jim All One more; P C S - Latin America; bye
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September 21, 1998
PCS in Latin America-evaluating the potential
By Edward Czarnecki
The Latin American wireless market is poised to enter the next stage of competition with increased
market liberalization and additional licensing of personal communications services. Basic changes
are underway in the Latin American wireless industry that are altering the competitive landscape,
creating new user segments and driving new consumption patterns. These changes are directly
related to the increasingly competitive character of the wireless voice industry resulting from the
introduction of PCS.
PCS is the latest generation of products and services to be launched in the Latin
American/Caribbean wireless voice communications markets. Broadband PCS will offer users
enhanced cellular-like services such as two-way voice and data communications in the 1.9 GHz
range.
The 1998-1999 time frame will be a major milestone in the Latin American wireless industry as true
competition becomes realized in the marketplace. With PCS already in service in Puerto Rico and
networks being built out in Chile, we soon will see broadband PCS being offered in a diversity of
markets, including Guatemala, the Dominican Republic and Mexico, catalyzing what already was a
burgeoning wireless industry. In our view, many of the main issues revolve around pricing. One of
the main questions is what differences will emerge between cellular and PCS pricing, and how fast
competition will drive down pricing.
We expect that PCS will increase mobile wireless voice subscriber growth through increased
service offerings and a lower cost of service. The declining total cost of wireless service will help
motivate subscriber growth as service becomes more affordable to greater segments of the market.
This article is offered as a general overview of growth prospects for mobile voice communications in
Latin America and the Caribbean.
Argentina, Chile and Mexico
Chile was the first Latin American country to issue PCS licenses. In Chile, PCS 1.9 GHz spectrum
allocations were awarded to two providers in December 1996: Chilesat (one license) and Entel
(two licenses). Both operators currently are in the process of building out their networks-a Code
Division Multiple Access system for Chilesat, and a Time Division Multiple Access system for Entel.
Entel will use one of its PCS licenses to provide high-mobility PCS service, and the other for
short-range fixed/mobile service.
In May, Mexico closed a PCS auction process begun almost six months earlier in November 1997.
The winning bids for all the PCS and fixed wireless licenses totaled [more than] $1.06 billion. After
128 rounds of bidding concluded May 8, some of the big winners included: the SPC consortium,
which won all nine A-band 30 MHz PCS licenses; Qualcomm Inc., which won B-band 30 MHz
PCS licenses in five regions, plus 10 MHz PCS licenses in Regions 3, 5, 7 and 8; Midicell, which
was awarded a B-band PCS license in Region 7 and 10 MHz licenses in Regions 2, 6 and 9;
Telcel, the cellular affiliate of Telmex that won 10 MHz licenses in all nine regions; and Iusacell,
which won 10 MHz PCS licenses in Regions 1 and 4 for a total of $61.7 million.
After much delay, Argentina's PCS regulations are still in the process of being issued. In January
1997, Argentina's President Menem signed a decree authorizing the auction of two PCS
concessions. These two PCS concessions will cover Buenos Aires in competition with the two
incumbent cellular operators: Minifon and Movicom. As of August, Argentina was studying a plan to
sell licenses for new mobile telephone services outside the capital of Buenos Aires, a bid to
circumvent a lawsuit by a potential bidder that is arguing the bidding process is not competitive
because it allows companies with existing cellular licenses to compete for the new PCS licenses.
The government, which had expected to garner at least $300 million from the PCS licenses, now
may sell two licenses in the north of the country and two in the south. In July 1998, the Argentine
government had sought to change the bidding rules and implement an open outcry system in an
effort to circumvent a lawsuit, which prompted an Argentine judge in April 1998 to block the PCS
auction indefinitely.
The demand for wireless
We expect the PCS subscriber base will grow very rapidly. Important for the historic growth has
been the growing awareness of mobile communications, due primarily to marketing in the cellular
telephone industry. In addition, all these industries have been undergoing rapid consolidation.
Cellular identified a need for two-way mobile communications, targeted the business user,
developed the service and aggressively marketed their services. Decreasing unit costs and declining
monthly fees also have driven growth. We would expect PCS to exhibit similar tendencies and
trends.
PCS will not offer auction winners access to virgin territory. In fact, many of the services that PCS
initially will provide are already supplied either in a less sophisticated form (with fewer features) or
more expensively by entrenched cellular companies. At the end of 1996, there were just more than
6.2 million cellular subscribers throughout Latin America and the Caribbean-a penetration of only
1.4 cellular subscribers per 100 inhabitants. In Chile, there were more than 314,000 cellular
subscribers by the end of 1996, a penetration rate of only 2.1 percent. In Argentina, regional
duopolies provided service to more than 671,000 subscribers at the end of 1996, giving a
penetration of 1.95 percent. In Mexico, cellular providers serviced more than 978,000 subscribers
at the end of that year for a total penetration of 1.12 percent.
By the end of 1997, BIA Consulting Inc. found that regionwide cellular subscribers passed 11.2
million, a growth of 81 percent over the prior year. In Brazil's cellular market-which accounts for
41 percent of Latin American/Caribbean subscribers-net activations increased dramatically,
driving the Brazilian market to 4.55 million by the end of 1997. Though not likely to license PCS
service until well after the year 2000, the Brazilian market deserves special mention because of its
immense opportunity. For example, BCP (BellSouth Corp.'s Brazilian cellular franchise) gained
more than 485,000 customers in Sao Paulo and more than 50,000 in the northeast region of Brazil
after only four months. BCP also had an additional 550,000 people on a waiting list in Sao Paulo.
BCP has been adding approximately 30,000 customers per week. Service in northeastern Brazil
began in June 1998.
The Mexican mobile voice market continues to demonstrate strong growth potential. Mexico
experienced an increase of more than 67 percent as its subscriber base surged from 1.05 million in
1996 to almost 1.8 million in 1997. By mid-1998 Telcel's wireless network had an existing
subscriber base of 1.6 million. More than 50 percent of the subscribers use the prepaid service,
which has been one of the key contributors to the rapid subscriber growth. Telcel has experienced
subscriber growth at a rate of 50 percent during the last eight months and expects this growth rate
to continue over the next few years.
Cellular growth rates were quite different in the 1996-1997 timeframes in each of the other new
PCS markets. Chile's relatively strong cellular subscriber growth of 44.5 percent gave that market a
year-end 1997 base of 454,000, up from more than 314,000 in 1996. The Dominican Republic
experienced modest cellular subscriber growth of 19.6 percent, bringing its cellular base to 97,000
subscribers at the end of 1997. In mid-1998, both Codetel and Tricom were moving to install PCS
networks in that market. Tricom's network will deploy capacity to connect approximately 36,000
PCS/wireless local loop subscribers by the end of 1999. Guatemala's very modest subscriber
growth of 7.1 percent resulted in a year-end 1997 subscriber base of 46,500.
Argentina obtained more than 1.3 million net subscriber additions in 1997, to yield a total base of
more than 2.01 million subscribers.
Much of this growth was attributed to the introduction of Calling Party Pays in Argentina that year.
After the introduction of CPP in April 1997, the market enjoyed new activations of up to 100,000
per month-fueled by the launch of CPP. However, by the start of 1998, new activations dropped
to half that level. We soon may see a second burst of new subscriber activations in the interior of the
country. CTI-an operator in the interior of Argentina, had about 490,000 subscribers by
mid-1998, and was preparing to launch prepaid service to stimulate subscriber growth in its
operating regions. A second issue facing the Argentine cellular market has been serious customer
payment problems. Because of inadequate screening of new activations, several of the cellular
operators have been forced to disconnect several thousand subscribers per month.
Other markets that still are wrestling with PCS regulation have realized quite respectable market
growth. Colombia saw its cellular market surge from 516,781 subscribers in 1996 to 1.26 million
subscribers in 1997. The Colombian cellular incumbents effectively have blocked any plans to
tender PCS in that market before September 1999, when their market exclusivity expires.
Venezuela, which has had difficulties in licensing PCS because of regulatory uncertainties, realized
cellular market growth of more than 54 percent as its subscriber base moved from 475,000 in 1996
to more than 733,000 in 1997. The introduction of Global System for Mobile communications
cellular service by Digitel, a third cellular operator serving the interior portions of Venezuela, could
provide that country's market with up to 150,000 cellular phone customers by December of 1999.
Market developments in Puerto Rico may be generally indicative of the potential for PCS growth in
the region. In one year of service, Centennial [Cellular]'s 1.9 GHz CDMA system gained a
14-percent market share in Puerto Rico. In the second half of the year, the two AMPS cellular
providers saw an increasing reduction in their net subscriber additions. PRT's net subscriber
additions fell from 16.8 percent in the first six months of 1997 to 11.5 percent in the second half of
1997. CCPR's net subscriber increases fell form 17 percent in the first half of the year to 9.4
percent in the second half.
This rapid growth sets the stage for the introduction of personal communications services in the
region. By the year 2003, it is quite possible that we will see wireless voice communications services
achieve a total penetration of 11.3 percent of the Latin American/Caribbean population, up form a
total 2.5-percent penetration in 1997 and an expected 5.4-percent penetration in 1999. Below, we
illustrate the expected growth trend for cellular and PCS subscribers in the region.
BIA projects cellular and PCS subscriber levels throughout Latin America will reach almost 43.6
million by the end of 2001. This means that region-wide penetration of these services will be just
over 9 percent at the end of 2001. We expect that PCS will drive mobile voice subscriber growth
through increased service offerings and prompting a lower total cost of service. By the end of 2001,
Latin America could account for 7.4 percent of the world's cellular/PCS subscribers, up from 5.5
percent at the end of 1997. Below, we illustrate our growth projections for combined cellular/PCS
growth in several selected near-future PCS markets in the region.
Pricing and Pricing Plans
The declining total cost of service will drive wireless subscriber growth to the levels discussed
above. Significant gains in wireless voice penetration will be made as service becomes more
affordable to greater segments of the marketplace. The cost of airtime is ultimately what will drive
subscriber growth in the increasingly competitive wireless voice market. Additional competition from
PCS is expected to force prices further downward, making wireless voice service more affordable
to a wider range of potential subscribers.
Trends in Service Pricing
Average revenue per unit has been declining. In general, average monthly bill have been declining
due to an increase of the portion of non-business subscribers relative to the total percentage of new
activations. This has had the effect of lowering the average cellular bill and depressing ARPU.
Average rates per minute have also been falling. Entel PCS expects cheaper rates to fuel explosive
growth in the country's wireless market. Entel PCS, the Chilean operator, is strategizing that says
lower prices tied to tariff cuts will boost its client base in the wireless market faster than expected.
By early 1999, wireless phone users will not have to pay a charge when called from a fixed
telephone. That should cut about one-third from the average monthly bill of about 17,000 pesos
(US$35) paid by Entel's clients. The wireless company hopes to capture about one-third of the
Chilean market, which it expects to double to about 1.5 million customers next year. That would
yield a penetration level of approximately 11 percent.
Roaming charges have also begun to decline. This is due to such factors as: less costly reciprocal
arrangements between operators; cluster consolidation by certain operators (as in Chile with the
merger of CTC Celular and VTR); and/or outright competition between operators (the elimination
of daily roaming fees by the Argentina B-band operators CTI and Miniphone was prompted by
elimination of such fees by the A-band operators-Telecom Personal, Unifon and Movicom-all of
which have ownership by the wireline operators).
Calling Party Pays has proven to be a strong driver of subscriber growth, at least temporarily. As
noted earlier, the Argentine market was stimulated by remarkable subscriber growth levels after the
introduction of Calling Party Pays. However, after euphoric growth over eight months, cellular
subscriber levels settled back down by the start of 1998. Broadly similar phenomena also occurred
in Brazil, Peru and Uruguay after the introduction of calling party pays. Other markets are planning
the introduction of Calling Party Pays, including Mexico, which will implement the plan for cellular
and PCS toward the end of 1998.
Prepaid cellular has become a major phenomenon in Latin American Cellular, a trend that the new
PCS entrants will have to accommodate. Mexico's Iusacell, for example, reports that nearly 35
percent of its customers subscribe to pre-paid plans. These users also tend to be less avid users of
airtime, further depressing ARPU. Pre-paid services should be structured to not only drive
incremental subscriber growth but to do so in a way that minimizes our risk on handset subsidies as
well as help reduce churn. The majority of handset costs should be recouped on the initial sale of a
pre-paid account. Credit scoring should also be tight for post-paid service, and potential customers
who do not meet the credit hurdles should be put on the pre-paid plan. Overall, pre-paid could
have positive impact on PCS business, despite its effect on ARPU.
We should expect roaming-both national and international-to be important factors in future PCS
operators' revenue streams. The amount of revenue that roaming will supply for wireless operators
in both proportional and absolute terms could well increase, as growth in roaming airtime and usage
may more than offset these price reductions.
PCS Pricing
We expect that PCS revenues will be derived from a number of sources very similar to that of
cellular. The primary cellular industry revenue sources are access fees (for monthly access to the
service), usage charges (for minutes of use) and roaming revenues (for use outside the home service
area).
Increasing competition will reduce prices and increase aggregate demand. Price changes are
expected to generate new types of users and to stimulate overall wireless usage. As competition
grows between and among the cellular and PCS operators, overall price declines will occur. While
PCS operators are likely to enter the market at prices slightly lower than cellular, cellular operators
will respond wither by lowering prices, offering enhanced services or increased packages of
included airtime.
We expect PCS providers to initially enter the market with a cost of service somewhere in the range
of 15 percent to 20 percent below the incumbent cellular operators. After the introduction of PCS
competition, the cellular operators could match the price decreases initially introduced by PCS
operators. The cellular incumbents also could introduce their own version of any differentiated PCS
pricing packages.
Decreases in the cost of service will make wireless voice service more affordable and encourage
usage in broader segments of the market. As mentioned earlier, usage among cellular subscribers
has been declining as ``lower-tier'' users comprise a greater percentage of the base. Depending on
pricing and marking strategies, the introduction of PCS could result in significant subscriber growth
for the entire wireless industry.
Conclusions: Evaluating the PCS Opportunity
Differentiating PCS from other wireless services
PCS can-and will need to- distinguish itself from the Latin American cellular incumbents. PCS
promises a network infrastructure capable of providing multiple wireless services to residential and
business subscribers. This PCS infrastructure will offer multiple services (voice, data and fax), digital
technologies, superior customer service, lower or differentiated pricing from cellular, and the
possibility of alternative local access (regulation permitting).
The overall components of service will determine the true value-added ti the end user. For example,
PCS operators can be expected to offer more free enhanced services than cellular operators do at
this early stage. Likewise, PCS digital networks will provide users with improved sound quality and
more increased security than analog cellular. These advantages are diminished sharply, however, in
markets where the cellular incumbents have made serious efforts to expand and digitize their
networks. Cellular will continue to provide its subscribers with a far greater coverage area than PCS
and the ability to roam nationwide and internationally-at least initially.
We expect market competition will be fierce, with cellular incumbents fighting hard to maintain their
market position. In most cases, the cellular incumbents will have substantial financial resources and a
level of commitment that imply an ability and a willingness to compete aggressively with any
company that threatens their market positions.
A prime example of the market power of a combined cellular incumbent/PCS entrant is Telcel,
Mexico's largest wireless network operator. Telcel will construct a nationwide
dual-band/dual-mode (800MHz/1900MHz, analog/digital) network employing its new 1900MHz
licenses recently won in each of the nine Mexican regions. Telcel will significantly boost network
capacity by integrating the 1900MHz and 800MHz channels in a common infrastructure for
seamless handoff by users. This is being done in preparation for the rapid subscriber growth
expected when calling party pays legislation is implemented towards the end of 1998.
Valuing PCS Opportunity
In order to evaluate PCS opportunities properly, sophisticated demand, pricing and financial models
should be developed. These models must incorporate projections of wireless services nationwide
and in the specific market. They also must include assumptions about market fractionalization due
tot he competitive mix int he market. Economic factors, such as rate assumptions, expense
projections and capital expenditure estimates also will have a significant impact on value. In addition,
the model must lend itself to conducting sensitivity analysis on key variables.
In developing a financial model to evaluate the PCS opportunity, it is critical that strategies are
defined and reasonable assumptions are made.
For the incumbent, the priority will be on maintaining revenue and earnings stream, legacy systems,
upgrading networks to digital, migrating high value customers and controlling churn. For the new
PCS entrant, the challenge will be to build a competitive footprint, to load the network quickly and
retain these customers, to raise prices after the promotions finish, and gain a distribution foothold or
find new channels. The new PCS entrants would be well-served to bear in mind that revenue is
more important than number of customers. Maintaining a focus on cost per subscriber should
maintain flexibility through sustained price wars.
BIA Consulting Inc., a full-service global telecom and media consulting and investment banking firm
in Chantilly, Va.
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