Telecommunications industry beats global crisis

MANILA, Philippines – No less than the Philippine Constitution recognizes the vital role that information and communications play in nation building.

In fact, one of the reasons for the persistent gap between rural and urban areas in any country is the telecommunications infrastructure gap. Rural areas have less telco infrastructure when compared with the urban areas. This difference is called the digital divide. Even developed and developing countries suffer this gap, which accounts partly for difference in their level of economic development.

As the world suffers from the global economic debacle, concerns naturally have been raised as to its effect on the local telecommunications sector, which for so many years has provided the much needed impetus to jump start the Philippine economy.

It appears though that while there is cause for concern, the effects of the global recession on the Philippine telco sector are not as pronounced compared with other industries. And this early, the country’s largest telecommunications companies have expressed confidence that 2009 will still be a good year, if not better than 2008.

Globe Telecom president Ernest Cu, Digital Telecommunications (Digitel) president James Go, Philippine Long Distance Telephone Co. (PLDT) president Napoleon Nazareno, and Bayan Telecommunications chief executive consultant Tunde Fafunwa share their thoughts on the global crisis, how their companies are dealing with it, and what the future holds for the telecommunications sector:

How important is the telecommunications sector to the local economy amidst the global crisis?

ERNEST CU: The telecom industry has been an important contributor to the Philippine economy in many, diverse ways.

First, we have helped build the national telecom infrastructure and have re-invested significant amounts of money back into the local economy. Globe alone has spent over P190 billion in capital expenditures since 1998, putting in capacities and investing in new technologies in line with the government’s investment priorities. This same infrastructure now enables the growth of other industries including the BPO, offshoring and outsourcing sectors which in turn provides employment to hundreds of thousands of Filipinos.

Second, the industry has provided jobs and livelihood to thousands of retailers, distributors, third-party agents, content providers, and a whole host of other micro and medium-scale businesses. Third, the industry’s key players have been one of the largest taxpayers in this country. Globe has paid over P60 billion in taxes and regulatory fees over the past 10 years.

Perhaps most important, the industry, since it was opened up to competition in the mid-1990s, has put a powerful communication and information tool in the hands of millions of Filipinos, providing them with affordable and indispensable communication services.

It is in this context that we espouse the principles of free market forces to propel the industry forward, providing more robust and converged services to its subscribers, investing in the infrastructure to support the demands of the industry, and continuing to play an important role in the development of the economy.

James Go: The telecommunications sector is very important. Voice, data, SMS, and video continue to enhance lifestyle, commerce and economic growth.

Napoleon Nazareno: It’s a vital contributor to domestic growth in the context of a globalized economy. Telecommunications enable growth industries like call centers and BPOs. From the perspective of households, we provide vital services that allow them to earn a living or keep in touch with loved ones overseas.

Tunde Fafunwa: Communication is at the center of the human experience. Therefore, it will grow in importance despite the changing global economy and environment. The technology innovation in the telecom field continues unabated, providing new services and opportunities to both service provider/operators and customers. In addition, most parts of the industry are competitive which helps to drive innovation and cost reduction, which again, consumers benefit from.

To what extent was the Philippine telco sector affected by the global crisis? How did your company deal with the crisis?

EC: We are not hunkering down and staying still, waiting for the economy to turn up again. We continue to invest in our broadband and cellular networks, and in improving the quality of our service to differentiate us from competition. We are strengthening our product pipeline and our sales channels. We are developing new offers to appeal to the needs, lifestyles, and tastes of our target segments, while making sure that our services are affordable and accessible.

We are also closely watching our costs. We are looking into doing more outsourcing, putting a cap on the growth of our headcount, and cutting back on some of our discretionary, non-essential expenses. We are also streamlining our processes and structures to make us nimbler, and to get more products out to the market faster. Just recently, we integrated the sales and marketing organizations of our consumer broadband and cellular businesses. With products and services converging, we think it is important to develop a unified view of the customer and his needs, and to have a single sales unit serving both the broadband and cellular needs of our consumers.

Moving forward, we will also be more discerning on our mobile subscriber acquisitions – putting more emphasis on getting quality subscribers versus focusing on the number of subscribers acquired. We would like to move away from acquiring and re-acquiring subscribers who use the service for a short period of time only, churning out shortly after. This does not change in any way our mass market ambitions – we still see the lower-income, provincial markets as a critical growth area. However, we have recast some of our acquisition programs to better zoom in on the quality subscribers – those who see the unique proposition of the brand and see value beyond the initial freebies loaded into the SIM.

JG: The local telecommunications sector is moderately affected by the crisis but is still growing. Prepaid churn is high; therefore there is always opportunity to attract additional subscribers. Our company is rolling out at full speed, spending over $350 million a year and adding over 1,500 cell sites in last 12 months. We have also come up with innovative products and good pricing strategies, focusing on the Power of Voice that can offer our customers the best value in the industry.

NN: Like all businesses, we’ve felt the pressure of the global economic crisis. But we’ve managed to mitigate its impact. As a result, the industry has not been adversely affected. Several factors have helped us. Remittances of Filipinos overseas for example have been resilient and have kept consumer spending up. People now consider expenses on communications part of the basket of essential household spending. On the part of the telcos, particularly PLDT and Smart, we’ve continued to make our services more affordable by offering a wide range of bucket-priced products, giving our customers increasingly better value for money.

TF: The global economic crisis have had a subdued impact as the industry still managed to post revenue growth although at a much slower pace than the previous years. Industry wide, revenue per subscriber has gone down as operators aggressively compete for share of wallet but subscriber base grew which led to the modest revenue growth.

In 2008, Bayan posted a 15 percent year-on-year revenue growth, and a 25 percent increase in EBITDA. In the first quarter of 2009, our revenue growth slowed down to five percent and EBITDA at 15 percent. Overall subscriber base grew by 10 percent in the first quarter over last year at about 500,000 total subscribers.

At Bayan, we focused on the customer and gaps in the market for what customers want – calling services and easy to get, easy to use broadband.

How was the first half of 2009 for your company compared to the same period last year?

EC: Our revenues have been resilient so far. While growth rates for our mobile business are not where we think we can take it, we have not seen any major sales contractions.

We are fortunate in the sense that the mobile phone has become a ubiquitous device, and is now so well-woven and integrated into our daily lives, cutting across all income, demographic, and psychographic segments. Telephony and internet rates are also so much more affordable these days, and the service so pervasive and accessible, in large part driven by intense competition in the market place. For instance, in Globe, we have bulk and unlimited offers which can bring the effective rate of a text message to below 20 centavos and domestic voice rates to about a peso per minute. These value propositions have somewhat insulated us from some of the household spending cutbacks.

JG: We experienced a very good growth compared    to same period last year. This robust performance can be attributed to our rapid network expansion, improved sales distribution and continuous product innovation. This performance was further boosted by the introduction of our broadband wireless service which is powered by an all IP equipped network using the most advanced global standard broadband technology so we expect good growth for the remaining half of the year.

 TF: We are ahead of our expectations, with the first half showing moderate growth in both revenues and EBITDA over the same period last year.

 How do you think your company would fare for the entire 2009 amidst the lingering effects of the global crisis and depressed locally economy?

 EC: We posted strong, double-digit growth in our consumer broadband and corporate data businesses in the first quarter, compensating for the flattish performance of our cellular operations which still comprises almost 90 percent of our consolidated revenues. We expect those trends to continue for the rest of the year, although we are of course hopeful that over-all economic activity and consumer confidence picks up in this second half.

 On the margins side, we’re continuing to see our costs rise faster than revenues. Low as they are now, average prices remain on a downtrend with cut-throat competition, and also with the market’s increased appetite for unlimited and “eat-all-you-can” SMS and voice offers. Broadband is also a lower-margin business compared to mobile, so we expect our consolidated margins to be diluted as broadband’s contribution to total group revenues increase.

 JG: We are optimistic that we will continue to experience a good growth because there is a positive market acceptance for the products that we offer and we are gaining market share.

NLN: At this point, we have not finalized the results for the first half of the year. What I can say is that our numbers in terms of revenues and net subscriber adds are tracking better than last year. We are in a good position to meet if not exceed our full year targets.

TF: We believe we are positioned to grow and do well unless there is a sharp downturn. The second half of the year holds an opportunity for modest growth. Bayan is strong in the two area of growth that customers and the market continue to demand despite the global crisis – calling services and broadband Internet. Both of these services are also very relevant to the Filipino’s need to keep in touch with their families.

Are the good days over for the mobile phone sector, especially with cellular penetration rates now exceeding 70 percent? What other businesses are you developing or focusing on that could bring in new revenue streams?

EC: We believe that the explosive growth of the mobile telephony business is past us. Subscriber growth will decelerate, and the key players will increasingly shift their focus towards subscriber retention and promoting usage.

This is not the case for the broadband business which is still in its rapid growth stages. Today, there are about 1.5 million broadband subscribers in the industry, and we believe this can double to about three million customers by 2010, with laptop, netbook, and PC prices continuing to fall. The wider availability of prepaid services will also fuel the expansion of the business, similar to the trend we saw in mobile during its nascent years.

JG: While penetration will slow down, the telecom industry continues to grow. You can note that there is increased usage of voice, data and content access to web for social networking. It’s lifestyle, and you can’t stop people in improving their lifestyles.

NN: We think there’s still room for growth in the mobile business. We are pursuing growth, for example, through value for money offers that address the needs of financially challenged consumers. Broadband is clearly the growth area for the coming years.

TF: Definitely, the acquisition mode of cellular phones has now reached a plateau. We have to be careful about assumptions on high penetration rates of cellular phones as most of them may be inactive SIMs that are counted into the subscriber base. Nevertheless there is no question to the high penetration of cellular phones in the country compared to other devices.

In our view, the high penetration of these devices is just one half of the story. What consumers do with their cellular phone is another. Even though most have cellphones, the only use they have for it is text! Voice calls remain underserved despite the new unlimited voice services by the incumbent operators as consumers still haven’t caught on to the habit of calling after being boxed in for a long time with high per minute voice charges. Plus the unlimited one time charge usually applies only to within the network calls.

Another area is mobile Internet to access applications and services. While this is currently available, just as small segment of the base are actual users because of the same walled garden approach by the incumbent operators. In fact, we see both of these as areas of further opportunities of growth for Bayan.

Does the broadband business have the potential of being as big as cellular mobile? How has broadband contributed to your company so far?

EC: In Globe, we are seeing very good subscriber take-up, particularly for our wireless broadband offer. We expect to close the year with about half a million subscribers – that’s about a four-fold growth from our 130,000 customers last year. Revenues are also growing at double digit rates. We believe our prospects in this space are good. We are in a strong position to capture a sizeable share of the industry’s growth. We have a solid technology portfolio which includes DSL, 3G, and WiMax, an extensive broadband network, a strong brand name, and a set of attractive, reasonably priced offers.

JG: It will be as big as CMTS but will of course take a few more years. Right now, we can say that broadband is growing fast, it caters to the needs of people on the go and are willing to pay a premium for that service. Again, lifestyle plays an important role here. Our broadband service is positively accepted by the market, and we recognize the fact that our broadband service will provide considerable incremental service revenue to the company.

NN: It is becoming a significant part of our business. Currently, broadband accounts for about nine percent of total service revenues. It continues to grow at double-digit rates on both mobile and fixed platforms. Broadband will become even prevalent as our networks and devices become more powerful.

TF: A cellular system can be designed and built mainly for text or it can be designed for Voice, text, Internet and content delivery as well, it just depend on the operator. The Philippines is a world leader in text. The other areas are under-developed. So yes, Internet broadband is the next big thing, both from a wired and wireless perspective. It has contributed significantly to our growth last year as well as in the first half of this year.

Do you believe that the global crisis is over? Has the Philippines experienced the worst of its effects?

JG: The crisis is definitely not over yet, though there is less panic in the air. The world no longer experiences this feeling of falling from a cliff. But I think it will take one to two more years until we can say that it is over.  

NLN: The worst of the global financial crisis may be over, but its effects will linger and recovery will be a gradual process.

TF: I believe we will continue to feel the effects of the global crisis particularly since the US, which is a key trading partner, remains in a downturn. However, in the past the Philippines has proven its resiliency and resourcefulness to adapt, learn and grow from the experience. Overseas remittances as reported recently grew over the same period last year, which further proves the resilient nature of Filipinos to provide for their families. If we continue to do what is right economically and politically, I believe the Philippines will come out of this in better shape than most of the countries affected.

How bright is the future for the local telecommunications sector? Where do you base this optimism?

JG: Since products offered by this sector are useful and functional, I can say that its future is vibrant.

NLN: The future of telecommunications in the Philippines is bright because the industry plays a vital role in the country’s economic growth and our people’s wellbeing. Its contribution consists not only of the industry’s own growth. Telecommunications also enables the development of other sectors in the economy. In an increasingly connected world, we provide the vital linkages that people depend on for their livelihood and leisure. Imagine what life would be without your mobile or the Internet.

TF: The potential for growth for Bayan is very high. I believe we are at the stage in industry where we are now ready to take the next level of technologies to the consumers, thereby in a sense leveling the playing field among the players as there is no firm market leader in these services yet. At the same time, we strongly believe there is room for disruption from Bayan not just in the products but even in how customers are being treated and serviced in the current environment today. Our track record in delivering our wireless landline service, and in our Bayan DSL which continues to grow while competing head on against more established players, is proof of that. In the end, it’s not a matter of who delivers the product to the consumers first, but who impacts the market first and serves the customers better. –Mary Ann Ll. Reyes, Philippine Star