National College of Business and Arts

Taytay. Rizal

THE EXISTING OLIGOPOLY OF LOCAL TELECOMMUNICATION

COMPANIES IN THE PHILIPPINES, THE THREATS IT FACE,

AND ITS IMPLICATIONS ON THE INTERNET SERVICE

A Term Paper Presented to the

National College of Business and Arts

In Partial Fulfilment of the Requirements

For Senior High School in the

Subject Applied Economics

Ressureccion, Josias M..

Mabazza, Stephanie M.
Rellosa, Adrian Clark A.
Rodrigo, Mark Ryan M.
Kho, John Timothy G.

January 2018
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Chapter I
INTRODUCTION

The Philippine telecommunications industry has long been dominated by an

oligopoly. The top 2 largest telco companies, PLDT and Globe, are both fighting to be the
country’s number 1 provider of telecom services. Many small telco providers have
entered the market but only offer limited services, unlike those of the big players.

PLDT or the Philippine Long Distance Telephone Company is the largest and
most known telecommunications provider in the Philippines. It was founded through the
Act 3436 in 1928 to establish a nationwide telephone network. It was nationalized during
the term of President Marcos and was later re-privatized. It was later renamed to PLDT,
dropping the “long distance telephone” from its name as it shifted into providing newer
services. It also acquired Digitel, hereby expanding its grip on consumers nationwide.
PLDT remained the top telecommunications provider in the Philippines by the number of
subscribers according to Rappler.

Globe Telecom fiercely challenged PLDT in the industry as they offered matching
services and continued to develop plans and products and significantly boosting its
customers. It focused on the growing trend of postpaid plans, which brings in more
revenue per subscriber than its competitor. However, PLDT still has the lead in the
number of postpaid subscribers.

Since the growth of social media and the development of Internet continue to
prevail in the market, it starts to replace the SMS or short message service, commonly
known as “text”. With this, the duopoly provided the market with its own products plans,
all of which uses the Internet. The telco providers brought out broadband plans, LTE, 4G,
and other data products which enables the user to use the Internet.

However, despite the large number of consumers of Internet plans and mobile
communication services here in the Philippines, Internet connection remains a problem as
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the country is reported to have one of the slowest Internet connections in the world. The
problem roots out from the telco industry being dominated by a duopoly, which dictates
the price and quality of service consumers get.

The Internet here in the Philippines costs an average value of $19 per mbps,
exceeding the global average cost of $5.21. This ranks Philippines as one of the countries
with the most expensive Internet (61st out of 202).

Under the Duterte administration, he planned to solve this internet problem by

inviting foreign telecom companies to become the other players in the market. By
changing the market structure from an oligopoly to a perfect competition, consumers can
expect to have more flexible, cheap, and fast internet services. The existing duopoly has
no choice but to level with this new telcos and they will have to adjust their current
product plans. Consumers will have more bargaining power and no doubt that the quality
of service will increase.

However, under the Philippine Constitution, foreign companies are restricted from
having full ownership of strategic industries, in this case, a telecom company. The
Constitution states that Filipinos should own about 60% of the company, while the other
40% are open for ownership for foreign investors. This provision limits foreign
companies from entering the Filipino market.

The Philippine Government has been eyeing out companies from China,
especially China Telecom. However, the aforementioned constitutional provision makes
Chinese state owned companies to be “uncomfortable with not having 100% ownership.”
In the case that the Chinese telco decides not to continue their plans in the Philippines,
options from other countries or telco players will definitely be considered.

The current market structure of duopoly (a form of oligopoly) inhibits the

consumers to get the quality service of Internet they deserve relative to the price they pay.
Inviting a third player will definitely boost the industry and will help keep competition.
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Chapter 2
STRUCTURE

The current telecommunications industry in the Philippines is a duopoly, a form

of oligopoly which only has two players. An oligopoly is a market structure in which a
small number of companies controls the majority of the market share (Investopedia). An
oligopoly should have two or more companies dominating the market, with their actions
having significant impact or influence upon each other.

Participants in oligopolistic structures tend to set prices rather than take them –
meaning that consumers have low bargaining power and have no choice but to take the
price offered by these oligopolistic firms. Having low competition in the
telecommunications industry in the Philippines means pricier products and plans without
care for quality service.

Should a third player come over to this duopoly, prices will change, quality of
service will increase, and the competition will be stiffer. New laws and strategies shall be
implemented by the government for other local companies to also participate. More
competitors in the market will keep the companies on their toes and watch out more for
consumer interest and service.

A perfect competition market structure is ideal for the Philippine telco industry.
Under perfect competition, there are many buyers and sellers and prices reflect supply
and demand (Investopedia). Consumers can easily choose other options if the good or
service they want to purchase becomes too expensive or falls short of quality. However,
this market structure is only “theoretical” meaning that this only serves a benchmark or as
reference for comparison against the other market structures. Perfect competition doesn’t
exist in real life; the closest would be the in the agriculture sector.
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Chapter 3
EXPLANATION

The PLDT and Globe duopoly of the telco industry dominates almost a hundred
percent of the market in a neck-to-neck competition. Their actions have a significant
impact over the other – for example, when Globe’s TM mobile carrier offered more
product promos, it made more revenues than its counterpart, Smart’s Talk ‘N Text.

Since there are only 2 dominating firms in the industry, Internet service has been
disappointing to much of the consumers. The average speed of internet is only 3 mbps,
against the global average of about 20. The ironic fact is that the Philippines is known as
the call center capital of the world, an industry dependent on the Internet, and yet Internet
service here in the country ranks the 2nd slowest in Asia.

The oligopolistic structure inhibits the country from experiencing fast internet –
which consumers need in this modern day and age. Lee Kuan Yew even insulted the
Philippine’s internet status, prompting then president Fidel Ramos to break the PLDT
monopoly. In the present, the current administration plan to address this issue by inviting
a third player to enter the telecom industry – a Chinese telecom company.

When China Telecom, the state-owned telecom company, becomes the third
player in the Internet industry, the current duopoly will be forced to make big
adjustments. China Telecom’s significantly lower prices yet promising higher quality will
attract majority of the market share, since most Filipino consumers are fed up by the slow
and lagging Internet they experience. When this happens, the duopoly will up their
systems, adjust their prices, and bring out product plans that will level the market.

In most oligopolies, there is a market leader. When it raises prices, the others will
follow. Since there are only 2 players here, they are keen to match each other’s prices and
rather focus on marketing, product quality and customer service to attract more customers
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and subscribers. However, if a third player enters the market, in which case the China
Telecom, it will offer cheaper prices in which the duopoly has to match. It will be the new
market leader, as they will set the prices and the other two will have to follow. If the
current duopoly fails to match the price and service offered by China Telecom, both are
doomed to fail and will lose control over its market share.

Singapore, the leader in quality of Internet service, owes this to their ideal market
competition – there are 6 big players in the market. Since there are many players in the
market, each company has to grow advantage over the other – faster speed, lower price,
stable connection, and etc. Because of the stiff competition, companies are forced to
produce quality service and better products.

The Philippines can certainly follow Singapore’s lead – as a growing nation, it

should develop our communication and network infrastructures as to keep up with the
other tiger nations. The Philippines will have better employment and business
opportunities.

President Duterte, in his bilateral talks with China, invited Chinese companies to
enter the market and play as the third player in the telecommunications industry.
However, Chinese state-owned companies are uncomfortable in the provision in the
Philippine Constitution that limits their ownership to just 40%. Malacañang has clarified
that if China refuses the deal offered by the government, they will look for other foreign
companies interested in providing the Philippines with the Internet service the Filipino
people deserve.

Should more companies enter the telecommunications industry, its market

structure will shift from oligopoly to a perfect competition. However, achieving such an
ideal market structure is impossible. Local businesses will require tremendous effort and
collaboration to create one big company that can penetrate the market effectively. Even
for foreign companies, establishing a telco company is difficult given the country’s
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geographical situation, which is an archipelago. This makes establishing of network

infrastructure and communication towers hard for all areas to be reached.

Chapter 4
SPATIAL ISSUES

The Philippines is an archipelago comprised of thousands of islands. This makes

the establishment and maintenance of cell towers and other infrastructure difficult for
telecom companies, since it requires them to set up more facilities to accommodate more
areas, allot more expenses in transportation and equipment maintenance, and deal with
government laws and policies.

Some rural areas are also hard to reach therefore making it harder for consumers
in those areas to get access to quality Internet services. Telecom companies should
address this issue by setting up enough and high technology equipment. They should
complement this by upgrading quality in customer service and responsibility.

Local competitors are faced with this barrier in entering the larger market. Since
smaller telecom companies have lower capital and fewer revenues, they are incapable of
expanding to other areas, especially those places that are not urbanized. Therefore, they
only control a significantly smaller market share.

Another significant barrier to entry competitors has to face in oligopolistic

industries is they are unknown. Carrier brands tend to have strong and easily recognizable
brands, which favor them over the new or smaller players. Local competitors has to prove
themselves over a period of time so they will be recognized by the public.

Chinese telcos, should they pursue to enter the Philippine telco industry, has to
face these barriers to entry. However, since they are already big and established
companies, they will have no problem in addressing these spatial issues.
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Chapter 5
CONCLUSION

The existing oligopoly in the telecommunication industry are PLDT and Globe
Telecom. Since they are the only ones dominating the market, the prices are more
expensive and the quality of their service is poorer than average. Most of the times, they
are the one to dictate prices. They are focused on getting a larger market share by
bringing out newer product plans such as the growing trend of postpaid plans.

The threats the oligopoly faces are the possibility of a third big player in the
telecom industry. This other player will make the competition stiffer, obliging the former
two to upgrade their services and lower prices to match the new player.

If the emergence of this new player will push, the consumers will experience a
boost in their Internet speeds, more stable connections, more flexible, and cheaper
Internet and data plans. This development in our network and communication
infrastructures will not only benefit individual consumers but also the country’s business
and institutions. Since almost every person is connected to the Internet nowadays, the
nation as a whole will experience more progress and development.
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BIBLIOGRAPHY

http://www.pldt.com/about-us/company-timeline

https://www.rappler.com/business/12269-globe-vs-pldt-who-is-winning-the-telco-wars

http://funwithgovernment.blogspot.com/2011/04/telecom-oligopoly-2-slow-internet-
in.html

http://business.inquirer.net/210841/internet-costs-forecast-remain-expensive-ph

https://en.wikipedia.org/wiki/Internet_in_the_Philippines

http://business.inquirer.net/243474/palace-foreign-telcos-welcome-talks-china-fail

https://www.investopedia.com/terms/p/perfectcompetition.asp

https://www.budde.com.au/Research/Philippines-Telecoms-Mobile-Broadband-and-
Digital-Media-Statistics-and-Analyses

http://beta.philstar.com/business/2017/03/27/1682179/philippines-better-2-telcos-tech-
expert

https://en.wikipedia.org/wiki/PLDT

https://www.rappler.com/business/industries/172-telecommunications-media/89197-pldt-
globe-dispute-top-spot-mobile-business

https://en.wikipedia.org/wiki/Telecommunications_in_the_Philippines

https://www.budde.com.au/Research/Philippines-Telecoms-Mobile-Broadband-and-
Digital-Media-Statistics-and-Analyses
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http://www.investphilippines.info/arangkada/seven-
winners/infrastructure/telecommunications/background/