LATAM Telecom

Ten years in the high tech industry is a long time, but it helps to to look back at where we were ten years ago and how the markets have evolved to better understand where we are going in 2010.

This is not meant to be an in depth article but rather a collection of bits and pieces from my experience and personal observations about the trends I am seeing in the region. So without further ado here are my top predictions for the LATAM market in 2010:  

(1) The economic environment and increased competition will put additional pressure on technology vendors.

During the last ten years, LATAM operators made huge investments in network infrastructure to meet growing demand and to incorporate new technologies. However, the economic downturn is forcing them to watch CAPEX spending closely and to do more with existing footprint.

The economic downturn will continue to affect CAPEX decisions; in addition to this, increased competition and changes in the relationship with mobile operators are putting additional pressure on technology vendors.

Increased competition is commoditizing network infrastructure, driving prices and margins down significantly. Vendors like Huawei and ZTE have gained market share in Latin America, winning important bids for network infrastructure. Traditional vendors like Ericsson and Comverse are reconsidering their presence and strategy for the region.

(2) New technologies in cloud computing will change the relationship between technology vendors and operators

Network operators have traditionally based their economic and business models around infrastructure CAPEX and ROI. This is understandable considering that entrusting operations to a cloud environment can be a risky endeavor and service reliability is a top priority for them. However, 'enterprise-grade' services are a reality now and 'carrier-grade' cloud services cannot be far behind.

Just six months ago, we wrote about Telefonica's launch of Personal Instant Messaging in the region (Telefonica Movistar (finally) moving in with SMS 2.0 in Latin America). This announcement was relevant not just because it's the first launch of this service in the region, but also because it is planned as a centralized, hosted solution.

Operators and technology vendors have tried for the last decade to come up with a business model that will allow them to deploy solutions without heavily investing in infrastructure, minimzing the market risk and allowing them to co-participate in a revenue share scheme with technology vendors.

What is needed now, however, is a business model that will result in a win win situation for both parties. So far, most attempts have been unsuccesful with either party having to invest heavily in infrastructure, marketing or both. Cloud based applications, however, can be the last piece of the puzzle for these initiatives, allowing for a demand based pricing solution.

This will require, however, changes in the way operators conduct business. This will require a restructuring of the VAS organization to a more simplified model, since CAPEX will no longer play a major role in the decision process. We can expect the decision process to be more customer centric.

(3) Advances in technology and changes in the customer base will drive demand for new services and applications.

As mobile market penetration reaches saturation in the region, new opportunities will open up. Revenue growth from traditional services -voice and SMS- have flattened in the last few years and operators are looking to increase ARPU through Value Added Services.

New technologies that allow managed services will affect operators' VAS offering, opening up opportunities for new players that will be able to provide services to giants like Movistar and America Movil.

In a similar manner as mentioned in my previous point, we can expect changes in VAS offerings. Traditional models will no longer work. We have seen in the last five years the limitations that a consumption based model can offer. Users have turned away from these services; despite the fact that usage trends in messaging indicate that instant messaging has a huge potential in the region (see LATAM 2009: A Mosaic of Opportunities), operators have stayed away from "all you can eat" pricing models. Such is the case for most IM initiatives in the region during the second half of the past decade (see Will 2008 be the year for Mobile Instant Messaging in Latin America?).

These are some of the major trends I see, as a result of changes in technology, competition and subscribers. I will continue to explore how these trends will affect specific markets and services in future posts.

"When we long for life without difficulties, remind us that oaks grow strong in contrary winds and diamonds are made under pressure." ~Peter Marshall

Opportunity Maps are particularly useful in analyzing and understanding these differences. The chart above shows three key factors: (x) Average Monthly SMS; (y) MOU - Minutes of Usage; and ARPU - Monthly Average Revenue per User (bubble size) for the six largest markets in the region; Brazil, Mexico, Chile, Colombia, Venezuela and Argentina.(1)

Some opportunities can come from increased MOU or SMS in countries that show low usage, introducing SMS based services in countries with low voice usage or new data services where usage and ARPU show potential for rapid adoption.

Some key differences stand out in the chart above:

• Mexico, Venezuela and Chile have a larger ARPU; Colombia and Brazil are on the lower end.
• Venezuela and Argentina show SMS usage above 100 messages per month; Brazil and Chile are almost in the single digits.
• Voice usage is significantly higher in Colombia and Chile and lower in Venezuela and Brazil.

The adoption of text messaging can be explained by a number of factors. In Colombia, the price war between operators a few years ago resulted in the launch of the "Pioneros" program by Ola (now Millicom/Tigo) with heavy discounts for voice. In countries such as Chile and Colombia, subscribers pay about the same for a text message and a phone call; this might explain why texting has not taken off.

Regulation also plays an important role; in countries like Venezuela and Brazil, the introduction of a regulation prompt for transfer to voice mail on busy/no answer advising callers that they will be charged for the call has resulted in increased slamdown and redial attempts. This impacts network productivity with a large number of calls generating traffic but no revenue.

From the map above, we can identify opportunities for call completion solutions that influence subscriber usage in countries with low MOU such as Venezuela and Brazil. This includes replacing voice mail with "A" party solutions such as availability notification for the calling party.

In countries such as Venezuela and Argentina, where SMS usage is high, there are opportunities for other forms of messaging such as Mobile Instant Messaging (GSMA PIM); subscribers are clearly using texting as a form of instant messaging.

This year operators have made it clear that they will have to limit CAPEX to a minimum to maintain healthy cash flows. Since the region is still expected to grow in number of subscribers, expanding capacity of existing network infrastructure will be their top priority. However, as the chart above clearly shows, there are other opportunities that operators can explore to increase revenue, despite the fact that subscribers are expected to curtail spending.

Some opportunities can be found in improving service and network productivity; i.e. increasing output using the same infrastructure or expanding capacity with minimal CAPEX. An added benefit is that some of these opportunities can be positioned as new services; this year operators will have limited resources but they cannot afford to miss opportunities to maitain or improve their position in the market.

For technology vendors, dealing with Latin America is becoming increasingly challenging; not only is the region incredibly complex, but the big players in the region -America Movil, Telefonica Movistar and Millicom- have consolidated their presence and gained negotiating power in the last few years.

Understanding the market and the specific needs and opportunities in each country, however, can help identify leads in Latin America, a market that is complex, fascinating and full of hidden opportunities.

(1) Source Pyramid Research, 2009