Future of the Latin American telecoms market
M&A activity in Latin America has been rife in recent years, as leading international and regional carriers compete for a slice of this potentially lucrative market. Alex Hawkes looks towards the future of this vast and flamboyant continent.
In November, Capacity reported that the Latin American telecoms market had overtaken western Europe to become the second largest mobile market in the world. During the second quarter of 2010, the continent’s number of subscribers shot up by a staggering 15 million to reach a total of 530 million. Meanwhile, mobile subscriber figures in western Europe continued on a downwards trajectory – declining from 520 million to 515 million during the same period.
Unsurprisingly, M&A activity has been rife in the Latin American telecoms market in recent years, particularly from western European operators keen on countering flagging revenues at home, as well as larger local companies looking to consolidate and grow their operations. The continent’s two largest service providers – Telefonica and America Movil – have continued to increase their market share, to the extent that monopolistic fear could prevent further M&A activity; while key domestic players, such as Brazil’s Oi, Telecom Argentina and ENTEL Chile, are finding innovative ways of competing with international giants on their home turf.
The market has largely been driven by greater end-user penetration. Analyst firm Yankee Group estimates that penetration in Latin America is now between 90% and 100%, of which 10% of end users are estimated to have more than one active phone. The main drivers of this growth are declining handset prices, an increase in GDP throughout the region and an increased awareness of the economic and social benefits of owning a mobile phone.
Wally Swain, senior vice president of emerging markets at Yankee Group, praises the contribution of domestic and international operators: “The growth has been fuelled by vigorous competition between large well-funded operators like America Movil and Telefonica, as well as significant local or regional operators like Millicom, ENTEL Chile and Oi. The intense, almost personal, competition between international companies has driven prices down both for handsets and airtime. The result has been the pleasant discovery that mobile telephony demand is elastic (for most services) and lower prices therefore mean higher revenues,” says Swain.
Telefonica and America Movil continue today to dominate the Latam market. Each has built a formidable regional base and between them they are the market leaders in no less than 10 of the 14 largest South American country markets.
“Telefonica has leveraged its experience across different markets to profitably introduce new services that have been successful in other operations. America Movil is more of a ‘blocking and tackling’ expert, relying on its vendors to understand what works and what doesn’t in value-added services,” comments Swain.
Evidence of the two companies’ continued interest was seen last year, particularly through Telefonica’s agreement to buy Portugal Telecom’s stake in Brazil’s largest wireless company, Vivo. The $9.8 billion deal will eventually see Telefonica’s share of the regional market rise to around 27%. Yet, Carlos Slim’s America Movil beat its rival in June 2010 by successfully acquiring Telmex and Telint for $23 billion. Once the merger is complete, analysts TeleGeography estimate America Movil’s share of the market will surpass Telefonica to reach around 32%.
The key markets in Latin America are Brazil and Mexico. As the largest country in the region, accounting for 34% of the continent’s population, Brazil has a natural advantage over its neighbours and claims 40% of the region’s total telecoms market. According to TeleGeography, the country is expected to end 2014 with over 300 million telecoms revenue generating units (RGUs). The other regional giant, Mexico, accounts for 19% of the continent’s market value and is expected to experience robust wireless and broadband subscriber growth over the coming years. Other key markets include Venezuela (9%), Argentina (7%) and Colombia (5%).
Swain points to these markets as areas where regional operators are starting to equally compete against international players. “Oi has taken the fight to Telefonica, America Movil and Telecom Italia in Brazil’s most populous state of Sao Paulo,” says Swain.
“Telecom Argentina and ENTEL Chile compensate for their smaller scale by innovating in products and leading in technology. ENTEL PCS is expected to launch LTE services before anyone else in the region.”
As a wholly owned subsidiary of Brazilian operator Oi, GlobeNet has witnessed firsthand the recent rise of regional operators in Latin America. The company provides international capacity between North and South America via an advanced submarine fibre-optic cable system connecting Brazil, Bermuda, Colombia, the US and Venezuela.
Oi, formerly known as Telemar, is Brazil’s biggest fixed-line telephony company. Following its acquisition of Brasil Telecom in 2009, it has continued to mark its dominance on the regional market. GlobeNet’s COO Erick Contag describes his company as a “growth enabler” for Oi, but he stresses that the company has continued to operate its own service since the takeover: “Though Oi represents an important share of GlobeNet’s business, we continue to have a strong market share in the US, Brazil, Venezuela and Colombia, serving all their major carriers.”
In the second quarter of 2010, Oi reported a net income of 444 million Brazilian Reais ($252.6 million), compared with a loss of 146 million Reais a year earlier. A large part of this growth was attributed to the number of additional broadband internet subscribers, which rose by 11% compared to the same period in 2009.
Contag believes that broadband internet and media-rich content has been a vital driver of growth across the continent: “What is really driving capacity in Latin America is broadband internet, but most content still resides in the US or transits via the US to global sites. An exception is Brazil, which has the largest amount of Portuguese content in the world. Any other Portuguese-speaking country will look to Brazil for content,” he says.
To keep pace with the growth of demand in Latin America, GlobeNet is increasing its network capacity from 80Gbps in 2003 to over a terabyte by the end of 2011.
Rules of the rainforest
Both Oi and GlobeNet have embarked upon the challenge of extending networks into remote areas. In northern Brazil, Manaus – the largest city in the Amazon rainforest – has remained reliant on satellite telecoms. Access to Manaus is traditionally via the Amazon River and the city has recently become an important R&D and manufacturing hotspot – attracting multinationals such as Nokia – and urgently requires greater telecoms services to sustain growth.
GlobeNet came up with an ambitious plan. Through strategic partnerships, it extended its network from its landing station in Venezuela to Boa Vista, the capital of the Brazilian state of Roraima near the border of Venezuela and Brazil. Phase two involves constructing 750km of fibre-optic cable between Boa Vista and Manaus – two cities which happen to share a well-maintained road accessing Manaus from the north. Phase 1 was completed in September of last year; the project has successfully helped to deliver Boa Vista’s first ever high-speed broadband services. At the time of writing, phase 2 is expected to be completed at the very tail-end of 2010.
“Not only are we proud of this from a strategic perspective, but the social implications have been vast too. Kids in local schools now have access to remote educational programmes that they didn’t have before and it has helped change lives,” Contag says.
Building for a brighter future
GlobeNet’s rival, Global Crossing, has also significantly increased its network and capacity across Latin America in recent years.
The global IP and Ethernet solutions provider has been in the Latin American market for over 15 years and its undersea cable system features 12,000-route miles (20,000km) of fibre-optic cable linking landing stations in seven Latin American countries.
Hector Alonso, managing director of Global Crossing Latin America & Caribbean, also believes the greatest challenge facing the sector is extending broadband penetration and telephony density to remote locations across the continent. “Infrastructure is often dependent on the investment from the public and private sectors, which are starting to share the goal of making information and communication technology a long-term priority in order to compete in the 21st century global economy,” he says.
“Work still needs to be done, however, to enforce regulations that help promote an environment of fair competition, which is sometimes restricted in areas where operators already have established a dominant position.”
With many telecoms operators in Latin America now deploying ADSL2+ and many cable operators offering higher speed services as their networks continue to improve, technology across the continent is showing assured signs of progress.
“The good news is that as operators shift their core networks to NGN because of efficiency, convergence of their fixed and mobile core networks and in peparation for LTE,the effective speed of any technology is increasing,” says Swain.
Although Swain also has a final word of warning for the future: “Some governments have complained about international backhaul prices – if it has got to this level then there must be a capacity issue.”
Sao Paulo, Brazil: the country is Latin America's largest and most important telecoms market
M&A activity has been moving so fast in Latin America recently, that here we bring you up to speed with just some of the bigger deals of the last few months: