The Philippines: the next towerco frontier?

Formerly a sleeper market characterised by the cosy duopoly between Globe Telecom and Smart (PLDT), things became interesting in the Philippines in late 2017 when President Rodrigo Duterte decided to open up the country’s telecommunications sector by inviting foreign investors/players to challenge the dominance of the incumbents. This was followed by a proposal for a common tower policy, opening the flood gates for international towercos to seek an entrance, grow their footprint, and make a mark in this virgin tower market. Globe’s recent announcement on its interest to divest all or part of its tower assets further fueled excitement.

Comprising of 7,000+ islands and an estimated population of 103mn+, the Philippines has experienced positive economic growth in the past few years, emerging as one of the fastest growing economies in the region. Buoyed by tax reforms, investments in infrastructure, market liberalisation, new foreign policy directions, and more, President Rodrigo Duterte is seeking to rewrite the country’s narrative domestically and internationally. Against this back drop, perhaps it’s not surprising the telecommunications market is now under the spotlight.

Mobile penetration in the Philippines in 2016 was 122% with 125.6mn subscribers (Smart-PLDT ~62.8mn; Globe ~62.8m). For year-end 2017, subscribers totalled ~118.6mn, with the drop mostly due to a change in reporting methodology from the MNOs, where prepaid subscribers who do not reload within 90 days were excluded, compared to the previous cut off of 120 days. This loss suggests a saturated mobile market that is not growing as aggressively as previous years, where the last of the non-subscribers are being captured, increasing unique numbers, incorporating population growth.

The Philippines is also a market where feature phones dominate. Reports suggest phone ownership cycles are increasing, resulting in greater difficulty in persuading consumers to switch to smart phones and get hooked on data to drive growth. With low ARPUs in the country, and consumers wanting services but often not willing to paying for them, the MNOs have a tough road ahead. There is sensitivity around what people are currently paying and what they are willing to pay, and whether the pricing is on a per megabit basis versus a consumption basis.

Globe’s principal shareholders are Ayala Corporation and Singtel, the former being the holding company for one of the largest conglomerates in the Philippines, with businesses spanning real estate, financial services, transportation, manufacturing and more.

Globe has three brands in the mobile market: Globe Postpaid, Globe Prepaid and TM.

For year-end 2017, Globe’s mobile revenue grew 7% YOY, at P98.5bn (~US$1.9bn) compared to P92.3bn (~US$1.8bn) a year ago. Mobile subscriber base reached 60.7mn, down 3% from the 62.8mn subscribers from 2016, due to the aforementioned change in reporting of the company’s prepaid subscribers. Data remains the biggest contributor to total mobile revenues, increasing its contribution to 44% against 38% a year ago.

Globe spent around P42.5bn (~US$811mn) in capital expenditures as of end-December of 2017 to support a growing subscriber base and demand for data, with ~82% of spending for data service needs. The MNO closed out the year with a total of 37,517 base stations, with over 24,700 for 4G (includes HSPA+, WiMAX and LTE).

Consolidated EBITDA margin from 2016 to 2017 was relatively similar, at 41% and 42% respectively.

Founded on 28 November, 1928, the Philippine Long Distance Telephone Company (PLDT) has three main business groups in fixed line, wireless and information and communication technology. Under the wireless umbrella, its brands include Smart Communications, Sun Cellular and Text and Talk (TNT).

Smart’s mobile revenue for the year-end 2017 totaled P82.3bn (~US$1.6bn), down 11% from P92.5bn (~US$1.8bn) YOY, with individual subscriber count of 57.9mn. Wireless EBITDA margin grew 8% from 32% to 40% YOY. Mobile data represented 40% of revenue mix, up from 36% in 2016.

Out of its total capex of P40.0bn (~US$764mn) in 2017, 67% went towards wireless. Using the radio frequencies/spectrum acquired from SMC, PLDT continued the rollout of 3G/LTE across the Philippines in line with its commitment to the National Telecommunications Commission (NTC) to cover 90% of cities and municipalities. By year-end, its network included more than 8,700 LTE base stations and over 4,300 LTE cell sites. It has also increased its 3G base stations to 9,850 and its 3G-equipped cell sites to about 7,500.

When news first broke President Duterte was looking to increase telecoms competition and service in the country, it was through an invitation to the Chinese to become the third operator, as bilateral agreements were signed between the two countries in mid-November 2017. Out of the three MNOs in China, China Telecom emerged as the candidate.

Originally President Duterte had suggested aggressive timelines for the third telco being operational by Q1-2018, though prospective parties are crunched for time to adequately prepare their bidding documents. Local media reports DICT official citing interest from China Telecom, Japan’s KDDI, South Korea’s LG Uplus, as well as one unnamed operator from Taiwan.

DICT has also indicted interest from three local firms, The Philippine Telegraph and Telephone (PT&T), Now Corporation, and Converge ICT. In this instance, partnerships with foreign entities could provide the technical expertise to run and manage the network and/or additional financial backing.

Currently, the Philippines’ constitution restricts foreign direct investment (FDI) to 40%.

Being archipelagos like Indonesia, it is tough to provide coverage and expensive to get backbone to cell sites in the Philippines. The new player would need to have specific strategy on what it wants to do and how in the country, with no obvious differentiation compared to, for example, MyTel’s entry into Myanmar with a clear angle on rural and “local” brand positioning compared to Telenor and Ooredoo.

The third operator selection process is still to be finalised and confirmed, as initial conversations on the minimum capital investment of P10bn (~US$190mn) has now shifted to commitment to coverage/service levels since stakeholder consultations took pace. The International Communications Union (ITU) has suggested the use of parameters such as minimum coverage, minimum average speed, with a performance bond for each year. In contrast, the DICT introduced the Highest Committed Level of Service (HCLoS), where the formula takes into account the number of services offered, speed in Mbps, and the coverage percentage at cities up to the 6th class municipalities during the implementation of the five-year roll-out plan. This generally paves the way for the third player to achieve at least 65% population coverage after five years.

According to DICT, 40% of the population currently remain unserved or underserved.

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On 8 January, 2018, the Department of Information and Communications Technology (DICT) released the first draft of “policy guidelines for the entry of a new major player in the public telecommunications market” which stipulated:

SECTION 1. Qualifications

Applicant shall have the following minimum qualifications:

1.1 Possess a valid Congressional Telecommunications Franchise. After the bid, the NTC shall issue the appropriate licenses/authorities to the winner, if necessary.

1.2 Not a subsidiary of, affiliate of, nor shall have any corporate or financial interest with, either the Globe Group or PLDT Group of companies as of 31 December, 2017; and

1.3 Written and binding commitment from a foreign joint venture company, if applicable.

SECTION 2. Criteria for Selection

The application with the highest committed investment for the first five (5) years shall be selected. This commitment should be secured with a performance bond.

SECTION 3. Assignment of Radio Frequencies

The new major player shall be assigned radio frequency bands that are now available for assignment as identified by the NTC. Non-compliance with its commitment under section 2 hereof shall result in the automatic recall of the assigned radio frequencies.

On 28 January, the DICT held a meeting with stakeholders seeking comments and questions on the policy guideline, timelines, and terms of reference.

On 24 February, a second consultation took place.

The third consultation is to be rescheduled from the original date of 14 March.

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Previously international towercos did not prioritise the Philippines as the duopoly market structure created a glass ceiling on the tenancy ratios. In addition, a reportedly burdensome tax regime, compounded by complex permitting processes further disincentivised investments.

There was no towerco appetite to speak of for the Philippines until President Duterte initiated the introduction of the third MNO in late 2017, and subsequently tasked Ramon P. Jacinto, his adviser on economic affairs and ICT, to implement a common tower policy.

While exact guidelines have yet to be released, what is currently being discussed are for all new builds to be undertaken through towercos, with mandated sharing amongst all MNOs. The towercos are to focus on unserved and underserved areas, while also having the ability to build in Metro Manila. Tower contract bidding and assignment would not be done through the government. There may also be minimum rollout commitments. The towerco would also be treated differently than a telco operator.

Jacinto was quoted by local media as saying: “We have heard the concerns of the telecom operators. We need a win­-win solution that takes away the biggest obstacle of telecom operators (and) removes the headache of obtaining permits and constructing and managing cellular towers away from the telecom operators so that they can concentrate on their core business, providing the proper service to the Philippine public.”

As it stands, all towers remain in the hands of the MNOs, with the government citing an estimated 17,000 across the country. Globe is on the record as having over 8,000 towers to date and Smart-PLDT is to have similar numbers, if not just a little more. Industry sources suggest a more realistic estimate may be between 16,500 to 16,600 towers overall. There is also likely anywhere from 30-40% overlapping sites as the MNOs have been building their own towers at strategic sites for coverage, especially in the metro cities.

While the talk is that another 50,000 towers are needed in the country, calculations may suggest otherwise. With subscriber population of ~118.6mn and ~17,000 towers, the country currently has ~7,000 subscribers per tower.

According to Paul Carpenter, Asia Partner of Hardiman Telecommunications, in South East Asia, there are 2,600 subscribers per tower on average. In Japan and China, where 4G is extensively deployed, it is significantly lower. Increasing the total towers in the country to 40,000 would bring the subscribers per tower to below 3,000 and provide coverage and infill capacity at a level similar to that of regional peers in 2017. Therefore, at the very minimum, a doubling of the current totals in the country is required. Densification below 3,000 subscribers per tower will occur. However, the historical deficit in tower infrastructure in the Philippines (as result of the complicated permitting process and long build times) has resulted in Globe and Smart deploying high capacity configuration sites. As such densification to the levels of that of Japan and China will be unlikely.

Back in November 2016, Globe’s Chief Information & Technology Officer Gil Genio noted user-per-site density in the Philippines is about 2,244, based on estimates of 21,000 total cell sites against internet users of around 47.1 million. Note the cell sites in this case likely correspond to base transceiver stations (BTS) rather than actual towers.

Given the number of towers required (minimally up to 34,000 total), the Philippines could be well served by a handful of towercos in the country to take on rollouts, although the most investible sites remain those in dense metropolitan areas.

The country is one of the toughest to build towers, not just because of the thousands of islands, terrain, and weather, but mostly because of the cumbersome permitting process. There are an estimated 25 permits required, including categories such as fire and sanitation, which are not typically associated with the construction of a cell site. All the permits add up to a cycle as long as eight months for approval. There has also been complaints of inconsistent fees and right-of-way access across the board.

Back in November 2017, Globe noted it had a cell site backlog of around 3,000 sites owing to difficulties in securing permits from various local government units, homeowners associations, and other government agencies, causing considerable construction delay. The MNO also noted at least 25 permits are needed to put up one cell sites and the permitting process takes at least eight months to complete barring major concerns from various agencies.

Recent developments to ease doing business in the country suggest the local government units will issue and approve build permits, potentially with a one stop-shop and shot-clock framework. While this could reduce the approval time, the time required to compile all the necessary documentation could remain similar.

There is evidently pent up demand for sites, however, until the government is able to drastically accelerate and simplify the process as part of the common tower policy, ideally down to two or three months, the towercos would be as hamstrung as the incumbent MNOs have been all these years. Without the ability to quickly rollout towers and secure paying tenants, the towercos would have to reconsider the economics of entering the market.

At one point headlines suggested the government was looking to reduce permitting approval times down to nine days.

In early February Globe announced it was looking at divesting all or part of its tower assets to independent towercos as part of its network expansion and optimisation plan.

According to Globe’s President and CEO Ernest Cu: “We have been allocating over 30% of our total revenues to capital expenditure for the past five years and this level will be sustained over a period of time. An independent tower company will be a win-win solution.”

The monetisation of assets will go towards capex and support the MNO’s dividend policy.

“ln addition, this greatly helps President Duterte’s initiative to open the telco industry to new players. The plan is for these towers to be open for lease to new and existing players,” said Cu.

The questions now remain for the valuation of the assets and terms for the ~8,000 tower portfolio.

The potential entry of a third telco player and tower sharing mandate makes the Philippines the must-watch Asian tower market of the moment. There is plenty of potential here, especially if the government is able to come through with significant improvements to permitting approvals, and perhaps even changing the FDI requirement to “sweeten” the deal for international investment.

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 American Tower: While ATC’s current footprint in Asia is limited to India, it has been actively exploring opportunities in the region over the years, including Myanmar and Bangladesh. ATC is also the only towerco to date that has been name checked in the local media; VP and Chief Business Development, Asia Manish Kasliwal has reportedly been on the ground actively engaging with key stakeholders.

edotco: Led-by CEO Suresh Sidhu, the region’s largest multi-country towerco has been expanding beyond markets where majority owner Axiata Group also has presence as an MNO. It entered Myanmar via acquisition and Pakistan with a landmark buy-and-leaseback deal. With a penchant for new, frontier markets, edotco would almost certainly be interested to explore the opportunities in the Philippines to grow its portfolio.

OCK Group: Malaysia-based OCK is Asia’s other official pan-regional player, which has been looking to the tower market to contribute to its overall revenue growth as a telecommunications services provider. With its entry into Myanmar and acquisition in Vietnam, it has shown its appetite and ability to make moves.

Protelindo: The Indonesia towerco could very well take a similar approach in the Philippines as it did in Myanmar with PAMEL, where they set up a team with common management DNA but remain a distinct entity.

IHS Towers: Best known as the largest of the “big four” towercos that dominate the African tower market, IHS has publicly expressed its interest to expand beyond the region. The Philippines would provide an interesting foray into Asia.

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