Does the recent re-assignment of SMC frequency benefit consumers? Part 2

Introspective Romeo L. Bernardo
Posted on July 03, 2016 11:19:00 PM

(This column continues the answer to that core question started in the first installment last week.)

What are the realities behind “slow internet” in the Philippines? The following factors, positive and negative, affect broadband speed:

1) Government Participation. This factor is mostly negative, with unclear and no comprehensive national broadband strategies, no substantial investment in a national broadband network, inefficient allocation of limited spectrum resource, decentralized LGU regulation of taxes and permitting.

2) Geography. The country’s smaller land area, compared to neighbors, can lead to more efficient infrastructure. However, multiple islands require more cables/fibers, including underwater ones.

3) Urbanized demographics. High population density enables economies of scale and faster deployment. On the other hand, infrastructure deployment in rural areas is challenging due to economic and market factors.

4) Economy. Higher gross national income per capita indicates ability and proven willingness of consumers to pay. Broadband affordability is correlated with income. Mix of low speeds vs high speeds affects perceived average speeds. In the Philippines on the downside with more people in a lower income bracket.

THE CHALLENGES
1) On Fixed Line Internet, the key challenges in accelerating investments are long duration returns (high cost of capex per line) and various bureaucracy elements (permits, right of way, and site acquisitions).

Historically, there has been underinvestment in this sector. Other countries had a better landline infrastructure from the starting line. In 1992, the late Singaporean Prime Minister Lee Kwan Yew noted that “98% of Filipinos do not have telephones,” Globe and other telcos leapfrogged using mobile technology, the quickest and most economic way to provide telephone service coverage.

2) On Mobile Internet -- By its nature, mobile requires an interplay between size of spectrum and site/tower density. Greater tower density allows mobile service providers to offer the same quality of service with smaller sizes or allocations of spectrum. Conversely, large slices of spectrum are necessary given low site density.

The Philippines does not have enough towers to support better speeds and affordability, and future growth. As can be seen in the first graph, the Philippines has less than 13,000 towers, while Vietnam has 55,000, Malaysia 22,000, Pakistan 28,000, US 300,000. (Source: TowerXchange, CTIA for US number)

The key challenge in towers and sites are permits, right of way, site acquisition, and broad discretion levels of permitting agencies like LGUs, local entities, and would-be tower neighbors driven by Not In My Backyard (NIMBY) mentality.

I recall a while back, our Globe Board of Directors approved financial resources to accelerate expansion of towers and sites -- we have an accumulated backlog of 3,000 sites. But despite pressure from management and the Board, and utmost effort from our team, Globe can only do 350-450 a year.

The hurdles are real and understandable.

Just to illustrate, our team has had to get 25 permits per cell site, and to deal with at least 120 primary level LGUs individually to build infrastructure. This is one area where the central government can play an enabling role, perhaps under the newly established Department of Information and Telecommunication.

EXPLOSIVE GROWTH
At the same time, there has been explosive growth in mobile internet use. We Filipinos have graduated from being the number one SMS users in the world to being the top users of social media (Facebook, Twitter, etc.) and consumers of movies and music. For Globe alone, in the span of a little over two years, subscribers of mobile Internet have more than doubled from 9 million at the end of 2013 to 24 million. Within that same period, traffic went up from five thousand to 50 thousand terrabytes, tenfold, even as revenue growth from this was controlled at just at three and a half times from P2 billion to P7 billion. Philippine telcos simply cannot sustain mobile Internet delivery service demand growing at 50-70% annually without more frequency and more sites.

THE SMC TRANSACTION ETC.
Against this back drop, San Miguel Corporation has sold all of its telecom assets to Globe and PLDT which has split these 50-50, and returned some frequencies to the NTC. This covers all frequencies, all sites and equipment, three holding companies, and 20 plus companies that has all of their telecom assets. Critical for improving mobile service delivery is the 4G/LTE frequencies in the 700 MHz band which provides longer range, broader reach.

It bears noting that SMC has underutilized this and other frequencies, and with the collapse of its negotiations with Telstra, has poor to nil prospects of utilizing it any time soon. Even for a giant conglomerate like SMC, it has proven most difficult to find a foreign partner who will risk several billions of dollars to invest in a Philippine telco play. For reference, it took Digitel more than five years before it could be profitable, and even then it only had ten% of the market before it decided to sell/merge with PLDT.

The NTC approved the transaction and co-use/ re-assignment of SMC frequencies, considering this is the best and quickest way of improving the service to the public. The approval came with the following conditions:

a) The surrender of frequencies across the spectrum by the two telcos. These frequencies are more than sufficient for a third player to come in and compete head to head with the incumbents.

b) A plan to cover at least 90% of cities and municipalities within 3 years, and to improve Internet speeds significantly within a year.

QUESTIONS
The Internet Society posed probing questions to determine if the two telcos really need the 700 MHz to improve service. The full technical answers to their questions are provided in the letter to them by Gil Genio, Globe Telecom’s Chief Strategy and Technology Officer.

[To read Mr. Genio’s letter posted on Mr. Bernardo’s blog, please visit http://goo.gl/bXKJu7.]

Another frequently asked query is whether the telcos are reinvesting enough or yielding shareholders too much. I mentioned in Part 1 that Globe invests 28-33% of revenues for CAPEX, higher than most telcos elsewhere. Moreover dividend yield averages 3.5% per year are healthy, but far from excessive.

CONCLUDING NOTE
Since 1997, we have gone a long way from a nation where there were only 1.8 million landlines and 0.5 million mobiles to one where there are 120 million mobile SIMs in circulation, about 40 million smart phones, 50 million plus internet users, 40 million plus FB and other social media users. We often forget that there are tens of millions who are now able to use Internet because of the investments of private sector, many times over versus the days of dial up. Even compared to three years ago the number has tripled.

That must count for something. We can always be better, speed could be faster, networks more pervasive, but to be constructive about it means having coherent suggestions and practical solutions, for the larger population. Filipinos do deserve faster and more affordable Internet, mobile or fixed. I do believe that the telcos are doing their part, and will continue to do so. Others need to play their roles.

Romeo L. Bernardo is GlobalSource Partners Philippine advisor. He served as Finance undersecretary during the Aquino-1 and Ramos administrations.       

Response of Gil Genio, Chief Technology and Strategy Officer of Globe Telecom to Internet Society

Internet Society- Philippines Chapter

Sunset View towers

2230 Roxas Blvd. Pasay City

Manila, Philippines

June 28, 2016

Attention:           Mr. Winthrop Yu  

Chairman

Mr. Aris Ignacio

President

Dear Messrs. Yu and Ignacio,

This is in response to your letter intended for the PCC which was used as reference for press stories published by the PDInquirer on June 21^st and Malaya on June 24^th.  For purposes of thoughtful discussion, especially given recent forums, we are sending you additional information that may be helpful in forming your postion regarding issues currently facing the industry.   

ISOP:  700 MHz is not necessary for good Internet service:

The narrative regarding the 700 MHz frequency band has been changing since news of a possible joint venture between SMC and Telstra emerged last year. Starting with “spectrum is a scarce resource”, descriptions of 700 MHz have more recently evolved from “faster” or “stronger” to “better coverage”. First, because its capacity to carry information is less than that of higher frequencies, the 700 MHz is actually “slower”, in this sense, than higher frequencies. Secondly, while 700 MHz may be said to have better “coverage” than higher frequencies, it does so at the expense of other desirable properties such as capacity, mentioned above.

What is clear is that though the properties of various frequency bands may differ, 700 MHz has no special or magical properties as against other frequency bands, particularly adjoining frequencies (e.g. 850 and 900 MHz) which would have properties similar to 700 MHz.

GLOBE:

Speed being provided to a user is a function of several variables: how far the user is from a cellsite, how many other users are being served by the same cellsite, the aggregate bandwidth from the cellsite to a mobile service provider (MSP) core network and internet backbone, and as important, the size of the frequency spectrum and its position that dictates how much information can be carried. Assuming all other factors being equal, a user can enjoy higher speeds if there is a larger slice of frequency spectrum, the slice being more at low frequency bands and smaller at higher frequency bands (without forgetting the distance to the cellsite).

When delivering ever faster mobile internet, MSPs normally favor higher bands (such as 2300 or 2600) because they can carry more information for the same MHz slice versus low frequency bands (such as 700/900). Technology developments and later generations of air interfaces have led to faster speeds using the same slices, but the principle remains the same.

As more high speed internet users use the same cellsite, MSPs use a variety of methods to support more users. One method is the split up the cellsites, effectively increasing site density and lowering the number of users using the same cellsite. Other techniques include re-using spectrum at various sectors, or even layering and aggregating frequency bands to support more users. Unfortunately, most people do not recognize that increasing site density simply means adding more cellsites, which is a huge barrier to telecom infrastructure construction in the Philippines.  We have pointed to Vietnam’s 55,000 sites for example, more than double Philippines 17-21,000. In the most extreme bandwidth use such as the US, the same site density would mean 94,000 sites in the Philippines (US has 300K towers for 318.9M population).

It is because of the inability to add sites that more frequency slices are necessary in order to support more high speed users per cellsite. Aside of course from its ability to carry information, the use of the 700 MHz band provides better coverage versus higher frequency bands (suc as 2300 or 2600), and therefore MSPs can support more high speed users using the same tower or cellsite footprint that currently exists today.

It would be unsolvable puzzle if MSPs like Globe were asked to support more high speed internet users, or to support ever higher speeds, yet hamstrung by an inability to increase site density or hamstrung by lack of frequency resources. 

ISOP:  Empirically, while many countries have (differing) spectrum plans for the 700 MHz band, most countries do not even use 700 MHz, yet all if not most of these countries provide much faster average Internet speeds than the Philippines. Clearly, the 700 MHz band is neither necessary nor sufficient for providing good Internet connectivity.

GLOBE:

There are three ways to increase capacity:

1.       Build New Sites

Globe has been aggressive in the past few years in implementing new sites but the current bureaucracy in securing permits hamper us in building new sites as fast as we want. It takes about 8 months before one cell site can be constructed because of the number of permits to be secured from barangay level up to national level.

2.       Add more spectrum

Regardless of frequency band, additional spectrum is still an additional layer for capacity. Having an additional spectrum in the low frequency band is just a bonus because it can propagate farther and deeper. This solution is the most difficult because one cannot use additional spectrum other than those assigned by the regulatory body.

3.       Increase Spectrum Efficiency through 2G to 3G to 4G migration
This is essentially how much bits per Hertz can you get from a given spectrum. Obvious solution is to shift the available spectrum into higher wireless generations like 3G and 4G/LTE. This is what Globe has been doing over the years, by reallocating our spectrum previously used for 2G to 3G and 4G/LTE. But we cannot completely devote all of our traditional spectrum assets to next generation wireless technologies since smartphone penetration is only about 40-50% and there are still lots of 2G users. One example is Mindanao where smartphone penetration is less compared to the rest of the country and where 2G service revenues continue to have healthy takeup. But Globe through its offerings of affordable postpaid plans bundled with smartphones is pushing as hard as it can for subscribers to adopt 3G/4G. It is worth noting that the Philippines is unique in that mobile operators support all existing technologies today: 2G, 3G, 4G/LTE, because majority of consumers in provincial areas have yet to adopt fully to smartphones.  Unlike other countries that make them use spectrum more efficiently, once they migrate customers to 3G, all 2G spectrum can be reallocated to a newer technology like 4G.   In the same vein, many developing countries have yet to adopt to 4G/LTE because their spectrum resources are only limited to 2G and 3G. Historically, in most of the world, the 700 band was used for analog broadcast. As broadcast migrates to digital technologies, the 700 bands are freed up for mobile internet.   To date, GSMA counts about 64 countries that have deployed or started to use the 700 MHz band.

ISOP:  Spectrum is not “scarce” in the Philippines:

When asked a direct question as to whether the telco conglomerate he was representing suffered from spectrum scarcity or was otherwise spectrum-constrained, a telco lawyer declined to answer. Obviously, highly dense concentrations (such as countries and operators in Central Europe) would be much more constrained in this respect, compared to the Philippines - spread-out over 7000 islands, sitting-out in the West Philippine Sea. Yet these countries do very well and provide better service with what they have.

Instead of scarcity, our two dominant telcos (but particularly PLDT group) actually have mor than sufficient spectrum. Most telecom operators around the world deliver much faster and better quality Internet by making efficient use of spectrum allocations that are less than those held by PLDT and Globe, even before their take-over of the SMC frequencies.

GLOBE:  The reasons why these countries do well are:

1.       They have high smartphone penetration that allow them to support mobile internegt customers using 3G/4G, and some countries are beginning or planning to turn off 2G.

2.       They have different user behavior. First world countries tend to use only wireless communication as data connection when they are outdoor or truly mobile or in transit. Citizens of these countries have had the benefit of many decades of wired (DSL or fiber or cable) internet infrastructure, which are the main internet access technologies when at home, at work, or at meeting places such as coffee shops or hotels. By contrast, citizens of the Philippines have not had meaningful wired infrastructure and now use mobile as the primary method of accessing internet.

3.       Geographically, they are landlocked countries means laying fiber for consumer and  backhaul can be built easily compared an archipelagic country like the Philippines that needs to build submarine cables to connect island-to-island thus needing considerable amount of investments.[kz1] 

4.       They have no issues on the number of cell sites (e.g. US at 300,000 towers). These countries are fully supported by their governments in building the infrastructure needed for their cell sites. Their government recognized the importance of reliable and fast communication in their economic development. The existing red tape right now in the country in securing permits needed in building a cell site hamper our eagerness to build as much and as fast as we want. Without enough cell sites telcos will need more spectrum in order to deliver the high speeds to cope with the rapidly growing usage of wireless mobile services. It’s as simple as that. Problem is all the red tape is hampering the fast deployment of cell sites needed to provide enough capacity layers needed to deliver faster broadband services.

ISOP:  Spectrum Efficiency:

Spectrum should not be allocated based on the current number of subscribers. Following the incumbents’ logic that those with more subscribers should be allocated more spectrum would only exacerbate and perpetuate incumbent’s dominance of the market, lock-out new players, and reward the incumbents’ inefficient spectrum usage or other shortcomings.

Instead, global best practice is to reserve (and keep unused) spectrum for potential market entrants. A good example of which is Singapore (already with one of the fastest Internet speeds in the world), which still reserves spectrum for new players, even providing spectrum to new players at a discount vis-a-vis incumbent.

GLOBE:   We generally agree that spectrum should be assigned based on the high speed users and total mobile internet traffic of an MSP, not just in terms of absolute subscriber numbers. For example, as of the first quarter 2016, Globe had about 70% of mobile internet traffic, supported by a set of frequency resources that is smaller than the other MSP and even smaller than SMC’s. This is the reason why Globe has been requesting the NTC for the past decade to re-allocate the 700 MHz band, especially when it was reclassified from analog broadcast to mobile, and be given its share. Clearly, citizens should have been enjoying the benefits of 700MHz band much earlier.

ISOP: Spectrum Lock-out:

It is possible to deliver excellent wireline (i.e. wired, e.g. DSL, FTTH ) Internet connectivity without any spectrum assets at all. Given their already solid foothold in the mobile market, expanding and improving wireline service is what incumbents PLDT and Globe should have been doing, instead both failed the NTC fixed broadband tests last year.

For new entrants, the story is different. New entrants will need sufficient and properly allocated mobile spectrum for fast roll-out and launch of their services. As the two dominant incumbents already had much more spectrum than many other operators worldwide even before taking-over the SMC frequencies, the 700 MHz spectrum grab not only restrains competition but effectively forecloses it (reduces contestability to zero). Notice should also be taken of the highly anomalous practice of incumbents deciding which fractured bits of spectrum to “return”, purportedly for use by a new entrant.

GLOBE:  For fixed broadband solution, wireline (via DSL, fiber, even cable) is still the most reliable so Globe has recently committed to a major fiber build program nationally. This is the result of an admitted priority serving mobile, which is now the main method of accessing internet. But we agree that overall, internet will be healthier with a more balanced mix of technologies. While there are also challenges in permits and rights of way, these are fewer and easier to overcome than cellsite permit issues.

We have worked with the NTC to surrender useful slices of frequency. Anyone who will implement a network compliant with global 3GPP standards, across 2G/3G/4G and even 5G, can easily use the frequencies that have been returned to the NTC and is now in their possession for disposition.

It is worth noting that the average amount of spectrum bandwidth assigned to wireless operators in the Asia Pacific Region is 401 MHZ. In Europe, spectrum holdings average 460 MHz, while in Latin America only 295 MHz. For the record Globe prior to the SMC deal only had 210 MHz of spectrum, after the deal it now has 340 MHz of spectrum, still way below the average in the Asia Pacific Region.  So to state the Philippine telcos have the most assigned spectrum relative to many other operators is definitely erroneous and incorrect.

We hope the additional information will allow for more positive exchange of views regarding the industry with the joint objective of serving the Filipino consumers.

Sincerely,

Gil B. Genio

Chief Technology and Information Officer

Chief Strategy Officer

Globe Telecom

cc: Arsenio Balisacan

       Chairman, Philippine Competition Commission