An update on 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 players to challenge the dominance of the incumbents. This was followed by a proposal for a common tower policy, opening the floodgates for international towercos to seek an entrance, grow their footprint, and make a mark in this virgin tower market. Globe’s recent announcement of its interest to divest all or part of its tower assets further fuelled excitement and the country is just one step away from appointing its third MNO, a game-changing decision that will revolutionise the Philippines telecom market.

Comprising of 7,000+ islands and an estimated population of 104mn+, the Philippines has experienced positive economic growth in the past few years, emerging as one of the fastest growing economies in the region. Specifically, the Philippine economy grew 6.7% in GDP terms last year, slightly below the 6.9% growth recorded in 2016 which was aided by election-related spending. 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 backdrop, perhaps it is not surprising the telecommunications market is now under the spotlight.

Mobile penetration in the Philippines is 122% with 126.3mn subscribers (Smart-PLDT ~62.9mn; Globe ~63.4m). The two market leaders have been battling to gain subscribers and introduced new services as both lost clients last year when the market consolidated. The Philippines has experienced a notable increase in mobile broadband penetration over the last few years and even thought the market is quite mature, growth is forecast to continue at a low pace in the near term.

Mobile ARPU levels have been decreasing for a long time as competition in the mobile industry has intensified. The operators continue to engage in an aggressive price battle in their effort to increase their market share.

Both national operators are investing in 3G network improvements while preparing to shift from 4G to 5G. PLDT Inc. has set up an R&D 5G technolab while Globe Telecom recently announced its intention to launch 5G services by the middle of 2019.

With the third MNO selection process coming to an imminent close, we can expect the new entrant to launch services in late 2019 at the earliest. The new MNO will require a considerable investment and relevant regulatory support to challenge the current duopoly. The irruption of a third player will generate a more aggressive price competition, drive down ARPUs in the short-term and potentially incentivise the creation of at least one independent infrastructure provider. 

Globe Telecom

Globe Telecom, Inc. is the number one mobile operator in the Philippines. Its main 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 runs three brands in the mobile market: Globe Postpaid, Globe Prepaid and TM.

For year-end 2017, Globe’s service revenues reached P127.9bn, a 6% growth YoY. Data-related services were the key driver of the performance, accounting for 54% of service revenues.

To meet the increasing data demand, Globe deployed close to 3,000 4G LTE sites nationwide, using the 700MHz, 1800MHz and 2600MHz frequencies for wider coverage and increased capacities. Majority of its LTE sites were deployed in Manila and highly populated areas, where most customers using LTE-based handsets are located.

Globe has been one of the main supporters of a potential Philippines tower sharing policy, but it has expressed its discordances with the latest terms proposed by the regulators. The company is interested in carving out its infrastructure assets and is currently in discussion with third parties for the creation of a tower company that will lease towers to both new and existing players.

Smart-PLDT

Founded in 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).

PLDT is listed on the Philippine Stock Exchange (PSE:TEL) and its American Depositary Shares are listed on the New York Stock Exchange (NYSE:PHI). In 2017, PLDT was one of the largest Philippine-listed companies by market capitalisation.

PLDT’s Consolidated Service Revenues reached P143.5bn, 3% less than in 2016, which in turn closed at 3% less than in 2015. Alike its competitor, the company made steady progress in shifting the base of its revenues towards data and digital services. Across all business groups, revenues from data, broadband and digital platforms grew 11% to P67.0bn, raising their share of service revenues from 41% to 47%.

Smart more than doubled the number of LTE base stations in its mobile phone network to over 8,700 and increased by 60% to over 4,300 the cell sites equipped with LTE base stations. Smart also increased its 3G base stations to about 9,850 and its cell sites equipped with 3G base stations to about 7,500.

In 2017, the company’s capital expenditures reached P40.3bn. This amount was split approximately 70-30% between mobile and fixed networks. For 2018, PLDT allotted P58bn in capex, with a little over 50% to be invested in the fixed line segment. The higher allocation for fixed is supporting an aggressive roll-out of fibre broadband to address the strong demand for fibre service and will eventually support high-speed mobile data. The company is making a big bet on fibre and by the end of last year, PLDT’s fibre network had reached 174,000km.

After several delays, The Department of Information and Communications Technology (DICT) recently announced that a temporary third operator will be selected in November. The race for the third telco slot started last year, when Philippines President Rodrigo Duterte publicly announced his intentions of introducing a new operator to increase competition and improve communications services in the country. 

The selection process experienced several delays due to multiple revisions of its terms, which were finally agreed in September. Both DICT and The National Telecommunications Commission (NTC) concluded that the winner will be selected based on the highest committed level of service, including population coverage and internet speed promises, over a five-year commitment period.

Based on the latest final draft of the Terms of Reference (TOR), the most important criteria is now national population coverage, which was weighted at 40%. The weighting for capex and opex commitments was decreased on the last draft to 35% with the weight for minimum average broadband speed increased to 25%. The expenses are definitely a major component and the third player will need to shell out between P140bn and P240bn over a five-year commitment period.

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A total of five local companies and three foreign firms have already bought the necessary bid documents

- Philippine Telegraph and Telephone Corporation (PT&T) (Philippines)

- NOW Telecom (Philippines)

- Udenna Corporation (Philippines)

- LCS Group of Companies & TierOne Communications (Philippines)

- Undisclosed bidder (Philippines)

- China Telecommunications Corporation (China Telecom) (China)

- Telenor (Norway)

- Mobiltel Holding GmbH (Austria)

DICT will be accepting new contenders until November 7, when it will also open the bids to check if they are complete in terms of the requirements.

Converge ICT Solutions Inc. is expected to acquire its documentation from NTC. The company will partner with KT Corp., a state-owned South Korean telecommunications provider.

Locally, TransPacific Broadband Group International Inc. and Easy Call Communications Philippines are reportedly interested. Internationally, interested foreign investors include Surya Telecom (India), LG Uplus Corp. (South Korea), KDDI Corp. (Japan), Viettel Group (Vietnam) and Vodafone (UK)

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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.

In July, DICT’s acting Secretary Eliseo Rio released the initial guidelines of the Common Tower and Pole policy, while Ramon P. Jacinto welcomed Globe’s initiative of selling off their towers to a potential towerco. 

Those guidelines stated that a maximum of two towercos would be accredited by the DICT, while NTC would be in charge of regulatory implementation. Both institutions aim for the accreditation to be completed Q1 2019, followed by six months of build-up and consultative meetings with telecom stakeholders to discuss and explore industry requirements.

The agreed maximum rollout capacity of each towerco will be 25,000 sites for a seven-year period, and each infrastructure provider is projected to invest US$2bn. For the first year, each company will build 1,000 towers, progressively increasing to 2,000, 3,000, 4,000 and 5,000 each year until the fifth (with 5,000 remaining the target for the sixth and seventh years too). In September, Ramon P. Jacinto presented the proposed policy for the first time to key industry stakeholders, including operators, potential towercos, investors and other private groups.

Meanwhile, Globe Telecom has been openly criticising the government’s proposed terms. The company stated that private operators would not be able to address the great need of towers in the country. Globe claims that the government should come in as the tower operator itself, since new private towercos will have to face the same bureaucratic barriers that the operators are now facing when deploying infrastructure. 

Currently, operators need to obtain 28 permits before building a tower, which notably limits any infrastructure development and compromises service delivery. During its continuous complaints, Globe has stated that as a sovereign entity, the government would be exempted from that painful permitting process. 

As it stands, all towers remain in the hands of the operators and we estimate that the Philippines has around 17,850 sites across the country. Globe is on the record as having over 8,000 towers to date and Smart-PLDT reported 9,850 sites, while industry experts estimate that the country requires a total of 70,000 sites.

Last August, Globe secured the approval from the Securities and Exchange Commission to establish a separate tower holding company, which will operationalise the divestment of all or part of its tower assets through a separate entity. The company has confirmed to TowerXchange that they are deeply involved in this process. 

In July, business conglomerate Isoc Holdings Inc. submitted an unsolicited proposal to DITC to participate in the initiative, committing to invest P100bn in tower construction.

In recent years, permitting processes and business pressure on MNOs balance sheets have slowed infrastructure growth. The telecom revolution that the Philippines market is about to experience will massively drive infrastructure development and present significant opportunities for investors, vendors and infrastructure players. Operators will keep investing in 4G and 5G deployment as well as modernising existing 3G networks.

Difficulties in building towers and  densifying networks have pushed Globe to explore new alternatives. The company has invested in deployment of MIMO technology that could expand and enhance its LTE network. MIMO enables a mobile network to multiply the capacity of a wireless connection without requiring more antennas.

The frequency that 5G requires will also drive the deployment of new antenna technologies and urban typologies. In order to deliver a better customer experience using 5G, Philippines MNOs will have to put up more cell towers, antennas, and base stations across the nation, especially in cities where line-of-sight transmissions are more difficult. 

Globe is also committed to sustainability and energy efficiency. Since 2014, Globe has installed 3,017 green backup power systems.

Globe has also been actively installing lithium ion batteries to reduce cooling systems dependence as well as replace acid. A free cooling system initiative has reduced energy consumption while the installation of hybrid solutions on off-grid sites—DC generators and deep cycle batteries—is reducing diesel consumption by 60%.

Last year, Globe started using DC generators, which consumes less fuel than an equivalent AC genset due to its load following ability. As a DC generator has a longer service interval of 500 hours, it makes for a more cost-efficient solution compared to fuel cell for open field sites.

Moreover, fibre will present great opportunities for the industry. PDLT’s ongoing nationwide fibre optic rollout program has already set up a number of so-called ‘PLDT Smart City’ areas. A consortium of Filipino-Chinese developers is working on an extensive smart city project that will lead to a mixed-use development off the coast of Manila.

PLDT has also signed multi-year agreements with Huawei Technologies and Amdocs to overhaul and manage the IT systems and platforms that support their network management and business operations. This will enable PLDT and Smart to design and deliver more relevant and personalised services to their customers individually. By next year, Smart aims to double the number of LTE base stations to about 17,700 and raise the number of LTE-equipped cell sites to over 6,800.

The imminent entry of a third operator and the tower sharing mandate make 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.

Different key industry stakeholders and international investors with interests in the Philippines will be joining the upcoming TowerXchange Meetup Asia - taking place in Singapore, 4-5 December - where the changes currently reshaping the national market will be covered throughout different panel discussions, roundtables and casual networking gatherings.