This year promises to be a transition period for the Latin American wireless market, a year hosting key events necessary to drive the subscriber growth that is projected by the end of the decade.
Impending introduction of competition in Brazil and Central America, as well as competition coming from personal communications services in some markets, together promise to dramatically increase the wireless market in the region. Expanding fixed-cellular deployments also will accelerate take-up of wireless services. And improving regulatory conditions and increasing competition will boost the market as well.
These events will help push the cellular and PCS subscriber base in Latin America and the Caribbean from the current 3.7 million to the 25 million projected by Cambridge, Mass.-based Pyramid Research Inc. for the start of the next century. And they will multiply an already abundant cache of investment and contract opportunities for U.S. carriers and vendors.
Brazil
The long-awaited B-band cellular licenses in Brazil are expected to be awarded this year, throwing open to competition the largest wireless market in Latin America. Brazil will be responsible for nearly half of the region’s cellular subscriber base by 2000. Finishing 1995 with 1.2 million cellular subscribers, Brazil is projected to boast 9.5 million of the region’s 21.4 million subscribers by year-end 2000.
Investors have long looked forward to an open market in Brazil, where government-controlled Telecomunicacoes Brasileiras S.A. (Telebras) is the primary basic services and wireless provider. Political and legal barriers, as well as union opposition, has kept competition from entering the market until this point, while insufficient capital for Telebras expansions has kept the carrier from even getting close to meeting demands for service.
The situation is so bad for wireless that one analyst said 1 million Brazilians now are on the waiting list for cellular service in Sao Paulo and that people actually are getting booted off the list.
The scenario has set the stage for great international interest in the Brazilian cellular market, with seven consortia already announcing their intentions to enter the bidding.
PCS
The first PCS licenses should be issued in the region in 1995. Countries that are first in line to award licenses are Argentina, Chile, Mexico and Venezuela. While it is unlikely all will complete the regulatory process this year, Latin America should see limited PCS deployment around the same time the mass of U.S. PCS carriers are expected to begin operations in early 1997.
PCS should add nearly 4 million subscribers to the Latin America/Caribbean wireless base by the end of 2000, predicts Pyramid Research.
However, the outlook for PCS as a distinct service is much less concrete in this region than it is in the United States.
Many industry players in Latin America view cellular as already offering personal communications, with carriers boasting much higher usage rates due to poor wireline service, cultural differences promoting mobility and digital deployment occurring much earlier than it did in the United States.
Some analysts say there may not be enough room in many markets for PCS carriers because of Latin America’s missing middle class. While cellular has been successful serving the upper class and business segments, once penetration within that group of people is saturated, expensive wireless service will be a tough sell to the mass-market lower class.
“In Latin America, I think there’s some questions as to how far [cellular] can go,” said Jonathan Tarlin, an analyst at Washington, D.C.-based Malarkey Taylor Associates-Economic and Management Consultants Inc. Right now, there’s plenty of room to grow, but is there a mass-market segment for wireless in the long term, he questioned.
“In other markets in the world, as the systems have aged, you’ve seen the systems expand” to other market segments, said Edward Czarnecki, managing director of International Technology Consultants, Inc., Bethesda, Md.
“Revenues go up, subscribers go up, but revenues per subscriber go down.” That hasn’t been the case yet in Latin America, he said, because most systems are still young. Cellular is still undergoing extraordinarily high growth, and that will continue for a while, said Czarnecki.
However, Tarlin noted: “The income distribution is such that there’ll be some challenges to grow the market.”
The situation could be accelerated by PCS. Tarlin points to Chile, where analysts say cellular growth already is leveling off. The Chilean government is planning to issue three national PCS licenses this year, adding to the four cellular carriers that currently provide service.
Analysts question whether there is room for all those providers.
“I’m very bullish on the Latin American market, but with all this PCS licensing, operators will have to figure out how we can still grow this market,” said Tarlin.
“The success of PCS is not a given,” agreed Jose Manuel Villalvazo, founder of the nonprofit International Institute of Wireless Communications in Washington, D.C. For example, he noted, “How can PCS be viable in Mexico if, at this moment, cellular rates are hovering at 15 to 17 cents per minute, [while] PCS carriers need to construct a more expensive infrastructure than their cellular counterparts in addition to spectrum fees?”
Nevertheless, with governments clearly expressing their interest in licensing PCS players, the service likely will become a major influence of some sort-as newsmaker and/or market contender-before the end of the decade. And it will contribute positively to overall wireless subscriber growth during this period, according to analyst projections.
Central America
Competition may come to some Central America markets, delivering a well-needed charge to an area that has seen slow cellular growth.
“I think that cellular service and investment are a good bet in these countries,” said Linda Barrabee, senior associate for Pyramid Research’s Latin America and Caribbean group. Although these countries are some of the poorest in the region, the market will be boosted by new operators, competition and expected lowering of tariffs, she said.
None of the Central American countries currently have competitive cellular markets. Several of the countries-including El Salvador, Guatemala and Nicaragua-have indicated they at some point will introduce a competitive cellular license, while Honduras and Panama plan to introduce cellular service.
Central American markets are smaller than the other markets in Latin America, but analysts say cellular growth here holds potential for investors that are willing to take the risk. Central America is known for its license tendering problems: Millicom International in Costa Rica last year had its license revoked, and Honduras has been going through a license retendering process for a couple of years.
“There is no doubt that there is a market opportunity in Central America,” said Villalvazo. “However, the credibility of these markets is weakened by a history of confusing and, at times, questionable licensing processes.”
Fixed cellular
Fixed cellular subscribers increasingly will become a larger part of the cellular customer base as carriers deploy more fixed solutions to provide basic service to underserved areas.
“We’ve seen an increased use of wireless local loop and fixed cellular to serve not only rural but urban areas as well,” said Barrabee. These services are an attractive alternative to extending copper wire service to these areas, she said.
In addition to fixed wireless and WLL, CT2-type services will begin to “get wireline minutes” that will add on to wireless growth in the region, added Jack Finlayson, corporate vice president and general manager for Motorola Inc.’s Pan American Wireless Infrastructure Division.
Regulation
“Governments are allowing more open foreign investment and p
articipation regulations,” said Villalvazo. “This is a big boost for wireless firms competing against well-funded PTTs. This also will create more competitive markets-quicker-in the long-run. The move toward competitive markets will be the predominant trend in the region for the next five to 10 years.”
Despite cellular’s growing maturity in some markets, several markets-including Brazil, Bolivia, Central America and Paraguay-do not yet have competition. Competition in these markets thus would boost the overall subscriber base in the region.
Both governments and businesses are increasingly realizing the potential for wireless as a competitor to wireline and are acting to make that a reality, potentially bring enormous business opportunities to the wireless industry, Villalvazo said.
He added, however, that the biggest changes that need to be made in the region are effective regulations that translate into tough anti-trust and pro-competitive legislation. “As you have seen in the United States, these laws must be persistently enforced in order to create fair and efficient markets,” he said. “Latin America needs to make their regulatory bodies more independent of the political structure in order to ensure regulations that take a market-oriented pro-competitive approach.”
Latin America notes
The largest growth market for specialized mobile radio, or trunking as it is referred to in Latin America, in terms of subscribers is Mexico. But subscriber growth there was lower than expected in 1995 due to the economic crisis in that country, according to ITC’s Czarnecki.
Meanwhile, Brazil had a tremendous year in 1995-with 60,000 trunking subscribers as of mid-year-and a better year predicted for 1996, he said. Brazil, he noted, has about 500 concessions for private mobile radio services, but the number of significant players is much smaller. Panama has seen comparatively strong growth to date-for its size-in the trunking market, likely because cellular licenses have not yet been issued, said Czarnecki.
An interesting trend there, he said, is that trunking interconnects to the wireline network are much higher than anywhere else in the region. More growth in interconnections can be expected because Panama does not restrict the percentage of a trunking carrier’s subscriber base that can be interconnected. This is compared with Mexico, he said, which has a 20 percent restriction.
“Looking for 1996 and beyond, we’re going to see very strong growth in the core business area for SMR and dispatch in Brazil, Colombia and Argentina,” concluded Czarnecki. “And we’re optimistic that we’re going to see a strong recovery in Mexico as well.”
By 2000, an estimated 10 million trunking subscribers are projected in Latin America, according to ITC.
The move to implement digital technology over cellular networks is moving forward in Latin America, with Colombia in the lead. The top two carriers in Colombia, Celumovil and Comcel, report that about 80 percent of their networks use Time Division Multiple Access digital technology.
In general, the cellular industry is still divided over Code Division Multiple Access and TDMA. Telebras in Brazil, once apparently hard set on CDMA, is now considering TDMA as well, according to one analyst.
Digital in Argentina and Venezuela also seems to be a mixed bag of interest between the two technologies.
“We know that there’s been some problems with TDMA [in Latin America],” said MTA-EMCI’s Tarlin. “And we know that not all the carriers are now happy with the performance with TDMA.”
He said carriers are reporting problems with the phones, service quality and coverage. “This is still a function, I think, of growing pains.” He added, however, that because of the capacity issues, a lot of operators are seriously looking at CDMA. “The big cities of Latin America lend themselves to a high-capacity standard like CDMA.”
However, the only cities where capacity has so far really been an issue is Buenos Aires, Caracas, Mexico City and Sao Paulo.
“Regardless of the particular flavor of digital, the choice to go digital will have a profound affect on Latin America,” said ITC’s Czarnecki. “They will be able to [serve] more subscribers, and that will have an impact on competition.”
In addition to the traditional European players such as Millicom, France Telecom and Telefonica as well as U.S. investors BellSouth Corp., Motorola Inc., GTE Corp. and AT&T Corp., the region is seeing more interest from Asia.
Tarlin said both Korea Telecom and Singapore Telecom have become interested in the privatization of wireline monopoly Telcor in Nicaragua.
Another interesting player is U S West Inc.; this regional Bell operating company, which traditionally has focused on eastern Europe and the former Soviet Union for wireless investments, plans to bid in Brazil as well.
Czarnecki noted that financial backers now are demanding more for their return on investment in Latin America: “They’re expecting a real answer on return on investment. The wireless market has matured in general, the users have matured [and] demand more for less money. The operators have matured. And finally, the investors have matured.” He said there’s “less carpet-bagging” and more institutional investment.
Dianne Hammer is a freelance writer and international wireless market researcher based in Denver.
