Internet Telephony in the Philippines: the next Big Thing?

(Published in 2002)

LIBERALIZATION AND COMPETITIVENESS, like love and marriage, are supposed to go together like, well, a Filipino texter and his mobile phone.

The Philippines continues to learn the hard way that its expensive telecom services (an IDD call to the USA costs $0.40 versus $0.05 in Hong Kong) don’t go together with competitiveness and economic growth. Telecoms was the Philippine economy’s high growth sector in 2000 and 2001, accounting for over 10% of GDP.

Telecoms is again expected to fuel Philippine growth. The call center industry is booming, with estimated revenues of $173 million this year and $864 million by 2004. Mobile telephony growth is placed at some 30% this year from 11 million subscribers after rising 80% in 2001.

Analysts say further cuts in telecom costs will spur competitiveness, as will government moves to advance liberalization.

Looming on the horizon is the commercialization of Internet Telephony (IP voice transmissions over PSTNs or Public Switched Telephone Networks) within a year’s time. The Philippines is expected to jump on the Internet Telephony wagon as early as this year via government-led reforms to its restrictive telecom law.

Dr. Bill Torres, past president of the Philippine Internet Service Organization (PISO), said there are clear indications the government may issue a new interpretation of Republic Act 7925 (the Public Telecommunications Policy Act of 1995) allowing Internet Telephony to be offered in certain cases, including its provision by ISPs and other providers who do not hold Congressional franchises. PISO is the Philippines’ association of ISPs.

He said the interpretation would be made either by Philippine President Gloria Macapagal-Arroyo or by telecoms regulator, the National Telecommunications Commission (NTC).

NTC, however, has remained adamant in barring non-franchise holders from providing Internet Telephony. It also does not permit the use of telephones to receive phone calls made via Internet Telephony but allows PC-to-PC IP calls.

On the other hand, anyone with a private network can sidestep the law and legally provide an Internet Telephony service as long as the operator does not use the PSTN.

“I think that within a year, we will see the government come up with a policy that will allow IP Telephony,” Torres said.

“Optimists think this will happen in 2002; pessimists in 2003. I tend to be an optimist.”

RA 7925 authorizes the NTC to establish rates providing for the economic viability of the companies involved in the Service Area Scheme (SAS) and grants them a fair return on their investments.

“I have a feeling that if we can come up with an amendment to the law, maybe that’s an opportunity to relax the hold of telcos (on IP Telephony),” said Torres.

Torres does not believe Internet Telephony can be profitable as a stand-alone service, however. Profitability will demand that Internet Telephony be packaged with other services.

“Alone Internet Telephony will not make money . . . because of its cheapness,” he noted.

Torres also feels that the Department of Information and Communications Technology (DICT), to be established this year, will go to bat for deregulating IP Telephony in support of President Gloria Macapagal-Arroyo’s goal of making ICT a key driver of the Philippine economy.

Cheaper phone rates result from Internet Telephony, with businesses and consumers benefiting the most from the lower prices. Although an exact comparison is not possible, the cost of an international long distance call using Internet Telephony would probably be about a few pesos per minute compared to the P20.40 (US$0.40) per minute charged by both Philippine Long Distance Telephone Company (PLDT) and Globe Telecom.

India surprised Asia by opening Internet Telephony to ISPs starting April 1, joining Singapore in this league. Indian ISPs are now allowed to offer much cheaper but lower quality Internet Telephony service without having to pay any long distance toll fees to state-controlled telco, Videsh Sanchar Nigam Ltd.

Satyam Infoway, one of the leading ISPs, is charging users $0.16 per minute during peak time for an Internet Telephony call to the United States, 80 percent lower than the regular peak time phone tariff of $0.80 per minute and $0.04 cheaper than a similar PSTN call in the Philippines.

PLDT, the dominant telco in both the fixed line and cellular markets, owns “Netopia,” one of the largest Internet café chains in the Philippines.

While a plus for consumers, Internet Telephony is not expected to be a killer app for the Philippine call center business because of its inferior voice quality.

“The quality of Internet Telephony is not good enough if your core business is providing good service,” said Domingo Guanio, general manager of SVI Technologies, which provides networking services to their call center.

“If it becomes very good, it can become a back-up to our regular leased lines.”

Guanio said that Internet Telephony was demonstrated to them and they weren’t impressed. “At this point it’s not good enough and quality isn’t negotiable in our business.”

PLDT is apparently making major moves towards introducing Internet Telephony as one of its mainstream telecom services.

PLDT has invested in frame relay infrastructure and is pioneering new services that will lay the groundwork for its eventual shift from circuit-switched network to packet-switched networks (the Internet), according to industry sources.

Philip Tan, network consultant of Cisco Systems Philippines, said PLDT is fully using a Cisco IP network but mainly to replace its existing and old PBX systems. The Cisco system allows PLDT freedom of choice as to its use, including Internet Telephony, said Tan.

He does believe there is a future for Internet Telephony and said it won’t make losers out of telcos “but they’ll have to re-engineer themselves. The technology is cheap but if you look at how the carriers are spending for infrastructure such as cables, that’s expensive.”

Edgardo Cabarrios, Director of NTC’s common carrier authorization department, said NTC was bound by law to restrict Internet Telephony to entities with Congressional franchises.

“Internet Telephony is not classified as a value added service,” said Cabarrios. “Therefore, any entity intending to provide Internet Telephony should have an authorization from the commission predicated on a valid Congressional franchise.”

By this definition, PLDT, “which is a duly authorized local, national and international voice service provider,” can provide Internet Telephony. “Other companies that have similar authorizations are Globe Telecom, BayanTel, Digitel, ETPI and Teletech and Philcom Corporation.”

“If an Internet Telephony service provider carries international traffic, then it is providing a service similar to that provided by an IGF. In order to level the playing field, those providing international Internet Telephony should also be required to install local exchange telephone lines,” Cabarrios explained.

NTC’s refusal to budge from its position has left it open to charges of being anti-consumer, anti-liberalization and pro-telco, allegations Cabarrios denies, saying that NTC “balances the interest of both the consumers and telecom service providers.”

Martin Enrile, telecoms analyst of ATR Kim Eng Securities, however, believes that IP Telephony is “a very clear threat to telcos.”

He feels that telcos will need to maximize their huge infrastructure investments, hence their continuing resistance to Internet Telephony and 3G.

“I guess there’s been lobbying by telcos to preserve their assets since there is an imperative to maximize use of these assets,” he said. He noted that PLDT’s move towards data and its low capex for fixed lines doesn’t seem to square with the company’s opposition to Internet Telephony being offered by ISPs.

PLDT and other telcos contend that Internet Telephony provides unfair competition because it allows its providers to bypass toll fees for international long distance calls. AT&T, one of America’s largest telcos, reported a loss of US$350 million in 2000 because of IP Telephony.

Research firm International Data Corporation (IDC) estimates that the Asia-Pacific IP Telephony market will grow from US$213 million in 2000 to almost US$7 billion by 2005.

Worldwide, IP Telephony is projected to account for 135 billion minutes by 2004 from 27 billion minutes in 1999.

The International Telecommunications Union (ITU), however, believes the main use of IP telephony may not be for outgoing traffic but from incoming international calls because of incoming net settlements.

It also foresees that legal restrictions on IP telephony will disappear as countries liberalize their telecommunication markets. ITU said any ban is almost always based on the premise that IP telephony is a voice service (and thus the exclusive right of incumbents) rather than a data service or application.

ITU says this premise is becoming harder to sustain with the integration of voice functions into other Internet-based applications such as e-mail.