The wholesale telecoms market in Latin America - unlocking potential

What changes are required to unlock the potential of Latin             America to a wider number of providers?

While there was a general mood of excitement among delegates and speakers at this year’s Capacity Latam 2012, there was also more than a noticeable hint of frustration.

On the one hand, attendees could look out of their windows and marvel firsthand at the fine health of certain local economies – the event took place in the heart of São Paulo’s impressive financial district. On the other, such lucrative opportunity often appears firmly in the hands of a select few dominant providers.

Speaking to a number of prominent regional and international players during the event in March, Capacity encountered concern about the progress and development of each stage of the continent’s connectivity – be it on an international, domestic or local level.

For the first time here we share their honest and open views about the region and what can be done to bring down prices, increase competition and ultimately enhance connectivity.

While Asia and Africa have both experienced a radical burst of new subsea cable capacity in recent years, subsea cable activity has continued to be minimal in Latin America.

David Berrios, director, business development, Latin America at NTT Communications believes the market has now reached a stage where the price of subsea cable capacity has become an issue. “Price points in the region for capacity have probably stopped foreign investment. Many telcos that would have invested in the region haven’t because of that,” he says.

NTT launched its Brazilian operations at the start of the year and has witnessed a “significant” growth in traffic in the region since. While Berrios says NTT had no specific plans with regards to subsea cable investment, he did see potential for the consortium model, which has been used in abundance in both Asia and Africa, to be introduced to the region.

“In many places you have telecoms companies in the region that have the desire to build more cables but don’t have the capital ability to do it. Then you have the foreign investors like AT&T that are trying to come into the market. They would see some advantage partnering with local companies in order to get the necessary landing rights and potentially utilise local networks,” he says.

“I think there is high potential for consortiums of some kind. Whether its huge consortiums, or small consortiums comprised of four players. I think we are more likely to see a consortium than another Telefónica cable.”

Berrios ended by saying that he didn’t think “the Telefónicas and Global Crossings of the world probably have much interest in seeing more cables [enter the region]” before urging for higher competition to be introduced to the region.

Funny enough when Capacity caught up with both Telefónica and Level 3, neither felt any immediately pressing need for new subsea cable systems to be introduced to the continent. Instead talk turned to upgrading existing infrastructure: “I think that over the next couple of years it will be more about upgrading the current systems because the technology has evolved enough to cope with the growth that the market is going to show in the next two to three years,” says Telefónica’s VP of sales and marketing, Rafael Arranz.

Nevertheless when pushed on the longer term viability of Latin America depending on just a handful of existing subsea cables, Arranz says:

“There are two different problems going on - one is how to cope with new demand, and the second is how to ensure we have the quality of networks that our customers demand. Nowadays we have so much traffic going on our submarine cables that one of the main concerns that our customers have is that we are depending on just a few submarine cables. Therefore it’s becoming a problem of how we are going to cope with a future of just relying on those cables.”

Arranz is skeptical, however, of where the investment will come from for additional cables. Level 3’s regional president of Latin America & Caribbean, Hector Alonso, agrees and is also skeptical that more cables are even the answer. “I’m not sure that adding more infrastructure will resolve the price and cost of broadband and increase penetration,” says Alonso. “Prices are permanently going down on subsea cable systems every year. However if there are people there willing to invest, we welcome them.”

While companies such as Internexa have helped pioneer the development of an IP backbone across Latin America in recent years, for many this layer of infrastructure remains a primary concern.

“I’m more concerned about the domestic backbones than I am international connectivity,” says Telefónica’s Arranz. “Sometimes decisions on the global arena are not persistent with the decisions we are making here. That’s when complications start to show up, and we have bottlenecks or quality problems in the domestic backbones that are completely impossible to solve from an international perspective.”

Level 3’s Alonso believes some operators have encountered regulatory issues when trying to expand connectivity across the continent as a whole: “We have a presence and licences in all of the Latin American countries which facilitates those issues. We can adapt to the customer requirements and at the same time fulfill all the regulatory and tax issues. But if you don’t have a licence to operate in every country, it’s very difficult to get connectivity solutions,” he warns.

Alonso says that Level 3’s success in acquiring licences in each Latin American country stems from long-term investment. Without the investment, he says, you won’t get your hands on a licence.

In essence, this helps explain why the company, along with Telefónica, América Móvil and to a lesser extent Telecom Italia, have achieved such a tight grip on the Latin American market. The companies were all at the forefront of initial investments in the region, and as a result now have strong footholds in each of the country’s telecoms markets. If anything the difficulty in obtaining an operating licence could work to their advantage.

NTT’s Berrios agrees: “The players that have been here the longest know how to best navigate the waters.” Berrios also suggests that there is a disparity between the regulatory environments in each Latin American country: “You have countries like Chile that are a little more open and other countries like Brazil that are tougher. It depends on how the process goes. When you deal with governments you have to take it with a pinch of salt.”

Berrios hopes, however, that NTT’s entrance into the Brazilian market will encourage other companies to try and enter the region. “Globally we are a quality leader on our IP backbone, and we want to extend that to Brazil and by doing that encourage other global players – and hopefully shift the dynamics of the market,” he adds.

Given the sheer scale of the continent it’s no real surprise prices for last mile access fluctuate hugely across Latin America. Yet trying to extend connectivity across the region and bring broadband prices down is becoming a growing priority and concern, particularly in Brazil which is due to host both the 2014 FIFA World Cup and 2016 Olympics.

The problem, however, is that pricing issues aren’t even purely restricted to rural areas: “The only way to overcome pricing is to build your own metro fibre network, especially in Brazil,” says NTT’s Berrios.

“Brazil is extremely expensive. Last mile access even in the São Paulo state for very small bandwidth could be thousands and thousands of dollars. What you are seeing still is a lot of power companies utilising their power lines to run fibre and give last mile access. They could possibly be a driver for decreasing prices. But that’s still to be seen.”

Berrios feels prices have to drop as the market matures, fearing otherwise that the Brazilian government will face a real gulf between reality and its 2015 broadband targets.

Level 3’s Alonso feels the impetus lies with the government to tackle last mile access issues: “I see it as an important role of the government to reach those underserved places. Governments should as a first priority provide access to them, and then as a second priority reduce the total broadband cost.”

Level 3, he says, plays a role in expanding last mile access by continually investing in its access services. Its reach, however, is dictated by where its customers need it: “One of the ways to stop that is to keep investing in your access services. Every year we assign an important bit of our investment plan to expanding our access. We serve governments and enterprises, which are in the most populated areas,” says Level 3’s Alonso.

This responsibility falls firmly on the shoulders of Oi. Following an amendment to Brazil’s telecoms law in 2008, the company merged with incumbent Brasil Telecom, and has since been required to establish local loops as well as long distant circuits all over the nation by the Brazilian government. Oi is now the incumbent operator in 26 of 27 states in Brazil, with the State of São Paulo being the lone exception. Jorge Rodrigues, international business development manager at Oi explains the challenge facing the company: “In the inner São Paulo state you have some options and a lot of demand, which is completely different from north or even provincial Brazil. Although the government is giving incentives to reach these places, there is not such a huge population density and to invest there as a local provider is not very cost effective.”

The Brazilian regulator ANATEL is, according to Rodrigues, currently review-ing the rules for regulating Brazil’s local loops. Last year, ANATEL published its initial proposals, allowing Oi the opportunity to offer its feedback and opinions.

“We suggested several changes to the proposals. They want us to provide low cost local loops everywhere and we are working hard to establish the fairest way to approach this. We feel this would be to follow some of the European examples, like France and Portugal, where you have a dominant provider in certain markets in certain cities.”

The final ruling is now due in the first half of this year. “If we have available infrastructure and demand to deploy last mile access then this is ok, but if we don’t then it is hard to commit. This is the huge discussion we have on the local loop market in Brazil at the moment,” says Rodrigues.