Post on 25-Jun-2020
Future scenarios for Latin American communications: emerging conclusions
Dr. Raúl L. Katz
Adjunct Professor, Finance and
Economics Division
Director, Business Strategy Research,
Columbia Institute for Tele-Information
Future Scenarios for Latin American Communications (II)
Columbia Institute for Tele-Information
April 14, 2008
Contents
• Background
• Future demand scenarios
• Future industry structure
• Conclusions and next research questions
The Latin American communications industry is at a cross-roads facing alternative development paths
● The cycle initiated in the early 1990s with the privatization and liberalization of
telecommunications has led to an exponential growth in service adoption across wireless, internet
and pay-TV services
● In addition, the supply side has been impacted by successive economic crises (1995, 2002) and a
wave of industry consolidation leading to the emergence of balanced oligopolistic industry
structures
● Looking forward, the industry is facing numerous issues (broadband deployment, content
distribution, spectrum allocation, degree of vertical and horizontal consolidation), the outcome of
which will determine its ultimate performance, both in terms of meeting social and economic
needs and generating reasonable profits to its shareholders
Three issues will be driving the future of the industry in the region
● How will the demand growth opportunity for the uncovered segments of the population be tackled in the region?
● How should new regulatory frameworks be defined in order to stimulate infrastructure investment in a converging industry environment?
● What is the optimal industry structure that will ensure further service adoption, technological development, and industry sustainability?
With the purpose of tackling these and other related issues, various research centers, with the support from several sponsors, have launched a research program
●Annenberg Research Network on International Communication, University of Southern California
●School of Information Science, Syracuse University
●Quello Center for Telecommunications Management & Law, Michigan State University
●Center for the Study of Hispanic Marketing Communication, Florida State University
●Information Economy Project, George Mason University
United States
●Enter, Instituto de Empresa Spain
●Maestría en Información y Comunicación para el Desarrollo, Universidad Central de Venezuela
●Centro Nacional de Cálculo Científico, Universidad de Los Andes
Venezuela
●Instituto Perú, Universidad San Martín de Porras
●Instituto para Estudios Avanzados Peru
●Programa de Investigación en Telecomunicaciones, Centro de Investigación y Docencia Económica
●Escuela de Graduados en Administración y Dirección de Empresas, Instituto Tecnológico de Monterrey
●Instituto Tecnológico Autónomo de México
Mexico
●Diploma Conjunto en Economía, Pontificia Universidad Católica de Ecuador
●Centro de Investigación, Desarrollo e Innovación, Facultad de Ingeniería, Universidad de Cuenca Ecuador
●Centro de Estudios de Competitividad, Universidad de Los Andes
●Universidad del Norte Colombia
●Departamento Ciencia de la Computación-Facultad de Ingeniería Pontificia Universidad Católica de Chile
●Centro de Estudios Públicos – Universidad de Chile
●Universidad Tecnica Federico Santa Maria
Chile
●Centro de Politicas, Direitto, Economia e Tecnologías de Comunicacoes, Universidade de Brasilia
●Departamento de Antropología, Política e Filosofía, Universidad Estadual Paulista
Brazil
●Centro de Tecnología y Sociedad, Universidad de San Andrés Argentina
Sponsors
The program is structured around two phases
Phase I: Development of long
term industry scenarios
Phase II: Assessing the
implications
•Five to ten-year scenarios:
•Demand
•Industry structure
•Strategies and challenges
•New services
•Future technologies
•Regulatory framework
•Industry competitiveness
Conference in Buenos Aires
(Universidad de San Andres)
October 5, 2007
Conference in New York
(Columbia University)
April 14, 2008
June 2007 October 2007
PROGRAM WORKPLAN
April 2008
In Phase I, concluded at the Buenos Aires conference, we tackledtwo primary areas
What are the alternative consolidation scenarios between infrastructure providers
and the content industry?
What is the expected entry scenario for international Internet players (e.g. Google,
Yahoo, etc.)?
What are the alternative entry scenarios for cable TV operators and other non-
traditional players?
What will the short-term outcome be of the ongoing consolidation in the
telecommunications industry?
INDUSTRY STRUCTURE
TRENDS
How are demand patterns changing for traditional and new media products?
Which lessons can be learned from successful BOP business models in other
regions?
What will the alternative scenarios be for the underserved segments of the
population (e.g. poor socio-demographic segments, rural areas)?
What will the expected penetration be for mature and new services?
DEMAND TRENDS
Contents
• Background
• Future demand scenarios
• Future industry structure
• Conclusions and next research questions
The communications industry in Latin America has undergone two fundamental restructuring process
� Accelerated infrastructure development
� Service quality improvement
� Decreasing teledensity gap
� Growth of demand for services
� Industry fragmentation
� Price reduction
� Margin erosion
PRIVATIZATION DEREGULATION
IMPACT
0
5
10
15
20
25
0 2,000 4,000 6,000 8,000 10,000
Access Lines per
100 population
GDP (U$S)
TELEDENSITY AND ECONOMIC DEVELOPMENT IN ARGENTINA
(1985-2002)
99 98
9796
95
94
93
9285 9190
86
87
8889
00
Sources: Wolrd Bank; ITU; INDEC; Pyramid Research, Analysis by the author
Privatizations allowed countries to reach levels of telecommunications development consistent with their economies
0102
0
20
40
60
80
100
120
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
Access Lines per
100 population
GDP PPP (U$S)
TELEDENSITY AND ECONOMIC DEVELOPMENT IN CHILE
(1994-2005)
99
98979695
94
00
Sources: World Bank; Subtel, Analysis by the author
However, beyond privatization, it was the wireless explosion that allowed countries to achieve greater levels of infrastructure growth
0102
0304
05
WIRELINE AND WIRELESS
WIRELINE
0607
01020304050
6070
8090
100
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
PeruPeru
Classic Formula to estimate wireless penetration Service adoption f(GDP per capita, handset price)
ChileChile ArgentinaArgentina
Penetración del Servicio(por 100 habitantes)
010
2030
4050
60708090
100
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
0102030405060708090
100
1990
1991
1992
1993199419
9519
9619
97199
81999200020
0120
0220
03200
4200
5200
62007
Sources: ITU; Morgan Stanley,Strategis Group; Subtel; Sikitel; CRT, TIA
CPP
PrepagoPrepago
CPPCPP 20%18-20%
The wireless industry has put in place growth strategies that have resulted in high service penetration
WIRELESS SERVICE PENETRATIONWIRELESS SERVICE PENETRATION
010
2030
4050
60708090
100
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
BoliviaBolivia
Penetración del Servicio(por 100 habitantes)
10%8 %
0
10
20
30
40
50
60
70
80
90
199419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
08(E
)20
09 (E
)20
10 (E
)20
11 (E
)
Service adoption (per 100
population)
DIFFUSION OF TELECOMMUNICATIONS SERVICES IN CHILE
(1994-2011)
Broadband
Internet
Wireline
Sources: Subtel; Pyramid Research, Analysis by the author
The region’s next challenge is broadband, where demand is not matching supply
Wireless
Broadband supply exhibits several limitations
Japan
19.0Korea
19.0US
17.0Spain
2.3Peru
2.8Colombia
4.0Brazil
6.6Argentina
8.8Chile
HOUSEHOLD PENETRATION
COUNTRY
8.0 %Tierra del Fuego
3.7 %Cordoba
6. 4 %Buenos Aires Province
36.0 %Buenos Aires Capital
HOUSEHOLD PENETRATION
GEOGRAPHY
3 %< 256 K
16 %256 K-512 K
57 %1 Mbps-512 K
24 %> 1Mbps
BREAKDOWNSPEED
$ 160.06 Mbps
$ 11.0128 KCable
$ 45.05 Mbps
$ 19.8512 KADSL
PRICESPEEDPROVIDER
LOW AGGREGATE PENETRATION
GEOGRAPHIC DUALITY
SLOW SPEED
HIGH PRICE
ARGENTINA: BROADBAND
Source: Cisco; IDC
Infrastructure
Future broadband infrastructure development in the region will be
driven by several enablers and obstacles
- Limited investment
- High relative tariffs
- Limited penetration of NGN
- High barriers to entry
- Slow decline of technology costs
+ Dynamic market growth
+ Low prices (10Mbit/s at U$5)
+ Increased penetration of NGN (BdP
+ SU)
+ Low barriers to entry
+ Fast decline of technology costs
- +
Content and applications are likely to evolve as well driven by several
variables
+ Consumer interest in content and applications of Web 2.0
+ Increase in demand for “a la carte” content
+ Services and terminal portability over different networks
+ Diffusion of Web 2.0 pattern to all socio-demographic
segments
- Consumer interest in standardized content
- Low level of interactivity and social networking
- Limited portability of services and terminals (subsidy model)
- Vertical value chain integration between connectivity and
applications/content (walled garden)
Content and applications
-
+
We have defined four scenarios for broadband development in the region
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
The “low equilibrium” scenario results from a reduction of competitive intensity and investment
● Limited infrastructure development, low NGN investment
● Macroeconomic instability and regulatory uncertainty disincentivize investment
● Limited competition among incumbents of converging sectors (cable, telco, media, internet)
● Prices remain at current levels
● Limited diffusion of Web 2.0 content and applications
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
The “uneven growth” scenario represents an extrapolation of the digital divide where the top of the pyramid is the only beneficiary of innovation
● Limited and uneven infrastructure development
● Broadband reaches penetration levels similar to those of pay TV (25%)
● High penetration of Web 2.0 content and applications in ABC1 households and youth segment
● High relative pricing of handset and access devices
● Limited impact of universal service programs
● Limited diffusion of IPTV, VoIP and Web 2.0 content
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
On the other hand, the “balanced growth” scenario benefits large portion of the population as a result of price declines driven by competition and technology innovation
● Almost universal adoption of low cost IP connectivity services
● High network interoperability
● Sophisticated users increasingly personalize their service portfolio
● High demand for interactivity and “social networking”
● Entry of new players
● Technology standardization promotes service portability
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
The “premature infrastructure development” scenario combines entry of new infrastructure competitors with limited service adoption
● Entry of new network operators results in strong price competition and margin erosion
● Socio-demographic, education and access technology limit the adoption of Web 2.0 services
● Difficulty encountered by operators in the definition of appropriate content and services bundling
● Failure in implementing new business models for the diffusion of new services
These scenarios raise several key questions
� Are countries in the region going to follow a common scenario? Or should we expect countries to follow alternative paths and scenarios?
� What are the possible trajectories to be followed in the regional markets? Could we expect a migration among scenarios?
� How should we accelerate the transition and avoid the “low equilibrium” scenario? What are the consensus points between industry players and policy makers tghat would enable the avoidance of such scenario?
Contents
• Background
• Future demand scenarios
• Future industry structure
• Conclusions and next research questions
The Latin American communications industry is highly concentrated
● Horizontal concentration of wireless industry in each country, combined with a regional integration in two players
● Vertical integration of national operators
– Local carriers entering into long distance (e.g. Colombia and Brazil)
– Telecommunications carriers entering into content distribution and pay TV (Perú, Chile, Colombia, Brazil)
– Integration based “string of pearls” acquisition strategies: Colombia (Telefónica in Long Distance, Local and wireless), Argentina (Telmex in wireless and local)
● Regional telecommunications operators vertically integrated
National wireless operators are emerging throughout the world asa way of leveraging economies of scale
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
05,
000,
000
10,0
00,0
0015
,000
,000
20,0
00,0
0025
,000
,000
30,0
00,0
0035
,000
,000
40,0
00,0
00
Total Subscribers (2007)
Opex/M
onth perS
ub (2007)
NA/EUROPEAN MOBILE OPERATOR ECONOMIES
OF SCALE (2007)
Sources: Merrill Lynch; Analysis by the author
� Large mobile operators enjoy significant cost-per-subscriber advantage over operators half their size
� These economies of scale are driven primarily by the large fixed component of local radio network deployment and infrastructure costs
� Furthermore, aggregate macro-scale in mobile services could be related to the fact that it remains a single product industry, which is governed by volume
� In addition, it is also possible that economies of multi-plant operation (multiple call centers, regional customer service, maintenance and logistics) are also at work US/European Mobile Operator Economies of Scale
In Latin America, the wireless sector is already concentrated
294,111,00053,105,000 (18%)39,528,000 (13%)116,914,000 (40%)84,563,000 (29%)Total
22,190,000
11,286,000
63,128,000
34,734,000
13,898,000
113,150,000
35,725,000
TOTAL
12,040,000 (54%)----------10,150,000 (46%)Venezuela
455,000 (4%)-----4,502,000 (40%)6,329,000 (56%)Perú
5,725,000 (9%)-----47,852,000 (76%)9,551,000 (15%)México
2,505,000 (7%)-----23,062,000 (66%)9,167,000 (26%)Colombia
5,511,000 (40%)-----2,489,000 (18%)5,898,000 (42%)Chile
26,064,000 (23%)29,264,000 (26%)27,165,000 (24%)30,657,000 (27%)Brazil
805,000 (2%)10,264,000 (29%)11,844,000 (33%)12,811,000 (36%)Argentina
OTHERTELECOM ITALIA
MOBILE
AMERICA MOVILTELEFONICACOUNTRY
WIRELESS SUBSCRIBERS IN LATIN AMERICA (2007)
Source: Merrill Lynch; operators reports;
analysis by the authorShare > O = 30% C2 > 60%
Wireless consolidation has been driven by a return to economies of scale
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
$0.40
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Market share of covered POPs
Opex per sub
ECONOMIES OF SCALE AND MARKET SHARE OF
COVERED POPS IN THE LATIN AMERICAN WIRELESS
INDUSTRY (2007)
Sources: Merrill Lynch; analysis by the author
Additionally, consolidation results from a need to impose price discipline
0
5
10
15
20
25
30
35
40
45
50
0 20 40 60 80 100 120
Market share of top two players
Average EBITDA
BrazilArgentina
Perú
México
ColombiaChile
Venezuela
CONSOLIDATION AND WIRELESS INDUSTRY PROFITABILITY (2007)
Sources: Merrill Lynch; analysis by the author
●Data above not consolidated with Telemar (fixed lines operator)
●Third biggest mobile operator in Brazil
●Leader in servicesrevenues in Brazil
●Vivo is going to achieve achieve National coverage in 2008
Observations
BNDES
National Groups
América Movil69,67% TIM Brasil Serv. e participações S.A.
30,33% Others
62,75% Brasilcel, NV
36,94% Publicly traded
Shareholders
27.5%25.0%23.1%25.1%EBITDA
4,1959,98812,44212,493Revenue (‘000’000 $)
36%24%33%25%Annual Churn
13.21%24.99%25.85%27.68%Market Share
15,98430,22831,26833,484Subscribers (‘000)
OICLAROTIMVIVO
Source: Teleco
MAJOR WIRELESS PLAYERS IN BRAZIL (2008)
As an example of potential for lesser price discipline, the Brazilian wirelessindustry has four balanced share players
As expected, the wireline industry is more concentrated than wireless, with a significant state presence
Telemar/Brasil Telecom merger
Telecom Argentina restructuring/sale
Axtel/Avantel merger
RECENT/EXPECTED
TRANSACTIONS
Private1900Colombia
Private3300Brazil
Private4100Argentina
State-owned5000Ecuador
Private5300Chile
Private5300Guatemala
Private6500Honduras
Private7000El Salvador
State-owned7000Venezuela
Private8750Mexico
Private8800Panama
Private9000Peru
State-owned10000Paraguay
State-owned10000Uruguay
State-owned10000Nicaragua
State-owned10000Costa Rica
INCUMBENT
OWNERSHIP
HERFINDAHL-HIRSCHMAN
INDEX (2006)
COUNTRY
Simultaneously, we see an emerging vertical integration across industry sectors
-Broadband- -Wireless-
97 % of market 100 % of market
CTC (50%)
VTR (40%)
Entel (3%)
Telefónica del Sur (4%)
Movistar (42%)
-Wireline-
~92 % of market
CTC (66%)
VTR (16%)
Entel (3%) Entel (38%)
-Pay TV-
87 % of market
Telefónica (15%)
Metrópolis (70%)
ZAP TV (2%)
Telefónica del Sur (7%)
Sources: company reports; analysis by the author
Telmex (20 %)
CHILE: COMMUNICATIONS INDUSTRY STRUCTURE
Two scenarios have been defined with regards to industry consolidation
● Scenario 1: the consolidation wave continues
yielding highly concentrated regional and
national industry structures
– At the national level, we would have a
vertically integrated operator
– At the regional level, we would have two
wireless carriers with presence in multiple
countries
● Scenario 2: Slowing down of the consolidation
trend due to three factors:
– The regulatory authorities become
concerned about excesive market power
– The regional dominant carriers consider it
convenient to maintain a minimum level of
competitive intensity
– The dominant regional players set their
sights in other markets (Europe and Asia)
● The resulting industry structure would be two or
three vertically integrated players per market
In parallel with telco consolidation, the cable TV industry is entering the telephony business
NET started up 2006; 4 million subscribers as of 20083 % (but Sao
Paulo 5.2%)
Brazil
Perú
VenezuelaLow
With the convergence law, cable TV operators can launch
telephony services; however, they still face foreign
ownership and interconnection restrictions
Despite the fact that, according to the convergence law,
cable TV players can launch telephony services, some
restrictions remain concerning foreign ownership and
interconnection
Telecable is offering telephony services since 2007
Observations
12%MéxicoMedium
20%Chile
45%Colombia
50%Argentina
Already offering
PenetrationCountriesProbabibility of cable TV
entry in telephony and
adjacent services
Finally, Wimax could become either a disruptive or complementary platform
● Complementary platform: economic solution for last mile of incumbent operators
– Wimax represents an opportunity for incumbents to improve broadband deployment and offer triple and quad-play
– For example, Telmex is using Wimax to complete its broadband deployment both in countries with a copper network (Mexico) as well as countries where it does not have wireline network (Argentina, Chile, Perú)
● Disruptive platform: technology used for entry of new challengers
– The entry of new operators would be achieved within niches of well defined operating spaces (geographies/markets)
– For example, there is a possibility that the challengers focus on “Bottom of the Pyramid” markets based on business models subsidized by government’s universal service funds
Based on the three dynamics described above, we have defined twopotential scenarios for the industry in 2011
No
Yes
NoYes
Status quoReemergence of the
“utility” model
Unstable competitive
model
Intermodal
competition
Entry of
cable TV
operators
in
telephony
Telecommunications sector consolidation
Wimaxdisruptive
Wimaxcomplementary
Moderate competition
Hypercompetitive scenario
According to the moderate competition scenario, the industry structure would comprise one or two scale-driven carriers serving several niche players
One or two
vertically
integrated
players
•Wireline
•Wireless
•Broadband
•Content
APPLICATIONS
SERVICE
PROVIDER
CONTENT
DISTRIBUTION
VERTICAL SERVICE
PROVIDER
INDUSTRY STRUCTURE
On the other hand, the hipercompetitive scenario is predicated on industry fragmentation and price competition
● The consolidation that has taken place over the last years has resulted in an improvement of margins
● This improvement has attracted new players coming from adjacent businesses such as content distribution or equipment manufacturing
● The entry of these new players is enabled by new platforms, primarily Wimax, which exhibit economic advantages (for example, lower capital investment or “pay-as-you-go”)
● Private equity groups could position themselves as providers of financial support to the new entrants
● This could be combined with the incumbents’ willingness to sell some non-strategic assets
● The entry of new players would be based on price competition aimed at capturing market share in the short term
● Beyond the new operators, global internet players could deploy cream skimming strategies focused on the large metropolitan areas (Sao Paulo, Buenos Aires, Santiago, etc.)
Contents
• Background
• Future demand scenarios
• Future industry structure
• Conclusions and next research questions
Is there a relationship between the demand and supply scenarios?
BROADBAND SCENARIOS FOR LATIN AMERICA
No
Yes
NoYes
Status quoReemergence of the
“utility” model
Unstable competitive
model
US modelEntry of
cable TV
operators
in
telephony
Telecommunications sector consolidation
No
Yes
NoYes
Status quoReemergence of the
“utility” model
Unstable competitive
model
US modelEntry of
cable TV
operators
in
telephony
Telecommunications sector consolidation
Moderate competition
Hyp
erc
om
pe
titiv
e
scen
ari
o
- Infrastructure +
Content and applications
+
(4) “Premature
infrastructure
development”
(4) “Premature
infrastructure
development”
(1) “Low
equilibrium”
(1) “Low
equilibrium”
(2) “Uneven
growth”
(2) “Uneven
growth”
(3) “Balanced
growth”
(3) “Balanced
growth”
Intermodal competition
Type of telecommunications and content distribution services will be a critical variable driving future scenarios
● What will the expected penetration be for mature and new services?
● What will the alternative scenarios be for the underserved segments of the population (e.g. poor
socio-demographic segments, rural areas)?
● Which lessons can be learned from successful BOP business models in other regions?
● How are demand patterns changing for traditional and new media products?
As expected, the regulatory variable in addition to competitive strategies will drive the outcome of scenarios
● What should the role of the state be in the upcoming phase of industry development?
● What should the optimal frameworks be to handle the long-term challenges outlined in the demand
and supply scenarios?
● What are the implications for regulatory entities (e.g. administration, talent, and links to other
governmental entities)?
● What is the role of sub-sovereign entities (e.g. municipalities, provinces) in policy formulation?
● What is the future challenge in terms of regional policy harmonization?
In addition, technology trends will have an impact on competitive strategies and supply scenarios
● What is the future of WiMax as a potential broadband alternative in the region?
● Is there a future for 3G?
● Should we expect fiber deployment in the access portion of the network (e.g. G-PON)?
● What are the likely adoption scenarios for digital TV?
● What are the potential unfulfilled needs regarding technological adaptability?
● Which role are regulators likely to play in standards-setting?
These questions drive the agenda for this conference
● Future telecommunications services
● Future broadcasting services
● Future technology trends
● Future regulatory frameworks
● Future industry competitiveness