The curious case of Philippine broadband (Part2)

14 Apr 2016

Between part 1 and part 2 of this article series, I managed to squeeze in delivering my second child. So apologies for the long pause.

The botched mobile network joint venturebetween Telstra and San Miguel Corporation (SMC) shows just how difficult and frustrating it is for any potential new player to enter the Philippine telecoms market. In a statement, Telstra said that it was “simply unable to come to commercial arrangements” favorable to both parties and it did not achieve the necessary “right risk-reward balance.”

With dominant local telcos that are ready to pull all (commercial and political) strings and that have threatened to pursue legal action against the regulator and SMC, it was no surprise that Telstra’s board have decided to end talks despite the promising rewards of catering to a generally dissatisfied consumer base and a huge unaddressed mobile broadband market.

There was also the hullabaloo about the 700-MHz spectrum on top of potential problems in infrastructure deployment, which some analysts said could cost more than originally projected. Although there is no obvious technical reason to support the claim that redistributing the 700-MHz spectrum, mostly owned by SMC, would result in faster internet speed, a new investor like Telstra would find this too pesky and troublesome to move forward.

The failure of the Telstra-SMC partnership reflects the terrible state of the Philippine telecoms market when it comes to contestability. That new players find it very difficult and costly to enter what is clearly a profitable market can only mean that there are barriers that help maintain the status quo and benefit existing market players.

Despite being liberalized and some areas deregulated in the 1990s, anti-competitive practices abound in the telecoms sector. The policy and regulatory environment also remains unclear and unpredictable, especially for a value-added service like broadband where a 20-year old law on basic telecoms service is being used as basis.

The Arangkada Project policy brief on Philippine broadbandthat was launched in February centered on better competition as the solution to the country’s slow and expensive broadband service. I previously discussed some of the problems identified in the policy brief, which include barriers to entry, anti-competitive practices, inadequate infrastructure, as well as bureaucratic requirements imposed by both local and national governments when telcos build infrastructure.

The NTC is weak and ineffective in regulating key areas in telecoms

Amid deregulation and the entry of new players, the Philippine telecoms market was soon dominated by only two big telcos who gobbled up the small players and made life difficult for the new players.

The dwindling number of telcos and ISPs was the result of mergers and acquisitions that did not undergo much scrutiny. Approval of such transactions falls solely in the hands of the regulator. This was clearly an area where the NTC should have applied the appropriate regulation but did not.

Judging from the consummated deals over the past five years, with PLDT buying out Digitel and Globe buying out Bayantel, it’s a question mark how NTC decided that these acquisitions would not adversely affect competition and consumer interest.

Interconnection is at the mercy of large telcos

Similar to the network interconnection problem that was experienced decades ago for voice calls and SMS, NTC has also failed to require interconnection among ISPs. The large telcos, who are also the largest ISPs in the country, are able to discriminate who connects to them and to dictate the price and quality. Local IP peering with PLDT is done through bilateral, commercial agreements—unlike 90% of peering arrangements globally that is done through a handshake.

The government has been operating an open and neutral IXP called the Philippine Open Internet Exchange (PHOpenIX), to which PLDT has refused to connect until recently due to public pressure. But this happened without any help from the regulator, who has practically made a hands-off stance on anything internet-related despite the service being the new bread-and-butter of the local telcos.

Through the years, the PHOpenIX has managed to attract major telcos, ISPs, and institutions to peer. It has also facilitated traffic exchange that has reached a monthly average of 14 Gbps (inbound) despite the non-participation of PLDT. Imagine how much more this would be if the country’s largest telco would peer.

Telcos complain of prohibitive bureaucratic requirements in infrastructure build-out

Finally, the telcos complain about the difficulties in getting permits and clearances from the local governments as a major culprit for having inadequate infrastructure to support the growing services that they offer. Both PLDT and Globe cite at least a few dozen permits that need to be secured before a base station can be set up in an area.

However, the incumbents have not identified any specific local government that has imposed these purported unreasonable bureaucratic and fee requirements.

There is a proposal to streamline the permits and clearances that telcos need to secure for building their network through legislation. However, this would entail a long and cumbersome process of amending the Local Government Code, which has remained untouched for over two decades. Do Filipino internet users also have to wait this long in order for telcos to build more cell sites and improve services?

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