Telecom Market Spotlight: Latin America

Light Reading’s Market Spotlight last turned on Latin America early in 2009. (See Top 10 Telecom Markets: Latin America.) This time, naturally, we're looking at how the major telecom indicators such as service revenues and penetrations have changed over the past year. We're also revisiting the region’s 3G growth story by looking at Brazil’s recent smartphone experience, and examining another trend where the region is beginning to pull ahead: pay-TV video on demand.

Despite the aftermath of the global economic problems, earlier telecom trends continue. Further market liberalizations have occurred or are ongoing – such as Costa Rica’s ending its mobile monopoly and introducing an auction for mobile spectrum, or Brazil’s move to introduce new spectrum and spectrum licensing rules. (See Brazil Preps for Mobile Upheaval.)

Foreign operators are maintaining their interest in the region. Vivendi , for example, is notably interested in entering the Brazilian mobile market after acquiring the GVT fixed-line broadband operator there in November 2009. (See Vivendi Reports 2009 Results and Vivendi Floors Telefónica.)

Vivendi is also reported (Financial Times, March 5, 2010) to be considering using GVT as a platform for pay-TV once regulation allows. Vivendi owns the Canal+ pay-TV operator in France, so would in principle be well placed for such a business. Spain’s Telefónica SA (NYSE: TEF) has a long-standing interest in expanding its already extensive Latin American business (see, for example, TEF Goes Nuts for Brazil) – which has led to complications in its close relationship with Telecom Italia (TIM) , another European player in the region. (See Is Italian on Telefónica's Menu? )

Spotlight data
Most of the table data is supplied by Pyramid Research , part of the Light Reading Communications Network. Pyramid analyzes and forecasts demand for communications and media services, applications, networks, and devices in more than 100 countries, with a strong focus on emerging markets. Future editions of the article will update, replace, or extend the data tables as appropriate.

Here’s a hyperlinked contents list:

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

Next Page: Markets, Services & Definitions

This article is limited to the following Latin American markets:

Services
The tables are limited to the following telecom services:

They include both business and residential customers. Services supplied exclusively to businesses, such as leased lines, are excluded.

Subscribers and service per-population penetrations
Penetration (calculated in various ways) is a measure of adoption of a telecommunications service in a country, and is generally used as a comparative measure of network development with other countries or to compare the different adoption rates of similar service offerings. The per-population penetrations in this report are calculated by dividing the total number of subscribers (or users in one case), both business and residential, by the midyear population of the country concerned.

This article looks at the per-population penetrations for:

Revenues
All revenues are retail and exclude VAT. Revenues are calculated on a bottom-up basis from their various components, as follows:

Data sources
All data in the tables is sourced from Pyramid Research, which operates an ongoing and phased program of country research and data collection. Figures for 2009 and 2008 are taken from Pyramid’s 1Q2010 Forecast Release in March 2010. Revenues are given in US dollars, converted at the average exchange rate for the year concerned.

Next Page: Market Spending

Table 1 ranks the markets in the group by (estimated) spending in 2009 on the following categories of telecom services:

Table 2 does the same, but for 2008 and using updated figures where necessary, to those of Top 10 Telecom Markets: Latin America.

Table 1: Latin America** Telecom Markets by Service Revenues 2009, US$

Table 2: Latin America** Telecom Markets by Service Revenues 2008, US$

It is important to stress that the revenue declines from 2008 to 2009 evident in these (and other) tables reflect both exchange-rate and recessionary effects – measured in local currencies, the picture may be different for some markets. And competition in some big markets, such as Mexico, has become intense and is thus driving down prices, which affects usage and revenues. However, Brazil clearly has maintained its extraordinary dominance of regional telecom revenues for both fixed and mobile, followed by the major quartet of Mexico, Venezuela, Argentina, and Colombia.

An interesting point is that Venezuela has overtaken Argentina as the No. 3 market, despite all the turmoil in the country. For example, it has become Telefónica’s most profitable business (48 percent OIBTDA – operating income before tax, depreciation, and amortization – margin) and contributes 15 percent of Telefónica’s Latin America OIBTDA, according to Pyramid Research.

Tables 3 and 4 give in US dollars the per-population total fixed and mobile revenues for the various markets. It is very noticeable how Brazil and Mexico, which hugely dominate the overall mobile-revenue figures in Tables 1 and 2, languish in the middle of the mobile revenues per-population tables – a function of the still relatively low mobile penetrations in those countries.

Table 3: Latin America** Telecom Markets by Annual Totals for Fixed and Mobile Revenues Per Population 2009, US$

Table 4: Latin America** Telecom Markets by Annual Totals for Fixed and Mobile Revenues per Population 2008, US$

Next Page: Market Penetrations

One of the points of per-population penetrations is to help to give a picture both of the state of telecom market development and of its future potential. Low figures suggest lots of scope for building up infrastructure and standard services, while high figures suggest scope for service innovation.

Tables 5 and 6 give the per-population service penetrations for narrowband, broadband, and mobile services for 2009 and 2008, respectively.

Table 5: Latin America** Telecom Markets by Service Per-Population Penetrations, 2009

Table 6: Latin America** Telecom Markets by Service Per-Population Penetrations, 2008

Table 7 shows the relative service per-population penetration changes from 2008 to 2009. Relative means that, if the 2008 penetration was, say, 50%, and the 2009 penetration is 60%, the percentage change is taken as 20% ([60 - 50]/50 as a percentage change, not 10 percentage points change from 50% to 60%).

Table 7: Latin America** Telecom Markets by Relative*** Service Per-Population Penetration Changes, 2009

The basic message of Tables 5–7 is the continuation of the now familiar one of the increasing dominance of mobile at the expense of fixed, narrowband POTS, but with the complication that fixed broadband remains relatively undeveloped, although growing. About half the region’s markets (generally the largest or most developed) are seeing narrowband penetrations fall, while the rest are either effectively static or are increasing a little.

Next Page: Growth Story I: Smartphones

Mobile operators worldwide are pinning much of their hope for revenue growth on the smartphone boom and the associated consumption of value-added data applications. With smartphones likely to account for over a third of all mobile handset sales by 2014, according to Pyramid Research, these hopes look well-founded – and it is the emerging markets of the world that will dominate this growth over the next five years. One such key emerging market is, of course, in Latin America. It’s the B in the BRICs: Brazil.

Smartphones today mean 3G networks, and these have begun to grow rapidly in Latin America following their introduction over the last two or three years, as Table 8 shows.

Table 8: Latin America** Total 3G UMTS/HSPA subscribers, 2009 and 2008

Brazil does have some considerable growing to do before its smartphone potential is realized. In 2009 it ranked 11th in global smartphone sales: 3 million, representing a 2 percent share. In comparison, the USA, at first position, saw more than 37 million and a 22 percent share. But Brazil’s smartphone sales are growing at about twice the US rate, and represent only about 5 percent of the total handset market there, compared to 35 percent in the US, so there is much more growth potential.Overall, Pyramid Research expects that Latin America’s share of the global smartphone market will thus increase from 4 percent in 2009 to 10 percent in 2014.

"Brazil’s mobile penetration passed the 90 percent level in 2009, as the country was not hit by the recession as severely as some of its neighbors, and mobile operators have continued to grow and improve profit margins," says Leslie Arathoon, director of product development with Pyramid Research, citing findings of the company’s recent report, "Smartphone Forecast: Operator Strategies Will Fuel Growth in Emerging Markets." "Smartphones will be one of the key factors driving 3G adoption there, and we expect mobile data ARPU to almost double by 2014."

Figure 1 illustrates Pyramid’s view of the takeup of 3G services in Brazil.

She points out that smartphones are already crucial to increasing the data revenues of Brazil’s largest mobile operator, Vivo Participacoes SA . It boosted its data ARPU by 30 percent in the first half of 2009 compared to 2008.

"Key success factors are the wide variety of smartphones offered, promotions targeting entry-level customers (the My First Smartphone program) and attractive data plans," Arathoon says. "We expect handset vendors to team with Vivo and other Brazilian operators to offer more flexible and attractive data plans and bundles for smartphone messaging and social networking."

Competing mobile operators like TIM and Claro are also aiming to increase data ARPUs and are now actively promoting smartphones, while increasing competition among handset vendors is increasing the range of smartphones available in the market. As a result, Brazil is becoming one of the most advanced smartphone markets in Latin America and is already, in terms of handset units and value, the largest in the region.

Next Page: Growth Story II: Pay-TV VoD

In Latin America, over 80 percent of households have TVs, but pay-TV penetration is only 22 percent. In global terms, this puts the region at the bottom of the world ranking in terms of total subscriptions (see Figure 2), although the Africa/Middle East region ranks lower in terms of penetration.

Nevertheless, two of the largest emerging pay-TV markets are Brazil and Mexico, and the prospects for the region’s overall pay-TV growth look good as there is a lot of room for catching up: Pay-TV penetrations in developed markets are typically over 60 percent.

But there are obstacles. Like many other emerging markets, Latin America is generally constrained by limited broadband infrastructures, regulatory restrictions, lower incomes, and a dominant TV/video business model based on free-to-air advertising revenues rather than on subscriptions. Such constraints are encouraging the region’s pay-TV operators to make their offerings more attractive by adding value through such enhancements as pay-TV video on demand (VoD).

“One way that emerging-market pay-TV operators can improve revenue is by adding VoD and positioning the service as complementary to linear-channel programming – assuming compelling content is included,” says Özgür Aytar, director of broadband and media at Pyramid Research, and contributing author of the recent report, "Pay-TV Video on Demand in Emerging Markets: Service Provider Strategies, Business Models and Five-year Adoption Forecasts." “VoD can both raise ARPS and increase customer loyalty. However, this is not always so easy, because pay-TV operators need an appropriate type of VoD service and pricing model.”

For example, the digital video recorder (DVR) integrated into a set-top box is the easiest way for digital pay-TV operators to offer VoD services, as it involves only a simple per-customer cost without network or back-office upgrades and investments. This approach has particular appeal to satellite operators, and DirecTV Latin America , which claimed the region’s first DVR service, has obtained double-digit percentage penetrations in several national markets there.

But cable is the dominant pay-TV transmission medium in the two largest regional markets – Brazil and Mexico – and so far pay-per-view (PPV) is the most widely adopted form of VoD in the region. It has the attractions of a limited financial risk and delivery over an analog signal: In the early stages, PPV generally offers only a limited amount of content and does not need significant network upgrades.

However, cable operators are moving to digital networks that have greater possibilities for VoD services than do analog networks. Megacable Comunicaciones in Mexico and Teléfonos de México (Telmex) in Colombia, for example, use PPV to differentiate themselves from TV services that do not include any form of VoD, as well as to compete with brick-and-mortar video stores.Further, Aytar expects that growth in IPTV adoption should spur the uptake of VoD services across emerging markets generally.

“By our estimates, IPTV growth across emerging markets will be significant: From year-end 2008 to year-end 2014, Latin America will show the highest CAGR, 91 percent, followed by Africa and the Middle East at 76 percent,” says Aytar.

Overall, he expects that, in Mexico in 2014, 29 percent of pay-TV subscribers will use VoD, while only 19 percent will be using DVRs. DVR adoption should fare somewhat worse than VoD adoption owing to the higher monthly cost of the DVR CPE compared to the per-use VoD cost.

As the two major pay-TV markets of the region, Mexico and Brazil form an interesting contrast in the emergence of VoD services.

Mexico: Cablevisión uses VoD to drive digital content
Pay-TV penetration in Mexico reached 28 percent of households in 2008 compared to the regional average of 22 percent – although Mexico is well behind Argentina, which leads the region with nearly two-thirds penetration. At the end of that year cable subscriptions accounted for 68 percent of total Mexican pay-TV accounts, and Pyramid Research expects that coaxial cable will remain the most widespread pay-TV technology in the country for the next five years.

With more than 200 cable firms operating on a municipal level, the Mexican pay-TV market is still highly fragmented; but consolidation is underway, and Grupo Televisa has been one of the most active players behind this (see Figure 3). Its DTH system (Sky) and cable operations (Cablevisión and Cablemas) combined control 43 percent of the total pay-TV market. Nevertheless, increased competition in the video services market has forced cable operators to accelerate their digitalization plans, and further competition is inevitable once the incumbent Telmex’s regulatory-delayed IPTV service eventually gains momentum.

Grupo Televisa is one of the largest media conglomerates in the Spanish-speaking world, with interests in television, radio, sports, live entertainment, broadcasting, international distribution of television programming, online and mobile content, electronic gaming, magazine publishing and distribution, and telecommunications services. Its Cablevisión and the recently acquired Cablemas cable operations had 1.5 million cable video subscriber as of the second quarter 2009.

“With its strong emphasis on triple play and advanced pay-TV services such as VoD, it has gained significant market share in pay-TV over the past several quarters,” says Jose Magaña, analyst for Latin America at Pyramid Research. “By introducing VoD, Cablevisión believed it could strengthen its strategic marketing goals of increasing subscriber numbers, reducing churn, boosting ARPU, and differentiation through value-added services and innovation. Innovating through interactivity and digital content are major goals for its parent, Televisa.”

Cablevisión began a VoD trial in September 2006 for a small base of subscribers in Mexico City, following with the commercial launch of Cablevisión on Demand, as the VoD service was branded, in 2007. It claimed to be the first operator to launch VoD in Mexico. The service includes 720 broadcast programs updated weekly, and a library that holds more than 2,000 titles, equivalent to about 5,000 hours of content, and the content is divided into catchup programming (free content as an extension of regular linear broadcasting) and on-demand transactions (paid-for titles).

"To get existing pay-TV customers to activate VoD, the company positions the service as a sort of enhanced video rental store," says Magaña. "We believe VoD, combined with other digital services, has had a positive impact on ARPU – by Q1 2009 Cablevisión had 20 percent of its subscribers using VoD. It has also had a positive influence on pay-TV subscriber growth and churn stabilization, and an important lesson seems to be that, in the early stages of deploying VoD, free content is critical to generating interest and meeting subscriber expectations."

Brazil: Brasil Telecom abandons VoD strategy
In contrast, the experience of fixed-line operator Brasil Telecom Participações SA (NYSE: BRP) with VoD in its own national market has been very different. Unlike Mexico, the Brazilian pay-TV market is much less developed, and household penetration was only 12 percent at year's end 2008. Cable is heavily dominant (61 percent of pay-TV accounts), followed by satellite/DTH (33 percent) and MMDS/LMDS (6 percent), and about 57 percent of pay-TV subscriptions in Brazil are digital. However, 87 percent of households receive free service.

“Pay-TV adoption is inhibited largely by limited unique content being available to operators and by high prices for end users. Most of the popular content is available over the air for free through broadcaster Rede Globo, making the paid offerings less attractive,” says Pyramid's Magaña. “But, like the two other regional incumbents in Brazil – Telefônica Brasil and Oi – Brasil Telecom (now merged with Oi) aimed to use IPTV to offset the decline in traditional fixed revenue with a multiplay strategy focused on growth in broadband. It also hoped to use its newly built ADSL2+ network to offer IPTV.”

Brasil Telecom launched its broadband-based VoD service, Videon, in September 2008. It offered access to a library of 18,000 titles consisting of general interest, adult movies and music, drama, and children's programming, together with local news, weather, and sports from its own Internet business – Internet Group – TV iG Website. Unfortunately, telcos in Brazil are prohibited from offering broadcast services over their fixed networks, and hopes that this restriction would soon be lifted have been dashed.

Although Brasil Telecom’s VoD offering undercut what average customers in Brazil spent on cable and satellite, the operator had a hard time selling the service without a broadcast programming component. After roughly six months of commercial service, it discontinued Videon and now is focused on a pay-TV strategy built upon its merger with Oi, which offers satellite pay-TV services. However, Oi/Brasil Telecom does not rule out a hybrid pay-TV offering that would combine linear programming over satellite with VoD over ADSL2+.

A further difficulty for Videon at the time of its launch was that broadband penetration was still low – even at the end of 2009 it was taken by only about 23 percent of households – and this represented a severely limited addressable market.

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

Back to Introduction