Latin America’s wireless telecommunications market is growing at more than 20% a year and is likely to remain one of the most important sectors for FDI in the continent.
According to the World Bank, Latin America has received more than half of all FDI flows in the telecoms sectors to the developing world since 1990. The Economic Commission for Latin America and the Caribbean, part of the UN, says the penetration rate of mobile telephony in the region increased to about 70% last year from 30% in 2004. It forecasts it will surpass 80% by 2011.
“Latin America attracted huge swathes of FDI in the telecoms sector in the 90s because many countries in the region privatised their telecoms industries during the period,” says Michael Mortimer, head of Eclac’s FDI unit.“The crisis in the information technology industry at the beginning of this decade hurt telecommunications operators in Latin America and the Caribbean, some of which – BellSouth, Verizon, AT&T – decided to leave the region.”
The relatively solid financial positions of others – especially Telefónica and Telmex/ América Móvil – allowed them to take advantage of this situation to expand their Latin American operations, he explains.
Telefónica and Telmex/América Móvil have been backed by national champion policies in their respective countries: Spain and Mexico. Latin America has been the focus of the internationalisation strategies of both firms, and they have become the two biggest operators in the continent. Telefónica alone has invested more than $70bn in the telecoms sector in Latin America. Telmex/América Móvil is owned by Carlos Slim, the Mexican billionaire, and has a dominant role in telecoms in Mexico.
Tim Perrot, head of investor relations at telecoms group NII, which operates under the Nextel brand name in Argentina, Brazil, Mexico and Peru, says: “Our cashflows and subscriber base in our main markets in Latin America have been growing at 35% to 40% annually during the past few years. Overall, I think the telecoms sector is expanding rapidly in LatAm; the region’s economic situation has been much more stable than in the past.” He says that Brazil has been the fastest-growing market for his company, which saw its subscriber base in the country grow by 50% last year.
Penetrating the market
Mr Perrot says: “The main battleground in Latin American telecoms for the next few years will be normal wireless phones, to get the penetration rate higher still. Maybe the 3G [third-generation] market will be the main battleground in five or 10 years’ time, but many Latin Americans cannot afford phones with those applications.”
He does not believe a slowdown in the US economy will affect Nextel’s business in Latin America as a high proportion of the company’s clients in the region are small and medium-sized enterprises, which need mobile phones to run their businesses. Nextel produces push-to-talk phones that operate similarly to walkie talkies and are popular with small companies.
At first, Telefónica concentrated on fixed telephony in the Southern Cone [Argentina, Chile, Uruguay and parts of Brazil and Paraguay] countries but then moved north throughout the region, as it found its way into new segments (mobile communications, internet and pay-television). From the start, América Móvil focused on mobile communications and on the largest market, Brazil, later expanding into the rest of the region.
José Otero, president of Buenos Aires-based telecoms consultancy Signals, says: “Low tele-density rates made the region highly attractive to foreign companies interested in diversifying their portfolio by expanding their reach into emerging markets. Latin America became the natural extension of companies established in Portugal and Spain, as well as the US.”
Since 2000, he says, much of the FDI in telecoms in the region has taken place because of technology migration, from code division multiple access to the global system for mobile communications, by operators such as Vivo in Brazil and Movistar in Mexico (part of Telefónica).
He adds: “The deployment of upgrades such as EDGE for data transmission during the earlier part of the decade, and more recently the ongoing deployment of 3G networks by the subsidiaries of América Movil and Telefónica, to be joined later this year by Millicom, continue to make this sector the most cash-intensive within the telecom industry.”
He expects the deployment of 3G networks – the universal mobile telecommunications system/high speed packet access version – and the upgrades by fixed-line operators and cable television players to offer triple play services (video, broadband, fixed telephony) will be the main focus of FDI during the next few years.
According to US law firm Harris Wiltshire, which specialises in LatAm’s telecoms sector, Panama awarded two licences in 1900 MHz in mid-May to América Movil and Digicel (America Movil is likely to launch a 3G high-speed downlink packet access [HSDPA] service while Digicel will introduce 3G HSDPA or 3G WiMax). 3G auctions in Mexico and Chile in the 1.7 to 2.1 GHz spectrum are expected to be held during the second half of this year.
“Chile would like to bring in a new wireless competitor to compete with Telefónica, America Movil and local group Entel. In Peru, the ministry of communications is planning to auction a licence in 1900 MHz to bring competition to Telefónica and América Movil,” says Tricia Paoletta, a partner at Harris Wiltshire.
“In Venezuela, the 10 MHz spectrum in 900 MHz will be auctioned in the second half of 2008; the operator Digitel seems to be the most interested, since it did not get any spectrum in the last auction of 1900 MHz at the end of 2007.”
About 22% of the region’s population are internet users, which translates into about 6% penetration of internet accounts. Joerg Funk, a partner at the Boston Consulting Group in São Paulo, says: “In Brazil, there will be a number of battlegrounds within the telecoms sector during the next few years. One of them will be the pre-paid mobile phone market for lower income groups, a very big market in Brazil. The second battleground will be the 3G market. We are only just starting to see phones with 3G applications launched in the country. The other main battleground will be triple play. Groups such as Vivo, Net and Oí have started to offer such services.”
Mr Funk adds that throughout a lot of Latin America a duopoly exists between Telefónica and América Movil but that is not the case in Brazil, where the mobile telephony market in particular is very competitive. He estimates that the Brazilian telecoms market is worth 100bn reais ($60bn) a year in revenues.
Deployment of 3G networks in Latin America
- Panama awarded two licences in 1900 MHz in mid-May to América Movil and Digicel.
- In Panama, America Movil is likely to launch a 3G high-speed downlink packet access service and Digicel will introduce 3G HSDPA or 3G WiMax.
- 3G auctions in Mexico and Chile in the 1.7 to 2.1 GHz spectrum are expected to be held during the second half of this year.
- In Peru, the ministry of communications is planning to auction a license in 1900 MHz .
- In Venezuela, the 10 MHz spectrum in 900 MHz will be auctioned in the second half of 2008.