Developments in LatAm Telecommunications

By: Raymond A. Perez

Over the past 20 years, governments in Latin America and the Caribbean have introduced policies to encourage competition and investment in the telecommunications industry both within their respective nations, and abroad. These changes have well positioned the region to lead the global expansion in telecommunications, fueled in large part by the growth of its mobile services sector, which includes the continued development of Long-Term Evolution (4G LTE), mobile payment solutions, cellular machine-to-machine (M2M) services, and mobile advertising. As a flexible regulatory environment continues to take shape providing for open competition among providers, and as consumer demand increases, the sector can expect significant investment to support new traffic and services on the networks.

Regulatory Environment

Prior to 1990, communication services in Latin America were primarily controlled by monopoly providers that were generally state-owned. However, throughout the 1990s and into the early 2000s, 18 of the 20 countries in the region succeeded in liberalizing the industry with the introduction of new federal laws, regulatory agencies, and tax breaks related to telecom investments.

In Mexico, the industry has long been dominated by Teléfonos de México (Telmex) in fixed-line telephony and its sister company Telcel in mobile telephony, both of which are owned by Carlos Slim’s América Móvil. Telmex currently holds 80% of the fixed-line market share, while Telcel holds 70% of the mobile market share. However, due to a new Telecommunications and Broadcasting law aimed at reforming the country’s telecom market, this is expected to change.

Under the reform’s regulations, dominant companies like América Móvil & Televisa must both take action to reduce their respective market shares under 50% through the sale of assets. Additionally, América Móvil must share its network infrastructure with other operators and allow its competitors to make calls on its network without charge. The law also established the Federal Telecommunications Institute (FTI), a new federal agency responsible for encouraging competition and enforcing regulation, as well as promoting and overseeing all aspects of the telecom industry, such as orbital resources, telecom networks & infrastructure, broadcasting services, and radio frequency spectrum.

In Brazil, the telecommunications industry opened up after a deregulation process in the late 1990s that led to the privatization of state-owned monopoly telephone company Telebrás and to the creation of the National Telecommunications Agency (Anatel). In November 2012 Anatel approved a new plan (PGMC, by its Portuguese acronym) in order to promote competition and further improve regulation in the sector. The plan identified the country’s leading operators and set forth rules for sharing network access with smaller companies. Currently, Brazil has four operators with “Significant Market Power” (> 20% market share) in the mobile sector: Vivo, Claro, Oi and TIM Brasil. Vivo, the country’s largest mobile operator, is a subsidiary of Spanish telecom company Telefónica, while Claro, is a subsidiary of América Móvil. The country’s fixed-line sector is divided among four principal operators: Vivo, Oi (recently merged with Portugal Telecom), Embratel/Net (subsidiary of América Móvil), and GVT (a subsidiary of Telefónica).

In September 2014, Brazil’s government also approved a program that provides a federal tax break related to investments in telecom networks. Approximately 1,400 projects are expected to benefit from the tax break program, which was issued in 2014. The projects, which include the creation of data centers, smart grids, access and transport networks, underwater cables and satellites, total nearly US $2.7 billion in tax exemptions. By year-end, Brazil’s telecommunications revenues are slated to total US $94.4 billion.

4G LTE Networks

As with the rest of the world, consumers in Latin America are migrating away from fixed line telephony toward mobile voice and data services, particularly smartphones. In 2013, the region had a mobile penetration rate of approximately 115%, surpassing the 96% world average rate, and the 104% U.S. rate. As a result of the shift toward mobile, operators are investing in their third generation of mobile telecommunications technology (3G) networks and are also looking to upgrade to Long-Term Evolution (4G LTE) networks.

However, the development of 4G LTE services is still a work in progress, with substantial capital expenditure required to improve infrastructure. At the moment, most Long-Term Evolution services in the region operate on high and less efficient spectrum frequencies. As 4G services gain momentum, countries will look to auction the 700 MHz spectrum frequency, which is considered more conducive to 4G networks.

Latin America 4G LTE subscriber adoptions totaled 4.8 million at the end of the second quarter of 2014 within 44 networks in the region. This figure is expected to reach 6.0 million by year-end 2014, and 23 million by 2016. Roughly 68% of LatAm’s 4G LTE connections are found in Brazil, a figure that rose after the country hosted, and prepares to host, the 2014 FIFA World Cup and the 2016 Olympic Games, respectively. Operators, such as Vivo, Claro, Oi and TIM Brasil have won 4G frequencies in the 2.5 Gigahertz (GHz) band and are also launching LTE networks within the country as the demand for mobile services continues to climb. Currently, Brazil’s mobile penetration rate is over 132% with over 276 million mobile phone subscriptions, making it the world’s fourth largest mobile telephony subscriber base.

Mexico follows only Brazil in LTE network prominence in the region, currently possessing an 11% connection rate. The country’s two leading operators, Telcel (owned by América Móvil) and Movistar (owned by Telefónica), have steadily expanded their 4G LTE networks. The recent expansion of LTE frequencies brings Telcel’s total number of Mexican cities with 4G LTE coverage to 46. Meanwhile, Movistar is also expanding its coverage and aims to introduce LTE networks to 300 cities by 2015. Mexico has a current mobile subscriber base of over 105 million and owns a mobile penetration rate of 92%.

In Colombia, seven operators have won 4G LTE frequencies, and four of the seven operators already provide 4G services (Claro, UNE, Movistar and Tigo). Colombia telecom operator Avantel, American direct broadcast satellite service provider DirecTV, and local Empresa de Telecomunicaciones de Bogotá (ETB) will also provide 4G LTE services by the end of the year. Overall, 1.5 million smartphones are expected to connect to 4G LTE networks in Colombia during 2014. The nation currently has over 50 million mobile phone subscribers, a 4.0% LTE connection rate, and a mobile penetration rate in the mid-100% range.

Puerto Rico has a mobile subscription base of over 3 million customers and a mobile penetration rate of over 80%. The commonwealth was the first territory in LatAm to launch high-speed 4G LTE mobile broadband networks through wireless telecom provider AT&T Mobility in November 2011. In 2012, Claro Puerto Rico (América Móvil) and mobile network operator PRWireless (d.b.a. Open Mobile) also launched LTE systems. Now, various operators have introduced investments in LTE infrastructure to expand mobile data services and mobile broadband availability in the island.

 

Mobile Service Trends

The development of new applications in the mobile sector, such as mobile payment solutions, cellular machine-to-machine (M2M) services, and mobile advertising are expected to help provide a basis for continued outsized investment and growth in the region.

Due to increased penetration of smartphones and a large under-banked sector of the economy, mobile payment services have emerged as an alternative to traditional “peer-to-peer” transactions paid in cash and on-site. As an example, mobile travel bookings via smartphones have jumped 42% in Latin America, as users increasingly use handheld devices to book and purchase airlines, hotels, cruises, and car rentals. These trends toward advanced applications and uses with mobile devices have attracted the attention of mobile carriers and new entrants looking to capitalize on these new trends.

In the mobile payments arena, BlackBerry recently launched a mobile payment platform known as BBM Money that it soon plans make available in Latin America. The app allows consumers to perform standard banking services, pay telephone and electricity bills, and purchase cellular airtime. BlackBerry plans to further develop the application to include taxi and restaurant payment services for its users. Similarly, Tigo (owned by Millicom) and mobile payment company Kalixa joined together to create a payment service provider for Latin America. The two companies are targeting a late 2014 launch and are mainly focusing on Brazil and Colombia, as these markets have shown rapid ecommerce growth.

Another new market that has emerged within the region is cellular M2M. As part of cellular M2M services, cellular networks are used to enable data transmission between two machines. In Latin America, the mobile M2M market in 2014 is expected to total US $4.6 billion and is projected to increase to approximately US $8.2 billion by year-end 2019, representing a 12% compound annual growth rate (CAGR). By the end of 2014, Brazil, Mexico, Colombia, Argentina and Chile will represent nearly 81% of all M2M connections in the region.

Also worth mentioning is that the region’s cross-platform and mobile advertising market is expected to experience robust growth in the years to come. The sector’s main players include Facebook, Google, AOL, Apple and Microsoft. In 2013, global mobile ad revenue for LatAm totaled US $144 million, a 215% increase from 2012’s figure. Similar to mobile payment and M2M services, the progression of the mobile ad market will be driven by advanced mobile Internet device uptake. With rising smart device availability, advertisers will reach larger audiences by delivering content across various display platforms (mobile, computer and tablet devices). Argentina, Mexico and Brazil are slated to experience the fastest mobile advertising growth rates in the region.

Sources: 4G Americas, Budde, Business Wire, Celistics, Frost & Sullivan, GreenbergTraurig, Hospitality Net, ICSC, MarketWatch, MediaPost, Nearshore Americas, PCC Mobile Broadband, PwC, RCRWireless News, S&P Capital IQ, TechInsider, Telecompaper, Ventureburn, Whatech.