Tawag & Txt: Competition among the Big Boys

Blogger's Note: The telecom industry in the Philippines, particularly the wireless sector, is one of the bright spots of our country's economy. Long dominated by the duopolistic nature of competition between Smart and Globe, the Philippine wireless market has seeing a resurgence of of competition upon the entrance of Sun Cellular. I, for one, has a Sun subscription and was very happy of its service until its promo "24/7" came along. Before it was easy to connect and text anybody from Smart and Globe. Now, because of the"24/7" promo, I'm experiencing all kinds of connection problems. What Smart and Globe is saying is true: Sun's existing network can't accomodate all its existing subscribers. Also, their coverage is still minute compared to Globe and Smart. Right now, I'm so fed up, I'm giving Sun up to May 2005 to fix the problem else I'm switching to Globe.

SPECIAL REPORT: Price war puts pressure on telco profits
Posted: 3:03 AM Mar. 17, 2005 by Clarissa S. Batino, Inquirer News Service

(First of two parts)

THE PRICE war that has gripped the telecommunications industry has raised a troubling question. Have the two hugely profitable wireless leaders been overcharging their subscribers all along?

Overpricing is the topic of conversation at neighborhood variety stores, on public transport vans on the way to work, even in the session halls of Congress.

"Sun Cellular has made us realize that mobile phone services should not be as expensive or as costly as they are now being offered by the two dominant telecom firms," an influential congressman, Representative Rodolfo Albano of Isabela province, said in a privilege speech last month.

He was referring to Smart Communications Inc. and Globe Telecom Inc.

In one of the world's most vibrant telecom markets, Sun Cellular, the trade name of Digitel Mobile Philippines Inc. of the Gokongwei family, is running a poor third. But it has gotten the attention of both Smart and Globe after it introduced in October its "24/7" plan, which allows unlimited number of voice calls and short-messaging system (SMS) or text messages within its network for only P250 a month or P100 for 10 days, on top of existing subscription plans.

Suddenly, there was a different ball game. Within a month, Sun Cellular reached the elusive one million subscribers mark. (It had started operations in March 2003.) At the end of February, its customer base reached 1.7 million. In the past five months, it grew at a pace much faster than in its first 19 months in business.

While Sun Cellular's subscriber volume still pales in comparison with the 19.2 million of Smart and its subsidiary Pilipino Telephone Cop.'s "Talk N' Text" and the 12.5 million of Globe as of the end of last year, its pricing strategy has rattled the two leading telcos.

Affiliate companies of both Smart and Globe petitioned the National Telecommunications Commission to order Sun Cellular to stop "24/7." And then this month, both Smart and Globe rolled out their versions of Sun's unlimited plan.

From March 8 to April 11, Globe is offering a similar eat-all-you-can menu for subscribers of its Touch Mobile brand: P300 for 30 days of within-network calls and text messages; as low as P50 for five days of unlimited text messaging on top of existing plans.

Smart went a step further. It is offering 10 days of unlimited calls for P115 and six days of unlimited text messaging for P60 within its wireless network, for Smart and Talk N' Text prepaid subscribers.

Calling it "Smart 25/8," the company said it had devised a system to prevent network traffic jams -- a common complaint about Sun Cellular's plan -- through the use of an "operator" that would queue all unlimited calls.

Wallowing in profits?
Albano asked: "So it's possible to bring down the charges and pay less for the services of mobile phone companies. If Sun Cellular can charge cheaper rates, why do Globe and Smart charge much higher?"

On repeated occasions, Economic Planning Secretary Romulo Neri has also said Philippine telecom services were among the priciest in the region.

A quick look at the income statements of the two leading players shows both are financially robust. Smart's parent, publicly listed Philippine Long Distance Telephone Co., turned in a record-breaking P25.2 billion in profit last year. Globe, a publicly listed joint venture of Ayala Corp. and Singapore Telecom, reported its net income at a high P11.3 billion.

Do these numbers necessarily mean that both Smart and Globe are overcharging their customers?

Rate base
Unlike power utilities, phone companies are no longer required by law to maintain a 12 percent return-on-rate-base (RORB) ceiling. The requirement was scrapped by the Telecommunications Act of 1995.

The RORB is a measure often used in the utilities sector to determine whether a petition for a rate increase is justified. The ceiling is a reminder that a utility is also a public service.

Edgardo Cabarios, a director of the NTC, said that while the Telecommunications Act may have liberalized pricing for value-added services like text messaging, it retained the NTC's regulatory power over tariff increases on calls.

These days, however, determining the right tariff is no longer computed based on the RORB, but on a "fair and reasonable rate of return."

Froilan Castelo, an assistant vice president at Globe, told the Inquirer that even if the 12 percent RORB formula were applied, Globe would still be below the ceiling.

Globe's asset base of P138.12 billion as of end-2004 against its net profit of P11.3 billion would give it a return of about 8 percent.

Philippine Long Distance Telephone Co. (PLDT) could claim the same. As of end-2004, its asset base was P265 billion. With a profit of P25.17 billion last year, its RORB was just at 9.5 percent.

But if earnings before interest, taxes, depreciation and amortization (EBITDA) were used, the two leading firms' return on assets would be staggering.

With EBITDA of P33.04 billion, Globe's return last year would be almost 24 percent. That of PLDT, with EBITDA P70.4 billion, would be around 26.5 percent.

Lowered prices
Cabarios noted that the law gave the NTC residual powers to regulate even the so-called value-added services liberalized by the 1995 law.

But fortunately, he added, competition did what no law nor regulator could do, which was to bring prices down.
Through the years, the price of cellular phone calls have fallen dramatically, from P12 per minute when it was first offered during the early 1990s to as low as P7.50 for inter-network calls today.

Globe's Castelo said, "In the earlier days, only the rich [could] afford a cellular phone. Then because of investments and innovations, mobile services became available to more and more people. Naturally, the rates have [had] to adjust to suit different types of consumers."

Rogelio Quevedo, Smart's head of legal services, noted that contrary to allegations that telcos were charging too much, the cost of text messaging in the Philippines is one of the cheapest in the world, at P1, less than two US cents per message.

In other countries, he said, sending a text message would cost anywhere from four to 11 US cents, or roughly P2.2 to P6.0 each.

For voice calls, Philippine mobile phone rates are also very competitive, NTC Chairman Ronald Solis said. He noted that in other countries, a one-minute call could cost between six and 18 US cents, or roughly P3.30 to P9.90.

(In the United States, some carriers are offering unlimited within-network calls for $10.)
In the Philippines, wireless calls within respective networks are charged an average of P5.50 to P6.50 per minute and calls to other networks, about P7.50 per minute.

Due credit
PLDT chairman Manuel Pangilinan said credit should in fact go to the older wireless players -- Smart and Globe -- for developing the mobile phone market.

Indeed, the competition between the two giants has turned telecom services into one of the driving forces of the Philippine economy, creating hundreds of thousands of opportunities even for ordinary people to make money and to spend money.

Last year, Filipinos spent more than P200 billion on transport and telecom expenses alone, from about P155 billion in 2003. Transport fares have gone up, which partly accounted for the increased spending, but so have the profits of PLDT and Globe.

Executives at both companies frequently point out that substantial profits are a function of substantial investments.

Both companies have spent more than P15 billion annually in the past several years to grow their respective networks and bring them to their current capacity and reach.

The investments have allowed the telcos to develop products that are more convenient for subscribers to load credit, for instance. The electronic loading scheme has reportedly provided more than a million jobs to micro entrepreneurs, particularly in the provinces.

"If you're not earning, how can you invest, how can you innovate?" Pangilinan said.
"Globe and Smart have really delivered the kind of products [the market needed] and stimulated the demand for these products," he said.

Smart and Globe have created more and more ways to use the mobile phone for a lot of things. In one of those ways, the cellular phone has evolved into a virtual wallet that can, among others, send and accept overseas and local money remittances.

Asked whether Smart and Globe could have been overcharging the market in exchange for the innovations, Pangilinan said: "If we have, then we would not have grown the market the way it has grown." With INQ7.net
URL: http://money.inq7.net/topstories/view_topstories.php?yyyy=2005&mon=03&dd=17&file=8


SPECIAL REPORT: Telecom firms blame NTC for price war
Posted: 2:18 AM Mar. 18, 2005 by Clarissa S. Batino, Inquirer News Service

(Second of two parts)

IS THIS price war going to lead to the death of the telecom industry?

The question may be rightly called alarmist, except that it was National Telecommunications Commission (NTC) Chairman Ronald Solis himself who posed it.

Solis seems to be bracing for the worst, as the NTC walks a fine line between heeding public clamor for lower prices and fearing a system breakdown. He said he was worried that the unlimited pricing war would cause the networks to burst at the seams. To date, there are about 34 million mobile phone subscribers in the country today.

It does not help that the telcos themselves blame the NTC.

Rogelio Quevedo, head of legal at Smart Communications Inc., accused the NTC of not doing its job by allowing the price war to get out of hand. The NTC, he said, was a useless regulator.

"It is the players themselves that are saying that no network is designed in such a way that it can accommodate a 24/7 [unlimited plan and] still meet the performance standard. For sure, the system will crash if everybody goes into this kind of thing," Solis admitted.

There was little public hand-wringing when it was just the Sun Cellular of the Gokongwei group, with only 1.7 million subscribers, clogging its own small network.

But the stakes went up when Globe joined the fray with its 1.7 million Touch Mobile customers last March 8. And exactly a week earlier, Smart upped the ante, when it launched a similar promo available to its prepaid subscribers. Of Smart's more than 19.5 million customers, 98 percent are prepaid subscribers.

Smart has given assurances that it had devised a way to prevent network traffic jams (a common complaint about Sun Cellular's unlimited plan). Quevedo claimed that a network operator would queue the unlimited calls and therefore prevent congestion.

But a Smart official pointed out that all networks, no matter how wide and extensive, will always prove vulnerable to traffic congestion. "At 5 pm, no matter how good your network is, there is sure to be traffic congestion. This week, we shall see how it turns out," the official said.

Quevedo said the NTC should have acted on the issue before all hell had broken loose. "The NTC is not doing its role as a regulator of the industry. Smart has no choice but to join the price war because it has to protect its market share. When the problem worsens, what will the NTC do?" the lawyer asked.

Failed performance?
Through their respective smaller units Pilipino Telephone Corp. (Pitel) and Innove Communications Inc., Smart and Globe have asked the NTC to stop Sun Cellular's "24/7" plan. Their strongest argument: Sun Cellular is failing the performance standards the NTC set in 2002.

An NTC circular laid out two specific standards for mobile providers; one is grade of service as measured by successful first call attempts and the other is a benchmark on dropped calls.

The order required a 93-percent grade of service and a 95-percent dropped calls index. This means that no more than seven out of every 100 connection attempts should fail on the first try while no more than five out of every 100 calls should be terminated by the network.

The two giant telcos conducted their own dry tests. According to Globe, its test found that 35.4 out of every 100 Sun Cellular calls during a 14-hour average failed to connect, or five times the limit. On the dropped call benchmark, however, the Sun network reportedly terminated only 5.09 out of every 100 calls.

But from 8 to 9 p.m., a staggering 87 out of every 100 Sun Cellular calls reportedly did not connect successfully, while dropped calls rose to 14.29.

Piltel's tests showed similar results. Quevedo claimed that Sun Cellular automatically cuts off its unlimited calls after 15 minutes, which should raise the network's dropped calls numbers significantly.

Heavy congestion
But Smart and Globe seemed to have forgotten that it was only a couple of years ago when their networks also suffered heavy congestion, said William Pamintuan, senior vice president of Digitel Telecommunications Philippines Inc. Sun Cellular is the trade name of Digitel Mobile Philippines Inc., a unit of Digitel.

The 2002 NTC circular was released precisely to restore order following years of traffic congestion and network failures of the two major players, he said. Now the NTC can no longer apply the service standards it had set earlier because conditions had changed.

Edgardo Cabarios, head of the NTC's common carrier division, said the network problem started in the late 1990s, when text messaging became a full-blown phenomenon. By the middle of 2000, the NTC had ordered phone companies to bill by the six-second pulse instead of rounding off call charges to the next minute because more and more subscribers complained of dropped calls. (Cabarios said the level of dropped calls by 2001 far exceeded 5 percent.)

But the major players contested the order before the court and obtained an injunction. The NTC never had the chance to implement the order.

"They cannot do an apple-to-apple comparison now because a lot of things have changed. The leading players, they went through the same growing pains. What we just want is to be given time to expand our network," said Pamintuan.

Paradigm shift
The competition has actually got it backwards, Sun Cellular has countered. Its radical pricing strategy is actually giving birth to a different level of competition in the industry.

And if the two leading telcos have taken credit for growing the industry and then exacting a price for such growth, the new player said the industry should cut it some slack, too, because it has introduced a new "paradigm" of competition.

Pamintuan said there should be different standards now for the telecom industry depending on what the carriers were charging. He reached for an analogy from the airline industry.

"You cannot charge business class for economy seats. But when you paid economy, don't expect first-class service," he said, by way of explanation. (The Gokongwei family owns an airline, Cebu Pacific.)

Smart and Globe have naturally opposed Digitel's logic. They said one rule must apply to all and insisted that the regulator not bend the rule to accommodate other players.

But it does seem as if the NTC is receptive to the idea of different levels of standards.

Solis said he was worried about the consequences of an unchecked price war, when players do as they please, without regard for the consequences of their actions. But seeing the marketplace change with the advent of unlimited pricing, Solis said the NTC would consult with experts on ways to create an enabling environment for the so-called buffet type of competition to continue to thrive.

He said, for instance, that the NTC could set a specific period during which eat-all-you-can prices apply, perhaps during off-peak hours.

Whatever the next steps, the regulator cannot allow anarchy to rule the industry, Solis said. "At the end of the day, we shall take into account what is good for consumers."

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