Mr. Ernest Cu, President and CEO of Globe Telecom, sat down with The Worldfolio to discuss infrastructure investment in the Philippines and the evolving telecoms landscape in the country
What is your opinion on the new government’s measures such as the 10-point economic agenda and their importance to sustaining the economic growth the Philippines is currently experiencing?
What the government is doing is fine. I see nothing wrong with their focus on infrastructure, and it is actually a win-win situation. This results in investments coming into the industry and life conditions here are improving. As you can see, every piece of government infrastructure in the country is challenged. Whether it be in Metro Manila or in other cities, there is heavy traffic and no mass transportation. Therefore, infrastructure is a “no brainer” development that is needed and in fact, I wish the developments could happen faster.
As to making the Philippines more attractive, the government should really work on bureaucratic system that is hindering potential investors or discouraging individuals to put up big businesses. Recently, another layer of bureaucracy has been added to the current setting through a new agency called the Philippine Competition Commission. This means that any investment greater than a billion will be inspected—a process that becomes a lengthy ordeal.
What are, in your opinion, the already existing fundamentals that make the Philippines attractive to countries like China and Japan today?
FDI will actually be impaired by the bureaucracy making business transactions more tedious than it should be. For example, you can only accept FDI in the Philippines if it is below USD 20 million. With these limits, how can one build a port or a subway? If every investment over a billion pesos will have to be reviewed and inspected, it seems like it is worse than an SEC or the PSE listing.
Having a very large population, as compared to other Southeast Asian nations, the Philippines becomes a very good market for foreign investments. However, there are impediments such as foreign ownership with limits, bureaucracy, or lack of infrastructure. The latter however may be seen as an opportunity on their end. The infrastructure shortcomings of the Philippines may be considered by international investors as a good chance to enter here.
In terms of telecom infrastructure, having only two companies contributing to it, increasing competitiveness is going to improve the prices but not necessarily the infrastructure. The less players there are, the easier and safer it actually becomes for investors to enter and develop infrastructure. Do you think bringing in a third or fourth competitor will be more beneficial to the prices or the infrastructure?
It is more of the former, the price. First of all, there is the need to understand where the real problem in telecom infrastructure lies. It is not in our willingness to invest. If you look at the capital expenditure to revenue ratio of the two major telecom companies, it is one of the highest in the world. Typical CAPEX to revenue investment ranges between 15-20% only, but for the major telecom companies in the country it is close to 30%. Despite this, we still need more.
Imagine if your CAPEX to revenue ratio for a scaled company (i.e. Globe) is 30%, what is it going to be for a start-up company? Second, the start-up will also have to build. Building a cell site within the Philippines is actually one of the most difficult in the world. As for our country, an average of 25 permits taking 48 months per cell site is required.
These requirements by the way are not national; they are imposed by the local government units. In this country, the national government cannot control the LGU. DICT secretary Rudy Salalima is trying to do it, and I hope he succeeds. He listens to our needs and makes the right statements regarding this matter.
Another thing about telco is scale. It is a scale business wherein it should get to a particular scale to acquire profitability. Without this profitability, one will not be able to achieve CAPEX. There is a reason why telecom companies in India decreased from 12 to 4. Similarly, in the United States, there is a reason why T-Mobile and Sprint are now talking about merging—because the companies are unable to make it work. Only AT&T and Verizon are stable—if you think about it, it is a duopoly as well.
Telecommunications is not really an industry meant for many players. The Philippines began with seven in the 1990s. Now, there are two. Briefly, there were three but it was eventually acquired because of profitability problems.
Being accused many times of being a duopoly, there is the notion of Globe offering services at a higher cost. In reality, you mentioned that Globe is implementing various promotions to make the cost lower. From a “net” stand point, how does it compare to other regional actors?
From a regional level, I believe we are one of the companies offering the lowest per gigabyte mobile data pricing. Fixed line is a completely different story. On the mobile data aspect, we believe that our pricing is just and is at the lower quartile in Southeast Asia.
This is another fallacy towards a duopoly—people think a duopoly is unable to price in a competitive manner. However, if the prices of Globe are not competitive, we could not have gained market share. In a non-competitive market, market shares are stable. In a highly competitive market, Globe has gained over 20 percentage points in seven years. Historically in the telco industry, no one has replicated this growth as a challenger for the number one spot. Thus, I take it negatively at times when people say we are a duopoly. It is not.
For me, a duopoly exists when prices and market shares do not change. Both companies are happy where they are, and none of the two companies will do anything to change it. If it were a true duopoly, we would keep increasing the prices and stop investment. However, when a firm’s CAPEX is close to 30% of revenue, prices are constantly going down, and the companies are fighting for market shares; it is certainly a very competitive environment where no true duopoly exists.
In terms of international price comparison, the United States is actually one of the most expensive markets. Their prepaid sim is approximately USD 60 a month for 1 gigabyte. As for the Philippines, Globe specifically, our cheapest bulk plan is PHP 999 (around USD $20) with 8 gigabytes of mobile data. If you want to go even lower, the best plan is the GoSurf50 which is 1 gigabyte lasting for three days for only PHP 50—this is also inclusive of texting. It is not at all expensive.
For broadband fixed line, it is more expensive because the audio costs here may be more expensive but also because there is no scale yet. Look at the internet speeds, people are focusing now on home speeds being slow, but there is no one saying that our mobile internet service is slow.
Europe, in comparison could be worse. We are talking about a competitive market that has been driven down. There are very few cities that have LTE in Europe. Go outside of Rome and Milan, it is all 3G connection. In the Philippines, go outside of Metro Manila (i.e. Laguna) you still have access to LTE.
Given that nothing is going to replace fibre and yet wireless connection could alleviate the home internet speed problems, is deploying the technology Massive MIMO among the strategies of Globe?
It is a strategy. Some homes will not need 10 or 20 Mbps, or beyond this speed. For homes with small families, this is actually more than enough. Moreover, investments in developing fibre lines are so much higher than wireless connection. Given that we have more prepaid consumers, it is a practical strategy to deploy technology like massive MIMO.
Therefore, the strategy of Globe is not only to take it to wireless but take it where the demand is. We are tailoring the infrastructure depending on the demand to make the capex efficient.
We see that Globe has been partnering with foreign player such as Jack Ma to diversify its services and portfolio. Could you tell us more about your diversification into Fintech and other subsectors and why it is important for the Globe Telecom to keep innovating?
What we do at Globe is to truly understand what our assets are and right to play. If you look at telco by itself, it should be going global because it is just a product that will flow through our distribution system. The Globe distribution system is a very robust system, having one million points where you can buy prepaid credits and more than 300 stores with a retail footprint. We also have a very good marketing machine.
Another factor is data. We have sheer amounts of data about our consumers both anonymized and specific. Putting these together we are able to infer on areas where we can play. Financial inclusion is another consideration—looking at consumer needs. 86% of the population is unbanked, we have the distribution to reach them, and we have the data to analyse, to get credit ratings and scoring. So, it became a very interesting business for us that we have been playing around for the last eight to ten years. Now, we finally realize it is time to scale up.
If you look at it from the perspective of being a retail footprint, distribution footprint, and a good marketing channel—what else can we flow into this pipe? This is how we see our business, because if you only focus on telco, you only have one product—data. It is going to be like an electrical distributor, how uninteresting is that for a company that is a consumer brand.
That is why we tried to repurpose our distribution system into many different things. This is also the reason why content flows through it now. If you look at Globe, it is a conduit for Disney, NBA, and Netflix. Among the opportunities is to become a conduit for financial services, data analytics service, or marketing services. We need to think of our business in an innovative manner because sooner or later, call and text may be gone.
What is your approach or strategy in terms of attracting content partnerships and finance-related deals as well?
On the fintech side, the opportunities are what I have already mentioned such that there are only 2% who have credit cards and 86% without bank accounts—the opportunity lies in there. Make cash ready.
In China, we can see very quickly how things could change when they used cards for people to eliminate cash and everything becomes more convenient. The market is getting ripe for this phenomenon as e-commerce comes into play. In the Philippines, can you imagine e-commerce companies service their deliveries on a COD, or cash-on-delivery, basis. At the same time, banks are hesitant to give out coins—you will have to pay for them. It is very difficult. Retailers are scrambling to get coins to give out as change. Coins are actually the most inconvenient medium of payment.
So, we want cash to be ready. That is why we chose a partner like Alipay who will help us bring the investment here into the Philippines. Today, we have less than a million active users and we want to achieve 20 times this number with five years. We want to turn merchants into e-pay recipients without the need of a POS. The vision is to have a street vendor and a usual department store to have the same capability of accepting payments.
This technology could then eliminate the vendor’s burden of dealing with cash every day. In relation to this, Globe will also be able to retrieve data regarding payments received. This data coupled with the vendor’s telco loading could then be used by Globe as credit scores to lend the vendor more working capital to help in the business. Just think about the power of this strategy, which by the way we are already doing. This creates a new business.
On the content side, it is a different strategy. We notice a major shift going on with regard to consumer habits. Nobody watches linear TV nowadays. At least for young individuals 25 years and below, there is a very limited portion of those who watch linear TV. So, what we are doing is that we are positioning ourselves to be the supplier of the video retailer of homes. This is because cable companies in the country have no capex and the technologies they are involved with are stuck—satellite technology is going down.
With this change, we aim to take the revenue per user (RPU) that is coming from cable and take it into broadband. To be able to do this, we need to bring a lot of content to bear. For example, we want to bring the content of Netflix to more segments. Thus, we need to integrate Filipino content into it. The problem with this is that Filipino content is controlled by large cable companies. So, there is no Filipino content available for Netflix.
To address this challenge, we have created Globe Studios. This studio supports independent film producers to prosper in this country. We are trying to reignite local filmmaking through sponsoring their projects that we can now present to our partners and eventually include in Netflix. We have one tv series and a few movies in production for this matter. From being merely a telco company, Globe is strategizing and incorporating content creation as a media company.
Given that the government wants to attract more macro scale manufacturers and added value manufacturers, the need for a stronger telecommunications infrastructure arises. Does Globe have the capacity to address the need of these manufacturers to help in their operations?
There is no issue building and providing telecom to those places. Imagine today, we are building a DSL cloud and the highest state-of-the-art submarine cable among others in Davao. First however, we need to convince people to go to this place. Globe does not mind following the people, we would invest where the people will go. It is not a problem. We are committed to either building first and the people will come or let the people come first before we build. Globe can certainly address these needs. Most of the backbone we have in the Philippines is already built. We have two to three backbones and we are working on the last mile of it. All of these are connected in rings. Hence, the national broadband plan. We have lobbied very heavily on asking DICT not to build the backbone anymore since Globe has three and PLDT has two, what we need are the spurs.
The kind of infrastructure that the company needs in terms of telecommunications is one that could reach even the most isolated places in the country. Sulu for example has poor internet connection because it is 120 kilometres from Mindanao, the area is less developed, and there is low revenue per user in the population. To get Sulu connected, a submarine cable is needed thus, it is the job of the government to provide the submarine cable and all else, then telco companies will just lease.
What are the possibilities of partnering with regional counterparts in the telco industry coming from Japan and how do you see them cooperating with your endeavours in the industry?
We have one current Japanese partner which is NEC. We do very little in Japan as far as telco is concerned but we are open to discussing possible partnerships with them.