By Katerina Karla Lizardo, XMG
September 17, 2011
In March 2011, PLDT announced the merger of 51.5% equity stake of Digital Telecommunications Philippines (Digitel) in a transaction amounting to PhP 74.1 billion. The deal would result in PLDT controlling over 70% of the total cellular subscriber share and an additional 400 thousand subscribers to the company’s 2 million strong broadband customer base. Globe Telecom, the Philippines second largest mobile network, and other telecom companies have since opposed the merger citing unfair competition. Globe called on the National Telecommunications Commission (NTC) to “level the playing field” by redistributing frequency franchises.
The merger is viewed by many as restoring the monopoly that was once enjoyed by PLDT. The company has denied the accusations stating that the deal enhances PLDT’s position but will not monopolize the market. PLDT expects competition in the telecom industry to remain competitive and consumers will continue to benefit from rivalries further citing that San Miguel Corporation with Liberty Telecommunications is set to be another competitor. The Philippine market has had a clear trend of competition in the mobile services for several years. Before the entry of Digitel, competition was stagnant with both Smart (PLDT) and Globe offering the same services and prices. After the entry of Sun Cellular (Digitel) competition intensified with their unlimited plans and bucket offers. Globe and Smart, seeing Sun’s market share grow to 15 million subscribers, has since followed suit and consumers enjoyed a greater variety of options.
With intense competition the market place, slow single digit growth as the market saturates for the past 3 years, the telecommunication market in the Philippines is entering a natural evolution – consolidation. With consolidation inevitable, this may potentially drive end-to-end telecommunication upwards. However, this may not necessarily be the case.
Although PLDT is adamant that it will not end Sun’s unlimited pricing plans, it is too early to tell on how this will impact the discount cellular product offerings. Assuming the merger is approved, it is highly unlikely PLDT would make drastic changes in the near term with Sun already being a strong brand as an alternative or second mobile service to Smart and Globe. XMG Global forecasts competition to remain at the same level prior to the merger in the near term with Globe affirming to stay competitive by increasing capital expenditures to 16% and spending a third of its budget on mobile broadband services. Maintaining its market challenger position, Globe will deliver an adequate level of service across a wide footprint, but face the constant threat of being perceived as a commodity provider. Nevertheless, the merger will change the Philippines’ telecommunication landscape in the long term. PLDT, Globe and other emerging players will be forced to review and rethink their strategies and can result to changes in services bundling and pricing.
Size matters in telecom. In the current economic climate, leaders must have substantial market share and respectable financials. XMG Global benchmark shows that mobile operators, on average, require a market share of 30% plus to be profitable. The merger pushes Sun and Smart’s market share to 69%, an increase in network size and coverage, and the ability to synergize, leverage costs and drive economies of scale. With Globe holding 31% market share and with the entry of Liberty, we expect the market to expand to a new, but uneasy equilibrium that would benefit consumers. Overall, XMG Global does not expect further significant decline in pricing or a drastic changes in the telecommunication landscape until the issue of interconnectivity charges are redressed or preferably removed altogether.
The proposed merger brings to light the state of readiness for the NTC to address the merger, the level of deregulation in the country and the perceived competitiveness of this market. The regulatory process has been slow, thereby putting a damper on the competitive environment. The light-handed approach by NTC is proving ineffective at letting market forces determine the development of the telecommunication landscape. Until the Philippine telecommunication landscape can transform to full liberalization, the stage for radical changes, healthy competition, differentiated service offerings and price drops will be hard to achieve. Furthermore, the NTC dictates the interconnection requirements. Interconnectivity charges will need to be dropped if a truly competitive market is to occur for consumer-oriented products such as mobile services.
Leading indicators of market attractiveness and maturity is competition, deregulation, and foreign ownership. Competition is alive, yet deregulation is not complete and foreign ownership is restricted. Continued competitive pressures with the absence of reform and higher foreign equity will make profitability elusive, and in turn, a market size that can only support no more than three major carriers. Thus, consolidation is inevitable, with more companies most likely to be absorbed.
The bottom-line is that the PLDT acquisition of Digitel is a threat to existing competitors as the merger fortifies the incumbent’s portfolio to wired, wireless and satellite services. Add PLDT’s media affiliations and you also have content. Other telcos, such as Globe or San Miguel, could have made the bid.
Consolidation of the market is inevitable. Concomitantly, government regulators must focus in preparing the industry for a new equilibrium and safeguarding the welfare of the consumers. It does so by consistent regulatory action, simplifying market entry, ensuring healthy competition, strengthening anti-trust laws, and encouraging flow of investments and innovation by relaxing entry barriers such as foreign equity limitations and congressional franchises. Without the political desire or the political pressure to further liberalize the telecommunication market, XMG Global sees limited visibility in the horizon on when the telecommunication market in the Philippines can achieve its full potential.
