Dial Up
The country’s telecommunications industry boasts of rapid expansion but still leaves much room for growth
By Maricar T. Manuzon

The Philippine telecommunications industry has undergone substantial transformation since its deregulation in 1993. For one, the country’s teledensity index (TDI) – the number of telephone lines per 100 persons – has improved from 1.4 in 1992 to 8.7 in 2002. This represents a seven-fold increase in installed telephone capacity from the pre-deregulation level of 890,000 fixedlines or landlines to the current number of seven million.

Deregulation has become the telecom industry’s single biggest blessing

Manila Centric
Still, dispersement and capacity of telephone services in the archipelago remain inadequate. The industry exhibits a distinct disparity in telephone services distribution such that Metro Manila, with 13.5% of the country’s population, has a lion’s share of 41% in the total number of telephone lines in the country. As a result, Metro Manila TDI of 26.5 is the highest among the regional phone ratios, with the lowest TDI of 1.8 belonging to the Autonomous Region of Muslim Mindanao (ARMM). Meantime, the country’s average TDI outside Metro Manila is only 5.2.

It also did not help that telephone exchanges in provincial areas often have very limited interconnecting facilities to existing “backbone” networks, which link local exchanges and allow domestic and international long-distance calls.

From Monopoly to Deregulation, to Mergers
PLDT is the country’s largest local exchange service operator and a primary provider of international call service. However, despite its dominance in the industry for 75 years – counting the years when it was the country’s sole telecommunications carrier – PLDT was unable to satisfy the telecommunication requirements of the country.

As such, deregulation has become the telecom industry’s single biggest blessing. The cellular mobile telephone service (CMTS) and international gateway facility (IGF) franchises granted by the National Telecommunications Commission came with the requirement to roll out 400,000 landlines each for CMTS franchisees and 300,000 landlines each for IGF franchisees. This mandatory local exchange carrier (LEC) roll out program for the new entrants in the industry was key to the expansion in the country’s installed capacity.

The industry landscape was further changed by the merger of the telecom carriers to enable more financial muscle and synergies amidst the required huge infrastructure investments and the scams and collection problems then besetting the industry. In November 1998, Salim Group Indonesia’s First Pacific Corporation staged what is to be known as the country’s largest corporate takeovers – that of PLDT. This is followed by Globe’s acquisition of Islacom.

Mobile phone service is the fastest-growing segment of the country’s telecommunications sector

Unraveling Wireless
Mobile phone service is the fastest-growing segment of the Philippine telecommunications sector. CMTS operators take advantage of the strong demand for mobile phones amid the dismally inadequate number of fixedlines in the country. Moreover, there is only about 20% of the country’s population who are cellular subscribers, indicating much room for growth.

To date, the cellular segment is practically a duopoly where Smart and Globe rule, each with a remarkable subscriber base in 2002 of 8.6 and 6.8 million, respectively. Current number of available fixedlines is way below Smart’s cellular subscriber base and about the same level as Globe’s.

Worse, only half of fixedlines’ installed capacity is actually being subscribed to. Clearly, the Filipino market has taken to using cellular or wireless phones as a more preferred mode of communication, not to mention that the handsets that come with the service have become most loved gadgets and status symbols as well.

Competitive Pressure
The cellular segment is highly competitive. Cellular operators compete on the basis of price, brand, network coverage, distribution, technology and service quality. Brisk competition has led to the introduction of more aggressive promotional programs as competitors seek larger market shares to enjoy better economies of scale necessary in the capital-intensive cellular business.

The entry this year of Digital Telecommunications Philippines, Inc. in the mobile service through Sun Cellular is marked by a series of marketing and advertising promotions intended to grab market share from the dominant players Globe and Smart. As a new entrant, Sun Cellular is expected to continuously innovate and offer value for money plans to attract subscribers. Currently, aside from cheaper phones, Sun has, for a limited period, been undercutting prevailing rates for International Direct Dialing (IDD) calls by pricing at US$0.30 per minute. Sun has also included IDD and National Direct Dialing (NDD) calls as part of its free call values, and is now offering new services such as real time balance inquiry.

A new entrant hungry for subscribers means more aggressive marketing campaigns for the old players, as well, as they would want to attract and more importantly, retain subscribers. At a time where there are a lot of options and switching barriers are less, subscribers will go to the service provider which offers better services and more value for money.

With this in mind, industry leaders Globe and Smart have retaliated to competitive pressure by increasing their handset subsidies not only to attract more postpaid subscribers but also to defend their market share in this segment. To compensate for these handset subsidies, the two market leaders are making good use of the new handsets to introduce and promote multi-media messaging service (MMS) which will boost average revenue per subscriber. On top of this, sister companies Smart and Piltel are trying to retain and win new customers by pioneering in affordable sachet-like schemes for load packages valued at P30, P60 and P115 made available at sari-sari stores. This innovative pricing and distribution scheme caters to the limited-budget consumers.

Beyond the Wall
The saturation point or penetration wall for the cellular segment is placed at 30%, adjusted upwards from the original estimate of 25%. This will happen sometime in the year 2005. After the cellular segment has reached the 30% penetration rate, the growth is expected to taper off, and cellular companies will find it hard to look beyond this point.

Future expansion in the industry’s subscriber base, that is, “beyond the wall,” is actually dependent on the willingness of telecom companies to invest in escalating their operating platforms to support the needs of a wider subscriber base. The lower the incremental capital expenditure, the more operators will pursue subscriber expansion.

Nevertheless, the cellular players are abstracting from the “wall-thinking” and remain optimistic that the opportunities in the cellular mobile telephony segment is deeper than any wall estimates. One important thing that augurs well for the industry is its ability to maintain the uptrend in subscriber take-up despite episodes of economic slump.

Can’t Have Enough
The popularity of cellphones has contributed to the progress of telecommunications in the country. After imputing both the landline and cellular densities, the overall combined (fixedlines and CMTS) teledensity of the country is registered at 28.1. This means that just a little over one-fourth of the population have access to either wired or wireless phones. Not too bad for a developing country like the Philippines.

It was year 2000 when the relatively newer cellphone business has caught up with the number of fixedline business’ installed capacity of more than six million. Note that the cellular business started only in 1991, with Extelcom and PLDT-owned Piltel as the only CMTS operators, joined in 1994 by Smart, Globe, and Islacom.

Today, after considering cross-ownerships, only three CMTS operators remain: Smart, Globe, and the low-profile, niche-player Extelcom. Thus, as of last year, the market is left with only two dominant players. Hopefully, with the entry this year of Sun Cellular, competitive pressure in the CMTS market will further escalate for the benefit of the millions hooked to their cell phones.