Internet Service Provider in the Philippines :

An Industry Analysis

Submitted by :
Jireh Anne O. Agot
Muhammad Yusuf M. Ali
Jerlyn Mae Magsayo
Ryan Felix R. Zamoranos

In partial fulfillment

of the requirements in

APPLIED ECONOMICS

Submitted to: Jerrold P. Ello

Economics Department

Mindanao State University - Iligan Institute of Technology

November 23, 2020

Contents

I) Introduction …………………………………………………………………….…………….3
II) Industry’s Dominant Economic Features ………………………………………..…………..7
III) Porter's Five Forces …………………………………………....…………………..…….....11
IV) Drivers for Change ….………………………………………………..……….….………..14
V) Conclusion ………………………………………………………………….……..………..17
VI) References ………………………………………………………………….…….………..19

List of Figures

Figure 1 : Percentage of IE establishments with computers and communication equipment,

and with internet access by industry in 2017 …………………………….………….6

Figure 2 : Internet Penetration in the Philippines ………………………………………………7

Figure 3 : Philippines: fastest ISPs by download speed 2020 ……………………….…………8

Figure 4 : Philippines Fixed Internet subscriptions …………………………………………….8

Figure 5 : Revenue CAGR by Service Type: 2019-2024 ……………………………………...9

Figure 6 : Service revenue of PLDT by type 2019 ……………………………………...……..10

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Internet Service Provider in the Philippines: An Industry Analysis

I. Introduction

The ​Internet service provider (ISP) is a company that provides customers with Internet

access. It is often referred to as just “the provider.” Data may be transmitted using several

technologies, including dial-up, DSL, cable modem, wireless, or dedicated high-speed

interconnects.

There is strong evidence in the international development sphere that Internet access is a

key driver of economic growth. Between 2000 and 2006, 150 developing countries—including

the Philippines—examined by a World Bank study (2009) had “about a 1.38 percentage point

increase in GDP for each 10-percent increase in [internet broadband] penetration”. A few years

later, Scott (2012) also found that “…a 10% increase in broadband penetration is correlated with

a 1.35% increase in GDP for developing countries and a 1.19% increase for developed

countries.” In the Philippines, the National Economic and Development Authority (NEDA)

stressed the need for robust internet network infrastructure as a critical component in building a

competitive workforce and enabling participation in the global market. High-speed broadband

Internet and coverage throughout the country can provide Filipinos with better access to

economic opportunities.

Prior to the Internet, the Philippines did not have a publicly-available TCP/IP data

network. The various data networks in operation prior to the coming of the Internet were run by

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private companies or groups. The government itself did not even develop per-agency networks,

much less a single integrated infrastructure. Live Internet connections were enjoyed by the

offshore offices of transnational companies. These offices got their access as part of their

connectivity to the companies' private networks. Connectivity for universities, research, and

nongovernment organizations was obtained through batched dial-up connections or by the X.25

network. There were also commercial email providers that operated through long-distance

connections to the U.S. They typically charged for the connection by volume. Since 1986,

hobbyists have been operating bulletin board systems (BBS), which eventually got connected

and formed local dial-up networks. These served as the catalyst for cyberspace developments

since they exposed technical-minded people to the possibilities and trained them in netiquette

and the online way of life. These systems eventually connected to international BBS networks

such as Fidonet, allowing them to receive e-mail and download shareware programs and

informational files.

Why Internet service providers (ISP) needed in the Philippines?

The Philippines is seen as a "potentially significant player" in the global digital market

with 73 million internet users, emerging as one of the world leaders in social media usage.

However, the country remains a laggard in terms of digital adoption. Citing data, only 70 percent

of Filipinos are active broadband subscribers against the 88 percent average in Southeast Asia,

according to the World Bank. Among internet users, only 72 percent had 4G or LTE mobile

broadband coverage versus 82 percent for the region. More dismal is the local download speeds:

mobile connections yield about 7 Megabits per second (Mbps), while fixed broadband speeds

average 26 Mbps. For ASEAN, the average download rates are at 13 Mbps for mobile and 59

Mbps for fixed broadband. Filipinos also pay more despite the slower service they are getting –

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the fourth-highest cost at $6.30 (about ₱315) per 500 megabytes of prepaid mobile connection.

The lender pointed out that the cost of fixed broadband plans here is close to the fees paid in

Singapore and Thailand, home to the fastest internet speeds in the region.

Private sector groups added that connectivity could make or break small businesses, which

have been forced to migrate to digital operations to make a profit. Philippine Franchise

Association president Richard Sanz said that delivery platforms are bound to grow as more

people tap online services during the pandemic, with most member-firms reporting the

downsizing of head offices as they realized the cost savings of letting employees work from

home. However, the concern was that about 30 percent of workers did not have stable internet

and only relied on mobile data connections.

Communication Technology (ICT) plays a significant role in boosting economic growth in

areas where development is needed. Several ICT solutions introduced in the Philippines have

improved access to healthcare, education, employment, and disaster risk reduction, especially in

a country that is an archipelago and prone to natural disasters. However, some of these have

struggled to scale up, due in a large part to poor connectivity. Poor Internet access limits the

potential of technology to deliver better social services, particularly in under-resourced areas

where it is most needed. Thus, better and resilient Internet infrastructure is necessary where ISP's

can deliver in the country.

Figure 1 shows the percentage of IE establishments with computers and communication

equipment, and with internet access by industry in 2017.

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 Figure 1 : ​Percentage of IE establishments with computers and communication

equipment, and with internet access by industry in 2017.

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 II. Industry's Dominant Economic Feature

Figure 2 below shows the internet user penetration in the Philippines. In 2019, 70.7

percent of the population in the Philippines was using the internet. By 2025, it is estimated that

there would be 77.1 percent of the population using the internet. As of January 2020, the number

of internet users in the Philippines grew to 73 million people, accounting for more than half of

the total population. The digital population mostly belong to the age group of 16 years old and

above.

​Figure 2 : Internet Penetration in the Philippines

The Akamai State of the Internet Report for the 2nd Quarter 2016 ranks the Philippines

at 6th out of 15 Asia-Pacific countries with an average mobile internet speed of 8.5 Mbps. Peak

connection speeds also reached a high 105.1 Mbps. Figure 3 shows that as of June 2020,

Comclark provided the fastest internet speed of 22.5 Mbps in the Philippines. Converge ICT

Solutions was the next fastest internet service provider with an internet download speed of 21.4

Mbps.

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 ​Figure 3 : Philippines: fastest ISPs by download speed 2020

Figure 4 below indicates that in 2017, fixed internet subscriptions for the Philippines

were 3.4 million. Fixed internet subscriptions in the Philippines increased from 21,000 in 2002 to

3.4 million in 2017 growing at an average annual rate of 50.95%.

Figure 4 : Philippines Fixed Internet subscriptions

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 Figure 5 presents the total telecom and pay-TV services revenue ($US) in the

Philippines that is set to grow at a compound annual growth rate (CAGR) of 4.09% between

2019 and 2024, mainly supported by the rising adoption of mobile data and fixed broadband.

According to Global Data’s Fixed Communications, Mobile Broadband and Pay-TV Forecast

Packs, fixed broadband will be the fastest-growing segment in terms of revenue. The share of

fixed broadband in the total telecom revenue will increase from 23% in 2019 to 30% by 2024.

The major driver for the growth will be the ongoing investments by the operators such as PLDT

and the government in fiber-to-the-x (FTTx) technology.

Figure 5 : Revenue CAGR by Service Type: 2019-2024

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 Figure 6 below shows the amount of revenue from data and broadband services of PLDT

was about 105.3 billion Philippine pesos in 2019. PLDT is one of the major telecommunications

and digital services providers in the Philippines.

Figure 6 : Service revenue of PLDT by type 2019

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III. Porter's Five Forces

Rivalry of Competitors

Competition among the existing rivalry is high with the highest key players such as

Converge, PLDT, One SKY, Globe Broadband, and RISE compete closely and strongly in the

market. With the PLDT (Philippine Long Distance Telephone Company) as the top provider of

telecommunications services, it hopes to leverage this base through e-commerce and digital

content offerings, standing firm against competitors, especially on Globe’s advance. ​PLDT last

year made another move aimed at raising its online profile: It spent $445 million to acquire a

10% stake in Germany's Rocket Internet, which owns and invests in startups, including

e-commerce websites. This year, PLDT set up a joint venture with Rocket to cultivate Internet

businesses in the Philippines. PLDT is under pressure from Globe, whose subscriber base is

growing and expanding rapidly. Globe’s rapid growth has affected PLDT’s earnings in recent

years. According to Fitch Ratings, the major credit rating firm has predicted that the PLDT will

lose market share to Globe at a 1 percent annual rate.

Threat of new entrants

There is no direct threat of new entrants to the internet industry here in the Philippines.

However, the increasing demand for the internet nowadays makes the internet industry in the

Philippines interesting to have new internet service providers coming outside the Philippines.

The new DITOtell community, a China-based telecommunications company, is described as the

newest telecommunications provider in the Philippines. ​Having agreed to meet a new technical

audit deadline by January 2021, DITO plans to launch as the Philippines’ new third major

operator by March 2021. Given the highly anticipated new internet provider, it is not just faster

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but also a dangerous competitor to the existing companies. It will be the third major telecom

player in the Philippines’ internet industry if the launch is successful.

Threat of Substitutes

The threat of substitutes in the internet industry in the Philippine is low. The other brands

of internet providers are not as big and as widely known compared to big companies like PLDT

and Globe. However, nowadays we are in total need of the internet due to the Covid-19 situation

and the on-going online classes. Many people need the internet, especially the cheaper ones that

can be afforded by the less fortunate in terms of economic status.

Bargaining power of customers

The bargaining power of customers could be rated as strength as buyers need internet

connections in their places. The information spread about the easy accessibility of the internet

done by a company can increase the bargaining power of customers. Internet providers give

changes and visions to customers to increase the number of customers and lower the bargaining

power of suppliers.

The buyers of the top internet providers in the Philippines can always be happy with what

the companies are doing. They can always criticize the price and services being offered and in

return a better improvement for the customers. Internet industry products and services may not

be replaced right away but the buyer has the choice to terminate the contract if a certain internet

provider company cannot reach the expectations of quality and standards of the clients.

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Bargaining power of suppliers

The bargaining power of suppliers could be low as internet providers in the Philippines

are in a strong deal in their price negotiation in their products and services. And also, the price is

very high and not directly proportional to how good the services work. Suppliers can hold on to

these customers because buyers may do comparative shopping but it is still the same in terms of

price, which makes the supplier's bargaining power low. And also, internet providers in the

Philippines inhibit the ability of suppliers to offer high-quality products and more unique or

improved services.

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IV. Drivers for Change

​The telecommunications industry is changing rapidly, influenced by technical advances

and light-speed innovation. It is also an industry that constantly redefines its boundaries, creating

enormous potential for development for communication service providers (CSPs) where internet

service providers (ISP's) belong to. However, new challenges emerge, both identified and

unknown, as CSPs broaden their partner network to offer revolutionary new services and

introduce new business models. This future in telecoms is formed by major forces: ​5G,

NFV/SDN, Rise of Internet of Things (IoT), Artificial Intelligence and Machine learning, and

Value-added Managed Services​ (Resende, 2019).

The first two forces, 5G and NFV/SDN reforming network infrastructures will help

pave the way to the promise for faster data speeds and better and wider connectivity especially

here in the Philippines. Network functions virtualization (NFV) capabilities will enable network

slicing, the architecture that will allow multiple service levels and custom-made services to be

offered to vertical industries. While software-defined networking (SDN) provides the ability for

CSPs to dynamically collaborate with a wide partner ecosystem. Together, these innovations

would boost network reliability to provide the high-value, differentiated networks promised by

5G.

The rise of the Internet of Things (IoT) indicates a significant growth potential for

CSP's According to Gartner, the number of connected things in use this year alone is predicted to

hit 14.2 billion, and then grow to 25 billion by 2021. Many of these connected things will be

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enabled by a complex web of partners and service providers, opening up new avenues for risk,

including fraud and revenue leakage.

As technology advances, the massive volume of data that we have at our fingertips

continues to expand. The exciting aspect of technologies, such as Artificial Intelligence (AI) and

Machine Learning (ML), is a greater ability to learn from this vast amount of data and to identify

patterns and trends for better-informed decision making with limited human or manual

intervention. In today’s digital environment, there are greater security risks. Service providers

utilizing AI and ML, particularly ISP's, will have a greater ability to predict, identify and

mitigate these risks in real-time.

Lastly is the Value-added Managed Services. Intense competition, demanding

consumers, emerging technology, regulatory barriers, and declining margins are placing

immense strain on the telecommunications industry. In order to survive these challenges, CSPs

are implementing new technology and methodologies to develop their activities and business

processes. In order to improve market success in this transformative period, many service

providers focus on outsourcing such services to established partners in order to take advantage of

flexible, innovative technology and expertise that could be too costly, too difficult to access, and

too time-consuming to develop in-house. The outcome is predictable, efficient, and agile

operations with accelerated ROI and decreased risk exposure.

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 Although there is an immense level of pressure on CSPs and their networks, the

future of this industry is full of prospects for market expansion, sales development, and

outstanding customer support.

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 V. Summary and Conclusion

Internet access is an important enabler for improving economic growth, as well as social

services like healthcare, education, and better access to economic opportunities. As the

Philippines adopts into the modern world of technology, it's very evident that the Filipinos have

a clear need for greater Internet access in the country. In which, Internet service providers (ISP )

play a crucial role in providing such service.

The demand for internet services is rapidly increasing. It's already forecasted that the

number of internet users in the country will grow 77.1 % of the population in the succeeding

years. Offering an average mobile internet speed of 8.5 Mbps, the total internet subscriptions are

growing at an average annual rate of 50.95% from 3.4 million in 2017. The higher number of the

fixed subscribers, the higher revenue it would contribute to the country's GDP.

Assessing the industry, the competition among the existing rivalries is high. On the

other hand, there is no direct threat of new entrants to the internet industry here in the Philippine.

Nonetheless, the increasing demand for the internet makes the internet industry in the

Philippines interesting to have new internet service providers from other countries. The threat of

substitutes is low. The bargaining power of customers could be rated as strength as buyers need

internet connections in their places. While the bargaining power of suppliers could be low as

internet providers in the Philippines are in a strong deal in their price negotiation in their

products and services.

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 The development of new technologies and innovations for strong and wide internet

access can make a significant impact on the potential growth of the industry. However, the

intense competition, demanding consumers, emerging technology, regulatory barriers, and

declining margins are placing immense strain also in the industry.

The current state of the internet in the Philippines calls for urgent and substantial

improvements for the digital economy to play a key role in the economic recovery especially in

this time of crisis. Therefore, the government should act fast in relaxing regulatory rules and in

allowing more internet service providers to enter and develop the local broadband market to

boost connectivity and make the service more affordable to all consumers in the country.

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VI. References

Akash Agamya. (2012, September 2). ​Porters five force analysis for telecom industry​.

Slideshare.net.

https://www.slideshare.net/AkashAgamya/porters-five-force-analysis-for-telecom-in

dustry

GlobalData​. (2020, March 6). GlobalData.

https://www.globaldata.com/mobile-data-services-and-fixed-broadband-to-drive-tele

com-service-revenue-growth-in-philippines-through-2019-2024-says-globaldata/

João Resende. (2019). ​Five Forces Driving the Telecom Industry | Mobileum.​

Mobileum.com. ​https://blog.mobileum.com/five-forces-driving-the-telecom-industry

Key Framework: The Five Forces of Industry Competitive Advantage.​ (2020). Github.Io.

https://saylordotorg.github.io/text_information-systems-a-managers-guide-to-harnes

sing-technology-v2.0/s06-04-key-framework-the-five-forces-.html#:~:text=In%20m

arkets%20where%20commodity%20products,shifts%20bargaining%20power%20to

%20sellers​.

MINORU SATAKE, Nikkei staff writer. (2015, September 11). ​Rivalry drives top

Philippine telecom company’s digital buildup​. Nikkei Asia; Nikkei Asia.

https://asia.nikkei.com/Business/Rivalry-drives-top-Philippine-telecom-company-s-

digital-buildup

PH needs reliable, cheap internet heading into new normal – World Bank.​ (2020). Cnn.

https://www.cnnphilippines.com/news/2020/6/9/World-Bank-fast-cheap-internet.ht

ml?fbclid=IwAR1NS3wM7s289bw1sAm8qCGoLfbHLdmF1d4tsLZCODqkBf3tG6

DANq-oHng

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Philippines: fastest ISPs by download speed 2020 | Statista.​ (2020). Statista; Statista.

https://www.statista.com/statistics/1117074/philippines-fastest-internet-service-prov

iders-by-download-speed/

Philippines: internet penetration rate 2017-2025 | Statista​. (2017). Statista; Statista.

https://www.statista.com/statistics/975072/internet-penetration-rate-in-the-philippine

s/

Philippines: service revenue of PLDT by type 2019 | Statista​. (2019). Statista; Statista.

https://www.statista.com/statistics/1054920/philippines-service-revenue-pldt-by-typ

e/

Vaughan O’Grady. (2020). ​Developing Telecoms​. Developingtelecoms.com.

https://www.developingtelecoms.com/telecom-business/operator-news/10097-dito-s

elects-partner-for-philippines-rollout.html

World Data Atlas. (2019). ​Philippines Fixed Internet subscriptions, 2000-2019 -

knoema.com.​ Knoema.

https://knoema.com/atlas/Philippines/topics/Telecommunication/Telecomm-Service

s/Fixed-Internet-subscriptions

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