Stephen G. Tom Issue: Global-ICT 2002
Article no.: 12
Topic: Lessons Learned: Keys to The Broadband Recovery
Author: Stephen G. Tom
Title: Chairman
Organisation: World Teleport Association
PDF size: 56KB

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Article abstract

Telecom businesses throughout Latin America have suffered from poor planning, over-investment, optimistic financial reports, and lagging sales. Broadband infrastructure investment has not been matched by demand and will not be until the content warrants it and more users are connected. The industry must complete a “clean-up cycle” and many companies restructured or liquidated. The health of the industry will depend upon “going back to basics” – securing paying customers, growing revenue and building sustainable, profitable, operations.

 

Full Article

Latin American markets did not escape thedot-com-bomb? Like the US experience, telecom businesses throughout Latin America have suffered greatly from a variety of ills attributable to poor planning, over-investment in technical infrastructure, overly optimistic financial reports, and lagging sales. A headline example is the recent decision by Impsat, the telecom company of the Pescarmona group, to suspend payments of millions of US dollars in interest on twobonds. With the approval of its creditors, Impsat is restructuring a debt of about US$1 billion, the product of what US Federal Reserve Bank Chairman Alan Greenspan called irrational exuberance?. What went wrong in the global telecom business? Telecom equipment manufacturers followed the lead of telecom service providers and jumped on a bandwagon without wheels. Needless to say, their trip was truncated. Over-investment was driven by the usual vicious cycle that drives all booms; growth that continues until the market is being driven not by demand but only by the expectation of continued growth. By allowing capital investment in infrastructure to get significantly ahead of customer demand, companies are now suffering from crushing debt burdens, often threatening their survival. The Economist magazine recently estimated that some 90% of all investment in the Internet bubble, worldwide, has gone to waste. In the case of Impsat, the devaluation of the Argentine peso has compounded the company’s troubles. With most of its revenue collected in pesos, and much of its overhead payable in US dollars, the devaluation has had a devastating effect. Since roughly 50% of Impsat’s revenue is generated by its Argentine subsidiary, the devaluation has had significant impact on Impsat’s ability to service its debt. In the US, the market’s enthusiasm for all things Internet-related created an unrealistic set of market-performance expectations. The late 90s were filled with visions of phenomenal infrastructure growth to support the use of the Internet for delivery of broadband content. Emarketer, a research firm that evaluates Net forecasting, recently checked predictions for broadband Internet access in the US made by 16 analysts during 2000. Only six made predictions that were within 10% of the 11 million US homes that actually had broadband by December 2001. According to Roger Crockett, writing in the February 18 issue of BusinessWeek, “The tech industry can make supercomputers that handle enough complex calculations to predict the weather but can’t produce market data that holds up much longer than a thunderstorm.” In Latin America, the story has been much the same. Latin America is much earlier on the development curve and huge investments in broadband infrastructure have definitely not been warranted by customer demand. Furthermore, until high-speed connections to the end-user become prevalent and meaningful content requiring broadband channels is created, much of the information superhighway will be excess capacity waiting for a user. Companies that have found themselves over-extended and under-capitalized have entered a downward spiral that is fed by the need to control costs. This has resulted in diminished customer service, limited capital for new projects, staff reductions, marketing budget cuts, decreased competitiveness, an inability to service debt, and ultimately a shrinking of the overall business or bankruptcy. WHAT NEXT? Despite the economic damage foisted upon markets that could ill-afford a downturn, the future may be .brighter because of it. As major telecom players reel and react to the failures of entities such as Global Crossing and Enron, the markets are still showing continuing demand for telecom equipment and services. But before this demand can rescue the telecom markets, we must complete the “clean-up cycle.” In other words, failing companies must be restructured or liquidated. The sooner this occurs, the faster we will get to the recovery phase. In an article “Telecom stocks catch Enron flu,” (Multex Investor, 2/9/02) John Filar Atwood highlights how concerns about aggressive accounting practices have drawn attention to many telecom stocks and in some cases punished some excellent stocks. Although this knee-jerk reaction is unwarranted in many cases, in the longer term, anything that causes companies to operate more responsibly, and to report results more honestly, will result in a healthier market. Fortunately, there is evidence that growth in telecom markets continues to be strong around the world, with some regional anomalies. According to Lawrence Roberts, a technologist who invented the ARPANET 30 years ago and recently completed an in-depth survey of bandwidth deployment and utilization by major carriers, Internet traffic grew by 400% in 2000 and will continue to grow at that rate for several years. The revenue of Web hosting companies in the US has slowed markedly — from 100% growth between 1999 and 2000 to “only” 25% from 2000 to 2001, according to newly published research from International Data Corporation (IDC). But IDC confidently forecasts that growth will accelerate again in 2002, driving market revenues to nearly US$21bn by 2006. CIO Magazine’s monthly survey of 1,600 chief information officers, as reported by Group Publisher Gary Beach in December 2001, showed compelling evidence that the information technology marketplace could recover as early as the second quarter of 2002. The good news for Latin America in these statistics is that the Internet related market there is likely to grow substantially faster than more developed economies to the north. According to the UNDP’s Human Development Report 2001, Internet use in Brazil rose from 1.7 million to 9.8 million users between 1998 and 2000. The “bust” after the “boom” that we are experiencing now will allow the survivors, and new players, to address market demand using infrastructure acquired at fire-sale prices. With a cost structure that is more in line with revenue potential, profits will no longer be illusory, assuming companies return to the basics and operate responsibly. These basics include securing paying customers, growing revenue organically (not through acquisitions), and running profitable operations. This means managers must deploy business plans that build shareholder value and profitability, without ignoring the needs of customers and employees. In other words, companies must exercise discipline and employ traditional business practices in order to achieve success and sustainable business models. Owners and investors must also revise their share-value expectations. Not all Latin American companies have suffered during the downturn in the economy. A notable exception is TIBA, headquartered in Argentina. TIBA, founded in 1993, is having what may be its best year ever according to Norberto Alvarez Vitale, its CEO. He attributes their success to a “regionalization strategy” which spreads their business across 10 countries. Meanwhile, their core business in Argentina is broadcast services and their clientele includes blue chip companies such as ESPN, Fox, and Disney. With long-term contracts in place and revenues collected in US dollars, TIBA is shielded from the impact of the peso devaluation. As a matter of fact, the peso devaluation has improved the company’s margins because operating expenses are paid in pesos and therefore the cost of labor and services has actually gone down. In Brazil and Argentina, American companies have sometimes attempted to bully their way into the markets without taking the time to establishing trustworthy local partnerships and business relationships. One international satellite carrier is reported to have spent 10 years trying to access Brazil. The carrier’s CEO refused to acknowledge local power brokers and their role in securing government approvals. In cultures that place tremendous value on relationships, arrogance is not a substitute, and it can be very expensive. Getting back on track economically will require having the patience to build solid relationships. Adding to the woes of the manufacturers and service providers, Latin American governments have been slow to open their markets to full competition. According to the International Telecommunications Union, only 23% of Latin American countries allowed full competition in local or long-distance telephony in 2000, while over 61% retained monopoly markets. The situation was somewhat better in data transmission, where 42% permitted full competition and only 23% maintained monopoly control, and in satellite services, where 34% permitted full competition. This has served to stunt the natural economic growth that would occur by meeting customer demand for basic telephony, Internet access, and general business communications. Governments continue to fear the consequences of deregulation and resist the sacrifice of government revenues that would result from privatization, failing to see how competition fosters better service, lower costs, improved technology, and long-term economic development. It is the fear of negative consequences that has caused some countries to create telecom duopolies in place of a fully competitive market. These duopolies have turned out to be only slightly better than the monopolies they replaced. MAKING A DIFFERENCE Of all the steps that Latin American business and government could take to jumpstart growth in telecommunications, none would be more powerful than to reduce the wide gap in education, access to basic services (clean water, reliable power, basic telephony), and incomes between wealthy minorities and the impoverished majorities. Why? Because it is a prosperous and growing middle class that creates vibrant mass telecommunications markets, demands Internet access, and craves last-mile broadband. Currently, according to UNDP, only an average of 3.2% of the population of Latin America uses the Internet, versus a world average of 6.7% and an average in high-income countries outside the US of 28.2%. Until a greater percent of the population have basic services, Latin America will continue lag behind in terms of Internet adoption. This is easy to say and extremely difficult to do, because it involves hundreds of years of history and culture, geographic barriers, and deeply entrenched interests. But like all major changes, it will be accomplished in many small steps, some of which are already visible. The Bank of Grameen, based in Bangladesh, has developed a workable business model for the rural “Village Phone.” By putting mobile telephones into the hands of “telephone ladies,” Grameen has dramatically affected segments of the economy of Bangladesh. During the pilot program, women who qualified for a small bank loan purchased a phone for about US$350 and sold minutes on that phone to members of their village. The Village Phone operators have averaged US$2 per day, or $700 per year, after paying all expenses — more than double the annual per capita income. In the process, they have generated local and long-distance minutes that have helped fill the big pipes of the carriers. There are now more than 7,600 Village Phones in service today in Bangladesh and the network continues to expand. The lesson of the Grameen Village Phone project is that, though the poor may lack money individually, they have collective purchasing power that can be tapped for their own good and the good of the economy. It takes creativity, grass-roots development work, and persistence, but it can be done. In an effort to address the educational shortcomings in some countries, governments have used distance learning via satellite as a tool to dramatically improve the delivery of educational programs, particularly to underserved populations in rural areas. As an example, the Brazilian government has a strong commitment to educating its population and has invested substantially in distance learning programs via satellite. Daniel Swartz, president of Videocom Brasil, reports that 60% of his company’s revenue is derived from satellite-based distance learning programs financed by the Brazilian government. And there is much encouraging evidence that educational achievement is improving. In the early 1920s, according to UNDP, 25% of children born in poor countries learned to read. By 1999, 75% of adults in developing nations were literate. (“Wired Schools, Wired Nations,” The Economist, November 8, 2001.) The Human Development Report 2002, from UNDP, gives more ground for hope. The report ranks countries around the world in terms of technological innovation, achievement and growth prospects. Not surprisingly, the OECD nations rank near the top in most categories. But on its list of “Potential Leaders,” UNDP included Mexico, Argentina, Costa Rica and Chile, while Uruguay, Panama, Brazil, Colombia, Peru, Paraguay, Ecuador, the Dominican Republic and Honduras were identified as “Dynamic Adopters.” The rankings were based on the proven ability to create technology, to diffuse it through the society, and to provide meaningful skills development to the population. Conclusion What can make the biggest positive difference in the Latin American economy? Long-term economic stability and growth will depend on public and private investment in telecommunication facilities and programs that will change behaviors, enlighten and educate, and deliver life-altering information. Progress also depends on the willingness of governments to release their regulatory, and in some cases monopolistic, hold on telecommunications. Businesses, on the other hand, have an obligation to operate in responsible ways so as to protect and promote the interests of all of their constituents (i.e. owners, investors, customers, and employees). If Latin America’s political leaders can implement effective telecommunications policy, and technology companies return to the basics of good business, the economies of Latin America will truly prosper and its people will flourish.