Telco

There is so much hope pinned on the entry of a third major player in the telecommunications industry – but also so much doubt.

The past few days, DITO Telecommunity Corp. seemed to be making headway in its effort to become a worthy challenger to the so-called “duopoly” dominating the industry. After a few months of delay due to the pandemic, the company passed the first technical audit of its progress. The company also managed to win a deferral of the renewal of its existing franchise – paving the way to securing a clear 25-year franchise when it is indeed renewed.

Delay in the conduct of the technical audit enabled the company to catch up on the timeline it agreed to under pain of large fines. The audit found the DITO network capable of delivering broadband speeds of 85.9 megabits per second for 4G and 507.5 megabits per second for 5G.

This is encouraging. It is many times faster than the presently available speeds we get from the existing providers. If our economy is to be competitive with our neighbors in the region, we should have the broadband speeds they make available to their people.

The whole purpose of government support for the emergence of a third major player in the telco industry is to induce competition. The only way DITO Telecomunity can survive is to offer services constantly better (and hopefully cheaper) than the two other players.

This is a tough challenge. Telecommunications is a capital-intensive business. The technology is rapidly changing – and so are the performance standards. Setting up a third network against the established players required a large initial investment in cutting edge technology, thousands of communications towers and the best engineering expertise available.

On the other hand, given the vagaries of future-proofing technology, return on investment is not certain. It required a certain amount of grit and financial muscle to actually venture into the role DITO now finds itself in.

DITO announced it would begin rolling out its services in Mindanao in a few weeks. That will be the first real test of the network it has been building over the past couple of years. It is also a test of the capacity of the domestic market to support this giant enterprise, given the economic distress we now endure arising from the pandemic.

Some doubt over the financial viability of DITO was raised after the Edmond de Rothschild-ASEAN Equity Fund group divested its 2.3 million shares in DITO-CME in September 2019. As a result, the venture was forced to scramble for financing.

The Udenna Group, Filipino partners of DITO, encountered financing shortfalls. Chelsea, an Udenna subsidiary, sought a guarantee from the Philippine Guarantee Corporation, to cover a fresh P700-million loan. This indicates the borrowing had breached the single borrower’s limit. This limit is intended to protect lenders from overexposure to business risks.

Currently, DITO has only P20 billion in equity against P150 billion worth of debt. The enterprise is overleveraged.

DITO is trying to borrow money from the Bank of China on top of the $500-million debt it already holds. This could draw Chinese bank regulators into the matter to reduce risk exposure to a start-up business.

If Bank of China extends additional loans, this will enlarge Chinese influence over a business enjoying only a thin majority to comply with our constitutional requirements. As things stand, much concern has already been expressed about the national security considerations surrounding this enterprise.

Recall the controversy sparked when the AFP allowed DITO to construct its communications towers inside its camps. Irresponsible voices raised the specter of electronic espionage made possible by the physical location of the towers.

As DITO begins rolling out its operations over the next few months, it will have to rely on Chinese engineers (at least at the outset) to man its systems. There is simply not enough ready Filipino talent to fill out its ranks. Expect the political groups that trade on xenophobia to make a big deal of this.

The next technical audit of DITO compliance with the timetable it committed to will be next July. This next audit will look more comprehensively at five basic resources indicative of how the enterprise is moving forward: financial, human, spectrum, base stations and equipment.

Of these, the most critical will be financial capacity. Much more financial resources are required in the coming months to complete the nationwide broadband system the company committed to build.

It does not help that the timetable for accomplishing this is truly compressed. Government, anxious over how much our digital capacity lagged behind our neighbors, wants a fully operational third player at the soonest possible time.

It also does not help that a large part of our business community thinks the Udenna Group has expanded its businesses too quickly over the past few years – to be fully viable. That adverse assessment is reinforced by rumors weeks ago that Phoenix Petroleum, centerpiece of this business group, is up for sale.

We do have a business community notorious for its conservatism and suspicious of businessmen who seem to be in a rush to grow their enterprises.

Notwithstanding, we do need as much new broadband capacity as we could get. We need as much competition as possible to ensure our consumers get the widest access at the lowest price. The theory that guides government policy encouraging the entry of a third player is that this will prompt competition.

The bar for the new player is raised as the existing players rush their own upgrades.