Better broadband service means more business for PH

February 24 2016, AIM Conference Center, Makati City Philippines – As a prelude to #‎ArangkadaPH2016‬, the Joint Foreign Chambers of the Philippines composed of American Chamber (AMCHAM), Australian-New Zealand Chamber (ANZCHAM), Canadian Chamber (CANCHAM), European Chamber (ECCP), Japanese Chamber, Korean Chamber and other distinguished Philippine Business Groups discussed the necessity of developing telecommunications and broadband internet services with the intent of improving the ease of doing business in the country.

Joint Foreign Chambers of the Philippines composed of American Chamber (AMCHAM), Australian-New Zealand Chamber (ANZCHAM), Canadian Chamber (CANCHAM), European Chamber (ECCP), Japanese Chamber, Korean Chamber and other distinguished Philippine Business Groups discuss the necessity of developing telecommunications and broadband internet services with the intent of improving the ease of doing business in the country.

Broadband internet access has been widely considered as a tool that can help achieve development and accelerate economic growth. World Bank estimates that a 10% increase in broadband penetration can lead to a 1.38% increase in the country’s GDP. An entry level connection of 0.5 Megabits per second (Mbps) has been found to increase the household income by $800 per year.

Trade Secretary Greg Domingo highlighted the need for the government to promote micro, small and medium-sized enterprises (MSMEs) and to help make them “go global”. Reliable broadband connectivity is an essential tool for making businesses, especially MSMEs, competitive in the global arena. It helps improve their processes and allows them to expand their marketing clientele. As MSMEs comprise a majority of businesses in the country, the broadband initiative becomes a part of building an inclusive economy. Expanding and improving broadband connection also helps address the problem of increasingly congested cities, as it enables telecommuting or working remotely.

Telecommunications is a capital-intensive and technology-driven sector. The problem? The law bars foreign players from fully participating even in wholesale segments (e.g., cable landing station and back haul), which effectively limits the presence of companies that can inject fresh new capital, bring in state-of-the-art technology, and compete in the market.

Philippine broadband penetration is limited, quality is poor, and access is expensive. It has one of the slowest average connection speeds in the Asia Pacific and is the costliest in the world. Major problems identified include the presence of barriers to entry, anti-competitive practices, inadequate infrastructure, weak and ineffective regulation, prohibitive bureaucratic requirements in infrastructure build-out and the lack of interconnection.

Key recommendations include (1) adopting an open access model, where segments of the internet infrastructure will be opened up to more and different players both local and foreign; (2) updating an upgrading laws and policies, which includes amendments to the Public Telecommunications Policy Act and the enactment of the bill creating a Department of ICT; (3) leveling the playing field by promoting open and neutral internet exchange points (IXPs) and encouraging infrastructure sharing; (5) improving spectrum management; and (6) ensuring and protecting the competitiveness of the telecommunications industry.

The Top Players in the Country:
Two telcos dominate the market: the Philippine Long Distance Telephone (PLDT) company (with 70% market share) and Globe Telecom, Inc. (28%). The incumbent operator, PLDT,and main competitor, Globe, are the major providers of fixed and mobile broadband services nationwide. The two incumbents have some of the highest earnings before interest, tax, depreciation, and amortization (EBITDA) margins compared to other telcos globally. In 2010, PLDT and Globe were enjoying between 60% and 70% EBITDA margins despite very low average revenue per user (ARPU). Over the past few years, PLDT and Globe have recorded EBITDA margins of 40-45%.

PLDT and Globe, the country’s largest internet service providers (ISPs), own and control most of the existing internet infrastructure – from the submarine cables, the landing stations, the back haul network (“middle mile”), up to the last mile. As such, the dominant telcos also dictate access to and the cost and quality of internet and broadband service in the Philippines, both fixed and mobile.

The Philippines recorded the second slowest average download speed (at 2.8 Mbps) in the Asia Pacific, besting only India. The country has been constantly outperformed by its ASEAN counterparts such as Indonesia (3.0Mbps), Vietnam (3.4Mbps), Malaysia (4.9Mbps), and Thailand (8.2Mbps).

In Q4 2014, the Philippines offered the second most expensive retail internet service out of 62 countries that were ranked. Philippine ISPs offered the lowest value for money – in terms of actual download speed experienced by customers vis-a-vis the cost of a monthly data plan – compared to their counterparts in South and Southeast Asia.

What Philippine Law states about Telecommunications:
By virtue of Commonwealth Act (CA) 146 or the Public Service Act of 1936, telecommunications – defined as “wire or wireless communication” and “wire or wireless broadcasting” – is considered a public service offered by a public utility.

Ms. Mary Grace Mirandilla-Santos, Author of ArangkadaPH2016’s Broadband Policy Brief. With a personal advocacy to promote better internet service in the country, Santos is currently an ICT (Information/Communications Technology) consultant at Asian Development Bank.

A Stop to Duopoly and Encouraging Entry of Industry Players:
Key stakeholders agree that the Philippine telecoms sector will benefit from the entry of new players, both domestic and foreign, and effective competition. Past reforms that introduced liberalization and competition have proven that the entry of new players can reinvigorate the market, promote better services, and lower prices due to competing providers that ultimately benefit consumers.

The Philippine telecoms market has been tagged as “less competitive” and “effectively a duopoly” by various analyses. It lags behind in terms of contestability or freedom of market entry and exit. Contestability is important as studies have shown that even the threat of a new entrant will improve the quality of service and pricing of current market players. Market entry in the Philippine telecoms is hampered by several major barriers.

Limitation on foreign ownership is a major issue that affects telecommunications. PLDT and Globe have been said to have major foreign equities that are technically accepted as compliant due to layers upon layers of holding companies that mask these ownerships. This is cumbersome but effective way of circumventing the law. The constitutional provision has given rise to workarounds that encourage non-transparent and scheming business practices. Meanwhile, other legitimate foreign telcoms are discouraged from entering and competing in the market by the company-layering and even political lobbying that are necessarily to work around the law.

The current structure makes smaller telcos and ISPs prone to anti-competitive practices by the large telcos who not only control the infrastructure and wholesale pricing, but are also allowed to compete in the same retail market as their client ISPs. As a result and end-users have to contend with high wholesale and retail costs.

How This Affects YOU:
The internet is an information and communications tool that is increasingly changing the way people live. Connectivity can improve the quality of life by the sheer reduction of time and distance in carrying out tasks related to education, health and livelihood. It can increase a country’s competitiveness, promote inclusive growth and development, and spur investment directly by the emergence of internet-related businesses and indirectly by improving the ease of doing business. The internet has also been known to help promote good governance by increasing transparency and aiding in initiatives such as open data.

In the coming months, the Filipino nation will elect a new leadership. This is a good opportunity to design and implement another cycle of major reforms. It is hoped that broadband connectivity would be one of the key focus areas not just as an issue of infrastructure, but that of competitiveness, innovation, development and consumer welfare. The challenge for the next administration is whether it has the vision and informed appreciation for how broadband technology could influence a country’s development path.

Mirandilla-Santos, Mary Grace. Broadband. Policy Brief No.4, February 2016. The Arangkada Philippines Project (TAPP). American Chamber of Commerce of the Philippines.

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