This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 MANILA 005983 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA; EAP/MTS 
STATE PASS USTR FOR BWEISEL AND DKATZ 
STATE PASS USAID 
TREASURY FOR OASIA FOR AJEWELL 
USDOC FOR 4430/ITA/MAC/DBISBEE 
 
E.O. 12958: N/A 
TAGS: ECPS EINV ETRD ECIN RP APEC
SUBJECT: TELECOM UPDATE: GRP ENCOURAGES INTERNET TELEPHONY 
 
REF:  MANILA 2282 
 
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SUMMARY 
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¶1.  The National Telecommunications Commission (NTC) issued 
recent rulings lowering entry barriers to encourage the 
development of Voice Over Internet Protocol (VoIP) services. 
The decisions should reduce international rates but will 
have less impact on lucrative cellular services, which have 
eclipsed fixed line services to drive industry growth. 
Incumbent telecom firms have reacted by threatening 
lawsuits, aggressively marketing broadband and sharply 
lowering international rates for broadband subscribers. 
Analysts expect incumbents to demand high interconnection 
fees in order to limit competition from VoIP service 
providers, particularly in the termination of incoming 
international calls. The NTC plans to implement a stronger 
competition policy to limit anti-competitive behavior by 
dominant firms.  USAID has assisted the NTC in drafting the 
VoIP rulings and continues to support its enhanced 
regulatory role.  End Summary. 
 
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BOOMING CELLULAR MARKET 
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¶2.  The telecommunications sector has grown sharply since 
2000, primarily through rapid expansion of mobile phone 
services.  Cellular subscribers increased from 6.4 million 
in 2000 to 32.9 million in 2004 with two main operators, 
Smart and Globe, accounting for 14.6 million and 12.5 
million subscribers, respectively.  Roughly half of wireless 
revenues come from text messaging, immensely popular in the 
Philippines due to its low cost.  Optel telecommunications 
analyst Gary Anonuevo estimated that 99% of cellular 
revenues come from pre-paid cell phone users who spend an 
average of 350 pesos ($6.50) per month for prepaid cards. 
 
¶3.  As cellular services have become more convenient and 
affordable, the relative importance of fixed line services 
has declined.  As of 2004, there were 6.5 million fixed 
phone lines, including 2.9 million with the dominant 
carrier, the Philippine Long Distance Telephone Company 
(PLDT), which owns Smart.  PLDT/Smart reported that its 
fixed line division provided 39% of revenues but only 6% of 
profits in 2004 after losing money in 2003.  According to 
the NTC, the four dominant carriers reported 42% average 
annual growth in wireless revenues from 2000-2004 compared 
with 1.3% average annual growth in fixed line revenues over 
the same period. 
 
¶4.  VoIP services are already available to broadband users, 
but Internet penetration remains limited to less than 2% of 
the population.  The NTC estimates that Internet 
subscriptions rose from 350,000 in 1999 to 1,200,000 in 
¶2004. 
 
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VOIP CLASSIFIED AS A "VALUE ADDED SERVICE" 
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¶5.  NTC's recent decision to classify VoIP as a "value-added 
service" (VAS) allows companies to offer VoIP services 
without going through the long and arduous process of 
obtaining a congressional franchise.  The ruling removes 
uncertainty over the status of VoIP services that were not 
foreseen and categorized by the 1995 Public 
Telecommunications Policy Act (RA 7925).  This law limits 
the provision of traditional telephone services to "Public 
Telecommunications Entities" (PTEs) holding a congressional 
franchise, but exempts VAS providers from the franchise 
requirement. 
 
¶6.  NTC registration guidelines established additional 
requirements for VoIP service providers, notably a 5 million 
peso performance bond, a 10 million peso minimum capital 
requirement and, most importantly, a valid interconnection 
agreement.  NTC Common Carrier Department Director Edgardo 
Cabarios explained that RA 7925 has no provisions to 
penalize telecommunication service providers, so the bond is 
intended to protect consumers from "fly-by-night" companies. 
He underscored the need for NTC to balance its role in 
protecting consumers with its interest in ensuring market 
access and competition. 
 
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DOMINANT FIRMS REACT 
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¶7.  Several incumbent PTEs vowed to challenge the NTC 
rulings in court, arguing that VoIP service providers will 
have lower overhead costs and can charge lower rates than 
existing companies that invested heavily in fixed and 
wireless networks.  Several telecom analysts doubted the 
legal merits of these lawsuits but portrayed them as 
delaying tactics.  ATT Managing Director Romulo Carlos 
suggested the incumbents may use legal threats to pressure 
the NTC into accommodating their interests on the important 
issue of interconnection rates.  As of December 14, Cabarios 
reported that the NTC had not been formally notified of any 
legal challenges to its decisions.  If the lawsuits do gain 
traction, two proposed bills (House Bill 3476 and House Bill 
3644) would strengthen the NTC's authority to define and 
regulate VoIP services. 
 
¶8.  Dominant PTEs are most concerned about the threat VoIP 
services pose to their profitable international direct 
dialing (IDD) services.  According to Optel analysts, U.S. 
firms have offered termination rates of approximately 1.5 
cents per minute for several years, but Philippine firms 
have maintained outgoing rates of 40 cents per minute (for a 
profit margin exceeding 90%) until the VoIP decision. 
Termination fees are particularly important since the volume 
of incoming calls is ten times the volume of outgoing calls 
and termination fees for VoIP-mediated calls are easier to 
control than interconnection fees for outgoing calls. 
Collusion to raise termination rates led to a dispute with 
US carriers in 2003, reported in reftel. 
 
¶9.  Incumbents have reacted to this threat by stepping up 
their marketing of broadband services and sharply reducing 
international rates for broadband subscribers.  For example, 
PLDT announced a new International Direct Dialing (IDD) 
service available to DSL subscribers at 10 cents per minute, 
75% lower than its usual international rate.  Globe 
countered with a similar service offering rates as low as 5 
cent per minute. Globe also reduced standard rates from 40 
cents to 10 cents/min for regular outbound calls.  Former 
PLDT/Smart Financial Advisor Peter Lawrence explained that 
PLDT plans to promote VoIP services while increasing 
broadband subscriptions to compensate for the expected 
decline in fixed line revenues.  Globe Telecom, the 
country's second landline/cellular provider recently 
purchased U.S. VoIP technology to expand their broadband 
service offering and broaden their revenue base. 
 
¶10.  Lower international rates for VoIP services should 
provide substantial benefits to U.S. consumers and U.S. 
firms.  The Philippines is the third-largest destination for 
outgoing international calls from the U.S. and the estimated 
four million Philippines-born Americans stand to gain from 
lower international rates of VoIP service providers.  The 
VoIP ruling has attracted U.S. firms interested in joint 
ventures with local VoIP providers to offer pre-paid cards. 
 
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INCUMBENTS MAY SET INTERCONNECTION RATES 
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¶11.  Industry analysts expect incumbent PTEs to impose high 
interconnection rates to delay the spread of VoIP services. 
Lawrence noted that interconnection rates should account for 
the higher level of investment by incumbent PTEs in fixed 
and cellular networks.  Observers point out that PLDT/Smart 
can pressure other firms to maintain high interconnection 
rates by threatening to raise connection fees and limit 
access to its network. 
 
¶12.  The VoIP guidelines allow the NTC to intervene to 
impose interconnection agreements if VoIP providers and 
incumbent PTEs cannot agree on rates.  Neither Carlos nor 
Optel analysts believe that the NTC will be aggressive in 
forcing incumbents to lower rates.  Cabarios acknowledged 
the danger of collusion among PTEs to limit connectivity for 
VoIP service providers but he underscored the NTC's aim to 
allow market forces to determine rates.  He pointed to NTC 
moves to increase broadband frequencies in order to further 
promote competition for interconnection rates. 
 
¶13.  The NTC signaled its willingness to regulate 
interconnection rates when it issued a "Consultative 
Document on the Development of a Competition Policy 
Framework" for the ICT sector.  The NTC estimates that two 
main fixed line carriers account for three quarters of this 
market while two main cellular carriers control 96% of the 
wireless market.  It criticized the "unregulated price- 
squeezing behavior of dominant licensees" and expressed 
concern that dominant firms could use similar strategies to 
impede the spread of VoIP services.  The NTC has proposed to 
impose "Significant Market Power" obligations on dominant 
firms, establish unbundling requirements, allow the resale 
of services and enhance NTC's role in ensuring reasonable 
interconnection rates. 
 
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COMMENT 
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¶14.  The NTC's progressive stance should encourage 
competition and lower international rates, but incumbent 
firms are likely to use their control of local connectivity 
to delay the spread of VoIP services.  The NTC can further 
ensure the spread of VoIP services by pursuing the more 
active regulatory role outlined in its draft competition 
policy.  Although VoIP services should reduce traditional 
fixed line revenues for dominant firms, they will have less 
impact on cellular services where profits and growth are 
highest.  USAID continues to support the NTC as it consults 
with stakeholders to strengthen its regulatory role. 
 
¶15.  The VoIP ruling, explanatory memo and guidelines are 
posted on the NTC website at: www.ntc.gov.ph. 
 
JONES