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[OPINION] Economic conditions don’t favor 3rd telco player

Would the entry of a third player make sense in the highly competitive Philippine telecommunications business?

Although the third player would enjoy the unbridled support of the Duterte government, the answer does not sound encouraging for a third player. See the state of the Philippine economy. Consider the dynamics of the local telecommunications sector and its future directions. Look at the overall policy environment.

Even as the third player comes out with a joint venture agreement with local business groups to form a new telecommunications firm – holding the maximum constitutionally allowed minority stake of 40% of the total equity, and getting past the regulatory and corporate issues and other barriers to entry – it would still be the overall economic condition that would dictate its entry.

Incidentally, President Rodrigo Duterte, speaking with a combined sense of bluster and bravura, announced late last year the entry into the Philippine market of the state-owned China Telecom by March this year, raising skepticism about the feasibility of having a third player in so short period of time.

It was later clarified that what he said was the announcement of the selection, and not necessarily the entry, of a third player in the local market, which would certainly take years. The final selection has to be moved to a later date because it is not possible to make a final decision in March.

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Heavy investments

The telecommunications boom that characterized the first decade of the 2000s is over; the wireless revolution that saw massive profits for the two telecommunications giants – the PLDT and Globe Telecom Groups – has ended. Their potential has reached a plateau. The telecommunications sector has matured. Such maturity has far reaching implications and consequences for the national economy.

A study by Dr Epictetus Patalinjug of the University of the Philippines Virata School of Business showed that retail, food, and beverage industries are more profitable than telecommunications and real estate sectors. A comparative look at the profitability indicators showed that retail, food, and beverage companies have higher rates of return than the top telecommunications and real estate firms in the country.

According to the study, although they contribute significantly to infrastructure building and development, the capital intensive nature of the telecommunications and real estate sectors does not appear to be an incentive for future investments. Capital intensive industries require heavy investments at the start of operations; it takes 5-10 years before they post profits.

Notwithstanding the regulatory hurdles and other barriers to entry, a prospective third player may not exactly like the idea of investing in the Philippines. They have to endure successive years of heavy losses before they could generate decent profits.
 
In fact, Patalinghug has postulated that over a longer time horizon, PLDT and Globe Telecom, and even SM Prime and Ayala Land, would be earning below the average rate of returns attained by top Philippine firms in other industries.  
 
Department store chain SM, for instance, had a return on assets (ROA) of 14.42%, while Asia Brewery’s ROA reached 12.13%. PLDT and SM Prime however, recorded ROAs of only 9.18% and 8.49% respectively. Globe and Ayala Land even ranked lower with 6.7% and 5.96%
 
Patalinjug’s study suggests that telcos and real estate developers would have to resort aggressively to increase capital expenditures and generate sufficient cash flow to sustain the required investments in capital intensive industries. Moreover, the lack of state expenditures on national telecommunications networks, housing, and transport infrastructure compound the issue of heavy investment requirements.

Likewise it implies that a third telco player would have to endure lower rates of return, thus decreasing its commercial viability. How it could sustain its operations despite year of losses and how it could endure the competition from the PLDT-Globe duopoly is anybody’s guess. But the business environment would not easy for the third player.

Policy environment

On the basic investment policy, Paragraph E of Section 4 of Republic Act 7925, or the Public Telecommunications Act of 1995, says: “Public telecommunications services shall be provided by private enterprises. The private sector shall be the engine of rapid and efficient growth in the telecommunications industry.”

This policy ties the government's hands; it cannot just invest in the telecommunications sector. National Telecommunications Commission chief Gamaliel Cordoba noted that while other ASEAN member-states have telecommunications networks that are either wholly-owned or partly owned, financed, and operated by their governments, the Philippines is the only country in the ASEAN region whose entire broadband networks have to be built solely by private firms.
 
This is a disincentive to any third player angling to join the fray. For its part, the Duterte government has not taken steps to alter the policy environment. There are no congressional incentives to amend RA 7925 to allow state investments in the telecommunications sector.

What the country has at the moment is the announcement of the Department of Information and Communications Technology (DICT) that it has finally recognized the need for government support in telecommunications. It has announced its plan to put up 250,000 Wi-Fi access points and 47,000 cell sites nationwide before the end of the Duterte administration in 2022.

Noises on third player

Duterte’s announcement of the entry of the third player this March has triggered a lot of noise. The acquisition of Philippine Telegraph & Telephone Corp’s (PT&T) by the Salvador Zamora group has been hailed as a step to position itself to be that potential “game-changer,” as it has announced plans to partner with Chinese firms to challenge PLDT and Globe Telecom.

So far, not much has been accomplished to actualize the much ballyhooed entry of the third telco player. Not much has been laid down on the table. What the country has been noticing are the loud noises. – Rappler.com