Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
More than 200 years ago, Edmund Burke said one of the most over-quoted sentences in history: “Those who don’t know history are destined to repeat it.” Although these words were said in a completely different political context, they seem prophetical when it comes to some public policy initiatives proposed by government representatives throughout the Latin American region. Short term memory and jingoistic discourses are extremely dangerous if they become the key ingredients in enacting new regulation regardless of the targeted industry.
One of the many industries that has been affected by this wave of misinformed good intentions is the telecommunications industry. Unfortunately, it’s not a new phenomenon. Ten years ago, I wrote in a now defunct publication: “It’s a historical fact that during the mid- to late 1990s a large number of Latin American telecommunication markets evolved from centralized public monopolies towards privatized competitive environments. The immediate effects of the privatization/liberalization wave were: increase on much needed foreign investment, modernization of outdated telecommunication infrastructure, expansion of current and deployment of new infrastructure, lower rates, new services & offerings, and a rapid increase on both mobile and fixed teledensity.
“However, the collapse of the telecom bubble deteriorated financial conditions throughout the region as investment slowed and economic growth became lethargic. This situation was exacerbated by discoveries of corruption by key government officials, and local politicians—some well-intentioned others opportunistic—immediately cried against privatization as the Pandora’s Box that created recession, monetary devaluation and the drastic increase in unemployment. Thus, the most effective political discourse included a cry against globalization as well as nostalgia for the pre-privatization times.
“Telecom populism resurgence is impacting the telecom sector in other ways:
- elected officials looking to boost popular approval of their administration;
- government officials with a clear social agenda that overlooks the ‘bigger financial’ picture; and
- elected officials with diminishing popularity looking to boost their image in front of their constituents.”
Many would argue that over ten years many things have changed in Latin America’s telecom industry and that the challenges are completely different. I would say that this statement is partially true, but the essence of populism is still strong in the region and has evolved—It is no longer limited to importing substitution measures or the nationalization of private companies. One of populism’s new ideas deals with consumer suffering at the hands of “merciless exploitations” by companies that don’t care about their customers.
It is extremely important to differentiate between regulatory entities demanding that telecom operators increase coverage and provide better quality services, and policymakers using the consumers as an excuse to pass laws that would deteriorate the market’s competitive environment.
Currently, Colombia provides the best example of a populist law proposal that is inaccurately being advertised to the general public as beneficial for consumers by creating a level competitive landscape for mobile services provision. The proposed bill currently under consideration by the Colombian congress imposes a 30% market share limit on revenues for mobile services. In addition, the bill states that “this 30% market share would account for both direct and indirect” revenues. Proponents of this regulation argue that it would help foster competition, hence, benefit consumers. This is inaccurate. If approved, this measure would stimulate the creation of a three-player oligopoly (each with 30% market share of mobile revenues) and drastically decrease operator investments in rural and remote areas. For example, if the bill is enacted into law, Claro would make an effort to retain its high ARPU consumers, positioning itself as a postpaid, premium service operator (Claro’s postpaid base accounts for more than 30% of its revenues).
As a result, the operator might no longer have the need to provide coverage to rural areas seldom visited by its subscribers. Under this scenario, the operator would only maintain services where obligated by law and either divest or relocate infrastructure from those areas that no longer have Claro customers. After Claro decreases its subscriber base to comply with the 30% revenue cap, its network would no longer have the same amount of traffic congestion the operator currently experiences. This in turn would allow Claro to do a LTE “in band” deployment on the spectrum it already possesses but with offers tailored for the high end Colombian consumer or the enterprise sector.
As Claro starts decreasing its subscriber base, the main recipients of the new subscribers would be Movistar and Tigo. Eventually these two operators would also reach the 30% revenue market share threshold and begin to start tailoring their commercial offers toward fulfilling the needs of higher ARPU consumers. In other words, they would focus their marketing efforts to acquire high ARPU subscribers—mostly concentrated in urban areas—and halt their investment in rural areas since they won’t need the same extended coverage that they currently have in the country, and they want to focus on the medium to high income consumers.
One of the main problems of the proposed law is that 10% of mobile market revenues doesn’t translate into 10% of mobile subscribers but in a much higher percentage of the subscriber base—as high as 25% to 30% of total subscribers. These are the low ARPU mobile subscribers that mostly live in rural areas that in many cases, receive services from one or two of the market mobile players. If mobile operators have a market share cap, they won’t be interested in offering services to these consumers. It’s a simple cost/benefit equation: why invest hundreds of millions of dollars in low ARPU subscribers if the 30% market share revenue cap could be reached by only providing services in urban areas? This common sense approach has an added benefit for the three government-created oligopoly operators: higher profit margins as a result of lower CAPEX and OPEX.
If Colombia’s three main mobile players (Claro, Movistar, and Tigo) lose the incentive to attend these customers, this responsibility would fall to the other two licensed mobile operators with infrastructure in the market: Avantel and UNE. Unfortunately, these two operators don’t have a strong network footprint that would allow them to replace Movistar, Tigo and Claro as mobile provider in many rural areas. This dilemma is exacerbated by the fact that if “indirect” revenues are also part of the 30% cap, mobile operators won’t have any incentive to host mobile virtual network operators (MVNOs), thus halting the potential entry of new players.
To summarize the potential consequences of the bill under consideration by Colombia’s Congress, it would:
- imperil the expansion of mobile coverage in low income areas,
- slow diffusion of technological innovation to the bottom of the pyramid,
- impose entry barriers to MVNOs, and
- eradicate the competitive pressure to aggressively invest in the market since the operators are limited to their 30% share of all revenues.
The proposed bill could be well intended and the rhetoric used to defend it may sound plausible to many, but the main beneficiaries of its approval won’t be the Colombian consumers.