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Skip Navigation LinksHome :: Back Issues :: Local operators drive the wireless revolution forward

March 2002

Local operators drive the wireless revolution forward


Shareholders in global telecom companies don’t want to hear about Latin American expansion any more. That leaves the way clear for smart, well-financed local operators.




       
Advertising mobile phones in São Paolo: the key is making
money from low-income users
This is not a good year to be a telecommunications company. If you are one of these unfortunate entities, and if you're not in bankruptcy, chances are you're saddled with debt, your shareholders are screaming after seeing their investments all but wiped out and the last thing they're interested in is adventures in the Amazon. The bubble has burst, and the hangover has started.
At the height of the bubble, investors loved emerging-market telecoms. Emerging markets were a huge opportunity for any growth-minded telecoms company: if only a small proportion of the population has a phone, the market potential is enormous. Wireless companies, especially, jumped in with both feet: a whole new type of country was envisaged, where most people would leapfrog the fixed-line stage. Aggressive foreign-owned private companies would revolutionize countries used to stolid state-run monopolies. No more waiting for months and paying huge bribes for a phone line, no more crackly connections: everybody could have a phone, and everybody would.
Amazingly, it actually worked out like that. The wireless revolution has certainly taken hold in most countries in Latin America. Cellphone penetration among the middle classes has reached saturation point. Calls to and from the region have plunged in cost; connections are clearer; competition and privatization have revolutionized the markets.
Now, however, telecoms companies in the region are bumping up against two big obstacles, both of which look hard to overcome. The first is demographic. Now that the middle classes all have phones, growth is going to have to come from poorer segments of society. The more subscribers they get, the less lucrative the next subscriber is likely to be. Yet the telecoms' finances are generally based on increasing - not decreasing - their average revenue per user.
The second huge problem in the region is one of regulation. When telecoms were desperate to get into Latin America, the cost of being left behind was always higher than the cost of participating in the market, and local regulators could be very forceful on the side of consumer rights. The cost of calling a mobile phone in Brazil, for instance, is among the lowest in the world.
Now companies are much more likely to simply walk away from countries where the regulator won't let them structure their businesses so that they can make big returns. The emphasis has moved from opportunities for growth to opportunities for saving money. In that sort of environment, even the fact that you've spent a lot of money on a licence is not in itself reason to spend even more building out a network.
The whole relationship between large US and European telecoms and their Latin subsidiaries has changed. A couple of years ago, the story was universally one of spending huge sums of money to take stakes in Latin American telecoms. Spain's Telefónica took the lead but Portugal Telecom and WorldCom and BellSouth and SBC all followed suit. Over the past year, both Latin America and the telecom sector globally have seen huge problems: only meltdown of Argentina-sized proportions starts to compare to the amounts of money lost in telecoms such as Global Crossing and Teligent. Risk aversion is now the watchword: cash-strapped telecoms might need to retreat from Latin America even if they don't want to.
Most of the difficulties have nothing to do with Latin America itself. The region could still look very attractive on its own terms but to a telecom company that has strained itself past breaking point on, for example, the acquisition of UK and German 3G licences, it simply isn't a priority. Even so, Latin America is far from immune to global trends: wireless subscriber growth rates are slowing down as much there as they are anywhere else.
And companies like Impsat, which had the misfortune to be based in Argentina, went bust long ago. In fact, there are no south American telecommunications companies that have the financial strength to compete against the major global companies, even in their present weakened state.
If the telecoms giants of the G7 can't or won't inject their own capital into the region any more, Latin America's telecoms are going to have great difficulty going it alone. The risk-free cost of capital in a country such as Brazil is about 13%, and lenders charge huge premiums on top of that for corporate risk - especially to telecoms. Equity markets in Latin America and in the US are closed to new issuance. Only private equity still operates to any degree in the region, as when US investment fund Southern Cross took control of troubled Chilean telecom Telex-Chile in January as part of a deal involving a capital increase of $387 million.
Essentially, the only companies that have good prospects at the moment are those that are cashflow positive, still able to borrow, interested in expanding at a time when everybody else is contracting, and have somehow managed to avoid the worst managerial excesses of the TMT bubble.
The marvel of America Móvil
Amazingly, Latin America actually has a pair of companies that exactly fit that bill. Mexico's Telmex and its wireless sibling America Móvil, spun off last year, never really had the opportunity to go on the sort of binges that have left their European counterparts hurting so badly. At the same time, the companies are extremely well run.
Telmex is the fixed-line company, a privatized monopoly forming the core of billionaire Carlos Slim's portfolio. Despite the fact that the market is now open to some semblance of competition, Telmex continues to serve 90% of the local market, and throws off more than $2.6 billion of free cashflow a year. It has nowhere left to grow in Mexico, so it's looking both south, to central America, and north, to the US, for expansion possibilities. It would have taken a sizeable stake in troubled US company XO Communications already were it not for regulatory issues about foreign ownership restrictions north of the border.
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