What is the future of telecommunications in Latin America?

Telecommunications are essential to enhance the competitiveness of countries, flow of information, development, economic growth, innovation and productivity. With lighter devices, higher speed connections, higher volume capacity, better voice quality and more energy efficiency, telecoms operators are confronted with a rapidly shifting technology landscape. Three main phases in the evolution of the sector in the last 25 years can be identified. In the first phase, from 1987 to 2000, privatization was the main issue. In the second phase, from 2001 to 2009 the successful mobile revolution in the region took place. In the third phase, from 2010 to date, the broadband explosion began.

Phase one: Liberalization until the internet bubble burst (1987-2000)

After what has been called ‘the lost decade’ of the 1980s, the first sector that was privatized in Latin America was telecommunications. In the early 1990s, most Latin American economies had spiraling debt, inflation, corruption in state controlled industries and protectionism. In this context, many policymakers abandoned the import-substitution model and a series of processes of liberalization and privatization followed and led to important structural reforms.

Chile was the first country to privatize their former state-owned operator in 1987, followed by Belize (1988), Argentina (1990), Mexico and Venezuela (1991), among others. A wide-range of liberalization/privatization strategies were implemented and in many cases they were a key factor in the development of the telecommunication network. This initial privatization led to what has been called ‘from public to private monopoly’; Telefónica (Spain) was a prominent player as well as Telmex (Mexico).

Brazil learnt from the early privatizations and in July 1998 launched a second type of privatization to foster competition from the onset. Telebras, the Brazilian telecom system, was restructured into four main subsidiaries (one long distance and three local telephone firms) and eight cellular companies. MCI (a US company that soon after went bankrupt), Telefónica (Spain), Telecom Italia (Italy), Portugal Telecom (Portugal) and A. Gutierrez & INEPAR (Brazil) became the main players in Brazil. Soon after mirror companies were auctioned as well.

Another characteristic of this phase is that most of the national telecom regulators were weak and lacked experience in enforcing regulations. Average fix-lines penetration in the region was about 18% while in Europe it was between 40-60%. This phase ends with the bursting of the internet bubble in March 2000, which would cause directly or indirectly the major crises and in some cases bankruptcy of telecom operators (i.e. MCI Worldcom). In this context, many international players from the US, Canada and Europe left the region (i.e. Verizon, Sprint, AT&T, France Telecom).

Phase two: the mobile revolution (2001-2009)

The above-mentioned crises significantly transformed the Latin American telecommunication landscape. As a consequence, many international operators restructured their international investments and new alliances emerged. In 2000, Bell Canada International and US-based SBC joined América Móvil (Mexico) to create Telecom Américas. This was a short-lived alliance due to financial troubles; in 2002 the joint venture was terminated. América Móvil seized the opportunity to acquire assets from their partners in the Telecom Americas and multinational corporations who were leaving Latin America because of difficulties at home and in some cases because their business strategies in the region failed.

The Mexican business model of prepaid cards provided América Móvil with valuable information about customer dynamics to expand in the region. Telefónica had mainly prioritized fixed-line telephony and then entered new industry segments while América Móvil focused on mobile telephony from the start. Mobile penetration in Latin America soared and today is above the average and regions with similar GDP per capita. Competition between América Móvil and Telefónica in the region was fierce in most countries.

According to GSMA, the Latin American mobile market was the fourth largest globally with 702 million connections (112% for SIM cards) by September 2014. The largest mobile market is Brazil, with 114 unique subscribers, followed by Mexico with 46 million, Argentina with 28 million, Colombia with 25 million and Venezuela with 17 million. Almost 80% of Latin American subscribers are prepaid. The telecommunications sector faced major challenges from rapid technological change and regulatory complexities. Broadband emerged at the end of this phase enabling the development of cloud applications and it required new access policies and regulations. The success of mobile telephones in Latin America can be also attributed to the competition among operators; most countries have at least three providers.

Phase three: the broadband explosion (2010-present) and the need for a second wave of reforms

Broadband access became a priority for governments all over the world; in 2010 even the US government launched a “Connect America: The National Broadband Plan”. In the region, Brazil’s National broadband initiative, a wide-ranging plan covering infrastructure adoption and demand-side initiatives, was also announced in 2010.

Two years later, Mexico presented the AgendaDigital.mx to increase fixed and mobile broadband penetration. In 2013, a telecommunications reform in Mexico established access to broadband and internet as a constitutional right. Although Colombia remains behind Argentina, Brazil and Mexico in most IT indicators, in 2013 the government announced a National IT Plan that established three main goals: 70% of Colombians with internet subscriptions, 100% of health and education establishments with internet access and 100% of rural areas with internet access.

According to the ITU, by the end of 2015 there was close to 3.2 billion internet users and globally, mobile broadband penetration reached 47%. The impact of broadband on GDP growth, job creation and increase in average household incomes is significant and there are noteworthy spillover effects of broadband in the economic system.

Estimated fixed broadband penetration in Latin America is around 9.2% per capita, close to the world average of 9.8%. Broadband expansion is limited by insufficient fixed line infrastructure (most of the infrastructure is mainly located in urban areas), low computer penetration and lack of bandwidth. ADSL is still the most used technology while cable modem is frequently used in countries that offer triple play.

More than 25 years later, there is an urgent need for reforms. In countries like Mexico there are important policy failures that have led to what the OECD has described as an inefficient telecommunications market that imposes significant costs on the economy and burden the welfare of the population.

Katz, Koutroumpis and Callorda created a digitization index to measure the deployment and adoption of information technology that incorporates a holistic dimension of impact that includes adoption skills and effective use. We estimate that digitization accounts for 8.13% share of growth in GDP between 2008 and 2011 in Latin America. Policy lessons, such as the formulation of ICT policies in a comprehensive and holistic manner, that cover all areas of the ecosystem in order to maximize the positive impact of ICT in the region, must be heeded.

Five recommendations

The World Economic Forum on Latin America is taking place in Medellin, Colombia from 16 to 17 June.