Latin America, region of contrasts
Geographically and economically diverse, Latin America is still full of opportunities in the coming year for those carriers who are prepared to be innovative.
“The problems we have had in Latin America are what have led to the technical advances we have seen,” comments Stephen Gibb, the CIO of Upaid, a service provider which isn’t only present in Latin America, but has acquired a company in Sao Paulo, Brazil, to take advantage of those advances.
Latin America is a region that spans every type of geography and economy. From the urban centres of Mexico City, Sao Paulo and Buenos Aires to Amazonia, a mostly uncharted region roughly the size of western Europe; from the sophisticated economies of Brazil and Mexico to undeveloped countries like Paraguay, where in rural areas phone service has to wait on the provision of electricity; and from stable, deregulated telecoms markets to state-controlled economies where hyper-inflation, dictatorships and economic collapse are recent memories.
It is also a region where a fragmented telecommunications market has seen islands of innovation which could, perhaps, be a benchmark for how telecoms markets can flourish in the developing world. Fernanda Veiga, a senior analyst at research company Ovum, has tracked the development of wholesale telecoms in Latin America, and she is convinced that the market is broadly healthy. “We believe that there are many more wholesale opportunities to be explored in Latin America by providing a variety of commodity and value-added services to fixed and mobile operators, ISPs, ASPs, systems integrators and brand extenders,” she says. “Latin American carriers’ wholesale revenues as a percentage of total revenues are still low compared with what we found for European wholesalers.”
What, then, is the problem? Veiga identifies government interference. “Regulation in Latin America is not stimulating competition as much as it could and should be, so wholesale has yet to take off in the region. For example, there are Chilean companies that have been planning to launch an MVNO since 2006, but there is no regulation in place to oblige traditional mobile carriers to interconnect with MVNOs. In other countries there are limitations on the extent of operators' coverage of multiple regions.”
This has meant an open field for global carriers who have been active in Latin America. “We expect that the market for international wholesale services within Latin America will continue to be dominated by carriers headquartered outside the region, including Global Crossing, Telecom Italia and Telefonica,” Veiga says, adding that anyone seeking to create business cannot do that by simply wholesaling voice minutes. “As traditional voice margins decline, carriers should be focussing on data-based wholesale services, where higher margins can be earned. There are increasing opportunities to innovate in data-based services,
It is not sufficient to simply offer commodity services, such as long-distance voice transit and bandwidth, to the wholesale market. Carriers must diversify into value-added services which offer a greater margin and can be bundled to form ‘stickier’ offers for customers.”
Working out what those value-added services might be is still a problem. If Latin America has a diverse set of constituent countries, those countries have many common factors. First, fixed-line penetration is poor, and in rural areas, almost non-existent. The drift towards the major cities of the region means that the case for building fixed-line connectivity, already poor, is less compelling than ever. It would be impossible to provide fixed-line coverage in the Amazon or the Andean region, for example (indeed, providing mobile coverage is barely economically viable over much of the area).
So mobile is not just the de facto voice network, but is also the basis of the data network for much of the region – even in major cities, and even for business users. Yet this provides bandwidth constraints.
Finally, the region’s status as an occasional economic basket case has limited outside investment from global carriers. “This, together with the recent re-nationalisation of telecoms in Venezuela reduces the attractiveness of the region to investors,” Veiga adds.
If these are the problems, then – as Gibb points out – there are also opportunities. Building a cellular infrastructure late meant that Latin America skipped straight to 3G.
“In Latin America we still use a lot of copper for fixed lines, and in some places even microwave,” says Narcissi Ribera, vice president and general manager for Latin America at Tellabs, which is helping many Latin American operators provide mobile backhaul, and to optimise their mobile networks. “The technology gap is closing. 3G was available in the US only 18 months before it was available in Latin America.”
While the technology gap may close, this doesn’t mean that Latin America will have a data market that resembles the north American model. “Operators are positioning 3G as a business-to-business communication, the main way to use high-speed data. It changes the marketing of 3G, but it also has to change the network design and the business model too,” Ribera says. “For example we have the ability to multiplex best-effort traffic. We don’t need dedicated lines all the time. Claro (America Movil’s cellular brand) in Argentina is one operator using our solutions, and they are doing a terrific job in decreasing network usage.”
Many operators, seeking to both win business customers in urban areas and to stimulate data traffic, are offering low-cost unlimited 3G mobile broadband, Ribera warns that, if they require capacity to fulfil this demand, they need to carefully examine the business model.
“They need to decouple the growth in network traffic from expansion of the network,” he says. “They need to make their investment in opex and capex proportional to the growth in revenues. So for example, for data traffic they need to fill those pipes as much as possible all day. There is literally a race to bring in subscribers. And to participate in a race like this, you need financial capacity... national operators may find themselves building cellular systems in small regional cities that have maybe 2,000 people living in them.”
Even the wealthy prepay
There may be a demand for service in rural areas, but meeting that demand – even while optimising the backhaul component – creates as many problems as it solves. Latin America’s users overwhelmingly prepay for service – in most countries, the proportion of prepay users is around 80%.
“Charging for data is a huge issue for the traditional operators. How will they prove these services? They are coming from a flat-fee and prepay world, they need to be much more reactive, able to price third-party content at a level that will generate margin,” says Renaud Sibel, vice president for alliances at billing service provider Highdeal, and also the head of the Latin American region.
“In Brazil, for example, Vivo has 40 million customers, all of whom pay exactly the same flat fee. You wouldn’t see this in other countries. Every country has a different history. Brazilian operators, for example, lack transparency on billing and consumption. If you pay monthly, you never know what your bill will be at the end of that month. That drives buying behaviour. Even wealthy retail customers prefer to prepay.”
Service delivery platforms
One of the first steps to creating more efficient service provision is for the regional operators to provide a common platform for service provision and billing, he explains. In this, Latin America has several advantages. A lack of legacy infrastructure – although billing systems are not generally sophisticated – the presence of international carriers like Telefonica and Telmex, and an entire region in which all but one country speaks the same language (and the other country has the largest single market) make it possible to create efficient service delivery platforms.
So far, that work is at an early stage. Only Brazilian operators have invested heavily in the trend to outsource network operations to vendors – even though, according to Yankee Group, network operations represent 60% of opex in the region. Compare this to 35% in EMEA, and 40% in north America. Yankee Group predicts that the cost drivers will overcome resistance from unions (and, occasionally governments) and lead to a vendor-driven renewal of network operations.
“In Mexico and Brazil we are talking about plans for MVNOs, and also Wimax. We have conversations around how they can standardise their prepay systems, and merge them with their postpaid platform. In Spanish-speaking Latin America the foreign investment is looking at how to rationalise systems and replicate them to reduce opex,” says Sibel. “Some of the most innovative SIP development is coming from Latin America. We are seeing some strong architectural thinking now – compare it to Asia-Pacific, where a lot of the investment is opportunistic.”
This will give a structural advantage to global carriers who are active in the region, provided they are effective at partnering with the local operators. Ultimately, those operators who can combine a strong wholesale business with their retail offering will be able to capitalise on the need for consolidated service delivery and billing platforms.
Currently, according to service provider Acision 90% of data revenues still come from SMS (and 80% of overall revenues are still from voice). Acision provides service for about 80% of the mobile messaging market in Latin America, where it supports messaging services across 35 countries and 18 operators.
Steven van Zanen, VP marketing at Acision, points out that as the service evolves, carriers need to find a way to make it pay. That’s going to be a problem when the average customer is cash-limited – and accustomed to budgeting by prepaying. “The proportion of SMS is going to change in the next couple of years. Mobile internet broadband will become the most prevalent source of income in the region... so carriers need to lead the evolution into mobile marketing, because they control the customer, and they can deliver those customers to the advertisers,” he says.
“This region was in diapers seven years ago, and now we have gone from a very immature market to a very mature market,” says Eduardo Bueno, vice president of sales and marketing for Latin America at Acision, “but the ARPU in Peru is $8 per subscriber, for example. Outside the large cities in Latin America there are still people who don’t know how to send a text message. Close to 20 million people live in or around Buenos Aires, in a country with a population of 40 million. Out of 100 million Mexicans, 21 million live in Mexico City. I don’t think America Movil will spend $200 million deploying 3G outside Mexico City for an addressable market of maybe 60 million people.”
The opportunity has to be to create advertising-sponsored services, he explains. By creating a platform for service delivery, the operators can also create a market for advertising that may ultimately be far
easier to target than traditional advertising. By agreeing to accept advertisements, users can be given more data services. “There are opportunities far in advance of the business model that most of the operators have, so how do they execute? It requires capabilities in the network that they don’t have today,” warns Bueno. “It won’t just mean simply attracting new revenue streams – it will also mean that local businesses will be able to reach out and find new customers. Potentially hundreds of thousands of businesses can reach a new customer channel through advertising. But that requires some key control mechanisms in the network.”
To make this a reality, operators need to commit to the services. But they also need to mitigate their risk. “At the moment the market is mostly clueless about what to do next,” says van Zanen. “The best response is to do a revenue share and see if it works. We need to go back to our roots, try some things and see what works. If that’s what we have to do, that is what we will do.”
At Upaid, Gibb is one of the service providers currently “trying some things”. With its roots in India, Upaid was attracted to Brazil because of the sophisticated electronic payment infrastructure in Latin America, it is creating a business in mobile payments in the region, based around its business in Sao Paulo which developed banking gateways for mobile operators. It’s one example of turning a disadvantage into an advantage, he says. “The problems we had are what have led to the technical advances we have seen. Hyper-inflation in Latin America led to banking systems being generally very advanced – when inflation is running at 1,000%, you need to get your money from one point to another pretty quickly. So part of the reason why mobile payments are developing quickly in Latin America is that there’s a real need for it, and part of the reason why they haven’t developed in other parts of the world as fast as many people expected is because few people really need it!”
Creative of necessity
Currently margins are “not massive”, says Gibb, who is also using a revenue share model, and is predicting that the business will grow by a factor of five in the next three years – provided the platforms for Upaid’s service are created by the carriers in the region. “This has to be driven by volume. Then we can add other applications to it. We have been moving up the food chain, and what we are doing with our hub model is buying prepay time from the operators and reselling it. We take the risk ourselves to establish a market.”
Latin America’s problems may one day make it a model of service delivery for developing economies – simply because, to grow their business, carriers have no option but to be creative. “We create mobile applications to fill gaps. Where there are existing problems, we solve them. So the Latin American market is a good one for us,” Gibb says.