Latin America DSL

Manual Andrade for DSL Prime (April, 2002)

(mandrade@xpandglobal.com)

1. Introduction

For the purposes of this article we will define Latin America as the collection of countries including Mexico, Central America and South America. Caribbean countries are not included.

1.1  Demographics, Telephone Penetration and Trends

The table below shows the Population and the fixed line statistics for all the countries in the region as defined above.

Although Latin America had a late start in the Telecom revolution,  it is important to note that in the last 10 years, due to widespread deregulation and privatization, the region went through a remarkable period of fast- paced growth in the Telecom sector. As a highlight of this trend, take Brazil where the number of fixed lines more than tripled in the last six years going from 15 million to  almost 50 million. The immediate result of these developments is that in most cases the backlog pent-up demand for basic telephony has been satisfied, creating the conditions for the widespread deployment of more sophisticated services such as internet.

The improvement of basic telecom infrastructure has enabled the creation and exponential growth of internet services, which combined with the significant reduction in the cost of personal computers, has set the stage for a pent-up demand for high-speed internet services.

Among the technologies available for the delivery of such services, ADSL looks like a winner due to:

-         Cable TV availability is recent and penetration is much lower than telephony.

-         The urban setting of Latin American cities and the newness of the plant have resulted in very short local loops. In some Brazilian cities 98%+ of the loops are less than 3KM ( 9,000 feet).

-         Local dial-up calls are charged by the minute, giving the users an extra incentive to move to flat rate ADSL.

The limiting factors are:

-         The well known ILEC inertia to move ahead and invest ahead of the competition.

-         The cost of backbone connection to the Internet is still costly and considerably higher than in the developed countries.

-         Unbundling has not arrived, giving the ILEC’s the de-facto “monopoly” in ADSL

-         The options of wireless (satellite or spread spectrum) have been deployed in limited quantities but can’t scale.

-         CAPEX is expensive in developing countries.

As in the U.S. some smaller operators had the courage to pioneer and started quite early. CTBC, a mid-size Brazilian operator, has been offering ADSL services since 1996.

However, by mid 2002 most of these barriers have finally come down and ADSL has finally started to flourish.

The next section  will  present an analysis of the current status of ADSL deployment in the major markets in the region. Again, is important to note that similar to the early days of ADSL in the U.S., hard data is not easy to find and some of the figures are estimated.

The table below shows the Yankee Group projections for the region as a whole.

Our bottoms-up inspection of the three biggest markets validates the Yankee group figures but we do believe that the actual numbers are slightly higher. We agree with the 100% growth rate for the year 2002.

2. Key Markets

In Latin America the top three markets represent approximately 80% of all telephone lines installed. They are Brazil, Mexico and Argentina. All indications are that in the near future these three countries will have 80%+ of the ADSL lines.

2.1  Brazil

Brazil has three major local loop operators that were former monopolies  controling 90%+ of all local access. New entrants and smaller pre-existing operators represent the remaining 10%. The major players are Telefonica (related to Telefonica-Spain), Brasil Telecom (related to Telecom Italia) and Telemar (a local group). The secondary group is comprised by CTBC, Vesper and GVT. Pricing has been very aggressive (around $40 for residential 256K) and the expected growth for 2002 is around 100%. IDC forecasts a total of 3,500,000 subscribers by 2005, surpassing Yankee’s numbers for the entire region. The table below shows the detailed operating data and the respective ADSL deployment for the above mentioned operators.

2.2   Mexico

Mexico Local Loop is still dominated by Telmex,which as an incumbent has been very slow to deploy ADSL. Prodigy, which is owned by Telmex, offers  ADSL service . The monthly prices are similar to the U.S. and Brazil, but the price charged by the modem is higher than in other markets. Deployment numbers are hard to find.

2.3   Argentina

Argentina has two major Local Loop operators: Telecom Argentina, jointly owned by France Telecom and Telecom Italia, and Telefonica (owned by Telefonica of Spain).

Until 2000, regulations granted monopoly of the POTS service to the two operators and did not allow them to provide data services thus delaying the introduction of ADSL services.

For a variety of reasons  cable TV operators were not able to take advantage of this situation and achieve significant penetration, despite the fact that the major operators do offer high-speed internet with cable modem technology.

Since 2000 the telcos are trying to catch-up and have been promoting ADSL. The economic crisis that engulfed Argentina has slowed down the deployment, but the pent-up demand is so large that Telecom has disclosed in their last earnings call that the number of ADSL subscribers in the fourth quarter of 2001 doubled from 12K to 24K, being this the only service that grew in that quarter. We estimate that Telefonica has around 30K subscribers, bringing the total to 60K.

Due to the recent devaluation of the peso, prices are unrealistically low, but it will  soon be adjusted and we believe that it will end up around $50 per month.

4. Summary

The table below shows our projections for 2002.

We agree with the general view that Brazil will grow 100% and that Argentina will suffer from the economic crisis.

The key unknown is the Telmex deployment. Because of their Prodigy ownership it can surpass expectations.

The rest of Latin America is mostly Telefonica properties that are deploying their “Speedy” branded service everywhere.