Debating the Philippines' spectrum dilemma

I’ve been getting a lot of feedback from colleagues and industry observers for my latest blog, The Philippines’ NTC and the spectrum mess. This came as a welcome surprise. Spectrum management is an issue of critical importance but is often left on the sidelines. It’s good to finally get the debate started.

To clarify, my previous post was not meant to focus on the 700-MHz issue between San Miguel Corporation and the two incumbents, PLDT and Globe. Although it was the article’s take-off point, it was not meant to target that band or its current holder, who happens to be an emerging challenger willing to take on the duopoly (and we all know my take on that).

There is an apparent lack of informed debate on spectrum management in the country and how the allocation of ALL radio frequencies ought to be carried out that would best serve public interest. There is no right or wrong way of allocating spectrum, although some ways are better than others. There are also more effective and appropriate ways of doing things.

Republic Act 7925 says that spectrum allocation is to be done through open tenders. But it comes with the caveat “when demand for specific frequencies exceeds availability.” This precondition is subjective and left to the judgment of the NTC.

While competitive auctions may be ideal as they are deemed transparent, a senior industry expert whom I talked to thinks that auctioning can be a double-edged sword. In the case of the 3G spectrum allocation in 2005, for example, he thinks that NTC’s choice of a “beauty contest” was justified as “3G was then a technology in its infancy.” With fixed broadband still fairly expensive and smartphones just beginning to enter the Philippine market, the uptake of 3G was low in the early 2000s. “The operators then started to sell dongles just to fill some of the built capacity,” the senior expert recalls. Resorting to an auction back then, he said, would have killed the mobile broadband business before it even took off.

In an auction, it is imperative to have a regulatory environment that cannot be easily and systematically overruled by the industry players. Otherwise, “the cost of the spectrum would go directly to the consumers’ bills, not even delayed or disguised. It just becomes an additional ‘communications tax’ for the ordinary Filipino to carry, nothing else,” the senior industry expert adds.

The large telcos always have more money, so auctions could actually work to consolidate monopolies, or duopolies in this case. Winthrop Yu of the Internet Society agrees. “Auctions are designed to award this scarce resource to the biggest players. The result is entities buying up as much spectrum as they can, thereby locking out new players,” Yu explains.

Given the local telcos’ steady profits and high EBITDA margins (about 45% in 2013-2014), the cost of spectrum should ideally be cut from earnings instead of getting passed on to subscribers. This would be the normal outcome of a competitive market. However, until the NTC has the teeth to rule against this and the level of market competition is enough, some industry observers believe that auctioning might not be appropriate at this time.

But in countries where auctions are held often, how do they benefit consumers? “Spectrum auctions are the best way of allocating this scarce natural resource amongst competing telecoms companies. This is as true for developed markets such as Hong Kong (where eight spectrum auctions have been performed since 2001) as it is for developing markets such as Thailand, where the December 2015 auction raised a much needed $4.2 billion for the government,” according to John Townsend, a telecoms specialist from KPMG Singapore.  

“Logistically, a spectrum auction is not difficult for a telecoms regulator to organize, so if a regulator chooses not to hold an auction, questions may be asked why it is not taking action,” Townsend adds. The important regulatory issue is making sure market structure facilitates desirable outcomes. Townsend commented that, “A non-competitive market structure is difficult to reverse post-auction. The telecoms regulator has to get it right the first time.”

Since building and operating telecoms services require a huge amount of capital, it is normal to have only a small number of qualified bidders to purchase spectrum for use. “The key point is auction design, which allows the regulator to shape market structure ahead of the auction. While the large telcos do have an advantage, the regulator can ensure that spectrum floors/ceilings allow for at least three players, as happened in the UK 2013 spectrum auction, thus preventing any one bidder from buying up all the spectrum,” Townsend added.

As for reallocating spectrum that is already assigned, Townsend said that it is not a question of confiscating but of “refarming” or the clearing of frequencies from low-value (by economic and/or social criteria) and reassignment to high-value applications as telecoms technology develops. “Notably, in 2012, the Hong Kong regulator refused to assign new spectrum administratively at the request of telcos, and forced them to pay again for this reallocated band,” he commented.

Another approach is awarding spectrum on a “use it or lose it” basis. There ought to be a sun-setting of spectrum allocation and the rights to use it should not be perpetual. Apart from efficient management, this can also prevent the hoarding of valuable spectrum bands.

The regulator must also take into consideration the potential positive impact of deregulating some frequencies, such as industrial, scientific, and medical radio (ISM) bands. Making this frequency free for all, which is the case in most countries, could help spur the emergence of wireless ISPs, especially in unserved or underserved communities, and make mundane things such as connecting building less costly and cumbersome.

Finally, Yu emphasizes that spectrum management reform, including setting aside spectrum for use by still-to-emerge players, for open, unlicensed use, and for shared (dynamic) spectrum use, should encompass all spectrum. And, yes, this includes spectrum currently held by all players. Looking at the broader picture and being able to balance the interests of all stakeholders is the point of regulation after all.