The marriage of PLDT and Globe

Corporate Watch
Amelia H. C. Ylagan

Posted on June 06, 2016

“When we started dating is no longer important. Because we’re already married.”

We thought we would never see them at the altar -- two archrivals in the Philippine telecoms industry: the Philippine Long Distance Telephone company (PLDT) group, headed by Manuel Pangilinan, who controls Smart Communications, Sun Cellular, and Cignal Digital TV, and the Globe group, headed by the Jaime Augusto Zobel de Ayala II, who also controls Bayantel.

PLDT and Globe acquired for $69 Million Vega Telecom, San Miguel Corporation’s holding company for its valuable 700-megahertz (MHz) spectrum telco assets. PLDT and Globe will jointly manage Vega Telecom as well as Bow Arken Holdings Company (the parent company of New Century Telecoms, Inc.) and Brightshare Holdings, Inc. (the parent company of eTelco, Inc. (InterAksyon 05.31.2016).

It was PLDT Head of Regulatory Affairs Ray Espinosa who joked about the “dating and marrying” of the fiercely-competitive duopoly to reporters who asked “when and how”, at the May 30 announcement of the “joint venture” in media. For the two telco companies have long been keenly watching each other on the allocation of frequencies and other allowances by the National Telecommunications Commission (NTC). Smart and Globe have been fighting rabidly for market share, with about 60% and 40% respectively (www.budde.com).

One big fight was when the NTC approved proposals to allow the major telecommunications firms to share mobile and broadband frequencies with other carriers. Globe appeared to have gained an advantage from this by bringing its frequency allocations close to Smart/PLDT’s (Rappler 10.01.2012). At that time, four years ago, the NTC found that both telcos failed to meet the NTC’s 4% standard for blocked call rates or grade of service, and co-use of frequencies was expected to expand capacities and improve service.

The Arangkada Philippines 2016 Forum assessed a slowdown in the telecommunications sector and challenged the duopoly of Smart/PLDT and Globe to repay its economic advantage with better service and improved offerings. “While fixed line penetration is lowest of the ASEAN-6, mobile phone penetration is high at 104.5%, (but) the percentage of Internet use... stood at 37% of the population in 2013. Only 47% of cities and municipalities in the country have broadband access” (Broadband Commission, 2013). The Philippines has the second slowest average download speed of 3.64 megabits per second (Mbps) among the 22 Asian countries surveyed by online metrics provider Ookla. The average global broadband download speed is 23.3 Mbps for Asia, or nearly eight times faster than that of the Philippines (GMA News, 05.31.2016)

And so the San Miguel Corporation (SMC) promised to step in as the third major telco company that would be the knight in shining armor who would break the duopoly, and expand and improve services with its venture with the Australian telecoms prospect, Telstra. SMC held 90 MHz of the total 100 MHz on the 700 MHz band through Wi-Tribe Telecoms, Inc.’s 80 MHz and High Frequency Telecommunications Inc.’s 10 MHz. The remaining 10 MHz was held by New Century Telecommunications (Philippine Star 11.26.2015).

When the talks between SMC President Ramon Ang and Telstra were dragging, PLDT and Globe clamored for the re-allocation by NTC of the idle frequencies within the 700 MHz and 800 MHz for the improvement of their broadband wireless networks. PLDT asked for an auction of the frequency band to industry players who actually have more subscribers than SMC. “The 700 MHz is key to providing faster Internet speeds and addressing the mobile data explosion as such allows signals to easily go through buildings and walls and covers larger areas with less infrastructure and investments needed as compared to frequencies in higher bands.” But the NTC declined the requests, preferring to wait for the SMC plans. (Philippine Star, Ibid.)

And in November last year SMC was firmly not in favor of giving PLDT and Globe access to the 700 MHz frequency, saying that this should be given to new entrants in the industry, for fair competition. “They have more than enough frequency between them. They have almost 300 MHz of LTE frequency. Why do they need more? All they need is to improve and fine-tune what they have,” Ramon Ang said (Philippine Star, Ibid). But then the partnership talks of SMC with Telstra collapsed in March. What a surprise when Ang turned around and sold Vega Telecom to the duopoly he was fighting, and with it the coveted 700 MHz spectrum telco assets!

Aside from splitting the prized 700 MHz 50-50, the two major telcos will also receive supplementary frequencies in the 900 MHz and 1800 MHz bands which PLDT says will result in “faster and improved data services.” (GMA News 05.31.2016). The NTC approved the SMC sale to PLDT and Globe, on the condition that they will immediately co-use the additional frequencies gained and provide higher broadband and Internet speeds within a year, attested in quarterly reports to the regulator. Can do, says PLDT, even by six months. NTC has imposed a goal on the duopoly to cover at least 90% of the cities and municipalities in three years (GMA, Ibid.).

Globe will be spending at least $800 million worth of capital expenditures (in 2016) for its data, voice and SMS services as well as for the modernization of the fixed-line infrastructure of Bayan (Philippine Star 11.13.2015). Globe Telecom’s consolidated service revenues for 2013 reached a record high of P90.5 billion, up 9% from P82.7 billion last year, driven by the continued growth in the demand. Core net profit rose 13% to P11.6 billion as strong performance of its mobile, broadband, and fixed line data businesses continued to drive revenue growth notwithstanding the onslaught of natural calamities in the last quarter of the year (Globe.com.ph).

Graphics by BusinessWorld Research showed “the rise and fall over a one-year period of the share prices of the Philippines’ top two telcos, PLDT and Globe as well as of conglomerate San Miguel Corporation, which wanted to venture in telecoms but ended up selling to the duopoly” (BusinessWorld 05.31.2016). In February, Globe reported 23% increase on year-on-year profit while PLDT reflected a 35% drop at that time. After they announced the purchase of the SMC telco, shares of PLDT and Globe jumped up dramatically, perhaps to show market hopes for the determination and perseverance of the duopoly to improve the telecoms service in the country as a vital instrument of development.

Fitch Ratings said PLDT and Globe are poised to reap large benefits following the P69-million mega deal (despite that) both companies might see a temporary increase in leverage but in exchange for better industry prospects, and the removal of the threat of a third challenger.

Ay, there’s the Anti-trust and the threat to fair and true competition. And a possible collusion in pricing?

Both PLDT and Globe made no guarantee that prices would come down, with either saying these were “in line” with regional peers or were already “affordable” (The Philippine Daily Inquirer, 06.01.2016). Globe President and CEO Ernest Cu noted that prices have already come down since the entry of the Gokongwei family’s Digital Telecommunications Philippines, Inc., which operates Sun, over a decade ago. The demand for lower prices and massive capital building will make it difficult for a new player to enter. He would need about 12 years “to catch up,” according to Cu (Ibid).

The marriage of PLDT and Globe is good for the business dynasties, and yes, for the industry and the country. But will this be good for the simple folk? But don’t let’s cuss in the new fashion of expressing helpless frustration.

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.