Assessment of the Structure, Conduct, and Performance of the Philippine Telecommunications Industry
126 Pages Posted: 7 Feb 2017
Date Written: January 31, 2017
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.
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 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 existing networks. However, there are historical examples of government failures in direct provision and operation of utility services.
Keywords: Telecommunications, Duopoly, Market Power, Philippines
JEL Classification: L13, L22, L96
Suggested Citation: Suggested Citation