart TNT
Sun Cellular Globe Smart Sun Cellular

Source: PLDT and Globe annual reports, 2011-2015.

Note: Globe and TM are Globe brands, while Smart, TNT and Sun Cellular are PLDT brands.

19
ARPU is the outcome of price and product mix. It offers the closest metric to actual observed price. It
harmonizes the various prices and product offering.

36
37
 The global benchmarking of prices shows the Philippines having one of the highest

prices across all telecom services, despite the declining ARPU in cellular services (See

Figure 4). ICT services in the Philippines cost 5.9% of GNI per capita compared to the

regional average of 1.7% (See Table 13). Moreover, Tables 14, 15, 16, 17, 18, and 19 show

the prices fixed-telephone, mobile telephone, fixed broadband, mobile broadband postpaid

handset-based, mobile broadband prepaid handset-based, and mobile broadband postpaid

computer-based among countries in the Asia-Pacific region, respectively. In all of these

services, except mobile broadband postpaid handset-based, the Philippines has consistently

the highest price as a percent of GNI, even compared to India and Vietnam which have lower

GNI per capita relative to the Philippines. The reason for this situation is that ICT services in

the Philippines charge higher prices.

38
 TABLE 13: ICT PRICE BASKET AND SUB-BASKETS, 2014
Global Country ICT Price Fixed Mobile Fixed GNI(5) per
Rank Basket(1) telephone(2) cellular(3) broadband(4) capita, USD
(out of sub-basket sub-basket sub-basket
173) as a % of GNI as a % of as a % of GNI
per capita GNI per per capita
capita
3 Singapore 0.4 0.2 0.2 0.7 53,986
6 Hong Kong 0.4 0.2 0.2 0.7 38,382
12 South 0.8 0.3 0.9 1.3 25,894
Korea
16 Japan 0.7 0.6 0.9 0.5 46,284
19 Australia 0.7 0.5 0.3 0.9 65,335
42 Sri Lanka 1.0 1.1 0.4 1.6 3,167
50 New 1.2 1.3 0.5 1.8 36,089
Zealand
62 Malaysia 1.6 1.0 0.7 3.1 10,420
67 China 1.7 0.9 0.7 3.6 6,553
72 Indonesia 2.0 1.2 1.7 3.1 3,576
75 Vietnam 2.1 1.2 3.1 2.0 1,738
79 Thailand 2.2 1.3 1.8 3.6 5,335
97 India 3.1 1.9 2.1 5.3 1,568
120 Philippines 5.9 5.8 3.8 8.3 3,267
Source: ITU (2015).
(1) ICT Price Basket is a composite basket that includes three price sets, referred to as sub-baskets: the fixed-
telephone, mobile-cellular and fixed-broadband sub-baskets. The value is calculated from the sum of the
price of each sub-basket (in USD) as a percentage of a country’s monthly GNI per capita, divided by three.
(2) Fixed-telephone sub-basket refers to the monthly price charged for subscribing to the public switched
telephone network plus the cost of 30 three-minute local calls to the same (fixed) network (15 peak and 15
off-peak calls). It is calculated as a percentage of a country’s average monthly GNI per capita, and is also
presented in USD and PPP$.
Prices are expressed as a percentage of GNI per capita in order to show them in relation to the size of each
country’s economy, thus reflecting the affordability of each ICT service at a country level.
(3) Mobile-cellular sub-basket refers to the price of a standard basket of mobile monthly usage for 30 outgoing
calls per month (on-net/off-net to a fixed line and for peak and off-peak times) in predetermined ratios,
plus 100 SMS messages. It is based on prepaid prices, although postpaid prices are used for countries
where prepaid subscriptions make up less than two per cent of all mobile-cellular subscriptions. It is
calculated as a percentage of a country’s average monthly GNI per capita, and is also presented in USD and
PPP$.
(4) Fixed-broadband sub-basket refers to the price of a monthly subscription to an entry-level fixed-broadband
plan. For comparability reasons, it is based on a monthly data usage of (a minimum of) 1 GB. For plans that
limit the monthly amount of data transferred by including data volume caps below 1 GB, the cost for the
additional bytes is added to the sub-basket. The minimum speed of a broadband connection is 256 kbit/s. It
is calculated as a percentage of a country’s average monthly GNI per capita, and is also presented in USD and
PPP$.
(5) Prices are expressed as a percentage of GNI per capita in order to show them in relation to the size of each
country’s economy, thus reflecting the affordability of each ICT service at a country level. GNI =
Gross domestic product + factor incomes earned by foreign residents - income earned in the domestic
economy by nonresidents; in USD, using the IMF annual rates of exchange.

For the sub-baskets, fixed-telephone services in the Philippines cost 5.8% of GNI,

close to 5x regional average of 1.3% and placing the country in the lowest quartile globally

39
(See Table 14). Meanwhile, mobile cellular services in the Philippines cost 3.8% of GNI,

three times the regional average of 1.2% and placing the country in the third quartile

globally (See Table 15). Lastly, fixed broadband cost 8.3% of GNI, three times the regional

average and placing the country in the third quartile globally (See Table 16).

TABLE 14: FIXED TELEPHONE SUB-BASKET, 2014

Global Rank Country As a % of GNI per capita USD PPP $(1) GNI per capita, USD
(out of 173)
6 Singapore 0.19 8.69 9.10 53,986
12 South Korea 0.30 6.47 7.45 25,894
18 Hong Kong 0.44 14.19 18.23 38,382
26 Australia 0.55 29.70 21.42 65,335
28 Japan 0.58 22.48 21.25 46,284
49 China 0.89 4.85 7.92 6,553
57 Malaysia 1.01 8.74 17.99 10,420
62 Sri Lanka 1.10 2.91 8.10 3,167
67 Indonesia 1.19 3.54 9.57 3,576
72 Vietnam 1.24 1.80 4.44 1,738
74 New Zealand 1.27 38.16 29.36 36,089
78 Thailand 1.32 5.85 14.55 5,335
96 India 1.87 2.45 8.52 1,568
140 Philippines 5.79 15.77 36.15 3,267
Source: ITU (2015).
(1) Use of PPP exchange factors helps to screen out price and exchange-rate distortions, thus providing a
measure of the cost of a given service taking into account purchasing power equivalences between countries.

TABLE 15: MOBILETELEPHONE SUB-BASKET, 2014

Global Rank Country As a % of GNI per capita USD PPP $(1) GNI per capita, USD
(out of 182)
2 Hong Kong 0.19 5.96 7.66 38,382
3 Singapore 0.19 9.88 6.58 53,986
9 Australia 0.33 17.69 12.77 65,335
12 Sri Lanka 0.37 0.97 2.69 3,167
23 New Zealand 0.52 15.76 12.13 36,089
29 Malaysia 0.68 5.87 12.08 10,420
34 China 0.75 4.07 6.65 6,553
39 Japan 0.87 33.64 31.80 46,284
42 Korea 0.90 19.32 22.24 25,894
74 Indonesia 1.69 5.05 13.67 3,576
77 Thailand 1.76 7.83 19.49 5,335
89 India 2.14 2.80 9.74 1,568
108 Vietnam 3.12 4.53 11.18 1,738
115 Philippines 3.76 10.24 23.47 3,267
Source: ITU (2015).
(1) Use of PPP exchange factors helps to screen out price and exchange-rate distortions, thus providing a
measure of the cost of a given service taking into account purchasing power equivalences between countries.

40
 TABLE 16: FIXED BROADBAND SUB-BASKET, 2014
Global Country As a % of USD PPP $ Speed in Cap per GNI per
Rank GNI per Mbit/s month in GB capita, USD
(out of capita
181)
6 Japan 0.53 20.59 19.46 12 900 46,284
12 Hong Kong 0.68 21.67 27.85 200 Unlimited 38,382
14 Singapore 0.70 31.49 32.97 100 Unlimited 53,986
40 Australia 1.21 65.80 47.82 8 50 65,335
47 South 1.32 28.49 32.80 50 Unlimited 25,894
Korea
53 Sri Lanka 1.63 4.29 11.95 2 2.5 3,167
60 New 1.79 53.92 41.49 80 36,089
Zealand
66 Vietnam 2.00 2.89 7.15 2.5 1.00 1,738
78 Malaysia 3.10 26.89 55.36 1 Unlimited 10,420
79 Indonesia 3.11 9.27 25.09 0.5 Unlimited 3,576
90 China 3.58 19.53 31.92 1 Unlimited 6,553
91 Thailand 3.63 16.13 40.14 6 Unlimited 5,335
108 India 5.28 6.90 24.04 2.00 1.5 1,568
122 Philippines 8.27 22.50 51.59 3.00 Unlimited 3,267
Source: ITU (2015).

Tables 17 to 19 show comparison of mobile broadband prices across different

packages (prepaid and postpaid, handset and computer based). Across the three types of

offering, the Philippines still ranks in the third quartile globally. The Philippines hand-set

based offerings are relatively more price competitive than its computer-based offering,

ranking closer to global median.

41
 TABLE 17: MOBILE-BROADBAND PRICES, POSTPAID HANDSET-BASED, 500MB, 2014
Global Country As a % of GNI USD PPP $ GNI per Monthly data
Rank per capita capita, USD allowance (MB)
(out of
164)
4 Australia 0.16 9.01 6.50 65,335 500
9 Singapore 0.35 15.71 16.45 53,986 2,048
18 Korea 0.48 10.45 12.03 25,894 500
24 New 0.55 16.59 12.77 36,089 500
Zealand
25 Hong Kong 0.56 18.06 23.21 38,382 1,000
26 Sri Lanka 0.57 1.49 4.16 3,167 500
44 China 0.89 4.88 7.98 6,553 500
47 Malaysia 0.99 8.56 17.61 10,420 800
53 Japan 1.11 42.81 40.47 46,284 500
62 Thailand 1.38 6.13 15.24 5,335 500
75 Indonesia 1.56 4.64 12.54 3,576 1,624
86 Vietnam 1.96 2.84 7.01 1,738 500
96 Philippines 2.47 6.73 15.44 3,267 700
97 India 2.51 3.28 11.41 1,568 600
Source: ITU (2015).

TABLE 18: MOBILE-BROADBAND PRICES, PREPAID HANDSET-BASED, 500MB, 2014

Global Country As a % of GNI USD PPP $ GNI per Monthly data
Rank per capita capita, USD allowance (MB)
(out of
167)
8 Singapore 0.26 11.84 12.40 53,986 500
12 Hong Kong 0.36 11.67 15.00 38,382 1,000
20 Australia 0.50 27.04 19.51 65,335 2,084
23 New 0.55 16.59 12.77 36,089 500
Zealand
45 Sri Lanka 0.97 2.57 7.16 3,167 1,024
46 Malaysia 0.99 8.56 17.61 10,420 800
55 Indonesia 1.13 3.37 9.12 3.576 600
61 Thailand 1.38 6.13 15.24 5,335 500
87 Philippines 2.47 6.73 15.44 3,267 700
88 India 2.48 3.24 11.29 1,568 600
125 Vietnam 7.31 10.59 26.16 1,738 4,200
Source: ITU (2015).

42
 TABLE 19: MOBILE-BROADBAND PRICES, POSTPAID COMPUTER-BASED, 1GB, 2104
Global Country As a % of GNI USD PPP $ GNI per Monthly data
Rank per capita capita, USD allowance (MB)
(out of
162)
10 Singapore 0.35 15.71 16.45 53,986 2
15 Australia 0.41 22.54 16.26 65,335 1
26 Hong Kong 0.64 20.51 26.36 38,382 1
39 New 0.83 24.89 19.15 36,089 1
Zealand
43 Japan 0.93 35.68 33.72 46,284 2
45 Sri Lanka 1.14 3.01 8.38 3,167 6
53 Korea 1.16 25.07 28.86 25,894 2
65 Indonesia 1.56 4.64 12.54 3.576 1
69 Malaysia 1.69 14.67 30.20 10,420 2
78 Thailand 2.49 11.05 27.50 5,335 1
89 India 3.13 4.10 14.26 1,568 1
99 Vietnam 3.92 5.67 14.02 1,738 2
117 Philippines 8.27 22.50 51.59 3,267 5
Source: ITU (2015).

In addition, the cost and affordability of telecom services remain a determining

factor for its uptake. The relatively high price of services remains a major barrier to usage

(ITU, 2015). This is seen in Table 20 where access and usage in the Philippines remain

depressed compared to other Asia Pacific countries and globally; updated numbers show

broadband adoption for 4 Mbps, the lowest speed measured, is only at 33% and adoption

level lowers as speed offering increases (See Table 21). The barrier to usage has a direct

economic impact, as well as an indirect economic impact through spill-over effects over the

rest of the economy. In the case of mobile broadband, adoption can contribute an annual

0.61% of GDP (ITU, 2012).

43
 TABLE 20: ACCESS AND USAGE INDICATORS, 2014
Fixed Mobile International Fixed Active
telephone cellular subs Internet bandwidth broadband mobile
subs /100 /100 bit/s/ internet subs /100 broadband
inhabitants(1) inhabitants(2) user(3) inhabitants(4) subs /100
inhabitants(5)

Country 2010 2014 2010 2014 2010 2014 2010 2014 2010 2014

Australia 47.4 38.9 100.4 131.2 41,110 75,069 24.6 25.8 55.5 112.2

China 21.6 17.9 63.2 92.3 2,356 4.995 9.3 14.44 3.5 41.8
Hong Kong 61.9 61.1 195.7 239.2 777,030 3,345,122 30.7 31.2 38.9 104.5

India 2.9 2.1 62.4 74.5 5,917 5,677 0.9 1.2 .0 10.7
Indonesia 17 11.7 87.8 126.2 2,473 6,225 0.9 1.2 18.6 34.7

Japan 51.5 50.1 96.8 120.2 15,730 48,637 26.8 29.3 87.6 121.4

Malaysia 16.3 14.6 119.7 148.8 11,495 27,173 7.4 10.1 9.1 58.3

New 43.0 40.6 107.8 112.1 34,143 95,081 25.0 30.5 38.6 92.7
Zealand
Philippines 3.6 3.1 89 111.2 10,702 27,688 1.8 23.2 2.3 28.0
Singapore 39.3 35.5 145.4 158.1 172,404 616,531 26.4 27.8 98.4 156.1
South 58.9 59.5 104.8 115.5 11,812 43,358
Korea
Sri Lanka 17.2 12.5 83.6 103.2 3,332 12,651 35.5 38.8 97.7 108.6
Thailand 10.3 8.5 108.0 144.4 12,791 48,826 4.9 8.2 0.0 79.9
Vietnam 16.1 6.0 125.3 147.1 4,925 20,749 4.1 6.5 7.9 31.0
Source: ITU (2015).
(1) Fixed-telephone subscriptions refers to the sum of active analogue fixed-telephone lines, voice-over-IP
(VoIP) subscriptions, fixed wireless local loop (WLL) subscriptions, ISDN voice-channel equivalents and
fixed public payphones.
(2) Mobile-cellular telephone subscriptions refers to the number of subscriptions to a public mobile-telephone
service providing access to the public switched telephone network (PSTN) using cellular technology. It
includes both the postpaid subscriptions and active prepaid accounts (i.e. that have been active during the
past three months). It includes all mobile-cellular subscriptions that offer voice communications. It excludes
subscriptions via data cards or USB modems, subscriptions to public mobile data services, private trunked
mobile radio, telepoint, radio paging and telemetry services.
(3) International Internet bandwidth refers to the total used capacity of international Internet bandwidth, in
megabits per second (Mbit/s) - the average traffic load of international fiber-optic cables and radio links for
carrying Internet traffic. International Internet bandwidth (bit/s) per Internet user is calculated by
converting to bits per second and dividing by the total number of Internet users.
(4) Fixed-broadband subscriptions refer to fixed subscriptions for high-speed access to the public Internet (a
TCP/IP connection), at downstream speeds equal to or greater than 256 kbit/s, irrespective of the method
of payment. It includes cable modem, DSL, fiber-to-the-home/building, other fixed-broadband
subscriptions, satellite broadband and terrestrial fixed wireless broadband. It excludes subscriptions that
have access to data communications (including the Internet) via mobile-cellular networks. It includes fixed
WiMAX and any other fixed wireless technologies, and both residential subscriptions and subscriptions for
organizations.
(5) Active mobile-broadband subscriptions refer to the sum of standard mobile-broadband subscriptions and
dedicated mobile-broadband subscriptions. The subscriptions can be used through handset-based or
computer-based (USB/dongles) devices. It covers actual subscribers, not potential subscribers, even though
the latter may have broadband-enabled handsets.

44
 TABLE 21: 4, 10 AND 15 MBPS BROADBAND ADOPTION (IPV4) IN ASIA-PACIFIC REGION

Source: Akamai (2016b); covers 148 countries.

2.2.2 Customer retention

Telcos have to contend with churn, especially in cellular services. Several factors

influence churn, some more uncontrollable (regulatory or technological) than others

(demographics, purchase history, customer experience, and environmental factors). As

such, churn is a possible indicator of customer dissatisfaction, cheaper and/or better offers

from the competition, more successful sales and/or marketing by the competition, or

reasons having to do with the customer life cycle. Whatever the drivers are, the actions of

the telcos in retaining customers will ultimately impact their revenue and margin

performance.

PLDT and Globe have similar strategies to retain their customers. Primarily seen in,

but not limited to, the postpaid cellular market, they are: 1) subsidized/discounted devices;

2) service rewards of additional free minutes and texts, even for prepaid subscribers; 3)

45
community privilege such as beneficial access to events; 4) reward points which

subscribers earn and can use to avail of products and services in the telco’s catalogue; 5)

contract privileges upon extension of contract, such as no more lock-up period, free (or

discounted) devices; and 6) converged offers, such as bundled voice, data and cable

products as offered by PLDT.

Notwithstanding all these efforts, churn continues to be elevated with prepaid

reflecting more than twice the churn of postpaid (See Figure 5). Churn in the Philippines is

one of the highest in the world (GSMA, 2014).

FIGURE 5: MONTHLY CHURN AMONG VARIOUS MOBILE PROVIDERS

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
2011 2012 2013 2014 2105

Globe Postpaid Globe Prepaid TM

Smart Prepaid TNT Sun Cellular Prepaid
Smart Postpaid Sun Cellular Postpaid
Source: PLDT and Globe annual reports, 2011-2015.

2.2.3 Innovation

Telcos are very active in the innovation space in the Philippines. They lead

innovation in tariff structure and develop initiatives themselves or seek start-ups and

investment partners, an effort more often pursued by internet players in other markets.

Smart (Ideaspace Foundation) and Globe (Kickstart Venture) have flagship innovation hubs

46
with investee portfolio ranging from payment solutions to mobile health to transportation.

This is fairly unusual, as mobile operators generally need to defend themselves from

disruptive products and services rather than seeking to develop these services themselves

(GSMA, 2014).

Innovative tariff restructuring spans from short term flexi models to focused

initiatives to increase data usage or defend against the growing phenomenon of IP

communication. Globe, for example, is the first partner operator for Facebook’s Internet.org

campaign, making the Philippines the first market in the world to provide free access to

Facebook and other basic services, doubling the number of people using the internet and

data (GSMA, 2014).

Three large innovations coming from the Philippines are mobile money, mobile

education and disaster response. First, mobile money, via Smart Money and GCash, were the

first to launch in 2001 and 2004, respectively; however, for a variety of reasons its take up

has been slow. Nevertheless, both have continually innovated, such as offering remittance

services and prepaid online payment application (Pay Maya by Smart Money). Second,

GSMA together with Smart, Globe, Department of Education and Technical Education and

Skills Development Authority (TESDA) introduce mobile education initiatives to increase

the reach of AbotAlam20 program across the K-12 spectrum. Third, telcos show innovative

approaches to deal with disaster illustrated by the experience with Typhoon Haiyan (free

calls, cellphone charging stations, free text messages, ultra-portable instant network, and

use of mobile money service as donation facilities).

20
Government program specifically targeting out of school youths and enrolling them into Alternative
Learning System and Alternative Delivery Mode programs, offering skill or vocation based training.

47
 2.2.4 Service quality

In various comparison studies, the Philippines ranks low in terms of average and

peak connection speed, average page load time for both broadband and mobile, and average

cellular mobile data speed21.

The Philippines has shown an increase year on year (YoY) and quarter on quarter

(QoQ) on internet average and peak connection speed at the end of second quarter of 2016

(Akamai, 2016) (See Table 22). Despite this, the Philippines ranks as one of the lowest

amongst the 15 countries surveyed in Asia Pacific, and in the lower quartile globally for

average speed and in the third quartile for peak speed. Its average speed is 16% that of the

highest average speed, South Korea, and 21% that of the highest peak speed, Singapore (See

Table 22).

21
Fixed line business does not have the same comparative studies on service quality.

48
 TABLE 22: AVERAGE CONNECTION AND PEAK SPEED (IPV4*) IN ASIA-PACIFIC REGION
Average Connection Speed Average Peak Speed
Global Country Q22016 QoQChg YoYChg Global Country Q2 QoQChg YoYChg
Rank Avg (%) (%) Rank 2016 (%) (%)
Mbps Peak
Mbps

1 South 27.0 -7.2 17 1 Singapore 157.3 7.1 44

Korea
3 Hong Kong 19.5 -1.9 15 2 Hong Kong 114.3 3.6 21

8 Singapore 17.2 4.5 27 3 South 110.1 6.3 33

Korea
9 Japan 17.1 -5.7 5.1 7 Indonesia 91.9 -17 355
15 Taiwan 13.7 27 63 8 Taiwan 88.8 6.9 23
26 Thailand 10.8 16 49 9 Japan 85.3 0.9 14
42 New 10.6 0.7 26 15 Thailand 77.6 11 42
Zealand
51 Australia 8.5 -3.0 6.8 47 New 53.8 8.0 32
Zealand
68 Malaysia 6.8 7.1 36 56 Australia 51.1 16 24
79 Indonesia 5.9 29 148 57 Malaysia 51.0 10 39
80 Sri Lanka 5.7 5.6 7.2 63 Sri Lanka 43.9 24 37
86 China 5.2 23 52 82 Vietnam 37.1 8.9 63
88 Vietnam 5.1 2.3 58 85 China 35.4 14 92
113 Philippines 4.3 24 37 94 Philippines 32.9 9.8 28
114 India 3.6 3.2 54 109 India 26.1 2.5 42
* Internet Protocol Version 4 (IPv4) is the fourth version of the Internet Protocol (IP)
Source: Akamai (2016b)22 covers 148 countries.

Meanwhile, average page load time23 provides insight into performance across

devices and networks. Of the 74 countries reviewed, the Philippines falls slightly below the

mid-range for broadband and slightly above the mid-range for mobile in terms of average

page load time (See Table 23).

22
Akamai is a content delivery network (CDN) and cloud services provider headquartered in Massachusetts, USA.
Quarterly, since 2008, they have come up with a “State of the Internet” report that shares an informed view into online
connectivity, cyber security trends and metrics, including Internet connection speeds, broadband adoption, mobile
usage, outages, cyberattacks, and web security threats.
23
Note that these measurements do not just reflect broadband network speeds but are also influenced by factors such as
average page weight, page composition, and the Akamai customer content consumed by users within these countries.

49
 TABLE 23: AVERAGE PAGE LOAD TIMES BASED ON REAL USER MONITORING OF
SELECTED ASIA-PACIFIC COUNTRIES
Country Avg. Page Load Time Avg. Page Load Time Mobile Penalty24
Broadband (millisecond) Mobile (millisecond)
Australia 4013 4912 1.2x
China 2785 2535 0.9x
Hong Kong 2262 3913 1.7x
India 3707 6202 1.7x
Indonesia 3244 3471 1.1x
Japan 2175 3618 1.7x
Malaysia 3318 3154 1.0x
New Zealand 2299 5498 2.4x
Philippines 4854 7253 1.5x
Singapore 2025 2657 1.3x
South Korea 2822 2626 1.4x
Sri Lanka 4075 4857 1.2x
Taiwan 2283 3354 1.5x
Thailand 2536 2134 0.8x
Vietnam 2918 4693 1.6x
Ranges 1.7 seconds (Israel) to 1.058 seconds 0.6x (Israel) to 2.4x
6.201 seconds (Kenya) (Israel) to 8.272 (New Zealand)
seconds (Nigeria)
Source: Akamai (2016b).

Lastly, the Philippines ranks in the low third quartile in terms of cellular mobile

speed in the Asia-Pacific region (See Table 24). Its average speed is 39% of the Asian

average of 10.9 Mbps, and 34% of the global average of 12.4 Mbps.

24
Mobile penalty is the ratio of average page load times on mobile connections versus average load times on broadband
connections. This ratio should not be taken as a pure comparison of mobile versus broadband network speeds, as these
speeds are just one factor in the overall user experience. Mobile penalty lower than 1.0x means that average page load
times is faster on mobile connections than on broadband connections.

50
 TABLE 24: AVERAGE CELLULAR MOBILE DATA SPEED IN ASIA-PACIFIC REGION
Ranking Country Average Speed (in Mbps)
1 New Zealand 27.7
2 China 27.6
3 Taiwan 25.6
4 Australia 22.0
5 Singapore 16.2
6 Hong Kong 15.0
7 Japan 13.4
8 South Korea 12.9
9 Sri Lanka 7.0
10 Malaysia 6.4
11 Cambodia 5.6
12 Thailand 5.5
13 Pakistan 4.4
14 Philippines 4.2
15 Indonesia 4.1
16 India 4.0
17 Laos 3.1
18 Bangladesh 3.0
19 Myanmar 2.5
20 Vietnam 1.9
Source: Milward (2015).

2.2.5 Mergers and Acquisitions

PLDT was a monopoly for decades until a series of telecom reform from 1989 to

199525 opened up the industry and saw an expansion in the number of players. However,

since the turn of the century, there has been several M&As that have resulted in the current

two-player state.

PLDT in 2000 acquired and consolidated the wireless companies Smart and Piltel,

effectively complementing its existing fixed line businesses. In 2008, PLDT, through Smart,

purchased Connectivity Unlimited Resource Enterprise Inc. (CURE), one of the four

recipients of 3G licenses awarded by the NTC in 2005. In October 2011, PLDT acquired

25
In 1989, the NTC awards two international gateway facility license to 2 non-PLDT players, namely, ETPI and
Philcom. In 1992, Congress grants franchises to the following mobile carriers: Piltel, Smart, Globe, Islacom, and
Extelcom. In 1993, then President Ramos signs two executive orders (EO): 1) EO 59 mandating the compulsory
interconnection of authorized public telecoms carriers in order to create a universally accessible and fully integrated
nationwide telecoms network; and 2) EO 109 requiring all CMTS operators to install at least 400,000 telephone lines
within three years, and IGF operators to put up 300,000 lines within five years. In 1995, RA 7923, The Public
Telecommunications Act, is passed; it seeks to promote and govern the development of the telecoms industry and to
improve the delivery of telecoms services.

51
99.4% of the outstanding common stock of Digitel, which owns the Sun Cellular brand,

giving it control then of over two-thirds of the industry subscribers.

Meanwhile, Globe in 2001 acquired Islacom (now Innove). In October 2013, Globe

acquired 38% interest in Bayantel and by July 2015 owned 98.6% stake in company after a

debt-to-equity scheme. In May 2013, ABS-CBN Convergence, Inc. (“ABS-C”, formerly

Multimedia Telephony, Inc.) announced the launch of its mobile brand, ABS-CBN Mobile; it

is supported through a network sharing agreement with Globe, wherein the latter provides

network capacity and coverage to ABS-C on a nationwide basis.

In 2008, San Miguel Corporation (SMC), partnering with Qatar Telecom, bought

interests in Liberty Telecom Holdings, Inc. and announced plans to enter the mobile and

broadband businesses. In 2010, SMC acquired 100% stake in Bell Telecommunication

Philippines, Inc. Also in 2010, SMC acquired a 40% stake in Eastern Telecommunications,

and by 2011 owned 77.7% stake in the company.

On May 2016, PLDT and Globe announced that they were acquiring a 50% stake

each in the telecom business of SMC worth a total of PhP 70 billion (See “Policy and

Practice”: HHI and Antitrust Case in the U.S. Soft Drink Industry). This transaction is currently

the subject of court cases between PLDT and Globe on one side and the PCC on the other,

with PCC putting out a position paper on why the merger needs further review (Jiao, 2016).

The HHIs among ASEAN countries are shown in Table 29. The Philippines has the second

highest HHI score after that of Myanmar.

52
53
 2.3 Performance

Performance refers to the outcome resulting from the current market structure and

conduct of industry players. Key indicators of performance include revenue growth, EBITDA

margins, ROE and ROA over time. Economists compute also for market power as a gauge of

market performance (See “Concepts in Context”: Measuring Performance).

54
 Overall, the Philippine telecom market growth for the period 2011 to 2015 has

mirrored the GDP growth, with EBITDA margins and return ratios having been healthy.

Indication also point to telcos having market power.

Philippine telecom revenues have increased from PhP 224 to PhP277 billion26 for

the period 2011 to 2015, representing a 5.9% CAGR. Revenue growth has been driven by

broadband and data (See Figure 6).

FIGURE 6: REVENUE GROWTH: 2011-2015

5.9% Service Revenue

4.6% Mobile

3.5% Voice

-2.6% SMS

76.2% Mobile Browsing & Other Data

9.6% Fixed Line and Broadband

24.4% Broadband

18.8% Fixed Line Data

-1.4% Fixed Line Voice

Source: PLDT and Globe annual reports, 2011-2015.

Globe and PLDT EBITDA margins have averaged 42% and 48% respectively for the

period 2011 to 2015 (See Figure 7). Compared to other regional telcos, in fiscal year 2015,

only Maxis has margins larger than PLDT (See Figure 8).

26
Combined service revenue of PLDT and Globe

55
 FIGURE 7: EBITDA(1) MARGIN: PLDT AND GLOBE, 2011-2015
60%
52% 51% 50%
48%
50% 45% 43% 42%40%
40% 40%
40%

30%

20%

10%

0%
2011 2012 2013 2014 2015

Globe PLDT
Source: Datastream International (2016).
(1) EBITDA divided by service revenue

FIGURE 8: COMPARISON OF EBITDA MARGIN VIS-À-VIS GLOBE, AS OF END 2015

38 Globe

46 PLDT

30 M1

30 Singtel

30 Telekom Malaysia

50 Maxis

40 Axiata

Source: Eikon Thompson Reuters (2016).

Note: Globe 2015 EBITDA is the base at 0%. Each telco’s EBITDA is subtracted to that of Globe. The
numbers in the chart are the percentage point difference to Globe’s 2015 EBITDA

ROE and ROA have shown greater variability than EBITDA margins for the period

2011 to 2015 (See Figure 9). For fiscal year 2015, both PLDT and Globe reflect ROE higher

than Philippine market average ROE of 14.5% (“Return on Equity (ROE) of stocks from –

Philippines”, (2016)); but only Globe reflects ROE higher than global telecom market

average ROE of 21.5% (“Return on Equity of Telecommunications stocks”, (2016)).

56
Philippine telcos returns compared to other regional telcos in fiscal year 2015 is at average

or above average (See Figure 10).

FIGURE 9: COMPARISON OF RETURN RATIOS: 2011-2015

ROE (1) ROA (2)
28% 10% 9%
30% 9% 9% 9%
26% 24% 25% 8%
24% 8% 8%
25% 8%
20% 21%
20% 18%
15% 6% 5% 5%
15% 12%
4% 3%
10%
5% 2%

0% 0%
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Globe PLDT Globe PLDT

Source: Datastream International (2016).

(1) Net income available to common divided by total equity
(2) Net income available to common divided by total asset

FIGURE 10: COMPARISON OF RETURN RATIOS VIS-À-VIS GLOBE, AS OF END 2015

ROE ROA

28 Globe 9 Globe
18 PLDT 5 PLDT

44 M1 17 M1

16 Singtel 9 Singtel

9 Telekom Malaysia 3 Telekom Malaysia

39 Maxis 9 Maxis

12 Axiata 5 Axiata

Source: Eikon Thomson Reuters (2016).

Note: Globe 2015 ROE and ROA are the bases at 0%. Each telco’s ROE and ROA are subtracted to that of Globe.
The numbers in the chart are the percentage point difference to Globe’s 2015 ROE and ROA.

For market performance, many economists also measure market power using the

Lerner index, which is the percentage markup of price over marginal cost. Because marginal

cost measures are rarely available, many SCP researchers use the price–average variable

cost (AVC), which is typically calculated as revenue minus payroll minus material cost

57
divided by revenue (Perloff, Karp, & Golan, 2007). The extent to which a firm can benefit

from the industry’s monopolistic or oligopolistic condition is dependent as well on the

flexibility of its demand curve. The Lerner index will be between 0 and 1; the closer it is to 0,

the closer it is to perfect competition; the closer it is to 1, the higher market power the seller

has and hence closer to a monopoly. PLDT and Globe’s Lerner index are at the 0.7 level (See

Table 25). It has remained at this level even with the presence of Digitel until 2010.

58
 TABLE 25: LERNER INDICES FOR GLOBE, PLDT, AND DIGITEL: 2008-2015
2008 2009 2010 2011 2012 2013 2014 2015
PLDT
Total Revenue 145.6 148.0 144.5 148.5 163.0 168.2 170.8 171.1
Less:
Compensation & employee benefit 20.7 23.1 24.1 15.4 22.0 21.4 18.7 21.6
Cost of sales 4.8 5.4 5.3 5.4 8.7 11.8 13.5 16.6
Interconnections costs 12.3 12.5 12.2 12.6 11.1 10.6 10.4 10.3
Sub-total 107.8 106.9 102.9 115.0 121.2 124.4 128.2 122.6
Lerner index 0.74 0.72 0.71 0.77 0.74 0.74 0.75 0.72
Globe
Total Revenue 65.9 65.2 66.6 81.5 86.4 95.1 103.2 120.0
Less: Variable costs
Compensation & employee benefit 3.1 2.9 4.2 5.9 7.7 10.0 10.7 13.7
Cost of sales 8.1 8.0 8.1 10.0 8.9 9.3 8.4 9.0
Interconnections costs 5.1 5.0 5.1 5.9 6.4 7.5 0.9 9.8
Sub-total 49.7 49.3 49.2 59.8 63.5 68.4 83.3 87.6
Lerner index 0.75 0.76 0.74 0.73 0.73 0.72 0.81 0.73
Digitel 0.75 0.76 0.74 0.73 0.73 0.72 0.81 0.73
Total Revenue 11.4 14.0 16.5
Less: Variable costs
Compensation & employee benefit 1.1 1.7 2.1
Cost of sales 1.2 1.3 1.5
Interconnections costs 1.4 1.7 2.0
Sub-total 7.7 9.3 11.0
Lerner index 0.68 0.67 0.66
Source: PLDT and Globe annual reports, 2011-2015; Digitel annual report, 2010.
Note: Interconnection costs are not detailed out prior to 2011. So for PLDT and Globe, the ratio of interconnection costs over total revenue for 2011 was used for prior
years, which are 8% and 12%, respectively. For Digitel the same ratio of interconnection costs over total revenue for Globe of 12% is used.

59
 3. Is There a Need for a Third Player?

3.1 Concentration and Number of Competitors

Kwoka (1979) showed that markets with three equal-sized firms are much more

competitive than those with only two firms. Bresnahan and Reiss (1991) studied the

relationship between concentration and prices and asked the following question: “how many

firms must be in a market for price to approach competitive levels?” For each service, they

defined the minimum population necessary to support a given number of sellers. They found

that prices were lower when there are two sellers than when there is one. And they found that

when there were three sellers, price competition was as intense as it can get. Finally, Shepherd

(2004) argued that for a high probability of consumer benefits, a market should be

characterized by at least 5 “reasonably comparable” rivals, although the number of firms varies

slightly across situations. The question is whether these findings apply to the

telecommunications industry (with a particular politico-economic setting) like the one in the

Philippines. The U.S. telecommunications industry has only four national network providers

(Verizon, T-Mobile, AT&T, and Sprint) and U.S. is a bigger telecommunications market

compared to that of the Philippines.

Table 26 shows that the Lerner Indices for PLDT and Globe did not change drastically

after Digitel was absorbed by PLDT. As mentioned earlier, the Lerner Index is a measure of the

firm’s performance relative to the competitive benchmark, and therefore the intensity of

competition did not change drastically when the industry shifted from one with three national

players to one with two national players. An industry characterized by fierce competition,

instead of collusion, is good for consumers.

Table 27 shows the range of HHI for each industry structure and the intensity of price

competition for each. Table 28 shows that the range of the HHI values for prepaid mobile,

postpaid mobile, fixed broadband, mobile broadband, and fixed telephone services are within

the .5 to .6 range. It fits the expected HHI for oligopoly as indicated in the stylized framework

shown in Table 27. Table 29 shows a comparison of the share of the largest firm and the

60
number of competitors in the ASEAN telecommunication sector. Except for Myanmar and

Philippines, none of the ASEAN countries have more than four competitors, and in many cases,

three or four firms dominate their telecom markets.

TABLE 26: LERNER INDICES: 2002-2015

YEAR PLDT GLOBE DIGITEL
2002 0.61 0.68 0.67
2003 0.64 0.70 0.65
2004 0.72 0.71 0.65
2005 0.75 0.71 0.67
2006 0.73 0.74 0.70
2007 0.73 0.76 0.67
2008 0.74 0.75 0.68
2009 0.72 0.76 0.67
2010 0.71 0.74 0.66
2011 0.77 0.73
2012 0.74 0.73
2013 0.74 0.72
2014 0.75 0.81
2015 0.72 0.73
Source: Calculated from the annual reports of PLDT, Globe, and Digitel.

TABLE 27: FOUR CLASSESOF MARKET STRUCTUREAND THE INTENSITY OF COMPETITION

Name of Competition Range of HHI Intensity of Price Competition

Perfect Competition Usually below .2 Fierce

Monopolistic Competition Usually below .2 Maybe fierce or light, depending
on product differentiation
Oligopoly .2 to .7 Maybe fierce or light, depending
on interfirm rivalry
Monopoly .7 and above Usually light, unless threatened
by entry
Source: Besanko, et al. (1996), Table 8.2, p. 287.

TABLE 28: HHI BY TYPE OF SERVICE, 2016

Service HHI

 Prepaid Mobile .5
 Postpaid Mobile .51
 Fixed Broadband .46
 Mobile Broadband .5
 Fixed Voice .56
Source: Authors’ calculation.

61
 TABLE 29: CONCENTRATIONAND MARKET STRUCTURE IN ASEAN
Country Largest Firm Owner of Competitors HHI
Share Largest Firm
Cambodia 56% Government 5 2,612
Indonesia 63% Government 4 2,444
Lao PDR 60% Government 4 3,138
Malaysia 60% Government 4 3,134
Myanmar 100% Government 1 8,100
Philippines 66% Private 2 5,162
Singapore 46% Government* 3 3,576
Thailand 60% Government 3 3,310
Vietnam 73% Government 3 4,733
Source: “Economic and Social Commission for Asia and the Pacific,” An In-Depth
Study of Broadband Infrastructure in the ASEAN Region, August 2013.
*Partly privately-owned.

3.2 The Appropriate Way to Assess Market Power and Competition

In the previous section, we consider the application of indicators that are related to the

exercise of market power and potential indicators of the extent of competition. The indices

considered are measures of concentration (Herfindahl-Hirschman Index, HHI) and price-cost

margins (Lerner Index). These indicators are assessed in terms of their relevance in an industry

where the technology of production involves relatively large sunk capital expenditures and

economies of network size. The ability to profitably raise price above short-run costs cannot

distinguish between the inefficient and efficient exercise of market power. International

comparison of prices is only meaningful if the factors that affect demand and costs are the same

across countries. To assess whether there is a market-power problem in the provision of

telecommunications services in the Philippines, the appropriate tools to assess market power

and competition should be used by considering the relationship between prices and costs of

provision. An assessment of competition must require an understanding of the nature of

technology. For instance, the provision of wireless telecommunication service uses a physical

distribution network that is comprised of the following elements: (i) access to bands of

spectrum over which the radio waves are transmitted wirelessly, (ii) antennas and signal

processing equipment (base stations) at towers which are connected wirelessly to subscribers’

62
handsets, and (iii) the backhaul connection from base stations, typically a wired connection to

the provider’s switch where calls are routed. The wireless network of a telco is capital-

intensive, its construction costs are sunk, and it is characterized by economies of network size.

Market power is defined in this report as the ability of a firm to profitably raise prices above

long-run average costs. The substantial fixed costs and sunk costs associated with network

deployment mean that the operator must earn sufficient gross margins in order to be profitable.

To break even in the long run, the operator’s revenues less avoidable costs (e.g. quasi rents)

must cover its sunk costs. This means, there is a minimum gross margin required for the new

entrant telco operator to be just profitable. The number of players in the industry will adjust in

the long run to ensure this margin is realized (Church and Wilkins, 2013). When Digitel initiated

a price war in 2004 (“unlimited talk and text” service), its margin suffered, while it was earning

positive quasi rents in some years before it sold its controlling stake to the PLDT group in 2011,

it refrained from making further investments. Consolidation and exit followed. Table 30 shows

the profitability indicators of PLDT, Globe, and Digitel, respectively. PLDT’s net income suffered

from 1998 to 2001 because it had to write off the losses suffered by its subsidiary Piltel. Globe

suffered losses in the initial years when it was infusing capital investments to build its

infrastructure. Digitel suffered big losses most of the years and especially in 2005 after it

initiated a price war in 2004.

The usual approach of measuring market power is to infer the exercise of market power

from high market shares and concentration. This approach is not appropriate when there are

significant economies of network size. Thus high margins and a highly concentrated market

might indicate market power or it might also indicate that firms must price in excess of

marginal cost to be viable in a high-sunk-cost industrythus both concentration and gross

margins have to be relatively high (Church and Wilkins, 2013). This is what Cayanan (2016)

found: high operating profit margin for PLDT from 1970 to 2013, and for Globe from 1999-2013

(but Globe incurred losses from 1992 to 1997).

63
 TABLE 30: PROFITABILITY INDICATORS: 1991-2013
YEAR PLDT GLOBE DIGITEL
Net Income ROE Net Income ROE Net Income ROE
(in million pesos) (in million pesos) (in million pesos)
1991 28% 52.46 17%
1992 17% (88.54) -21%
1993 13% (80.74) -4%
1994 11% (78.62) -2%
1995 11% (155.38) -4%
1996 11% (750.87) -16% 703 7.11%
1997 7,698 12% (870.17) -14% 801 7.50%
1998 (1,454) 0% 22.90 0% 603 5.35%
1999 1,229 3% 939.52 7% 5 0.04%
2000 (2,502) -2% 1,548.83 8% 5 0.04%
2001 1,066 2% 4,305.42 10% 67 0.59%
2002 3,070 2% 6,844.63 14% 29 0.26%
2003 1,461 0% 9,952.64 21% (1,287) -13.27%
2004 27,959 63% 11,396.24 21% (2,052) -40.41%
2005 34,502 48% 10,314.51 20% (1,590) -55.58%
2006 35,341 35% 11,754.67 21% (963) -50.71%
2007 35,978 33% 13,277.02 24% 1,170 38.16%
2008 35,298 34% 11,275.88 23% (1,978) -181.59%
2009 40,095 42% 12,568.87 27% 260 19.25%
2010 40,259 43% 9,744.63 21% 527 1183.04%
2011 31,218 21% 9,831.81 21%
2012 36,099 24% 6,857.01 15%
2013 35,453 25% 4,960.25 12%
2014 34,090 25% 13,372.19 24%
2015 22,075 18% 16,484.45 28%
Sources: Cayanan (2016); Globe and PLDT annual reports.

There are two alternative approaches that do distinguish between competition (when

concentration and high gross margins are consistent with competition) and the exercise of

market power when the industry is characterized by significant economies of network size.27

These approaches are: (1) undertaking international comparison of market structure, and (2)

calculating the internal rate of return on investment (Church and Wilkins, 2013).

Although the use of accounting profits to measure market power is controversial as

explained in the “Measuring Performance” Concepts in Context section, the measure is still

useful as long as companies are compared by the same profitability measure. Return on Assets

27
Church and Wilkins (2013) call this “economies of scale and scope”; economies of scale arise when the
average cost of capacity declines as capacity increases; and economies of scope arise when both voice and data
services are jointly provided using an integrated network.

64
(ROA) is used as a proxy of the firm’s real rate of return on investment, and price-cost margins

are evaluated via the Lerner Index.

Profitability indicators (See Table 31) show that over a longer time horizon, both PLDT

and Globe are earning below the average rate of returns attained by top Philippine firms in

other industries. In addition, Table 32 shows a complementary perspective. Since

telecommunications is a capital-intensive industry, a measure of cash-flow margin (EBITDA less

capital expenditure as a share of revenue) is the appropriate indicator. As shown in Table 32 the

cash-flow margin is dwindling for both PLDT and Globe as both aggressively embark on

increasing capital expenditures; Digitel’s exit from the industry is explained by its inability to

generate enough cash flow to sustain the needed investments in a capital-intensive industry.28

TABLE 31: COMPARATIVE PROFITABILITY INDICATORS: 1997-2014

(Return on Assets)
Firm ROA Industry
1. SM Shoemart 14.42% Department Store
2. Asia Brewery, Inc. 12.13% Beer
3. San Miguel Corp. 7.77% Food
4. Philippine Long Distance 9.18% Telecommunications
Telephone Company
5. SM Prime Holdings, Inc. 8.49% Real Estate
6. ABS-CBN Broadcasting Corp. 7.47% TV Broadcasting
7. Globe Telecom, Inc. 6.70% Telecommunications
8. Ayala Land, Inc. 5.96% Real Estate
9. Honda Cars Makati, Inc. 5.34% Automotive Retail
10. Fortune Tobacco Corp. 4.25% Tobacco
Source: Patalinghug (2016).

28
Accounting and economic profitability indicators, such as ROA and IRR, are related to capital expenditures.
Capital-expenditures adjusted profitability indicators such as cash-flow margins (which can be converted to IRR
when relevant initial investment and inflation data are available) are more relevant to capital-intensive industries
such as the telecom industry. Thus, capital expenditures affect profitability, but it may pay off in the long run.
The point being conveyed in the report is that high capital sunk cost industries require high margins to be viable.

65
 TABLE 32: EBITDA MARGINS, CAPITAL INTENSITY, AND CASH MARGINS: 2002-2015
YEAR PLDT GLOBE DIGITEL
EBITDA Capital Cash-Flow EBITDA Capital Cash-Flow EBITDA Capital Cash-Flow
Intensity Margin Intensity Margin Intensity Margin

2002 52% 21% 31% 60% 85% -25%

2003 51% 18% 33% 57% 33% 24% 29% 144% -115%
2004 58% 18% 40% 61% 40% 21% 31% 108% -77%
2005 66% 17% 49% 64% 28% 36% 34% 108% -74%
2006 68% 17% 51% 68% 26% 42% 24% 60% -36%
2007 66% 18% 48% 64% 22% 42% 24% 76% -52%
2008 60% 18% 42% 59% 32% 27% 50% - -
2009 60% 19% 41% 60% 40% 20% 34% 73% -39%
2010 60% 20% 40% 54% 31% 23% 22% 49% -27%
2011 52% 21% 31% 45% 34% 11%
2012 51% 23% 28% 43% 22% 21%
2013 48% 18% 30% 40% 40% 0%
2014 50% 21% 29% 40% 27% 13%
2015 40% 26% 14% 42% 27% 15%
Source: Calculated from annual reports of PLDT, Globe, and Digitel.

3.3 Will a Third Player Matter?

Globally, consolidation, rather than fragmentation appears to be the trend in this

industry. Most of the countries reach the consolidated stage with 3 or 4 players (this is the

pattern in both ASEAN and OECD countries). However, the intensity of competition under the

existing two-player structure is illustrated by the following statements of industry

practitioners:

As the battleground shifts into data services competition in the

telecommunications sector remained intense as the incumbent aimed
to protect its declining overall revenue and subscriber shares.

Jaime Augusto Zobel de Ayala

Chairman, Globe Board of Directors
Excerpts from “Message from the Chairman,”
2015 Globe Annual Report, page 10.

I think someone would be hard pressed to prove that there is no

competition between the PLDT group and the Globe group.

Ernest Cu
Globe President and CEO
Excerpts from “Interview with Globe President
and CEO Ernest Cu,” inquirer.net, Philippine
Daily Inquirer, October 11, 2016.

So as you can see, there are many reasons why the Philippines ended up
with two major telcosscale, continuing high capex requirement that
can only be funded from overseas or by ploughing back profits into the
business, infra difficulties that give incumbents advantage, and in

66
 mobile, limits on how frequency are sliced up. From everything I have
seen as a Board Director for over a decade, there is not only
competition, but fierce competition, Globe as the challenger has played
its role to the hilt. It has been gaining market share through innovation
and improvement in services. For the public, evidence of this
aboundlook at the billboards and TV ads, or the daily SKU battle in
prepaid, or how for PhP 15 one can get unlimited calling and texting for
a day, and how mobile Internet prices have come downthese are the
indicia of competition.

Romeo L. Bernardo
Globe Board Member
“Does the Recent Assignment of SMC
Frequency Benefit the Consumers?”,
BusinessWorld, June 26, 2016.

A firm’s success is explained by its own market share, and not just by industry

concentration. “Only when a firm is efficient or innovative is it profitable to expand in a market

and make the market concentrated” (Carlton and Perloff, 2005, page 267). Brand creation

(brand image and advertising campaign) can make the industry more concentrated, and this

adds to the substantial sunk costs and big-scale economies to be hurdled by a new entrant

(Sutton, 1991). This statement may describe the Globe experience. If competition is tough and

leads to a low price, entry is discouraged, and industry concentration is higher. This may

describe the current Philippine telecommunication industry.

Then, what does it take for a third player to enter the market? PCC’s preliminary

assessment indicates that the PLDT-Globe-SMC transaction “will leave a limited amount of

spectrum to a potential third player… and that the terms of the co-use agreement entered into

by Smart, Globe and Bell Tel, particularly for the division of the 700 MHz band, is structured in a

way that creates a disadvantage for a third player” (PCC, 2016). On the other hand, NTC is

quoted to encourage the entry of a third player and plans to auction to a new player the

frequencies that were returned by PLDT and Globe after their purchase of the SMC-Vega

frequencies (See “In the News”: NTC Wants 3rd Player Within Duterte Term). However, critics say

that the government may fail to attract a new player for the proposed frequency auction

67
because it excludes control of spectrum assets (e.g. 900 MHz and 1800 MHz) “which are needed

by at least half of the market in the Philippines.”29

In sum, the only possible third player is the government, but this might be good for the

industry if the government builds the passive “last-mile” network and then leases it to private

telcos to operate. The downside of the current situation from a public-relations view is that: (1)

it paints Globe in the same corner with the usually contentious and controversial PLDT; (2) the

current situation creates the opportunity for active government intervention; and (3) it

promises a false expectations of improving quality of service at a lower price, when the reality is

that high quality can only be produced if the acquisition of expensive infrastructure investments

29
Miguel Camus, “Frequency Earmarked for Bidding Seen Not Enough for Third Telco,” Philippine Daily
Inquirer, October 24, 2016, page B4.

68
will earn an attractive or competitive rate of return. The other downside is that there are many

historical examples of government failures in operating public utilities.

IV. Spectrum Management Analysis

1. The Nature of Radio Frequency Spectrum and Why It Has to be Managed Well

Radio frequency spectrum is a valuable intangible resource with varying uses such as

radio broadcasting, television broadcasting, military and government communication, medical

and scientific communication, radio astronomy, and mobile broadband. The different

frequencies within the spectrum define the boundaries of the spectrum and are referred to as a

“band of resources,” akin to a race track. The track consists of eight lanes of equal length and

width; it is finite, and there is no scope for expansion. It is like any other natural resources a

country has. The spectrum bands can carry and transmit information; higher frequencies can

transmit a larger volume of information. However, the higher the frequency, the shorter the

distance reached. Thus, the physical attributes of the spectrum define which frequency band can

be used for a given technology and for a particular type of application. The “high demand” or

“sweet spot” frequency bands are the ones most commonly used by television and mobile

telecommunications (Blackman and Srivastava, 2011; Dinkelman, 2013).

Spectrum management is the process of regulating the radio spectrum so as to

efficiently allocate this scarce resource among a number of users. It arose from the need to

prevent interference among users of adjacent frequencies or those from neighboring geographic

areas. The need for efficient spectrum management increased due to various technological

innovations, first television, then cellular phones and internet. Spectrum management thus acts

like a traffic cop. It enables the smooth flow of data and prevents anarchy in the airwaves.

2. Spectrum Allocation Methods

Spectrum allocation process is important because the method chosen by the regulator

determines the resulting structure of the industry. Also a flawed allocation process can lead to

69
anti-competitive and inefficient allocation of radio frequency spectrum. This scenario is called

“regulatory failure.”

There are basically four types of spectrum allocation methods utilized with varying

degrees and forms of transparency in different jurisdictions: (1) administrative approach, (2)

auction or public-bidding approach, (3) trading approach, and (4) use-or-lose-it approach. The

administrative approach is sometimes called “beauty contest” approach. In this approach,

applicants are evaluated on specific qualifications and criteria, and the “most attractive”

applicants are assigned the spectrum. When demand exceeds the number of spectrums to be

allocated, this method is tweaked by employing technical, financial, operational, geographical,

and social criteria and weighting them to produce a weighted composite score for each

applicant. The applicants obtaining the highest weighted scores will get the available spectrums.

The auction approach is employed using sealed public bidding (on site or electronically) based

on the applicants’ perceived commercial valuation of the radio frequency or based on the

minimum economic value imposed by the regulator in the bidding documents. If done well, this

approach could raise billions of pesos for the government. The trading approach is a “first-

come-first-served” allocation system and allowing spectrum holders to trade excess spectrum in

the market. And the “Use or Lose It” approach is intended to prevent warehousing and hoarding

of spectrums. And it imposes penalties to holders inefficiently utilizing their existing allocation.

In terms of transparency, the auction approach is the most transparent and could be the

most efficient approach if it is well designed and implemented. It may require regulators with

weak institutional capacity to seek the assistance of outside experts (See “Policy and Practice”:

The Spectrum Auction: How Economists Saved the Day). On the other hand, the administrative

approach is the least transparent and encourages hoarding. On a case-to-case basis, the

regulator may allow the sale of the operator’s allocated spectrum to other operators

(incumbents or new entrants).

70
71
 3. Spectrum Management in the Philippines

The National Telecommunications Commission (NTC) is tasked under RA 7925 to

manage and award spectrum licenses. All spectrum user fees collected by the NTC go to the

National Treasury. RA 7925 stipulates that when demand for frequencies exceeds supply the

NTC can award frequencies through an open tender process. However, no biddings have ever

taken place. The telecommunications companies have always been assigned frequencies by the

72
Commissioner. R.A. 7925 also mandates that the government shall allocate the spectrum to

service providers who will use it efficiently and effectively to meet public demand for

telecommunications service. However, NTC never implements the use-or-lose-it approach

based on this mandate. There seems to be a lack of transparency in how frequencies are

evaluated. There is also a lack of due process on how the spectrum is allocated and this is a

concern as the number of broadband users increases. Most of the spectrum bands have already

been allocated to the big companies without regard for smaller players and new entrants

(Mirandilla-Santos, 2016).

World Bank (2005, page 177) analyzed NTC’s spectrum management practice this way:

NTC has limited capacity and resources to set and implement spectrum
management policies. A major issue in this regard is the inability of NTC
to utilize the proceeds from its fees for spectrum usage to manage and
monitor this resource. All of the revenue from NTC fees goes to the
general revenue fund of the government and it has virtually no budget
for new equipment or staff support. This lack has led to a largely
passive mode of regulation, by necessity. As a result, there has been
little enforcement to ensure that allocated spectrum is in fact used
effectively and efficiently.

One spectrum management issue that sticks out is the unused 700 MHz band owned by

SMC. Recently SMC sold its telecommunications assets to both Globe Telecom and PLDT. Some

see an issue in this because the frequencies were awarded without any due process.PCC (2016)

states that out of the 90 MHz of the 700 band that SMC held, PLDT and Globe will each have 35

MHz of the 700 band while 20 MHz will be left vacant. The Commission expressed concerns that

the SMC deal leaves little spectrum to a potential third player in the market while it gives PLDT

and Globe a huge advantage over potential market entrants. On August 30, 2016 the Court of

Appeals issued a writ of preliminary injunction that stopped the Commission from investigating

the deal. The ability of the big telecom players to use the court system to delay or overturn the

decisions of regulators that adversely affect them exposes the weakness and ineffectiveness of

the regulatory structure in the country (Mirandilla-Santos, 2016). The NTC’s “beauty contest”

spectrum allocation system is being criticized for its lack of transparency, and for treating

spectrum licensing information as confidential (Galla, 2016). The PCC’s preliminary assessment

73
of the Globe-PLDT-SMC spectrum deal is that the transaction will leave a limited amount of

spectrum to a potential third player. It also stated that the amount of available spectrum post-

transaction may not be sufficient for a new player to exert competitive pressure on PLDT and

Globe (PCC, 2016). Critics are unfairly riding on this hot issue and injecting misinformation in

the media. For instance, Democracy.Net.PH claimed that there were “zero” available

frequencies in the broadly used 900 MHz and 1800 MHz for a new player. Yes indeed, but this

situation existed before the deal.

4. Spectrum Management in the United States.

In the United States radio spectrum frequencies were initially allocated by conducting

hearings. Aside from the low application costs these licenses were given out by the Federal

Communications Commission (FCC) for free (Christopher, 2016). The hearings were held in

order to determine which applicant advanced best the “public interest” but what determines the

“public interest” is a contentious issue. The rise of television and the advent of cellphones

flooded the FCC with license applications. Congress passed legislation in 1983 to hand out

spectrum licenses via lottery. The problem with the lottery though is that some firms acquire

frequencies for free and then sell them to third parties for a handsome profit. In 1993 Congress

passed a law ordering the FCC to sell spectrum licenses via auction. Nobel Laureate Economist

Ronald Coase was one of the early proponents of auctioning off spectrum licenses. In his paper

he stated that the allocation of resources should be left to market forces and not government

decisions (Coase, 1959). Economists Paul Milgrom and Robert Wilson were able to design an

auction mechanism for the FCC that solved “the exposure problem”. The exposure problem is

where one player wins the bid for one state and thwarts the plans of other players to expand

nationally or to a region which includes the state that the player won. The player can hold the

state “hostage” and ask for a huge payoff in exchange for the spectrum rights for that state. This

problem thus reduces the incentives in taking part in the auction. Kwerel and Felker (1985)

state that auctions are better than lotteries or hearings because requiring the winner to pay for

the license is an efficient way of reducing the number of license applicants. Conducting auctions

74
according to them is also cheaper than doing hearings or lotteries. The first auction was held in

1994 and it generated $617 million for the FCC (Christopher, 2016).30

The FCC imposed limits on the amount of spectrum any company could control in any

geographical area in order to avoid an outcome when companies gain control of enough of the

spectrum to manipulate market prices (Milgrom, 2004).

In 2016 the FCC for the first time held an incentive auction. This auction repurposes the

spectrum by encouraging licensees to voluntarily relinquish spectrum usage rights in exchange

for a portion of the proceeds from the auction (FCC, 2016). The auction benefits consumers by

making these frequencies available for wireless broadband thus easing congestion on wireless

congestion and enabling the rollout of fifth generation (5G) services and applications. Stage 1

began on May 31, 2016 and ended on August 31, 2016. Stage 2 began on September 13, 2016

and ended on October 19, 2016.

One issue that has been prominent in the US lately is the issue of net neutrality. In June

2016 the US Court of Appeals in a 2 to 1 decision said that the internet is a utility not a luxury

and thus it should be valuable to all Americans (Kang, 2016). This means that broadband

companies cannot block or slow the delivery of content to consumers. Without this decision,

providers can create fast and slow lanes on the internet subjecting businesses and consumers to

extra charges and limited services. There are parallels going on in the Philippines with its slow

internet speeds. A net neutrality rule wherein the role of the internet as a utility is confirmed is

needed to ensure that the big companies do not open up fast and slow lanes to the internet and

enable full and equal access to the internet for everyone.

5. Implications of Improved Spectrum Management for the Philippines

Mirandilla-Santos (2016) cited several reforms in order to promote investment and

innovation in communications and connectivity. One is to amend RA 7925 so that companies no

longer need to get a franchise for Congress and anyone who is able to put up internet

infrastructure can do so regardless of size, nationality or whether it is public or private. She also

30
The British spectrum auction of 2000 raised $34 billion (Milgrom, 2004).

75
calls for amending CA 146 so that it reflects the realities of the information age. Currently, there

is ambiguity in CA 146 in the definition of public utility which is often used interchangeably

with public service. A national broadband plan to improve internet speeds and access to

underserved areas is needed. The US has already adopted a national broadband plan in 2010.

In order for the country to fully reap the rewards of the information age effective

spectrum management must be done. Mirandilla-Santos (2016) proposes that the NTC develop

a spectrum management plan in coordination with various stakeholders. She also advocates for

a transparent allocation process which includes a clear set of criteria as well as a mechanism for

the valuation of the spectrum and a publicized allocation process. The reassignment of

frequencies from low value to high value applications, similar to what the US is currently doing,

must be done too. Another suggestion is to deregulate some frequencies especially those used

for industrial, scientific and medical purposes. By making these frequencies free (which in most

countries is the case) could help spread internet connectivity in unserved or underserved areas.

The International Telecommunications Union (2005) listed several best practices for

national spectrum management. Among their suggestions include: (1) establishing a national

spectrum management organization that is either independent of or part of the

telecommunications regulatory authority; (2) promoting transparent, fair, economically

efficient and effective spectrum management policies; (3) making public whenever possible

national frequency allocation plans; (4) removing regulatory barriers and (5) assuring open and

fair competition in the market. However, Strategy& (2016) cautions countries to avoid or

manage the so-called “national broadband acceleration risks.” For instance, Australia’s initial

cost estimate for an NBN was $30 billion, but it grew to $52 billion; and in 2015, Australia’s rank

in the 2015 Networked Readiness Index (NRI) fell from 25th to 42nd due to poor quality service.

In conclusion, effective spectrum management is needed for the Philippines. Auctions

have become the most effective and transparent way of allocating spectrum frequencies and

this has been used in the US, Canada, Germany, India and others. Creating an efficient auction

76
mechanism facility for the Philippines, similar to the creation of WESM in the power industry,

would have advantageous effects for the Filipino consumer.

V. Broadband Policy Analysis

1. The Importance of Broadband to the Economy

The Internet has revolutionized the way people work and live and how they create and

share ideas and information, accounting for 21 percent of the gross domestic product (GDP) in

developed economies for the period 2006–2010 and benefiting not just national economies and

multinational corporations but also individuals as well as technology and other startup

companies (Manyika and Roxburgh, 2011). Increasing broadband speeds has the potential to

add 0.3 percent to GDP growth and increasing broadband speeds by 4 Mbps in the Organisation

for Economic Cooperation and Development (OECD) countries and 0.5 Mbps in emerging

economies result in additional annual household income of USD 2,100 and USD 800,

respectively (Ericsson et al., 2013). Having a reliable broadband service improves labor market

outcomes, provides access to information and better health care, and enhances civic

participation (Council of Economic Advisers, 2016). Most emerging economies have started to

recognize that providing reliable broadband connection, not just to urban areas and large

corporations but also to rural areas and marginalized communities, will lead to higher economic

growth and that having universal access and service (UAS) policies to expand the use of Internet

services increases the demand for broadband (International Telecommunication Union, 2008).

Lack of options with regard to choosing a broadband service provider, however, may slow the

rate of growth for broadband penetration (Broadband Commission, 2014), which suggests that

opening the Philippine telecommunications industry to more players may lead to lower prices

and better quality of service (QoS) as competition intensifies (Diaz-Pines, 2013). Jamison (2012)

argues that for the telecommunications industry to remain competitive, entry of new firms

should be easy, there should be at least five comparable firms, and that no single firm controls

40% of the market. Galla (2016) and Mirandilla-Santos (2016) suggest that the high prices, slow

speed, and unreliable broadband service in the Philippines may be the result of an industry that

77
is dominated by two telecommunications companies, PLDT and Globe, with a market share of

70% and 28%, respectively. Since reliable broadband access tends to increase household

incomes and economic growth (Salway, 2015; Worstall, 2012), the Philippines needs a

broadband policy that promotes the public welfare.

2. Internet Speed

Rappler (2016) reports that 55% of the 119 million mobile phone subscribers in the

Philippines have a mobile broadband subscription, although some 80% subscribe to speed tier

plans between 1 and 3 Mbps, indicating that a large majority of broadband users either cannot

afford a premium broadband service or their current need for broadband does not require

connection at higher speeds. The demand for cheaper and slower broadband service by most

Filipinos results in an average revenue per user (ARPU) of PhP 101 for prepaid and PhP 1,029

for postpaid in Q1 2016 (BMI Research, 2016). While the low ARPU for prepaid broadband may

deter PLDT and Globe from improving broadband infrastructure and QoS (e.g., HTTP download

speed, TCP download/upload speed, latency or network round trip time, packet loss, and DNS

response times), industry observers argue that the dominance of PLDT and Globe in the

telecommunications industry largely explains the deplorable state of high-speed Internet

service in the Philippines (See “In the News”: Globe Telecom Expands Network, To Build Over 500

LTE700 Sites).

Table 33 shows the average connection speed (IPv4) of selected countries in Asia Pacific

in Q1 2016 for fixed broadband. The Philippines is ranked 113th globally with an average

connection speed of 3.5 Mbps, representing a 10 percent increase from the previous quarter

(QoQ) and a 24 percent increase from the same quarter of the previous year (YoY). Given the

Philippines’ average connection speed QoQ and YoY in Q1 2016, India may surpass the

Philippines’ average connection speed in Q1 2017. Table 34 shows the peak connection speed

(IPv4) of selected countries in Asia Pacific in Q1 2016 for fixed broadband. The Philippines is

ranked 88th globally with a peak connection speed of 29.9 Mbps, representing a 10 percent

increase from the previous quarter (QoQ) and a 47 percent increase from the same quarter of

78
the previous year (YoY). Given the Philippines’ peak connection speed QoQ and YoY in Q1 2016,

the country’s peak connection speed may be comparable with either Sri Lanka’s or Australia’s in

Q1 2017, provided that the change in peak connection speed in Sri Lanka and Australia is 14.0%

and 6.8%, respectively.

79
 TABLE33: FIRST QUARTER 2016 AVERAGE CONNECTION SPEEDIN ASIA PACIFIC REGION
Global Rank Country or Average Mbps Q1 2016 QoQ Change YoY Change
Territory Fixed Broadband
1 South Korea 29.0 8.6% 24%
4 Hong Kong 19.9 19.0% 19%
7 Japan 18.2 4.6% 20%
13 Singapore 16.5 19.0% 29%
21 Taiwan 14.8 15.0% 46%
39 Thailand 10.8 16.0% 49%
43 New Zealand 10.5 13.0% 25%
48 Australia 8.8 7.7% 15%
74 Malaysia 6.4 22.0% 49%
83 Sri Lanka 5.4 13.0% 12%
89 Vietnam 5.0 31.0% 59%
94 Indonesia 4.5 16.0% 110%
100 China 4.3 3.3% 15%
113 Philippines 3.5 10.0% 24%
114 India 3.5 24.0% 55%
Source: Akamai (2016a).

80
 TABLE 34: FIRST QUARTER 2016 PEAK CONNECTION SPEED IN ASIA PACIFIC REGION
Global Rank Country or Average Mbps Q1 2016 QoQ Change YoY Change
Territory Fixed Broadband
1 Singapore 146.9 8.3% 49.0%
2 Hong Kong 110.3 4.9% 19.0%
3 Indonesia 110.2 38.0% 535.0%
4 South Korea 103.6 8.7% 32.0%
7 Japan 84.6 2.0% 21.0%
8 Taiwan 83.1 5.4% 20.0%
20 Thailand 69.6 9.2% 30.0%
49 New Zealand 49.8 16.0% 28.0%
54 Malaysia 46.3 10.0% 46.0%
56 Australia 43.8 12.0% 6.8%
77 Sri Lanka 35.4 31.0% 14.0%
78 Vietnam 34.1 16.0% 60.0%
86 China 31.0 3.3% 60.0%
88 Philippines 29.9 10.0% 47.0%
104 India 25.5 24.0% 48.0%
Source: Akamai (2016a).

Table 35 shows the average and peak connection speed (IPv4) of selected countries in

Asia Pacific in Q2 2016 for fixed broadband. The Philippines has an average connection speed of

4.3 Mbps, representing almost 23 percent increase from the previous quarter (QoQ) and a peak

connection speed of 32.9 Mbps, representing a 10 percent increase from the previous quarter

(QoQ). The change in the average connection speed in Q2 2016 represents an improvement—23

percent vs. 10 percent (see Table 33) while the change in the peak connection speed is the

same—10 percent vs. 10 percent (see Table 34). The change in average and peak connection

speed indicates that the Philippines still lags most of its Asia Pacific neighbors in improving its

high-speed Internet service.31

31
In March 2016, DICT has indicated that the country’s internet penetration increased to 52% from 27% in
2010; the average connection speed was 2.1 Mbps, and only 8% of the users were enjoying connection speeds
faster than 4 Mbps (Galla, 2016).

81
 TABLE 35: SECOND QUARTER 2016 AVERAGE AND PEAK CONNECTION SPEED
IN ASIA PACIFIC REGION
Country or Territory Average Mbps Q2 2016 Peak Mbps Q2 2016
Fixed Broadband Fixed Broadband
South Korea 27.0 110.1
Hong Kong 19.5 114.3
Singapore 17.2 157.3
Japan 17.1 85.3
Taiwan 15.6 88.8
Thailand 13.7 77.6
New Zealand 10.6 53.8
Australia 8.5 51.1
Malaysia 6.8 51.0
Indonesia 5.9 91.9
Sri Lanka 5.7 43.9
China 5.2 35.4
Vietnam 5.1 37.1
Philippines 4.3 32.9
India 3.6 26.1
Source: Akamai (2016b).

The Philippines fares much better when it comes to mobile broadband average and peak

speeds. Table 36 shows the average and peak connection speeds (IPv4) of selected countries in

Asia Pacific in Q2 2016 for mobile broadband. The Philippines has an average connection speed

for mobile broadband of 8.5 Mbps, almost twice the average connection speed of its fixed

broadband in the same period while the country’s peak connection speed for mobile broadband

is 105.1 Mbps, representing more than three times the peak connection speed of its fixed

broadband in the same period (see Table 35). The Philippines ranks sixth and third in average

and peak connection speed, respectively, for mobile broadband among 15 countries ranked by

Akamai in the Asia Pacific Region in Q2 2016.

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 TABLE 36: SECOND QUARTER 2016 MOBILE CONNECTION SPEED IN ASIA PACIFIC REGION
Rank Country or Average Mbps Q2 2016 Peak Mbps Q2 2016
Territory Mobile Broadband Mobile Broadband
1 South Korea 11.1 67.6
2 New Zealand 9.8 97.7
3 Japan 9.5 93.2
4 Taiwan 9.3 59.4
5 Australia 8.9 171.2
6 Philippines 8.5 105.1
7 Singapore 8.1 61.3
8 Indonesia 6.9 46.3
9 China 6.7 32.4
10 Thailand 5.8 127.7
11 Hong Kong 5.7 50.3
12 Sri Lanka 5.0 46.2
13 Malaysia 3.4 31.8
14 India 3.3 19.5
15 Vietnam 2.8 29.7
Source: Akamai(2016b).

The recent sale of the SMC’s telecommunications assets to PLDT and Globe and the

commitment by Globe and PLDT to improve telecom services a year after the transaction will

demonstrate whether NTC’s implicit policy of allocating the spectrum resources to those who

can utilize them more effectively will improve broadband QoS at a reasonable cost. Globe has

submitted its three-year rollout plan to NTC last July 29, 2016. Globe commits to provide mobile

services including voice, SMS and data to 95 percent of cities and municipalities by the end of

2018, using the spectrum it acquired from SMC.

3. Philippine Broadband: A Policy Brief

This section on broadband policy analysis summarizes the major issues raised by the

USAID-funded policy brief on broadband connection in the Philippines (Mirandilla-Santos,

2016) and analyzes the policy brief’s recommendations as well as Globe’s counterarguments.

The USAID-funded “Philippine Broadband: A Policy Brief,” (hereafter referred to as “policy

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brief,” authored by Mary Grace P. Mirandilla-Santos) argues that the country’s broadband

penetration is limited and despite charging one of the highest rates in the world, the QoS of the

broadband network provided by PLDT and Globe remains poor. The policy brief cites a World

Bank study that argues for a more widespread use of broadband because a 10 percent increase

in broadband penetration rates results in more than one percent increase in GDP, as well as a

study by the Lee Kuan Yew School of Public Policy and Microsoft that indicates greater

socioeconomic benefits of widespread internet use for developing economies. Moreover, the

policy brief argues that reliable broadband connectivity helps make Philippines businesses

more competitive in a global environment by improving business processes as well expanding

access to new markets and customers.

The policy brief argues that because of the anti-competitive behavior and actions of

PLDT and Globe, the two dominant telecommunications companies, the growth of Internet

access in the Philippines has been slower compared with other countries in the ASEAN—around

2.6 and 20.3 per 100 Filipinos for fixed and mobile broadband, respectively, in 2013 and 23.2

and 28.0 for fixed and mobile broadband, respectively, in 2014. Since PLDT and Globe own most

of the extant internet infrastructure (i.e., submarine cables, landing stations, backhaul network,

and last mile technologies), the two companies control access to their networks and dictate the

cost and quality of internet service in the country, allowing PLDT and Globe to enjoy one of the

highest earnings before interest, taxes, and other charges among emerging economies despite

having one of the lowest ARPUs. The policy brief also notes that PLDT has revenues and net

income of at least PhP 150 billion and PhP 35 billion, respectively, since 2010, with a market

capitalization of PhP 669 billion in 2015 while Globe is valued at PhP 241 billion in the same

year.

The policy brief notes that the information and communications technology (ICT)

infrastructure and services in the country are private sector-driven and that while deregulation

of the telecommunications industry in the 1990s has attracted entry and competition, most of

these companies have been either acquired by PLDT and Globe or driven into bankruptcy.

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Fixed broadband service is concentrated in major urban areas while mobile broadband service

has been more accessible to the populace through the widespread use internet-ready handsets.

Despite the widespread use of mobile internet access, however, the policy brief cites a 2012

Department of Education survey indicating the lack of internet access to 79 percent of public

schools in the country.32 Internet access is also one of the slowest in the Asia-Pacific region with

an average of 2.8 Mbps, much slower than Malaysia’s 3.4 Mbps and Thailand’s 8.2 Mbps,

according to a 2015 report by Akamai. Citing reports by Ookla and TechInAsia, the policy brief

argues that the Philippines has one of the most expensive broadband subscriptions rates or cost

per Gigabyte.

The policy brief reviews Commonwealth Act 146 (Public Service Act of 1936), which

defined telecommunications as “wire or wireless communication,” Republic Act (RA) 7042

(Foreign Investments Act of 1991) that was amended by RA 8179 by providing a foreign

investment negative list, Department Circular 87-188 in 1987 of the Department of

Transportation and Communications (DOTC) that affirms the development of a

telecommunications industry through regulated entry and competition, Executive Order (EO)

59 that mandates interconnection among Philippine telecommunications companies, resulting

in lower telephone subscription rates, EO 109 that mandates service improvement of local

exchange carriers, establishing the service area scheme (SAS) for telecommunications

companies, and the passage of RA 7925 (Public Telecommunications Policy Act) that designates

the National Telecommunications Commission (NTC) as the regulator of the Philippine

telecommunications industry. The NTC’s tasks include regulating basic telecommunications

services, ensuring a healthy competition in the industry, and protecting consumers from anti-

competitive practices. The decisions by the NTC may be appealed through the Court of Appeals

and Supreme Court, however. The policy brief notes that by 2000 mobile phones have

overtaken fixed-line use by a ratio of more than two to one and the shift to mobile phones and

32
Galla (2016) stresses that 85.8% of the 38,683 public elementary schools do not have an internet connection.

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text messages made international and national direct dialing services unprofitable.33

Interconnection between networks was again a problem until PLDT/Smart and Globe agreed to

allow their subscribers to connect to other networks. Internet was introduced in 1993 when the

computer networks of major Philippine universities were interconnected through a government

network, the PHNET, and by the middle of the decade internet service became commercially

available, resulting in more than 300 small internet service providers (ISPs) across the country.

The number of ISPs dwindled to around 10 by 2015, however, due to prohibitive access fees

charged by telecommunications companies.34

The policy brief argues that barriers to entry, such as securing a congressional franchise,

applying for separate licenses and permits to operate from NTC and various national and local

governments, and restricting foreign ownership on telecommunications companies, have

resulted in a “less competitive” industry, which is considered as a duopoly between PLDT and

Globe. Due to these barriers to entry, the Philippine telecommunications industry lags behind its

ASEAN neighbors in terms of contestability or the ease in which firms enter and exit an

industry. The market structure of the telecommunications industry allows the two dominant

companies to engage in anti-competitive behavior and activities since they control eight of the

nine submarine cables that connect the country to the rest of the world. Local and international

internet providers have to connect with the networks of PLDT and Globe, making broadband

connection expensive since 75% of the cost comes from the backhaul network controlled by the

two companies. While NTC regulates the industry with regard to radio spectrum management

and the operation of wire or wireless communications services, among other things, local

telecommunications companies have challenged its decisions at the Court of Appeals and

33
The policy brief wrongly inferred that Cambodia was even ahead of the Philippines because its mobile-phone
subscribers overtook fixed-line subscribers as early as 1993. In reality, fixed-line roll-out was not a practical
possibility in war-torn Cambodia because land mines and live munitions remained all over the country.
34
“The Philippine Internet Services Organization (PISO) complained to the NTC against the ‘anti-competitive’
practices of the dominant telecommunications companies… According to PISO, the telecommunications
companies have set the prices of E1/R2 – a significant standard that allows a single cable to have thirty (30)
channels – 20% to 45% higher than what telcos offer to their own affiliated companies…A case in point is the
DSL services.” Telcos were pricing DSL services complete with bandwidth and other support at PhP 2,500 and
available only through a Telco’s own brand or to its affiliated ISP. But the Telcos were reselling raw DSL
services (no bandwidth and other support) to non-affiliated ISPs at average price of PhP 2,700 per channel
(Padojinog, 2005, pages 45-46).

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Supreme Court, resulting in the delay or reversal of NTC decisions that are unfavorable to these

companies. Moreover, the penalties imposed on companies that violate the NTC’s directives are

not substantial, which result in noncompliance. Industry stakeholders and observers have

argued that the NTC have been ineffective in regulating the industry with respect to industry

consolidation, radio spectrum management, and promoting competition. The NTC has approved

M&As that have resulted in a more concentrated market structure, restricting entry and

competition that have led to higher prices and unreliable service. The NTC’s approval of the

M&As appears to disregard antitrust issues and the public interest. With regard to spectrum

management, the decisions and actions of the NTC have favored more established companies

such as PLDT and Globe to the detriment of smaller companies. Moreover, NTC’s practice of

simply allocating available radio spectrum for the telecommunications industry without proper

public bidding and consultations is considered inefficient and lacks transparency. The issue of

spectrum management and allocation has become critical as the demand for broadband service

increases and the NTC has reallocated certain radio frequencies, initially assigned to

broadcasting companies, to public telecommunications companies. The radio spectrum that has

been allocated to SMC has become a major issue as PLDT and Globe want control of this

spectrum, the 700 MHz band, arguing that SMC has not been able to use this spectrum

efficiently to expand and improve internet service in the country. The 700 MHz band has the

potential to expand access to low-cost mobile broadband service due to its relatively wider

propagation capabilities, resulting in lower capital investments.35 While the “use it or lose it”

approach in reallocating radio spectrum may result in more effective and efficient use of scarce

resources such as radio frequencies for telecommunications use, this approach may favor

entrenched companies that have the infrastructure and other resources to maximize the use of

the 700 MHz band. Since there are still other frequencies available for the telecommunications

35
Galla (2016) argues that this spectrum can reduce the telcos’ obligatory capital expenditures. To meet demand
and subscriber growth, the telcos need not increase cell site density. “Instead of building more infrastructure, a
wireless communications service provider will merely add a few new antennas to its existing cell sites for the
new frequencies, or simply reprogram its base transceiver station equipment to include the spectrum that it has
acquired” (p. 9).

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industry, radio frequencies that have been initially allocated to other uses (e.g., industrial,

scientific, and medical radio bands) should be made available to ISPs and value-added service

(VAS) providers, which may open up the industry to small-scale network operators and

community-based ISPs without connecting to large telecommunications companies. With

regard to promoting competition in the Philippine telecommunications industry, the NTC has

not been able to implement the provisions of the consultative document on significant market

power due to strong opposition from telecommunications companies and that as of the writing

of the policy brief, the NTC has not adopted a working definition of what constitutes “public

interest” in regulating the industry. Moreover, the NTC has not imposed any restrictions on

telecommunications companies (e.g., PLDT and Globe) with significant market power. The

policy brief notes that the creation of the PCC, which began operations in February 2016, may

be able to remedy the anti-competitive practices of PLDT and Globe and introduce a healthy

competition in the industry. Other barriers to competition that the industry faces include (1)

prohibitive bureaucratic processes imposed by national and local governments for

telecommunications network expansion, (2) inadequate telecommunications infrastructure,

and (3) lack of interconnection among local companies. With regard to bureaucratic processes

the policy brief notes that local government units (LGUs) impose arbitrary fees and permits

when building telecommunications towers and other infrastructure, charging up to PhP

200,000 a month for setting up cell sites in their area, in addition to the various clearances

telecommunications companies need to secure from national government agencies. The

resistance of exclusive subdivisions and residential enclaves only adds to the difficulties faced

by telecommunications companies when they set up cell sites adjacent to these areas. With

regard to inadequate infrastructure, the prohibitive cost of deploying fiber optic cable results in

just 10 percent penetration rate of fixed line broadband. While mobile broadband technology

may increase broadband penetration in the country, isolated island communities and sparsely

populated rural areas are expensive to serve, although the use of universal access funds (UAFs)

may alleviate the problem of providing fast internet service to these communities. With regard

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to the lack of interconnection between local telecommunications companies, local IP peering

not only improves the transmission quality and speed of local internet traffic, but may also

provide more security for sensitive data and information because local internet traffic will no

longer be routed through a third party telecommunications network located outside the

Philippines. The Philippine Open Internet Exchange (PHOpenIX) may provide a way for PLDT

and Globe to agree to multilateral peering, which should result in faster internet connection

speed and lower cost.

The policy brief has six recommendations to make the Philippine telecommunications

industry and provision of broadband service more competitive: (1) adopt an open access model,

(2) update laws and regulatory framework to promote investment and innovation in

telecommunications and connectivity, (3) level the playing field so anyone can connect, (4)

update and upgrade the country’s ICT strategy and plan, (5) improve spectrum management,

and (6) ensure the competitiveness of the telecommunications industry. The policy brief

concludes that high-speed internet service results in socioeconomic benefits not just to the

country but also to individual Filipinos.

4. Analysis of the Policy Brief’s Major Recommendations and Globe Telecom’s

Counterarguments

4.1 Adopt an open access broadband internet service model

The OECD defines ‘open access’ as “an arrangement that provides effective, wholesale

access to network infrastructure or services at fair and reasonable prices, and on transparent

and non-discriminatory terms.” A number of countries have adopted and implemented open

access arrangements that include fixed access networks and mobile networks as well as

internet exchange points (IXPs) and undersea cables (Diaz-Pines, 2013).

Open access arrangements generally promote competition that results in more

consumer choices and lower prices, especially in developing economies with little or

nonexistent infrastructure competition, because allowing new companies to connect to and use

existing telecommunications networks is more economical and reliable than building new

networks (Diaz-Pines, 2013). Open access arrangements may also facilitate the creation of new

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revenue sources to make up for declining ARPUs, bring faster payback period on the fiber

investment, accelerate service take-up for faster return on investments, comply with

regulations for open and competitive access, allow innovation and faster introduction of new

services, support a competitive retail environment, and promote flexible end-user choices

(Mastrangelo, 2010).

Globe’s argument that “congestion brought about by the disproportionate number of cell

sites vis-à-vis traffic” does not really address the open access question since open access

arrangements lead to a restructuring of the traditional telecommunications business model,

which requires the unbundling of the vertically integrated telecommunications company to

allow for a horizontal network architecture that will support three commercially independent

business segments—infrastructure providers, network providers, and service providers

(Keymile, 2011). Infrastructure-sharing arrangements that allow internet service providers

(ISPs) that leverage IXPs have been shown to reduce data transfer costs up to 100,000 times

lower than typical voice rates (Diaz-Pines, 2013), indicating the potential of open access

arrangements to increase broadband penetration in a country where prepaid broadband

subscribers who are price-sensitive predominate.

However, Globe is actually advocating for an open-access legislation. The ‘open access

model’ recommendation by the policy brief for the Philippine telecommunications industry can

be evaluated by policymakers and industry players as an alternative to the vertically-integrated

business model (with some modifications as explained below since open access arrangements

may improve broadband penetration and QoS, resulting in higher household incomes and GDP

growth. Open access arrangements are rarely reached voluntarily, however, and the

government may need to intervene. The goal, then, is to introduce open access policies that

facilitate new investments in infrastructure that promotes product innovation and more

reliable service (Diaz-Pines, 2013).

Globe assertions that “existing cell sites from current players even if shared will not

improve site density because locations are almost the same” are true. But an open access law

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can only work in practice if it: (1) allows tower sharing, (2) declares cell site build up a

government priority project, and (3) facilitates the process of granting network and wholesale

operators market-based incentives by bidding for the least amount of government subsidy to

build and maintain the network.

In reality, it is politically and financially difficult for a jurisdiction to shift from a

vertically integrated to an open-access model because existing operators have already invested

huge amount of money to build and maintain their existing network (mostly located in highly-

urbanized population centers). The risk for restructuring is described by the following issues:

who decides which assets are to be transferred, how is the current assets valued, how is the

financial transfer structured, and who covers the separation cost? A vertically integrated

structure allows or requires an operator to own and maintain a network as a vertically

integrated organization that provides all services direct to all customers, wholesale and retail.

In contrast, an open-access system requires the separation of the physical infrastructure from

service provisioning. In this model, a separate company is established to design, build, and

operate the passive national fiber infrastructure; another company is set up as an operating

company for active access services, and provides switches, transmission equipment, and

wholesale services; and at the third level are retail service providers which buy bandwidth

connectivity from the wholesale operators. This model is similar to the power industry

structure. Before 1986, National Power Corporation operates both the transmission and

generation network. Now, transmission company is separated from generation; generation is

opened to competition; distribution is still area-monopoly through a Congressional franchise,

but starting in 2017, retail competition is allowed among retail electricity service providers.

The most realistic option is for government to build the “last-mile” network and this last-mile

network can then be leased to network and wholesale operators who are required to allow

open access to ISPs which want to serve or provide “last-mile” connectivity to unserved,

underserved, and missionary areas (See “In the News”: Globe Submits 3-Year Rollout Plan to

NTC). Globe has recently signed five-year contracts with Huawei Technologies, Nokia, and

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Wuhan Fiberhome International Technologies to increase data and fixed-wireless broadband

capacity and to provide coverage in unserved areas.36

The policy paper cited UK and Singapore as the ideal open-access models. These

assertions are not consistent with the facts. In 2005, when British Telecom (BT) had limited

competition, the UK was lagging in fixed broadband penetration. Due to regulatory pressure, BT

created Openreach, a functionally separate business division, to operate its local access

networks. Openreach provided nondiscriminatory support to retail activities of all providers;

and wholesale customers could buy services from either Openreach or BT Wholesale, but both

wholesale operators are owned by BT, the network operator. This structure resulted in low

customer satisfaction and high setup costs. The British regulator (OfCom) pressured BT to

structurally separate Openreach into an independent company, but the outcome was that

Openreach was not forcibly spun off; instead it was compelled to offer duct sharing and pole

sharing to stimulate structure sharing. BT was made the holding company of Openreach, with a

separate board of directors and financial reporting. In sum, British regulators avoided

structural separation and adopted other avenues such as quality of service guarantees as

alternative. In Singapore’s case, the government issued a grant to build a co-owned national

broadband network (NetCo), and awarded to a separate company (OpenNet) to operate it for

active access services. Public-private collaboration produced strong alignment among the

government, the regulator, and network operators. But incumbent SingTel neither aligned with

nor encouraged the NetCo’s objectives. OpenNet and its shareholders (CityNet, NetLink, and

SingTel) submitted an application to Singapore’s regulator, InfoComm Development Authority

(IDA), for CityNet (a wholly-owned subsidiary of SingTel) to acquire 100 percent of OpenNet.

The application was approved in 2013. In summary, it shows that the success of the national

broadband plan is highly correlated with incumbent involvement (Strategy&, 2016).

36
Miguel Camus, “Globe Inks $750 M In Deals With 3 Tech Partners,” Philippine Daily Inquirer, October 24,
2016, page B3.

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 4.2 Update and upgrade information and communication technology (ICT) laws
and policies

There is a need to regularly review and update ICT laws and policies due to the fast

changing telecommunications environment as new technologies and standards become

available. The major problem in the Philippines is not the lack of laws or regulation that govern

the ICT sector, however, but the somewhat arbitrary implementation of existing laws or

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regulation. The policy brief recommends the reorganization of the NTC that will allow greater

competition in the telecommunications industry and the creation of the Department of

Information and Communication Technology (DICT) that will help the Philippines develop a

national strategy for the sector, as well as amendments to RA 7925 and CA 146. The creation of

DICT is already a reality. Globe supports these recommendations and argues that “the

management, allocation, or assignment of radio frequency spectrum [should be] transparent,

fair, economically efficient and effective.” The NTC’s approval of the acquisition of the SMC-

Vega assets by PLDT and Globe and the recent action of the Court of Appeals against the PCC

review of the acquisition have been heavily criticized by various stakeholders. As to whether

this action undermines the call for greater transparency and fairness in spectrum allocation

remains to be seen. On the other hand, Globe explains its side on the SMC-Vega

telecommunications deal and reiterates that the company is guided by the principles of good

corporate governance (See “In the News”: Globe Gives Side on SMC Telco Deal).37

37
Globe President and CEO Ernest Cu said that, “the essence of competition commission should be to ensure
that competition does exist in the marketplace…it’d be hard-pressed to prove that it isn’t, given the pricing
pressures, given the seeming price war that has erupted on data and the competitive positions that the two
players have put themselves in” (Interview with Globe President and CEO Ernest Cu, Philippine Daily Inquirer,
inquirer.net, October 11, 2016).

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 4.3 Level the playing field for all industry players

This recommendation is closely related to the adoption and implementation of an open

access model in the ICT sector. The policy brief recommends local IP peering, which may

improve network security within the Philippines, and shared infrastructure. Globe supports IP

peering, but disagrees with the proposal on tower co-location and sharing of radio spectrum.

Globe argues that tower co-location will not resolve anything. In contrast, the policy brief, as

well as Democracy.Net.PH argue that shared utility corridors, shared towers and poles can

lower the capital expenditures for the telecommunications companies.

The reluctance of Globe to share its infrastructure assets with new players is

understandable given the huge investments the company has made in technology and product

95
development, site acquisition, and civil works, among other things. There are ways to

encourage incumbents to share their infrastructure with new players that help reduce future

infrastructure deployment costs, however. The Broadband Commission (2014) suggests the

following policies for infrastructure development that support open access arrangements.

 Site acquisition: National and local governments should identify and make available all sites

that can accommodate telecommunications equipment in a database format for improved

network design accessible to all parties.

 Sharing of existing infrastructure: National and local governments should provide

incentives for voluntary infrastructure sharing through primary and secondary legislation,

review prices for infrastructure-sharing, ensure effective and efficient resolution of

disputes, and build awareness and capacity (competence) about frameworks for

infrastructure-sharing for property owners, operators, and national and local authorities.

 Co-deployment of new infrastructure and coordination of civil works: National and local

governments should promote and mandate coordination of civil works, develop a database

where all planned civil works are published, develop recommendations on possible cost-

sharing models and reference agreements on co-deployment, and ensure effective and

efficient resolution of disputes on coordination of civil works.

 Pre-conditions for cheaper deployment of infrastructure: National and local governments

should mandate deployment of empty ducts for roads and water supply wherever possible,

mandate specific diameters for empty ducts in areas with high demand for sharing, and

mandate technical requirements for poles and antenna masts with the aim of ensuring

sharing.

 Effective construction processes: National and local governments should review and

simplify the rights of way process in cases where infrastructure is deployed over public and

private property, build awareness and capacity (competence) about rights of way among

property owners, operators, and local authorities, and review and simplify permission

procedures and associated administrative procedures.

96
 Review taxation: National and local governments should review and simplify taxation

structures in terms of tax holidays, investment allowances, corporate tax and VAT rates

applicable to telecom services and equipment.

Globe’s arguments that “many infra[structure] backlogs happen due to difficulty in

getting [local government] permits” and the absence of “standardized fees at [local

governments] breed[s] corruption” may be addressed by the foregoing policies recommended

by the Broadband Commission (2014), specifically the policies that pertain to the sharing of

existing infrastructure and effective construction processes.

4.4 Update the Philippines’ ICT strategy and plan

The policy brief recommends that it is high time to update the Philippine Digital

Strategy: 2011-2016 (PDS) which was formulated by various ICT stakeholders under the

coordination of the Commission on Information and Communication Technology (CICT). The

new DICT, which is mandated to be an ICT policy-formulation and coordination agency, should

spearhead the update of the PDS. The new PDS should incorporate a National Broadband Plan,

describing the steps on how to achieve the country’s national broadband goals. Globe supports

this recommendation and suggests that the “government [should] invest in the internet

superhighway,” because building ICT infrastructure in missionary areas is high risk and is not

financially attractive for private corporations. With the creation of the DICT, the Philippines

should be on its way to adopting a more deliberate “internet of things” policy that will provide

universal access to broadband technology that facilitates a more inclusive economic growth.

Globe adds that the government should “also provide incentives to private corporations to

connect public schools to the Internet,” suggesting the need for the government to “reduce

taxes and import duties on ICT equipment and services” (Broadband Commission, 2014). This

indicates Globe’s willingness to help provide internet connection to public schools provided the

government gives the company financial incentives on the importation of telecommunications

technology, equipment, and services, and in facilitating in obtaining permits, right of way, and

site acquisition from LGUs and local entities.

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 The Broadband Commission (2014) argues for the creation of “universal service funds

(USFs) to close the digital divide.” One of the ways governments have reduced the digital divide

is by providing free internet access and affordable broadband devices to marginalized sectors

and communities. The government and the private sector, as well as civic organizations, may

contribute to the creation of USFs in the Philippines that will be used to “help connect

marginalized and underserved populations” (Broadband Commission, 2014) especially in rural

areas and isolated island communities that have little demand to justify fast and reliable

internet connection. The PLDT-Globe IP peering may result in faster connection speed for local

internet traffic since local internet traffic will no longer be routed through a foreign

telecommunications network (See Figure 11). The ideal scenario is for PLDT and Globe to peer

through the Philippine Open Internet Exchange (PHOpenIX), an open and neutral IXP that

allows multilateral peering, to increase the speed of local internet traffic. While Globe is already

connected with the PHOpenIX and peering with other local networks, PLDT has limited its

peering with the government (PLDT, 2016).

The challenge is to cover unserved areas in a cost-effective way for operators. Turkey

has experienced that the deployment of fiber network in suburban areas costs twice as much as

in dense urban areas; and it costs four times as much in rural areas as in dense urban areas

(Strategy&, 2016).

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 FIGURE11: PLDT-GLOBE IP PEERING

Source: http://www.pinoytechnoguide.com/2015/09/pldt-joins-phopenix-increase-Internet-speed.html

4.5 Improve the spectrum management

The acquisition of the SMC-Vega telecommunications assets by PLDT and Globe

underscores the need to improve spectrum management in the country. While PLDT and Globe

argue that the SMC-Vega assets are underutilized, the sale would invariably result in a more

concentrated market structure as PLDT and Globe possess more spectrum frequencies. There

are other ways to manage the underutilized spectrum of SMC that will support the national

interest as well as the interests of the public such as allowing SMC to lease part of its spectrum

to PLDT, Globe, and other interested parties while the company seeks other partners to finance

its telecommunications business as a result of its failed joint venture with Telstra. The lease

would have allowed SMC and its future partners to improve competition in the

telecommunications industry since a third player may alter the incentives for PLDT and Globe,

resulting in product innovation and improvement in QoS. But there is no evidence that SMC was

forced to sell its spectrum, instead of leasing it to Globe and PLDT. Globe argues that if the

country has a high site density, there would have been no need for 700 MHz because having

merely 5 to 10 MHz will do.

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 The recent test on TV white space frequency by Globe (marketmonitor.com, 2016) only

adds to the urgency of exploring new approaches to spectrum management (See “In the News”:

Globe Completes TV White Space Trial). A number of countries, including the United States, the

United Kingdom, and Canada have also tested the use of white space so there is real potential in

the use of this spectrum to increase broadband penetration and QoS in the future. The next

steps should include the development of technologies and equipment that will utilize the white

space available for broadband services. With regard to spectrum allocation and management in

the Philippines, the government should allow new players to exploit white space spectrum (and

other frequencies that will be made available for internet use in the future) for broadband

service.

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 The policy brief recommends that the NTC adopt a “use or lose it” approach with regard

to spectrum management. The danger with this recommendation is that it may favor

incumbents who have the infrastructure, capacity, and capital to maximize the use of spectrum

that have been assigned to other players. This argument may have influenced the NTC’s

decision to approve the acquisition of the underutilized SMC spectrum and its

telecommunications assets to PLDT and Globe. Designing an incentive system for the

incumbents to adopt open access arrangements through infrastructure-sharing with new

players should result in more affordable and reliable broadband internet service.

4.6 Ensure and protect the competitiveness of the country’s telecommunications

industry

The policy brief appropriately characterizes the Philippine telecommunications industry

as “less competitive and effectively a duopoly” because the market is practically divided

between PLDT and Globe. The apparent conclusion is that the only way to ensure competition

in the telecommunications industry is to open the industry to foreign capital and new players.

The foreign ownership limit has stifled investments in key industries in the Philippines

especially in the telecommunications sector, which requires huge investments. The experience

of countries that liberalized entry of foreign investments in the telecommunications sector did

not attract foreign firms, however. What happened was that foreign firms invested through

joint partnership with local incumbents or equity infusion with local incumbents, and sharing

the rent with incumbents. Even if the market is fully liberalized, NTT will still come in to

partner with PLDT, and Singapore Telecom to partner with Globe. They will not enter the

market as independent entities. That has been the investment pattern in most countries in this

sector. The literature on market structure also points to the existence of concentrated market

(e.g. two-player industry) because intense competition leads to low price, which discourages

new entrants. Duopoly (or two-player market) therefore is consistent with a competitive

market. Low price and high profits are expected in a concentrated market that discourages new

entrants (See “In the News”: Globe Telecom Data Traffic Surges 35%).

101
 Galla’s (2016) market-share data illustrates this point, reporting on the market shares of

PLDT/Smart and Globe in the five telecommunications service categories—fixed line telephone,

prepaid mobile telephone, postpaid mobile telephone, fixed broadband, and mobile broadband.

With regard to fixed line telephone service, PLDT/Smart controls 67 percent of the market

while Globe has 33 percent market share. For prepaid mobile telephone service, PLDT/Smart

controls 54.8 percent of the market while Globe and other players have 44.7 percent and 0.5

percent market share, respectively. For postpaid mobile telephone service, PLDT/Smart has

55.2 percent market share while Globe’s market share is 44.8percent. For fixed broadband

service, PLDT/Smart controls 51.6 percent of the market, Globe has 43.9 percent market share,

while smaller companies control 4.5 percent of the market. For mobile broadband service,

PLDT/Smart has 54.7 percent market share while Globe has 45.3 percent. The foregoing

market shares of PLDT/Smart and Globe in the five telecommunications service categories

indicate that low price due to fierce competition discourages new entrants.

102
 Globe argues that the continuous decline in the prices of voice, text messaging, and data

in the last three years as well as the preponderance of “customized” products that cater to the

needs of various customer groups point to a competitive industry. These marketing strategies

entice price-sensitive customers to spend more. Competition drives incumbents to offer better

service, but in the long-run competition drives profits to normal rate, which elicits exit of firms

earning below normal rate. Consequently, only the efficient firms survive. Thus after the initial

liberalization and deregulation phase, the industry consolidates, and the remaining few firms

divide the market among them. In addition, both incumbents are well prepared to meet the new

demand pattern: a shift from talk-and-text to data.

103
 VI. Conclusions

The telecommunication sector plays an important role in contributing directly to the

Philippine economy. Since 1928 the Philippine Long Distance Telephone Company (PLDT) has

dominated the industry. Several new players entered in the 1990s after the government

deregulated the industry. The fragmentation and lack of economies of scale of the service area

scheme (SAS) led to a series of consolidations and mergers until its present structure where

Globe Telecom is the only player that can restrain PLDT’s dominance.

An application of the traditional structure-conduct-performance (SCP) paradigm shows

that the industry is highly concentrated with significant barriers to entry such as capital

requirements, subscriber base, and brand image. The market structure is likely strongly

influenced by the conduct of the incumbents such as Globe’s and PLDT’s buffet pricing, bundled

product offering, and innovations. And both market structure and conduct of the incumbents

impact the market performance industry EBITDA margins, ROEs and ROAs have been healthy.

An analysis of industry performance using metrics appropriate for an industry characterized

with sunk costs and economies of scale and scope shows that the industry players do not

exercise abusive market power.

The present two-player structure is characterized as fiercely competitive. However, the

market realities of capital intensity, sunk costs, and economies of network size prevent a

realistic entry of a private third player. Only a publicly-owned third player, that builds a “last-

mile” network that is financially not viable for private operators to build, can complement the

coverage gap in the present network.

Spectrum allocation process is important because the method chosen by the regulator

determines the resulting structure of the industry.

The two commonly used spectrum allocation methods are: (1) the administrative

approach which evaluates applicants on the basis of some criteria that may not be consistent

and transparent, and (2) auction approach that is transparent and increasingly used by many

regulatory authorities in this time of excess demand compared to available frequencies. NTC’s

104
preferred allocation method is the administrative approach and NTC is being criticized for lack

of transparency and for treating spectrum licensing system as confidential. A transparent

system is recommended by various industry stakeholders, and that NTC must develop a

spectrum management system in coordination with them. In sum, an effective spectrum

management system is needed in the country.

Increasing broadband speed has the potential to add 0.3 percent to GDP growth and

increasing broadband speeds by 0.5 Mbps results in additional annual household income of USD

800. The internet revolutionized the way people work and live and how they create and share

ideas and information, accounting for as much as 21 percent of GDP.

The recommendations of the Philippine Broadband: A Policy Brief are analyzed. First,

the proposal to adopt an open access network infrastructure model requires a restructuring or

structural separation of the existing system. Moreover, the performance of the UK open-access

system is far from its expectations, and even the Singapore “open-access” system has aspects

akin to the vertically integrated system. Second, the need to update ICT laws and policies is a

recommendation which is difficult to disagree with. Third, promoting IP peering is reasonable,

but infrastructure-sharing requires government incentive scheme to encourage infrastructure

investments by incumbents and avoid a free-lunch behavior by new and small entrants. Fourth,

updating of ICT strategy and plan can be undertaken by the newly-created DICT. Long-term

plans must be sustainable and cannot be driven by a flavor-of-the-month shift from one model

to another. The update should address the historical gap between targets and performance.

Fifth, spectrum management and allocation in the Philippines can be improved, but it might

require the institutional strengthening of NTC’s capacity. And sixth, the policy brief

characterizes the telecommunications industry as “less competitive and effectively a duopoly.”

Our market and competitive analysis of the industry points to fierce competition between Globe

and PLDT, and the earnings by the incumbents over the long run are not too high as to attract

new players in less concentrated “last-mile” areas whose infrastructure deployment cost is far

higher compared to dense urban areas.

105
 Competition exists in the present Philippine telecommunications industry which is

described as a two-player market. The valuable role played by Globe in the industry is to

gradually gain operational and financial viability in the long run, and then provide an effective

constraint against the exercise of market power by PLDT. The ability to exercise market power

by raising prices and reducing the quantity of service is not apparent. On the contrary, fierce

price competition and competition to install and upgrade facilities are equally intense and

evidently apparent. Although globally most telecommunications markets are having three to

four competitors, a third player may have a difficult time attaining financial viability in the short

run due to its late-mover disadvantage and the need to penetrate undeveloped areas whose

deployment cost is higher than the almost saturated urban markets dominated by the

incumbents. The only realistic third player is the government because it has the capacity to pour

investments in “last mile” and high-cost areas to build “last mile” network that complements

with existing networks. However, historical experiences of government failures in direct

provision and operation of utility services are rampant.

106
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