We have seen this before when Digitel’s Sun Cellular disrupted the mobile industry in the early 2000s, and we are seeing it again in the telco space with the entry of DITO in mobile and CNVRG in fiber.
For new players attempting to disrupt an industry, offering value-for-money products can be an effective way of attracting customers, but it can also be detrimental to the company’s finances as they endure reduced margins until they are entrenched enough to raise prices.
The initial explosive growth in revenues inevitably attracts investors, but prolonged periods of low profitability eventually lead to poor share price performance.
On the other hand, the more mature incumbents may not suffer immediately, as long-time customers may still have some brand loyalty or simply lack the courage to switch to a new service provider. Furthermore, the earnings of these incumbents tend to be supported by other developed and diverse business segments.
However, the longer the price war continues, they will eventually have to choose between lowering prices and reducing margins or risk losing customers. In either scenario, the incumbents inevitably feel the financial pain.
In the case of Sun Cellular, its groundbreaking unlimited call and text promos allowed it to grab 16 percent market share in a space dominated by Smart and Globe, but it never reached a sustainable level of profitability in the long run.
TEL and GLO eventually offered the same services at competitive price points, leading to reduced profitability. Low profitability forced JGS, Digitel’s controlling shareholder, to eventually sell Digitel to TEL in exchange for a 12.9-percent stake in the latter.
The current battleground
In the current telco landscape, where internet connectivity is of utmost importance, TEL and GLO are again fighting a war, this time on two fronts, with DITO carving out a space in the mobile data market, while CNVRG emerges as a worthy adversary in the fiber-based broadband market.
TEL and GLO run the risk of losing subscribers to new players offering more data or faster speeds at lower price points.
It is fairly straightforward to roll out a service and offer it to customers at a price point that undercuts competitors. However, starting a price war requires a sizable war chest to back it up.
In the capital-intensive telco industry, challengers need to be well-funded to build the infrastructure necessary to serve growing demand while maintaining service quality. New players must have stable revenue streams to support operations and expansions, or else they will need to secure additional funding as the need arises.
5P’s: Proper preparation prevents poor performance
With this in mind, CNVRG appears to be doing it the right way. Over the past three years, it has completed the majority of its fiber network rollouts and successfully secured a foothold in the fiber space with its flagship product, FiberX. It pioneered the prepaid fiber market and is now embarking on an aggressive campaign to undercut TEL and GLO with its fiber offerings.
Recently, CNVRG upgraded the speed of its postpaid FiberX 1,500 plan, resulting in an average cost per Mbps of P5. While this price point is on par with GLO’s GFiber Plan 1,500, it offers a lower average cost than the P6 per Mbps of the two giants.
GLO, on the other hand, is outperforming competitors with its GFiber Surf699, which has an average cost of P13.98 per Mbps compared to PLDT Home Prepaid 699’s P19.97 per Mbps and CNVRG SuperFiber30’s (priced at P700/month) P28 per Mbps.
However, CNVRG is better positioned to capture the lower-income market with lower price points than its rivals. This is likely just the latest salvo in the prepaid fiber price war, with more developments to come.
Conversely, DITO recently announced plans to raise up to P40.3 billion by 2028 to address capital shortfalls and fund its network expansion. While DITO has had some success in capturing market share with its 5G offerings, it is now suffering from a lack of funding, leaving it unable to expand its network infrastructure.
DITO ended up on the short end of the stick, as it was not well-funded enough to sustain its aggressive expansion. As a result, DITO now has an equity deficit of P30.9 billion due to its massive debt pile and three consecutive years of mounting losses.
To compare, DITO rolled out its network expansion seven months earlier than CNVRG, but CNVRG has already captured 30 percent of the fixed broadband market, while DITO has only captured 9 percent of the wireless market.
CNVRG’s success in the price war can be attributed to being well-funded, cost-efficient, and effective in implementing its strategies. This allowed it to achieve a successful entry into the fixed broadband business and establish itself in a position of strength to compete head-to-head with the two telco giants.
Conclusion
Price wars disrupt industries, but when executed properly, new players can potentially overtake and outperform mature incumbents. This success (or failure) is inevitably reflected in the financial performance of the company and, consequently, its share price.
