Wanna bet on Sextel?

A Sprint-Nextel merger was months ago unthinkable to many. They’re incompatible in technologies (the former is CDMA while the other is IDEN) and their networks overlap in almost all US cities. So where’s the value add?

Nextel’s strength is its ownership of enterprise customers while Sprint’s lies on its wholesale communications packages, strong consumer appeal and strong landline network.

Still this $36 billion merger with a board that is 50-50 split still doesn’t make sense. Well, let’s look at the Philippine mobile phone market, where it was and where it could likely go.

Life was simple then. There was Globe and there was Smart. One GSM provider is virtually the same as the other. When Sun came in, it had to shake the duopoly but since it is also GSM, it could only do so on the basis of price disruption. Its 24x7 product pegged at P250 for unlimited service is a true killer. Subscribers in the hundreds of thousands switched. When one GSM gains, the others lose. It’s a zero sum game.

Next Mobile (formerly Nextel Phil.), having IDEN and not GSM technology, is doing the reverse. Its average revenue per user (ARPU) is already P1,300.00. Its new brand product IMX Telematics links their mobile phones seamlessly to corporate servers, allowing owners and management to track every individual, vehicle, package and transaction in and outside company premises in real time. The information captured is linked to SAP, Oracle and other enterprise applications of their customers. This value add kicks up the ARPU to P3,400, which corporate clients don’t mind paying because they save millions from wastage, pilferage and inefficiencies.

They learned this from Nextel USA. Its international company has a 20 percent equity option in Next Mobile. Nextel US’ ARPU from enterprise customers is $71 while Sprint, Cingular, Verizon and T-Mobile are about $10-$15 less.

Why the merger? The market is changing, and fragmenting. Power is transferred to the customer, not the provider. Their tastes vary and their needs are diverse. Being cheap does not always mean being the best. So to compete, one has to be highly differentiated. In a market that is fully fragmented, having few but right customers could be very profitable.

Sprint Nextel wants to have the best of both worlds. Their merger basically means one company but two brands. Sprint now would have access to Nextel’s 15.3 million subscribers, many of whom are business customers who are more profitable than Sprint’s base of customers. Jointly with 39 million customers, they rank only number three, Verizon with 42 million users as second and Cingular with 48 million users as the leader. Financially however, the merger puts the combined company on the very top – with combined year-to-date revenue at $30.3 billion, compared with Verizon’s $20.3 billion and Cingular’s $12.3 billion. Because of operational synergies and drastic reduction on costs, the merger will soon become the most profitable as Nextel on its own had proven in the past.

What we have to watch out for in the Philippines are walkie-talkie calls from the US to Philippines. There is already Canada-US, Latin America-US. Do you think there is a market for this here? I am not a gambler but with 3.5 million Filipino-Americans, wanna bet?

Now, Next Mobile has become a prime target for those who see the wisdom behind the Sprint-Nextel merger.

VAT - A Better Tax

There is no justification in killing the hen that lays the golden eggs.

It’s always convenient to pick on the big guys, to say that the telcos which are raking in billions of pesos in profits every year deserve to be taxed more.

But taxing them more in the form of a fixed tax on gross revenues is not only unfair to the subscribers who stand to pay more just because government bungled up in preventing this fiscal crisis; it is also unfair to the communications sector which has done wonders not only in building communication bridges but also in making it more attractive for foreign investments (business process outsourcing, call centers) to come in.

In taxing the telecommunications sector some more, we not only talking about PLDT, Smart or Globe that are the more profitable companies in the industry. Also to bear the burden are small telephone companies in the provinces that are hardly making ends meet.

There is currently an agreement among executive and legislative leaders to push for a two percent increase in the value-added tax (VAT), while plugging existing loopholes.

According to the Foundation for Economic Freedom (FEF) led by Alex Magno which is supporting the move, even without factoring in the effect of lifting exemptions, the increase in rate alone can raise revenues by P30 billion per year and together with a fortified version of the tax on sin products, can bring us closer to the P80 billion new revenue measures target for this year that the administration has indicated and which the financial community finds as appropriate to bring the country along the road to fiscal sustainability.

Quoting the UP paper "The Deepening Crisis: The Real Score on Deficits and the Public Debt," FEF said: "A simple strengthening of the VAT system, through an expansion of its coverage and a slight increase in its rate (by two percentage points) is superior to the other revenue-raising proposals that have recently been made. Relative to these other proposals, the superiority of the VAT is twofold: it is uniform and transparent in application—which reduces discretion and the scope of corruption; and it is neutral in its incidence – which minimizes the inevitable economic distortion caused by any tax."

The paper further notes that other proposals are inferior for similar reasons. In the case of the tax on text and the franchise tax on telecoms, no compelling economic reason exists why these activities should be singled out for special taxation. No serious argument has been put up that these are anywhere like "sin products" or carbon emission in being public "bads".

On the contrary, Magno observed that improvements in telco services and costs have not only led to fostering community building as people are able to keep in close touch with one another, it has also led to lowered cost of doing business and increased Philippine industries‚ competitiveness, especially for communications-based industries like IT, call centers, business process outsource, and the like.

Just a piece of advice on our leaders who still insist on taxing the telcos some more: A franchise tax on telcos may move the country one step forward, but it will definitely result in us moving two or even three steps backward. And that is a very heavy price to pay.

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