The domestic telecom market is abuzz with mergers, acquisitions and mega-deals. The industry is
consolidating again, not so long after AT&T Corp. was broken up into Baby Bells; cellular and then personal
communications services licenses were awarded, and carriers of all stripes began competing for customers.
But if
you look at the rest of the global wireless market-especially emerging markets where improvements in
telecommunications are needed most-you will find the industry in a state of proliferation, not consolidation. These
markets are following an evolution similar to the United States, just a few years later.
Instead of super carriers, split-
ups and selloffs are the norm as governments in emerging markets seek to finance increased teledensity. Stepping up to
seize these new opportunities are wireless consortia-spectrum owners, financial investors and consortium leaders with
the expertise to launch new networks in these competitive markets.
Unlike some of their larger and more entrenched
competitors, these consortia, if properly focused, should be nimble enough to spot and respond to market trends, launch
quickly, and manage the technical, financial and human resources that make networks successful.
I believe Leap
Wireless International is the prototype of the new international wireless carrier. In markets like Mexico, Chile and
Russia, Leap is leading wireless consortia that will change the way people use telephone service. In many cases, our
operating companies will provide customers with their first telephone line, rather than a second or third. Leap is
dedicated to bringing the benefits of reliable, cost-effective and high-quality voice and data services to domestic and
emerging markets.
Leap is not alone. Other companies are using a similar model, and more are expected to
follow.
These consortia are seizing new opportunities in emerging markets, where teledensity-so critical to
economic growth-is woefully low.
Why the focus outside the United States? Because global wireless subscribers are
expected to more than double to 693 million by 2003. And an astounding 83.5 percent of that growth will take place
outside of North America, according to the Strategis Group. In Latin America, wireless subscribers are projected to
more than triple to 64 million by 2003, while Eastern European subscribers should more than quadruple to 28.6
million.
Emerging markets: the opportunities
Today, hundreds of new telecom carriers are being formed
around the world because governments have realized building teledensity is a national imperative and an economic
necessity. In fact, improving infrastructure-including telecommunications, transportation and power-is the key to a
healthy, stable economy.
Leap was founded with the belief that wireless is the best way to increase teledensity. It is
cheaper and faster to install than wireline service, with the same, high voice quality. For operators, wireless is more
economic to maintain. For consumers, it offers the added benefit of mobility.
Governments have realized they can’t
build teledensity single-handedly. They need the technical expertise-and the funding-of outside players. The capital
needs for teledensity increases mean new carriers and new market opportunities.
That’s where the wireless
consortium comes in.
First, governments are raising money by selling off all or part of their monopoly telephone
companies. But even that is not enough, so they’re selling new licenses and spectrum for wireless services.
The
wireless consortium combines the financial resources of investors, the in-country knowledge of local partners, and the
management and technical expertise of the consortium leader to pull it all together. The ultimate objective-increased
teledensity to foster economic growth.
Mexico: A case study
Take Mexico as an example, where teledensity is
among the lowest in Latin America at 9.7 percent and wireless penetration is a mere 2.5 percent. (This provides a stark
contrast to the United States, where teledensity-or the number of lines per 100 inhabitants-is 64 percent. U.S. wireless
penetration was 24.3 percent in 1998, and projected to be 29.3 percent in 1999, according to the Strategis Group.)
In
May, the Mexican government completed its auction of PCS spectrum. Pegaso, the consortium led by Leap, won nine
1900 MHz licenses that give it a nationwide footprint to provide PCS and wireless local loop services throughout the
country.
Pegaso plans to launch wireless service in Mexico’s four largest markets-Mexico City, Monterrey,
Guadalajara and Tijuana-in 1999, starting in February with Tijuana. Pegaso is the only new entrant in the PCS market
with a nationwide footprint that has acquired its license. Pegaso’s PCS network will compete with incumbent carriers
such as Telcel (owned by the Mexican telecommunications giant Telmex), which has a nationwide presence, and
regional carriers such as Grupo Iusacell and others.
Through its digital network, Pegaso plans to offer secure, clear
voice communications and fast, reliable access to data services, including e-mail, fax and Internet browsing.
Leap is
the largest single shareholder in Pegaso at 33 percent. Leap has teamed up with two well-established local partners-
Grupo Pegaso, a private investment group with interests in various industries in Mexico, and Grupo Televisa, the
world’s leading Spanish-language media company with interests in television, direct-to-home satellite services, and
cable. Other investors include Citicorp Equity Capital Latin American, the Latin America Infrastructure Fund, and
Nissho Iwai Corp.
Pegaso has raised or obtained commitments for nearly $1 billion to build and launch its PCS
network. Qualcomm Inc. and Alcatel are providing equipment and vendor financing.
By bringing together the
financing, in-market knowledge, and management and technical expertise provided by different strategic partners, Leap
believes that Pegaso will demonstrate the power of the consortium model. The ultimate winner should be the Mexican
consumer.
Factors for success
Several factors are necessary to make the wireless consortium model a success.
One of the most important: choosing the right strategic partners. In Mexico, for example, Leap’s local partners-
Grupo Pegaso and Grupo Televisa-bring extensive experience and understanding of the local market to the Pegaso
venture.
In Russia, Leap is working in conjunction with an equally strong partner- Teletal, an affiliate of ITAR-
TASS, the government’s prime news agency. Through a 70-percent majority-owned holding company, Leap is a partner
in Metrosvyaz, which establishes joint ventures with local Russian telecommunication operators to deploy and operate
fixed wireless systems. Fourteen such joint ventures are formed or in the process of forming. Leap believes this is an
excellent opportunity because the latest published data shows 8 million people are waiting for fixed phone lines in
Russia, where teledensity is 19 percent. The Russian government has pledged to add 30 million lines during the next 10
years, and these are expected to be mostly wireless lines.
Of course, the economic situation undoubtedly will slow
this growth in the next few years in Russia and elsewhere. However, Leap believes it is necessary to take a long-term
view on the state of the economy in emerging markets. Leap believes its holdings in Latin America and Russia are
strong, that these economies will be strong as well over the long run and
that telecom in particular will remain a priority
for these and other areas of the world. This is because Leap believes the need for communications will remain high in
markets where teledensity is low, and that the cost efficiency a
nd ease of deploying wireless networks will make
wireless the preferred way to build teledensity, regardless of the economic situation. Because rapidly improving
communications infrastructure is such an economic necessity, the high correlation between teledensity and GDP per
capita suggests that the telecommunications industry will continue to receive government and consumer support, even
when resources are limited.
Finally, teaming up with top-flight financial partners offering vendor finance, bank debt
or high-yield debt is mission-critical. While the capital market is tight at the moment, Leap believes companies with a
proven track record will be able to attract financing when the market opens up.
The future
The opportunities for
wireless consortia in emerging markets are just beginning. I believe that in the future, countries like those in which
Leap is building wireless networks ultimately will have more wireless users than wired users. People from these
countries will come to the United States, scratch their heads, and ask, “Why is that phone nailed to the
wall?” In fact, if we’re lucky, even in the United States we may all find ourselves trying to remember what it was
like to have a phone that plugged into a jack.
As the world becomes wireless, the quality of wireless service has to
equal wired networks, because it will be the basic service. That’s why I believe the quality of wireless communications
will improve to the point where it becomes the standard for both voice and data communications.
In addition,
because wireless networks are easier and cheaper to build than wireline, some countries will eclipse even the United
States in the number of wireless subscribers.
Innovative data services will become increasingly more important, as
companies like WirelessKnowledge provide platforms to make checking e-mail and updating contact databases more
customer-friendly. Leap has teamed up with WirelessKnowledge, the Qualcomm and Microsoft Corp. joint venture, to
offer those services to the customers of its operating companies.
Through it all, Leap will continue identifying and
investing in growth markets with strong local partners, which Leap believes will provide familiarity with the market
and an ability to facilitate deployment. In each of its ventures where it holds a major interest, Leap Wireless expects to
be instrumental in building the team and putting the management in place. And in the end, we believe Leap’s
performance will validate the success of the wireless consortium.
Harvey White is chairman and chief executive
officer of Leap Wireless International Inc.
