Latin America is destined to emerge as one of the most important regions in the global market for mobile telephony, according to the latest studies published in the sector. The GSMA, the international association of mobile service providers, estimates that during 2014, smartphones represented 32% of all phone connections in Latin America. By 2020, such devices are expected to comprise 68% of all phone connections in the region. In absolute numbers, this will mean that there will be more than 605 million smartphones in the region by the year 2020 — a figure that will be exceeded only by the Asia Pacific region.

When it comes to the penetration rate of such devices in the general population, about 35% of the population in the region, or 216 million people, used mobile phone devices to access the Internet in Latin America in September 2014, according to the GSMA. By 2020, the GSMA estimates that about 50% of the population — or about 105 million additional people — will be using their cellular devices to access the mobile Internet. Already, this kind of technology is the principal means for accessing the web for the majority of the population of Latin America. In 2011, the number of broadband connections surpassed the number of fixed line connections in Latin America as a whole. This is the case throughout the region now, including the five largest markets — Brazil, Mexico, Argentina, Colombia and Venezuela — in which there are five times as many broadband connections as fixed line connections.

The Latin American telecom sector has been undergoing a transformation that has made it “one of the most-watched markets in the industry today,” according to a recent report by PricewaterhouseCoopers LLP, the global consulting firm. “Fueled by government privatizations and liberalizations throughout the region in the 1990s, the telecom sector has been experiencing a growth spurt that just won’t stop. A combination of trends — economic growth, consumer demand and further regulatory changes — is moving countries across Latin America to continue investing and innovating to meet the communications needs of consumers and businesses. In most of the countries, mobile and broadband offer major opportunities and are attracting competition not only from local operators, but also from abroad.”

The Latin American telecom sector has been undergoing a transformation that has made it one of the most-watched markets in the industry today.

Pitting Local and Global Providers

What impact is this transformation having on providers of cellular services and smartphone devices? When it comes to cellular services, analysts foresee a fierce struggle for market share between the great international telecom companies and the local firms that are headquartered in those countries. Will the battle be won by new firms that arrive in the region — but are headquartered elsewhere? Or will those cellular service providers that already have a presence in Latin America wind up strengthening their dominance over the course of the competition? Ramiro Tovar Landa, professor at ITAM, the Autonomous Technological Institute of Mexico, believes that the latter outcome is more likely.

Tovar forecasts that the contest between the big telecom service providers that are now present all across the continent will expand. “The competition they engage in will not focus on who has a relatively higher number of mobile service providers in its market. Rather, the battle will take place on a continental scale between two or three operators in each country [in the region], depending on the income level of each economy.” The main operators in the overall region will continue to be America Movil, Telefonica and AT&T, he adds.

However, Tovar expects a consolidation in the number of service providers in Latin America as these large firms take over other service providers that operate on a smaller scale in the region. This trend will occur, he adds, despite the fact that the governments of some countries, such as Mexico, Ecuador and Colombia, have adopted asymmetrical regulatory regimes, which penalize the larger players in each of these countries. Thus, the size of the telecom market in a country does not have any consistent relationship with the intensity of the competition in it. “The populist position [taken by some countries in the region], which penalizes the larger [telecom service] providers in each country, will wind up having an adverse impact on competition and investment,” he warns.

According to the latest study by the International Telecommunication Union (ITU), focused on the legal framework for telecom services in Latin America, the average country in the region has only three mobile telephone service providers, although in some specific cases that figure can vary between one and six firms.

Nevertheless, Sergio Costa Sant’Anna, assistant professor of strategic alliances and international business at the IESE Business School and the Pompeu Fabra University in Barcelona says that the newest technologies can open the Latin American market up to other “important international players” in the sector. Among those players, Costa cites Britain’s Vodafone and France’s Orange. Vodafone, which is the largest telecom service firm in the world, does not currently have any presence as a telecom service provider in Latin America, while Orange is not active in the largest markets of the region.

“Another company that could take advantage of the expansion of the [Latin American] market is TIM (Telecom Italia), an Italian firm that operates in Brazil, but has its own very serious management problems,” he notes. “TIM’s expansion into other countries could provide a major boost to its business and to the sector as well.” He also cites Oi, a Brazilian firm that could have the opportunity to expand itself into new markets in the region. “Finally, and for political reasons, let us not forget China Mobile. Because of its close relationships between the Chinese government and the top leaders of Latin America, it can be a big beneficiary [of this overall trend toward expanding into Latin America]. In its case, however, I view expansion [into the region] as something that has a largely political and strategic character that can enable [China Mobile] to really compete with the other companies mentioned above.”

4G connections “can only become a reality if there is an increase in investments in infrastructure on the part of governments and [local] service providers.”–Sergio Costa Sant’Anna

Alejandro Mellado Gatica, a professor at the computer engineering school of the Catholic University of Temuco, Chile, says that WOM, a new telecom service provider (resulting from the purchase of Nextel Chile by Novator Partners, a British holding company) can define the path that the other operators in the region will be following. “With the arrival of WOM in the Chilean local market, I see that the advertising and costs of services are becoming more competitive, in order to win over [new] customers. Depending on how WOM performs, I believe that the other international telecom firms will be able to evaluate whether it makes sense for them to establish themselves in the Latin American market,” he says.

The Battle for Market Share

During the first quarter of 2015, the Latin American smartphone market grew by 25%, year on year, and by 4% compared with the previous quarter, according to the latest study by Counterpoint Technology Market Research. Although Samsung, LG and Apple are still the three top vendors of smartphones in the region, sales of Apple’s iPhone devices are growing more rapidly than those provided by Korea’s Samsung and LG brands.

According to the same study, Samsung has been the best-selling smartphone device in the Latin America market ever since 2011. However, Samsung’s share of the Latin American smartphone market fell by 900 basis points, year-on-year, in the first quarter of 2015, to 29.5% — down from 38.4% in the first quarter of 2014. Meanwhile, Apple’s share of that market increased to 10.1% in the first quarter of 2015, up from 5.4% during the same period in 2014. In the fierce competition to retain as much of its market share as possible, Samsung slashed prices across several models, and its shipment mix moved toward a lower ASP (average sales price). Year-on-year, Samsung’s ASP dropped by a remarkable 31%, noted the Counterpoint study, yet the Korean manufacturer was unable to retain its share of the Latin American smartphone shipments market against Apple’s latest iPhone devices.

The growing adoption of smartphones is also providing a boost for the development of faster broadband mobile networks in the region. According to data from 4GAmerica, an organization composed of telecom service providers and telecom manufacturers, there were 16 million 4G-LTE lines in Latin America and the Caribbean in March 2015, a year on year growth rate of 396%. That makes the region the fastest growing market for such connections in the world. The same association also forecast that for 2019, the number of high speed [LTE] mobile connections in Latin America should reach 196 million. According to GSMA, Latin American telecom service providers invested almost $8 billion in spectrum licenses between 2012 and 2015, mostly aimed at the deployment of 4G. The same association stressed that the capital expenditures of mobile service providers in Latin America are growing at a significant rate. GSMA forecasts that their capital expenditures will reach a cumulative total of $193 billion during the seven-year period between 2014 and 2020.

Given that the economies of Latin America will experience relatively low economic growth during the next few years, regulatory changes must be made if the mobile service providers in the region are indeed going to meet these forecasts for large-scale corporate investment. Notes Tovar, “The regulatory changes will have to favor investment, which means that those countries that have implemented regulations that take a hostile view of those companies that have a larger size will be able to enter a new stage of reform in which they deregulate their domestic markets to promote obvious competition [between locally based companies] with those cellular service providers that have a multinational presence.” He notes that “those countries that have populist tendencies must be able to change those tax policies that are hostile to long term investment, and to investment that comes from abroad.”

Costa warns that forecasts for growth in 4G connections “can only become a reality if there is an increase in investments in infrastructure on the part of governments and [local] service providers.” He says that many companies will adopt ways for sharing these infrastructures, with the goal of optimizing the utilization of their assets and, as a result, minimizing their costs, as well as reducing the time required for expanding into new geographical regions and those that are currently neglected. “We have a great opportunity to expand within those new regions in Latin America that are less developed, especially within rural areas,” adds Mellado. He says that companies should concern themselves with what will occur if they develop high speed mobile networks and their customers begin to pay fixed prices for data service and for using applications such as WhatsApp and Telegram. “It is going to be a big mess because the margins for maintaining the entire infrastructure and the transmissions of data would be very narrow,” he argues.

Price Discounts and Rural Development

It is too early to assess the impact of all these changes on Latin American consumers and society in general. Generally speaking, experts expect a decline in the prices for mobile devices and services, but many nuances have to be considered.

Costa says that the trend will move toward lower prices for services over the medium and long term. “However, you have to consider how much competition exists within each country. Some countries [in the region] have protectionist laws and, in some cases, I don’t believe that leads to any reductions in their prices, but rather to a short- or medium- term increase that results from the monopolies or oligopolies that exist in those markets. Prices can decline in the short and medium term only as a result of an increase in competition within the sector,” adds Costa.

“Telephone networks play a crucial role in the integration of a country, and as a result, in the generation of new businesses.”–Sergio Costa Sant’Anna

On the other hand, Costa notes that the economic benefits for Latin American economies from developing high speed mobile networks can be substantial, especially for the development of areas that are either rural or have slower economic growth. “Telephone networks play a crucial role in the integration of a country, and as a result, in the generation of new businesses. That way, the region will benefit from the generation of new jobs, whether directly or indirectly, by the construction of infrastructure or as a result of the incentives that exist for opening new businesses — [all] because of the availability of a technology that provides communication that is faster or more efficient,” he says.

A recent study by McKinsey notes that the decline in the prices for smartphone devices has favored the purchase of smartphones in the region. Despite that fact, for a large part of the population, smartphones are still a costly luxury that they cannot afford. According to the latest calculations by McKinsey, the average price of an intelligent device in Mexico is the equivalent of 2.6% of per capita income (or $269). In Brazil, it is the equivalent of 4.5%, or $521, and in Colombia, it is 5.8% of the average income, or $439.

Tovar notes that there is a downward trend in the price of hardware as a result of growing competition among the manufacturers at a global level. Prices are declining, as well, because of growing economies of scale and technological change. However, Tovar adds that this trend will “unfortunately be interrupted by substantial devaluations in the currencies of the major countries of Latin America (Brazil, Colombia, Chile and Mexico), which have [already experienced] devaluations relative to the American dollar.”

In the case of Mexico, he says, the peso has devaluated by more than 20%. Elsewhere, the devaluation of local Latin American currencies has been high as 60%, as in the cases of Brazil and Colombia. “This trend results in lower rates of [smartphone] penetration, while raising costs involved in the entry of capital.”

Tovar says that one approach to overcoming this obstacle will be “to increase the subsidies that each service operator awards to its subscribers, but which have been eroded by the regulation of the termination rates” which one telecommunications operator charges to another for terminating calls on its network.