Latin America’s wireless sector, the world’s fastest-growing, is expected to expand even more, partly spurred by smartphones.
BY ADAM WILLIAMS
AND LISA K WING
Latin Trade Magazine
SAN JOSE — As Costa Rica’s state telecom provider prepares to face competition for the first time in its 62-year history, the company known as ICE has amped up marketing and customer service like never before.
From January to March, customers who bought a new wireless phone, prepaid plan or service package were entered into a raffle for tickets to a Shakira concert or to an international soccer match at the new National Stadium in San José. ICE also recently offered free phone upgrades to the 3,000 subscribers across the country who were still relying on older models with outdated TDMA technology and it constructed service centers in rural areas.
Driving these promotional efforts is the looming arrival of two deep-pocketed multinationals who are Latin America’s top pan-regional wireless operators. Although the passage of the Central American Free Trade Agreement (CAFTA) in September 2009 eliminated, at least on paper, ICE’s monopoly over cellular service, the move to an open market was slowed by debate over industry guidelines and by bureaucratic delays.
In September of this year, two years after CAFTA was adopted, the last state-run wireless monopoly in Central America will finally come to an end when Mexico-based América Móvil and Spain’s Telefónica launch service in Costa Rica.
Market observers predict a radical transformation of the industry in this nation of 4.6 million people. Pyramid Research, the Cambridge, Massachusetts-based specialist in the telecommunications industry, estimates that ICE could lose as much as 75 percent of its market share by 2015. An estimated 3 million Costa Ricans currently have cellular service from ICE.
“In soccer terms, this will be like a game between one of the world’s best teams, like Brazil or Spain, against a high school team,” says Juan Manuel Campos, a lawyer with the telecommunications law firm Ciber-Regulación Consultores. “ICE has never had to compete for users in its own market. Learning how to thrive in a competitive market will be an entirely new challenge for them. Telefónica and América Móvil, on the other hand, are already competing — and dominating — markets in Latin America. They already have strategies in place for penetrating markets and know how to gain market share. They should have no problem doing so in Costa Rica.”
América Móvil has committed to invest $77 million in infrastructure and market development in Costa Rica; Telefónica has promised to spend $95 million. In early March, both companies had begun construction on customer-service centers throughout the capital.
But not everyone is convinced that ICE will suffer a dramatic fall from grace. Given its dominant market-share position, some people think ICE will be tough to topple. It also offers fixed-line and Internet services. “Costa Rica is a small market, and about 65 to 70 percent of the people in the country already have service plans with ICE,” says Carlos Gallegos, telecommunications director of the consulting firm Deloitte in Costa Rica. “The challenge for the incoming companies will be finding new users or taking current users from ICE. This market has already been penetrated, so I think getting users to switch to new providers will be a challenge, even for the big companies that are entering the market.”
Yet some consumers are eager for options. Service from ICE has its flaws. Every few weeks, coverage will fail. National text messaging sometimes is not available for three-hour stretches.
Costa Ricans will receive the “same high level of service that has resulted in … [millions of] Latin American users,” says Ricardo Taylor, executive director of América Móvil in Costa Rica. As of December, 2010, América Móvil boasted a total of 207.3 million wireless subscribers in Latin America.
ICE might serve a base that is just 1 percent the size of América Móvil’s pan-regional one, yet the company’s president, Eduardo Doryan, says the company is up to the challenge. “Our goal is to maintain as much market share as we can, and we have prepared a strategy that will allow us to do so,” he says. “We have no fear of the competition. The market has space for one and for all. They will have their clients, and we will have ours. … But I can assure [you] that we will defend our revenue with all of our strength, and that we fully expect to remain the primary telecommunications company in Costa Rica.”
Meanwhile, no one disputes that the companies that manufacture the wireless handsets will be big winners from the heated competition. “We will enter Costa Rica strongly,” says Teobaldo Palacios, vice president for Latin American Telecom Operations at Korea-based Samsung Electronics, the world’s second-largest wireless phone producer. Part of his optimism stems from the fact that the company has a strong brand name from other products.
“We already have a presence there with other Samsung products,” Palacios says.
The competition in Costa Rica is expected to bring the country in tune with the rest of Latin America, which has seen a dramatic increase in wireless phone sales and subscriptions over the past decade. Thanks to the monopoly of ICE, Costa Rica has long been a regional laggard in wireless. Its penetration rate is higher than only Cuba and Haiti in Latin America, and it is lower than its poorer neighbor Nicaragua, according to the Latin Technology Index from Latin Business Chronicle.
In the 2005-09 period, Costa Rica posted the second-lowest growth in wireless subscriptions in Latin America. Only Chile — which has long been a highly competitive and saturated market — posted a smaller increase, according to a Latin Business Chronicle analysis of data from the International Telecommunications Union (ITU).
BRAZIL: RISING TIDE
Data services are driving top-line growth in Brazil, where the leading providers are Telefonica subsidiary Vivo; Claro; TIM, a division of Telecom Italia; and locally owned Oi, in which PT Telecom owns a stake.
“All the companies indicate that the income from data will become more important,” says Luis Fernando Azevedo, a telecom analyst with Bradesco. “Vivo currently has around 20 percent in data. We think they will surpass 30 percent by 2013. TIM is at around 12 percent and should go to 20 percent over the next three years.”
Although analyst Alex Padellas, who covers telecoms at Banif bank, agrees that demand for data services will grow, he cautions that it is starting from a low base.
“For demand for these things [data, music, videos and Internet] to increase significantly, you need to have a rise in incomes,” he says.
The mobile providers are nonetheless investing in their 3G coverage and capacity, which will support more consumer usage of smartphones, mini-models, notebooks and tablets, Bradesco’s Azevedo says.
He also predicts that prices of voice services will come down. “Minutes will be cheaper. Smartphones will be cheaper and more accessible,” he says. “And as the companies invest, the services will get cheaper. SMS [texting] services are already growing, and you have more applications for that.”
Renata Gammarano, a bank employee in São Paulo, exemplifies the trend. She uses an iPhone. “I am totally addicted. It’s like my child,” she readily admits. “I wouldn’t dream of getting any other kind of phone.”
The iPhone design and iPod music function were determining factors in Gammarano’s December 2009 purchase, but now she uses her smartphone for e-mail and to go online, principally to Facebook. She uses the Skype function and sends a lot of text messages. Gammarano upgraded to the latest model, an iPhone 4, in December. “It really is the best,” she says.
Brazil had 203 million mobile lines at the end of 2010, representing an astonishing penetration rate of 105 percent, according to Padellas, who estimates that the number will rise to 215 million by year-end 2011.
“There are more lines than people because one person has two or three or four lines,” he says. “If he wants to talk to someone with a TIM, he puts a TIM chip in his phone, and TIM to TIM is free. And then if he wants to talk to someone with Vivo, then he’ll put a Vivo chip in because it might have an offer on. That’s why the penetration is so high. Otherwise, it would be 30 to 40 percent.”
With Brazil’s upper classes oversubscribed, new wireless customers are coming from the lower economic strata, and they favor prepaid services, which account for 82.3 percent of all mobile accounts, Padellas says.
He expects the ratio of pre-paid to contracts to remain constant. “If anything, the prepaid numbers will rise a little towards around 85 percent, in my opinion,” he says.
An already-heated market will become more competitive in 2011, says Padellas, who expects Oi to be more aggressive. Another factor: Nextel. “Nextel was in the radio segment, but it will start operating in the 3G wireless segment, and that’s another reason that competition will be fierce,” he says.
However, other experts disagree. “Telefonica’s purchase of Vivo, already the largest operator, will make it the dominating carrier,” says Paola Soriano, an IDC senior analyst on Latin America mobile devices.
Telefonica paid Portugual Telecom 7.5 billion euros (U.S. $9.8 billion) last year for the 50 percent stake it didn’t already own in Vivo.
PERU: JOCKEYING FOR POSITION
With mobile phone penetration in Peru expected to reach 100 percent this year, the country’s top wireless operators are spearheading efforts to improve their service and diversify their offerings in order to capture new clients — and retain their current ones.
“Although voice is still our core business, data traffic is growing at an impressive pace,” says Rodrigo Arosemena, commercial director for América Movil, owner of the Claro brand. “At our points of sale, the first thing people ask is, ‘How can I migrate to a smartphone?’ ”
Industry experts say the growing popularity of smartphones among Peruvian mobile users is a confirmation of a trend away from voice-only use of the phones — a trend that can be observed elsewhere in the region and around the world.
With this in mind, Peru’s three wireless operators — Telefónica (with about 60 percent market share), América Móvil (with about 35 percent market share) and Nextel (with about 4 percent market share) — hope to lure customers by offering additional products and services related primarily to data transfer, Internet and e-mail access, instant messaging, ring tones, social websites and other content.
“Complements to voice communication are all the rage,” says Arosemena, who notes that mobile Internet access and the use of USB 3G modems among subscribers are on the rise.
With a more demanding customers base — and a robust economy — competition among Peru’s wireless operators over the next couple of years is expected to remain strong. The number of subscribers reached 27 million in 2010, a 20 percent increase over 2009. The customer base is expected to continue to post annual growth in the double digits for the next few years.
“Mobile density on average surpasses the 100 percent mark, but there still exist regions with less than 70 percent density and some poorer ones with less than 30 percent. We will focus on extending coverage in those areas,” says Alvaro Valdez, director of corporate communications and image at Telefónica del Perú. “In the more developed markets like the main cities, growth will basically be driven by mobile Internet services, smartphones and value-added services.”
Indeed, smartphone sales in Peru are skyrocketing. The number of smartphones in the market is expected to grow 100 percent within the next two years, according to Telefónica’s Valdez.
The typical mobile phone user will continue to look more and more like self-proclaimed tech geek Michelle Allemant, a 34-year-old marketing executive who uses her Apple handset mainly for data and less and less for talking.
“I’m on one of the cheapest plans because I barely make calls from my iPhone. I prefer texting my friends or sending them an e-mail — it’s quicker, cheaper and less intrusive,” says Allemant, who has been a Claro subscriber for more than five years. “Most of my friends either have iPhones or BlackBerrys. I can’t imagine anyone carrying anything else.”
At Claro, more than half of all the new phone lines the company sells to its post-pay clients are with smartphones. In an effort to tap into the prepaid customer base — where smartphone use is comparably low — Claro recently launched an offer in which prepaid subscribers can access 10 megabytes for 1 sole a day, or about 27 U.S. cents.
Telefónica, on the other hand, is launching its new Movistar Prime handset during the second trimester of this year. The device, which will use the Android operating system, will be the company’s star product in its self-branded smartphone catalog Alvarez says.
To keep up with consumers’ changing habits and emerging technologies, wireless operators in Peru will continue to invest heavily in infrastructure, mostly increased backhaul capacity over fiber optic and other technologies.
Telefónica, for example, is investing more than $1.5 billion in the 2010-2013 period to upgrade its network, which includes, among other things, 1,200 kilometers of fiber-optic lines.
As Claro’s Arosemena points out, “More than just a fad, mobile phones have become a necessity, a working tool at all socioeconomic levels.”
MEXICO: BATTLE OF THE TITANS
Although América Móvil’s Telcel unit has long dominated the wireless sector in Mexico, it is now expected to face more competition from a joint venture between local media giant Televisa and local carrier Iusacell. “Iusacell will be an important alternative to Telcel,” Soriano says. “It will be healthy for the Mexican market.”
Televisa announced in April that it planned to buy a 50 percent stake in Iusacell for $1.6 billion. The deal is pending approval by regulators. The expected facedown between Telcel — controlled by Carlos Slim (the world’s richest man) — and Televisa and Iusacell, controlled by moguls Emilio Azcarraga and Ricardo Salinas, respectively, has been dubbed “The Battle of the Titans.”
Telcel boasted a 69.1 percent market share in 2010, according to the Competitive Intelligence Unit, a consultancy in Mexico City.
The rest of Mexico’s mobile subscribers are divided among three other providers: Movistar, (with a 13.7 percent share); Nextel (with 11.7 percent) and Iusacell (which also uses the Unefon brand, with a 5.5 percent share).
Nextel is a special case. It has the lowest number of subscribers of the four wireless companies but boasts an average revenue per user of 582 pesos, or about $50 a month — more than five times as much as Movistar, which has the lowest average revenue per user.
Nextel’s relatively high-earning users are all on monthly plans. Movistar focuses on low-income consumers; about 90 percent of its customers rely on prepaid cards for their service.
Rosa María Velázquez, a homemaker and part-time bookkeeper, has long been one of Movistar’s prepaid customers. But she feels pressure from the company to upgrade to a contract. “I’m happy with a prepaid system, but the folks from Movistar have been pressing for me to opt for a plan,” Velázquez says. “It would suit them, no doubt, but it won’t necessarily suit me.”
Telcel and Movistar both offer packages in which customers can talk or message with friends on the same mobile network at reduced rates. But there are limitations for the smaller competitor. Telcel has six times as many subscribers, which means Movistar customers have that many fewer potential buddies. “It’s a bit frustrating,” Velázquez says, “but it’s not so much I would want to change operator.”
If she were to change, Velázquez, who lives in Texcoco, near Mexico City, could choose from any of the other three.
Others have no choice. “I’m stuck with Telcel,” says Cristina Ortega, a small farmer from Nautla in the state of Veracruz.
In Nautla, Telcel is the only game in town. Indeed, Telcel has the broadest national coverage of any of the providers, followed by Movistar. “There are places all over Mexico that are covered only by Telcel,” says Carlos García Moreno, chief financial officer of Telcel. “That’s simply because our competitors haven’t invested as much, and we have.”
Meanwhile, the wireless service providers are looking to a revenue boost from data services with the advent of cheaper smartphones, tablet computers and other devices that can connect to the Internet.
These devices “provide services that only a computer used to have. And most people in Mexico didn’t have a computer,” García says. “The arrival of the smartphones is changing all of that radically. They offer the services of a computer at only a fraction of the cost.”
Wing reported from Lima. With additional reporting by Ronald Buchanan in Mexico City and Andrew Downie in São Paulo.
This article originally appeared in the May/June issue of Latin Trade magazine.
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