As a member of the Board of Directors of Globe Telecom with responsibility for corporate governance, accountable not just to shareholders but to all stakeholders, including customers and government authorities, I am fully satisfied that the answer is an unequivocal “Yes.”
Some history: Former Singapore Prime Minister Lee Kuan Yew famously said in 1992 -- “The Philippines is a country where 98% of the residents are waiting for a telephone and the other 2% are waiting for a dial tone.” (Check out my Sept. 9, 2011 blog entry entitled “De-monopolizing telecom” by visiting the link --http://goo.gl/aY1rUr.)
Twenty-five years later, there are as many mobile phones, pocket computers really, than there are people, offering a dizzying array of services fitting any lifestyle and business need. Our progress in telecom has made possible our global leadership in BPO, the key growth driver of the economy. How did we get here?
The long and winding road.
With the reforms introduced by President Ramos during 1992/1993, there was a burst of new entrants, and optimism -- five mobile carriers started, also several landline carriers. The issue was lack of landlines so it was roll-out obligation imposed on those who wanted mobile or international licenses.
The Asian crisis came in the late ’90s. Carriers who were competitively weak found themselves struggling under debt burdens too, and a period of consolidation started. Five mobile carriers became two -- Globe bought Islacom, Smart took over Piltel, and Extelcom went into into financial distress. And those who bet on landline or international went into distress -- PLDT had debt issues, then Smart bought PLDT (but PLDT became the parent), Piltel’s landline went to PLDT, Bayantel was in receivership, PT&T likewise. By 1998-2000, only PLDT/Smart and Globe, with good business models, strong shareholders and scale, were surviving. That was also the strongest growth period in the era of voice/SMS.
The government actually gave Digitel, a small landline company, a mobile license, as they felt the need to have a third mobile player. It took them five years to get to a scale to be a serious third player with more than 10% share.
When 3G arrived, the frequency standards allowed the government to grant 5 licenses: three to the existing players, plus a new one (Cure), and a fifth that Bayan says should have gone to them. Given efficiencies of scale, Cure was bought by Smart, and eventually Bayan got bought by Globe. Digitel by PLDT. So back to two main telco groups. (Thank you to Gil Genio, EVP of Globe for refreshing my recall of all of this.)
So as you can see, there are many reasons why the Philippines ended up with two major telcos -- scale, continuing high capex requirement that can only be funded from overseas or by ploughing back profits into the business, infra difficulties that give incumbents advantage, and in mobile, limits on how frequency are sliced up.
Is this resulting two player structure inimical to public interest?
I think only if they behave in a non-competitive way.
From everything I have seen as a Board Director for over a decade, there is not only competition, but fierce competition.
Globe as the challenger has played its role to the hilt. It has been gaining market share through innovation and improvement in services. For the public, evidence of this abound -- look at the billboards and TV ads, or the daily SKU battle in prepaid, or how for P15 one can get unlimited calling and texting for a day, and how mobile Internet prices have come down -- these are the indicia of competition.
Moreover, more players do not mean better service. Europe is a good example. They had a lot of players competing that led to price competition lowering of EBITDA margins (aside from an aggressive regulator). This has taken away the ability of these telcos to spend for needed rollouts. Eventually, the markets began to consolidate leaving a small number of players. Incidentally in the case of Globe (and I believe likewise for PLDT) it is reinvesting 28%-33% of revenues for capex, significantly more than telcos in most other countries.
Ultimately, it is not concentration per se but harmful behavior that indicates lack of competition that the Competition Law (RA 10667) is concerned about. Even before the passage of that law, Globe has always placed the interest of consumers at the center of its business, the sine qua non for long-term profitability and sustainability of Globe, and the industry. (See “Demonopolizing Telecommunications”).
(The next installment of this column will address observations on poor or costly broad band service of local telcos vs peers, why this is true for fixed line infrastructure but not for mobile, factors that explain these, and what government can do to improve service. Also why the re-assignment of the 700 mhz frequency band from SMC will help majorly advance the interest of consumers vs alternative courses.)
Romeo L. Bernardo is GlobalSource Partners Philippine advisor. He served as Finance undersecretary during the Aquino-1 and Ramos administrations.
source: Businessworld
Friday, September 9, 2011
De-monopolizing telecommunications
Business World
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
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