Will the recent PLDT acquisition of Digitel (Sun) lead to better benefits for the general public in terms of the telecommunications aspect? How will it affect overall competition in the industry? This Policy Note examines the situation more closely.competition, Philippines, climate information, communication, telecommunications sector, telecommunications companies, mergers and acquisitions

Aldaba, Rafaelita M.

English

Research Papers in Economics

PLDT-Sun acquisition: good or bad?
Rafaelita M. Aldaba
Philippine Institute
for Development Studies
Surian sa mga Pag-aaral
Pangkaunlaran ng Pilipinas
Policy Notes
No. 2011-08 (April 2011) ISSN 1656-5266
PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-
tain policy issues. The treatise is holistic in approach and aims to provide useful
inputs for decisionmaking.
The author is Senior Research Fellow at the Institute. The views expressed are
those of the author and do not necessarily reflect those of PIDS or any of the
study’s sponsors.
For more than half a century, the country’s
telecommunications sector was dominated by a
private monopoly, the Philippine Long Distance
Company (PLDT). During this entire period, the
Philippines’ telecommunications sector was in a
dismal state as indicated by the long waiting
time to own a telephone which at worst took
more than 10 years. Due to underinvestment in
the sector, a huge telephone backlog existed,
telephone service was generally unavailable, and
where it was, the quality of service was unreliable.
A history of dominance
All these changed with the opening up of the
telecommunications sector in the late 1980s up
to the early 1990s. The entry of new players led
to rapid growth in the industry as foreign
investment increased and new services emerged.
However, despite the entry of new players, PLDT
continued to dominate the industry due to its
ownership of the backbone network and to its
largest share in the total number of fixed lines.
Being the owner of the domestic backbone
system, PLDT was able to influence not only the
speed but also the terms and conditions for
interconnection as well as terms and conditions
for revenue-sharing arrangements.
As this developed, First Pacific bought control of
PLDT and consolidated its position in the
Philippine telecommunications industry by
synthesizing the operations of PLDT and First
Pacific’s Smart, the leader in the cellular phone
market. During that time, Smart and Piltel (PLDT
subsidiary) had a combined share of 68 percent
of the total number of cellular telephone
subscribers while PLDT and Smart together
accounted for 43 percent of the total number of
installed lines. The merger of the dominant firms
in the fixed and mobile markets reinforced PLDT’s
position with its combined telephone and cellular
phone subscribers of 3.87 million accounting for
48 percent of the total number of telephone andPN 2011-08
2
Policy Notes
cellular phone subscribers. With this strategic
move, PLDT has retained its market power.
After the consolidation, two companies, PLDT-
Smart, along with Globe, emerged as the
formidable telecommunications companies in the
country. Competition was muted as the two
telecommunications giants offered basically the
same prices for their services. For instance, text
messages cost P1 each. In 2003, Sun Cellular of
Digitel entered the market and started offering
24/7 unlimited call and text messaging. The top
two incumbent companies immediately charged
Sun Cellular of predatory pricing and filed
separate petitions before the National
Telecommunications Commission (NTC) to stop
Sun Cellular’s service and fix call rates at P5.50
per minute and bar Sun from charging much
lower rates. After the NTC ruling in favor of Sun,
Smart and Globe also offered fixed rate or
“bucket” plans for voice and text services. Smart
and Globe were forced to apply restrictions after
experiencing network congestions during peak
times and even resorted to suspending their
promotions during holiday seasons.
Intensifying competition with third
party entry
Overall, after the entry of Sun Cellular,
competition in cellular mobile service has
become intense. The telecommunications
companies (telcos) have continued to fight for
market shares largely focused on unlimited plans
and aggressive bucket offers such as Globe’s
Super All Txt 20 which, for P20 a day allows a
subscriber to send 200 text messages to any
network (P0.10/SMS). Globe’s Unli Txt All Day
allows one to send unlimited text messages to
Globe/TM subscribers for one day. Smart Buddy’s
AllTxt Combo Plus at P25 gives a subscriber 100
text messages to another Smart subscriber, 10
texts to other networks, plus five minutes of
calling. Sun Cellular’s P25 Superloaded Call and
Text Unlimited has free 30 minutes of mobile
internet on top of unlimited Sun-to-Sun calls
and 10 texts to other networks. Its Sun TextALL
at P15 a day enables a subscriber to send 150
text messages to any network.
While traditional revenue sources like
international and national long distance (IDD
and NDD) calls are already on a decline, demand
has been strong for new revenue sources such as
broadband Internet services whose prices have
also been declining due to unlimited plans and
bucket offerings. For P50 a day, a Globe
subscriber is given unlimited access to the
Internet using a Globe Tattoo Broadband USB or
mobile phone for one day. Smart also offers
unlimited mobile surfing for P50 per day while
Smart Broadband has its unlimited Internet
access promo at P200 for five days. Sun
Broadband prepaid has a similar offering (one
day unlimited for P50).
With intense competition, the telcos’ margins
have come under pressure even as demand for
more network services increased. PLDT Chairman
Manuel Pangilinan pointed out that while daily
outbound text messages increased from 800–900
million to 1.2 billion, yields declined from 18
centavos to 13 centavos/text. In 2010, revenues
from cellular data/text dropped by 13 percent to
P31 billion despite a 25 percent increase in text
volume.1 Globe’s postpaid average revenue per
______________
1 M. Reyes, “A year of changing dynamics,” Philippine Star,
(30 December 2010).PN 2011-08
3
Policy Notes
unit (ARPU) fell to P1,168 while Smart's
postpaid ARPU remained steady at P1,257
(Business Monitor Quarter 3 2010).
With mobile telephony now already considered a
mature industry (cellular penetration exceeding
80%), broadband Internet services are expected
to be the sector’s new growth driver. According
to Business Monitor International, Smart and
Globe continued to report strong growth in their
broadband business segment. Total broadband
subscribers for the two operators crossed the 2
and 1 million mark, respectively, and wireless
broadband take-up is the main subscriber
growth driver for Smart and Globe.
Redux: reconcentration of market
power – will it benefit the public
welfare?
It is amid this setting of falling revenues in
cellular services (an industry segment nearing
maturity) but with high prospects for broadband
Internet services (another segment which is still
in its infancy and expected to compensate for
the decline in cellular revenues) that PLDT has
recently acquired Digitel. The deal would result
in a duopoly with PLDT’s Smart, Talk N’Text
(Piltel), Red Mobile (CURE), and Sun (Digitel),
on the one hand, and Globe Telecom and Touch
Mobile (TM) on the other. PLDT now controls 70
percent of the total cellular subscribers while
Globe controls the remaining 30 percent (Table
1). Digitel has 400,000 broadband subscribers
to be added to PLDT’s 2 million subscribers.
   
How will this reconcentration in the industry
affect overall welfare? It is important to
distinguish between welfare-enhancing mergers
and acquisitions (M&As) and welfare-
diminishing M&As. In the former, M&As between
firms can be an effective way of developing
competitive advantage, optimizing the benefits
of complementary strengths, and taking
advantage of economies of scale and scope.
M&As can also work as an important discipline
upon poorly performing management. All these
could lower the operating costs, for instance, of
PLDT. Thus, the M&A activity can improve
efficiency to the benefit of consumers and the
country in general. Existing Sun subscribers can
benefit from PLDT’s wider network coverage.
Smart can also expand its network capacity if it
is able to use Sun’s 3G frequency which could
lead to less network congestion and improved
wireless connectivity. Note that radio spectrum is
an essential input for wireless telecommunications
such as mobile telephony or wireless internet
access. Access to this essential resource is
restricted to those owning a license.2 Three of
______________
2 Licenses for using radio spectrum are applied due to a
negative externality: too many firms broadcasting on the
same frequency range may cause mutual interference
degrading signal quality.
Table 1. Number of subscribers and percentage shares:
2009 and 2010
Telco Number of Cellular % Share prior to % Share after
    Subscribers     Acquisition   Acquisition
2010 2009 2010 2009 2010
- Globe  14.4 13.8      
- Touch Mobile 11.8 9.3      
Globe, subtotal 26.2 23.1 29.8 31.1 29.8
Sun 16 10 18.2 13.5  
- Smart 25.7 24.2      
- Talk ‘N Text 19 17      
- Red Mobile 0.95        
Smart, subtotal 45.65 41.2 52.0 55.5 70.2
Industry Total 87.85 74.3PN 2011-08
4
Policy Notes
the four 3G3 licenses awarded by NTC are now
owned by PLDT (Smart, Sun, and Connectivity
Unlimited Resource Enterprise, Inc. [CURE], a
new player which was eventually bought by
Smart in 2008).
On the other hand, however, M&As can result in
a decline in the number of players in an
industry, at least in the short run. In some
cases, particularly where there are significant
barriers to entry, M&As can lead to increased
industry concentration and increased market
power which may run counter to national
welfare. It is not easy to enter the industry due
to existing barriers such as a separate franchise
requirement for each  telecommunications sector
as well as constitutional restrictions limiting
foreign participation to 40 percent. Obtaining a
congressional franchise is difficult and costly,
apart from the need to have political influence.
Moreover, access to radio spectrum is another
constraint for new entrants, especially if this is
concentrated in the hands of only one player.
Until these entry barriers are addressed,
competition will be limited and the industry
would continue to reap oligopoly rents.
Recommendations to ensure
competition and welfare
improvement
To ensure that mergers and acquisitions do not
create or enhance market power which can
damage emerging competition, it is necessary to
remove barriers to entry and have laws and
policies that would ensure market contestability
and regulate anticompetitive business conduct
or practices. For instance, in the US, Japan,
Korea, and Singapore, mergers and acquisitions
are controlled when they tend to stifle
competition substantially or to create a
monopoly. Substantive assessment of mergers is
conducted using important criteria such as
market structure and efficiency arising from the
merger or acquisition. The industry regulator NTC
said it would review the acquisition.
If effective competition has to emerge, the
government must pursue regulatory reforms
toward the creation of competitive market and
industry structures. Regulatory barriers include
the need for Congressional franchise, foreign
equity limitations, and access to radio spectrum.
Given these high entry barriers along with the
absence of effective competition law, the recent
acquisition of Sun might pose some risks for
competition. Past experience shows how PLDT
behaved in the face of increased competition
from new entrants. Without effective competition
laws acting as safeguards for fair competition, it
may be difficult to control mergers and
acquisitions, particularly those that lead to
substantial increases in industry concentration.
Along with the difficulties posed by the high
barriers to entry, the PLDT-Sun deal may endanger
both competition in the industry and any
welfare improvement arising from the deal. 
For further information, please contact
The Research Information Staff
Philippine Institute for Development Studies
NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City
Telephone Nos: (63-2) 894-2584 and 893-5705
Fax Nos: (63-2) 893-9589 and 816-1091
E-mail: raldaba@mail.pids.gov.ph; jliguton@mail.pids.gov.ph
The Policy Notes series is available online at http://www.pids.gov.ph. Reentered
as second class mail at the Business Mail Service Office under Permit No. PS-
570-04 NCR. Valid until December 31, 2011.
______________
3 3G technology provide high-speed data transmission and
support multimedia applications such as full-motion video,
video conferencing, and Internet access, alongside
conventional voice services.

PLDT-Sun Acquisition: Good or Bad?

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PLDT-Sun Acquisition: Good or Bad?

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