Telstra International: the Philippines is emerging as Asia’s next connectivity hub

Details: James Barton; Category: Optical & Fixed Networks; 27 November 2024; 232165 views

The Philippines is well on its way to becoming a major connectivity hub in Asia. The archipelago has a strategic geographical location and is a key node for submarine connectivity, with the subsea route between the Philippines and the US attracting particular investment.

Additionally, the Philippines recently updated its 85-year-old Public Service Act (PSA) to allow 100% foreign ownership of businesses within the domestic market, making it more attractive to for international submarine cable networks and hyperscale data centres.

One company charting the rise of the Philippines is Telstra International, which covers the Australia-headquartered group’s digital infrastructure outside of its home market, with a particular focus on the Asia-Pacific region. Its remit includes subsea cables and landing stations as well as terrestrial fibre across the Pacific, as well as the services sold on top of this to wholesale and enterprise customers. We spoke to the company’s CEO Roary Stasko about how the Philippines is well-positioned for future growth.

What are the strategic advantages offered by the Philippines that are now attracting investment?

There's a couple of dynamics at play. Geopolitics have changed - the north transpacific route has become more challenging, so we see new opportunities developing across the south and mid transpacific corridors in terms of subsea cables. [If] we look at the path of where the Philippines lies, it's a great connection point between other parts of Asia and the US or Australia.

How are we building diversity and resilience into our network? Will we have a lower reliance, or diversify our reliance on cable systems that may transit through the South China Sea or for through those northern Pacific routes? In that, the Philippines is a very friendly environment for us. We've continued to build out capacity, but we also see an operating environment which, with some of the changes in telecommunication laws in the Philippines, makes it a little bit more favourable for companies such as ours to operate.

As a specific example, the change to allow 100% ownership by foreign companies from the Public Service Act, that has been one dynamic that makes the Philippines an even a more interesting place as a regional hub for international submarine cable networks and hyperscaler data centres for that matter, too.

What are the advantages being opened up by the change to ownership laws?

As those ownership laws have changed, that has created less friction and more transparency in terms of how companies need to operate in the environment. Those types of rules and regulations are pro-digital infrastructure, pro-business, pro-telecom. We've been operating there through a partner for some time, and we'll continue to seed the market. As others look at the market, particularly in the data centre space, they would look at that and think “is this a place where I need to go in with a local partner? Is this a place that we can just own and operate and it's easier to manage and govern from a corporate governance perspective - not to mention cost and equity and long-term predictability?” Because just like any partnership over time, sometimes the various parties’ interests diverge, and that creates complexity. These are long term deals, not two- to four-year transactions - you're making 15, 20, 25-year investments. You want to have confidence in your partner or your operating model in any country that you go into, across any market in Asia. Some of the progressive actions that the Philippines is taking in terms of changing those regulations is an enabler - it reduces that friction, and it makes it attractive for foreign companies to come in and land.

Are these updated rules a play by the Philippines to compete with – or offer an alternative to - other established connectivity hubs in the region?

It absolutely is a competitive environment now. Certain rules that Singapore has put in place - limitations on data centre builds unless you have availability of green power - have created an opportunity for other regional hubs to emerge. Hong Kong may not be as attractive for putting a data centre now for a variety of reasons; Singapore had may have some restrictions on data centre capacity because of availability of power. You start to look at Malaysia, Indonesia, the Philippines, Vietnam - if you're operating in any one of those markets, or you're a regulator or the government in any one of those markets, how do you reduce friction to make this a more attractive place for hyperscalers and the data centres to establish presence? With the connectivity that's already through the Philippines, with some of the planned cable systems that are intending to go through there, the changes in regulations, those are all very conducive to attract that type of investment. On top of that, you have a strong set of demographics of end users in that market as well. If you look at the Philippines and the consumption, the data penetration, mobile penetration, the types of use cases, and GDP, etc, you know this isn't just going to be a processing centre where all the traffic comes in and goes out. If you're a hyperscaler, the Philippines is a target-rich environment from where you want to serve the market to serve the region, but also where there's a local market to serve as well.

Are hyperscalers shifting their focus towards newer growth markets?

You have sort of two different types of hyperscalers – B2C and B2B - and as you think about AI and how it flows through, they obviously have different needs as well. They have the training modules where they need to build large amounts of capability, but then they have the inference modules as well. I think the nature of those two is defining the topography of how hyperscalers are deploying their networks - first their data centre networks, but then also their connectivity networks that they need to connect that. I can't speak on behalf of the hyperscalers, but what we see from customers is the desire and the demand is - they want those traditional hub markets, but increasingly, because of demand and because of need, they are looking where else they can go. That's why there's this emergence of new hubs - the thing that's defining that, in many ways, is power regulation and the local markets that they want to serve.

A B2C hyperscaler will be different than a B2B hyperscaler in terms of the kind of needs they're serving and how much they need in the training modules, versus the inference levels versus how much sits in the end user. What we see through all of that is the need for connectivity; we see hyperscalers increasingly being willing to trade off latency, particularly in the training modules, for availability and cost of power. If you look at your inference models, or if you look at some of the cloud demand of the prior generation of growth drivers, there was a higher sensitivity to latency. But now, as you think about the training modules, they don't need that ultra-low latency - they're willing to tolerate a little bit of latency, and that's where I think these emerging hubs are coming in.

AI implementation is going to place an even greater demand on data centres – where does the Philippines sit on the scale of AI deployment as compared to more developed hubs in this region?

It's still relatively early days - it’s a high population with large number of digital users. It’s somewhere in the middle in terms of power cost per megawatt, and it’s still developing in terms of those renewable sources. I think there are other emerging gateways that are probably still a little bit further ahead in that development of where those AI training centres are going to be. We increasingly see that stopping off point and the connection point into the Philippines as a very important emerging hub for connectivity, both into data centres, but also to serve the 120 or so million people that live in the Philippines.

There are other markets where the energy costs and maybe the construction costs are lower than the Philippines, but for the hyperscalers it’s the power cost and the amount of green energy. Around 20% of their energy is sourced from renewables, and that’s an opportunity for the Philippines to think about: how do they want to create the availability of green power to help drive that investment?

While there is work to be done catching up with more established hubs in terms of green energy and AI implementation, the Philippines has evidently taken great strides towards attracting investment. As a hub for subsea cables and therefore an attractive proposition for hyperscalers – along with modernised foreign ownership laws - the market is fast becoming a major new emerging gateway for Asia and the Pacific.