Future scenarios for Latin American communications: emerging … · 2019-05-14 · The Latin...

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




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 +


+

(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 +


+

(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 +


+

(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 +


+

(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 +


+

(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




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

GOOGLE

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




Is there a relationship between the demand and supply scenarios?

BROADBAND SCENARIOS FOR LATIN AMERICA

No

Yes

NoYes


“utility” model


model

US modelEntry of

cable TV

operators

in

telephony


No

Yes

NoYes


“utility” model


model

US modelEntry of

cable TV

operators

in

telephony


Moderate competition

Hyp

erc

om

pe

titiv

e

scen

ari

o

- Infrastructure +


+

(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

Future scenarios for Latin American communications: emerging … · 2019-05-14 · The Latin...

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