The two incumbent operators in the Philippines, Globe Telecom and PLDT, collectively plan to spend a whopping $2.7 billion in capex this year as they face continued pressure to boost the country’s very slow data rates and brace for the end of their long-time duopoly on mobile services in the country.

Competition is set to increase with the entry of a third major mobile operator after consortium Mislatel (recently renamed Dito Telecommunity) won a licence late in 2018. Unsurprisingly, Fitch Ratings said the entry is credit negative for PLDT and Globe Telecom, and will likely dilute their market shares.

Globe Telecom held a 57 per cent market share by subscribers at end-June, while PLDT’s mobile unit Smart Communications had a 43 per cent share, data from GSMA Intelligence showed.

The two operators have more than a year to prepare, as Dito Telecommunity plans to launch commercial service in late 2020 and cover 17 major cities after two years. It is targeting 37 per cent population coverage after its first year and 84 per cent after five years, when it aims to have 8,000 base stations nationwide.

In addition to the newcomer threat, mobile internet speeds in the country still lag behind most regional peers and require bigger investment. Despite strong gains in 2018, the Philippines still ranked tenth in Asia, with average download rates of 7Mb/s, up three places from a year earlier, Q1 2019 data from Opensignal showed.

Capex intensive
The country’s telecoms sector ranks as one of the most capex intensive among Asia-Pacific operators, with total capex forecast at around 40 per cent of revenue compared with the regional average of the low 20s, Fitch Ratings recently stated.

Although Globe Telecom earmarked PHP63 billion ($1.2 billion) for capex in 2019 (a 45 per cent jump from 2018), its spending in the first six months of the year actually fell to PHP19 billion from PHP22.9 billion in the January-to-June 2018 period. Its capex in 2018 inched up 1.9 per cent from PHP42.5 billion in 2017 and represented just 29 per cent of revenue.

Meanwhile, rival PLDT was forced to step up its game in early 2016 after its profit and revenue fell sharply and it continued to lose customers to Globe Telecom. PLDT then outlined a three-year recovery plan, dubbed its digital pivot, which called for a huge increase in network investment. Three years on, it is seeing the start of a sustained recovery, with revenue rising for four straight quarters.

Its H1 capex was 50 per cent higher than the PHP32.7 billion spent in the first half of 2018. For the full year, it is targeting raising the capex-to-revenue ratio to more than 40 per cent as it adds up to PHP20 billion more than the PHP58.5 billion allocated in 2018 (38 per cent of revenue). The jump comes after it hiked capex by 58 per cent from PHP37 billion in 2017.

To prepare for the higher network investment over the next few years, in June it plotted the sale and redevelopment of various offices in Makati City.

Marc Einstein, chief analyst at Japan-based research company ITR, recalled that a decade ago the two companies had the highest SMS per capita usage and lowest voice minutes of use (MOU) in Asia, if not the world, which led to extremely high profits. During that time their capex was notoriously low.

Early days
He told Mobile World Live both incumbents still have quite a bit of catching up to do compared with their regional peers and capex will need to be much higher for at least the next three-to-five years.

Einstein noted the new entrant is expected to be aggressive on pricing and coverage, and will also likely get a good deal on network equipment given China Telecom is a partner in the venture.

While Globe Telecom is yet to fully fund its proposed capex rise, its net profit was flat in Q2 and mobile revenue grew just 4 per cent, a worrisome sign. Look for its margins to be crimped as its capex soars and revenue edges up by the targeted high-single digits in 2019.

PLDT appears to be rebounding from a few bad years, after aggressively pushing its digital transformation agenda. But it’s still early days in that recovery, which Dito Telecommunity no doubt will be looking to stall.

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.