The highly competitive wireless market in the Republic of the Philippines-with five carriers serving some 70 million people-is perhaps the most ripe for consolidation compared with all Southeast Asian countries.
With cellular companies burdened with the devaluation of the Philippine peso against the dollar, mandatory buildout of fixed lines, as well as a monstrous fraud problem, mergers between the cellular operators there seem inevitable. The question is, who will merge with whom?
There haven’t been any mergers yet, and only two confirmed reports of talks-between Bayan Telecommunications Holding Corp. (Bayantel) and Globe Mackay Cable and Radio Corp. (Globe Telecom MCRC); and Smart Communications Inc. and Eastern Telecommunications Philippines Inc. (ETPI).
There also have been rumors about merger talks between Bayantel and Express Telecommunications Corp. (Extelcom); Philipino Telephone Corp. (Piltel) and Extel; and Globe and Isla Communications Inc. (Islacom).
“There are just too many players,” said Hank Goldstein, managing director-international for Daniels & Associates, headquartered in Denver, United States. “Like (in) a lot of developing countries, there are factions, and so they don’t even talk to each other, which makes mergers and acquisitions more difficult.”
The Philippine wireless market has been dominated by Piltel and Smart since its deregulation in 1993, taking market share from previous monopolist Philippine Long Distance Telephone Co. (PLDT).
The National Telecommunications Commission, the telecom regulator in the Philippines, has delayed offering 1800 MHz Personal Communications Services licenses. However, with the recent election of Joseph Estrada during the country’s centennial year, NTC likely will forge ahead with the license offering soon.
Former President Fidel Ramos in 1993 passed Executive Order 109, requiring cellular operators to install a minimum of 400,000 local exchange lines as a condition of their licenses. International gateway operators were required to install at least 300,000 local lines within three years from the start of operation.
“Traditionally, the incumbent fixed carrier, PLDT, has been reluctant to build out lines outside of the Manila area because it’s not profitable,” said Robert Purcell, a Tokyo-based analyst for the Yankee Group. Building one fixed line can cost about US$1,000.
In addition to fixed-line requirements, fraud has hit the carriers’ pocketbooks hard. Piltel took an extraordinary loss of US$21 million when it purged its subscriber list of delinquent and fraudulent subscribers in late 1996, and has continued a “series of cleansing cycles over the past 1.5 years,” shedding a lot of its subscribers, said Alan Wee, a market analyst for Pyramid Research in Singapore.
Piltel subscribers fell from 428,000 at the end of 1996 to 412,000 at the end 1997, and again to 385,000 in March. Piltel, which recently launched its CDMA (Code Division Multiple Access) network supplied by Motorola Inc., has cut prices and offered free CDMA handsets in exchange for old AMPS phones in its effort to compete. Yet the company posted a net loss of P$86 million for the first quarter.
“Piltel was hit hardest by fraud, and a lot of us believed that was just because they had analog AMPS, which is easier to clone,” said Daniels’ Goldstein. “A big problem that Piltel had was bad debt.” Goldstein was the executive director of Asia Link, a holding company of First Pacific Co., before joining Daniels in June.
Smart, an affiliate of First Pacific company Metro Pacific and Japan’s NTT, took the position as cellular front-runner from Piltel during the first quarter. In June, the company reported topping the 700,000-subscriber mark. Smart operates a TACS (Total Access Communications) network supplied by L.M. Ericsson.
Smart has delayed its initial public offering several times due to soft market conditions, and in light of the economic crisis, it has delayed it indefinitely. The IPO would help raise part of an estimated US$255 million required to expand and convert its network to digital, said the Yankee Group’s Purcell, in a report on the Asia-Pacific region.
“We started to go to market twice with [the IPO], and in hindsight we should have done it,” said Goldstein. “It was really a matter of waiting for the market to improve.”
Smart also has delayed its migration to a network based on GSM (Global System for Mobile communications) technology until the fourth quarter or early 1999, according to recently published reports.
Also hard hit by fraud was Globe Telecom, which operates one of two GSM networks in the Philippines. Globe lost US$16.7 million in 1996 and dumped one-third of its subscriber base, 25,000 subscribers at a time, Purcell’s report says. The other GSM system is operated by Islacom.
While cloning has been a problem on AMPS systems, “subscription fraud apparently accounts for the bulk of bad debt in the Philippines,” Purcell said. It accounted for the majority of fraud on Globe’s network, which uses GSM technology-supposedly “fraud-proof.”
Tighter credit-check policies and anti-fraud software have helped reduce the carriers’ fraud problems. Globe posted a net income of P$6 million for the first quarter of 1998, compared with a net loss of $P132 million for the same period last year.
