|Issue:||Latin America III 1997|
|Topic:||Personal Communications Services in Latin America:Evaluating the Potential|
|Organisation:||International Consulting for BIA International, USA|
Personal Communication Services is the latest generation of products and services in the wireless communications markets today, competing as a cellular alternative. In order to evaluate PCS opportunities properly, sophisticated demand and financial models should be developed. New PCS entrants should bear in mind that revenue is more important than numbers of customers. Price alone is not the only differentiator. The prospects and challenges for PCS will be examined by looking at Chile, Argentina and Mexico.
Personal Communication Services (PCS) – soon to be a reality in several Latin American markets – is the latest generation of products and services in the wireless communications markets today. Broadband PCS will offer users enhanced cellular-like services such as two-way voice and data communications in the 1.9 GHz range. Narrowband PCS will offer users enhanced paging-like services, including advanced voice paging, acknowledgment paging, data messaging, one and two-way electronic messaging, and fax and other imaging offerings. This article will focus on the prospects and challenges for PCS in three key markets: Chile, Argentina and Mexico. Chile In Chile, PCS 1.9 GHz spectrum allocations were awarded to two providers in December 1996: Chilesat (one license) and Entel (two licenses). Both operators are currently in the process of building out their networks – a Code Division Multiple Access (CDMA) system for Chilesat, and a Time Division Multiple Access (TDMA) system for Entel. Entel will use one of its PCS licenses to provide high-mobility PCS service, and the other for short-range fixed/mobile service. Argentina In January 1997, Argentina’s President Menem signed a decree authorising the auction of two PCS concessions, and the Argentine Comision Nacional de Telecomunicaciones (CNT) will begin auctioning radio spectrum for PCS in September 1997. These two PCS concessions will cover Buenos Aires in competition with the two incumbent cellular carriers: Minifon and Movicom. However, the CNT has yet to define very fundamental issues, such as interconnection costs and whether the standing 20% import duty will be levied on PCS handsets. Mexico In November 1997, the Mexican Comision Federal de Telecomunicaciones (COFETEL) is due to begin auctioning radio spectrum for PCS in Mexico. The PCS auction will offer 20-year regional concessions for fixed and mobile wireless services: one or more concessions of 30 MHz in the 1850-1990 MHz range; one or more concessions of 10 MHz in the 1850-1990 range; six blocks of 25 MHz in the 3.4-3.7 GHz range, and one or more concessions of 14 MHz in the 440-450 MHz and 485-495 MHz ranges. No other country has attempted to auction this much spectrum simultaneously. Demand for Wireless Communications PCS will not offer auction winners access to virgin territory. In fact, many of the services that PCS will initially provide are already supplied either in a less sophisticated form, with fewer features or more expensively by entrenched cellular companies. At the end of 1996, there were roughly 5.8 million cellular subscribers throughout Latin America – a penetration of only about 1.2 cellular subscribers per 100 inhabitants. In Chile, there were over 342,000 cellular subscribers by the end of 1996. In Argentina, regional duopolies provided service to almost 668,000 subscribers at the end of 1996. In Mexico cellular providers serviced more than 978,000 subscribers. By the end of 1997; BIA forecasts that region-wide cellular subscribership will surpass 9 million, a growth of 36% over the previous year. BIA projects wireless (defined as cellular and PCS) subscriber levels throughout Latin America to reach over 41.8 million by the end of 2002. This means that nationwide penetration of these services will be near 8% at this future point in time. BIA expects that PCS will increase subscriber growth through increased service offerings and lower rates. It also expects that PCS revenues will be derived from a number of sources very similar to that of cellular. The primary cellular industry revenue sources are monthly access fees, usage charges and roaming revenues (for use outside the home service area). Average monthly bills have declined steadily. In Chile, for example, monthly cellular billing averaged just under US$70 per subscriber in 1996 and are under US$60 per month today. This compares to US$110 per month in 1994. However, it should be noted that average monthly bills have declined due primarily to a change in subscriber mix, not usage. Specifically, the initial subscriber base for cellular service was the business community, which had the need for instant access provided by mobile communications as well as the ability to pay. As the industry has matured, non-business subscriber activations have been an increasing proportion of the total percentage of new activations, lowering the average bill. Pre-paid cellular is becoming a major phenomenon in Latin America, a trend that the new PCS entrants will have to accommodate. Mexico’s Iusacell, for example, reports that nearly 35% of its customers subscribe to pre-paid plans. Average rates per minute have also been falling. In Chile, the average rate per minute fell to around US$0.39 in 1996, down from about US$0.56 in 1994. Roaming charges – both in terms of per minute rates and access charges – have begun to decline due to: · less costly reciprocal arrangements between operators; · cluster consolidation by certain operators (as in Chile with the merger of CTC Celular and VTR); or · outright competition between operators (the elimination of daily roaming fees by the Argentina B-band carriers – CTI and Miniphone – was prompted by elimination of such fees by the A-Band operators – Telecom Personal, Unifon and Movicom – all of which are owned by the wireline operators). However, the amount of revenue that roaming will supply for wireless operators in both proportional and absolute terms could well increase, and growth in roaming airtime and usage may more than offset these price reductions. BIA expects roaming – both national and international – to be an important factor in future PCS operators’ revenue streams. The Competitive Landscape The franchise regions for Latin American PCS will be roughly contiguous with the coverage of existing cellular companies. In Argentina, the PCS franchises will overlap with the Buenos Aires- cellular duopoly. In Mexico, the franchises will follow the nine regions established for cellular licenses. This differs from the situation in the US, where the PCS franchise regions are much larger than those for cellular systems. In most cases, the cellular incumbents will have substantial financial resources and a level of commitment that implies an ability and willingness to compete aggressively with any company that threatens their market position. For example, cellular service providers in Chile are beginning to thin their margins and to employ creative pricing strategies to pre-empt broadband PCS entrants. It is reasonable to assume that competition will be fierce, both internally and externally. This increased competition places a substantial burden on those interested in participating in the upcoming PCS auctions to accurately evaluate the licenses on which they expect to bid. In Argentina and Mexico the cost of acquiring PCS spectrum through the auction process will add millions of dollars to the start-up costs for most systems. This additional burden will clearly have a significant impact on return on equity calculations for the PCS operators. PCS proposes a network infrastructure capable of providing multiple wireless services to residential and business subscribers. PCS can – and will need .to – distinguish itself from the Latin American cellular incumbents through the offering of multiple services (voice, data, fax), digital technologies, superior customer service, lower or differentiated pricing from cellular, and the possibility of Wireless Local Loop services (regulations permitting). BIA expects that PCS in Latin America will attempt to portray itself as a cellular alternative at a lower price (better feature set, yet in the near term, not necessarily better coverage). While there has been much talk of PCS as an alternative supplier to the local telephone company, a conservative assumption would be that such a migration from the wire network would occur only after regulations are clarified, and after there is some maturation of the technology and service providers. Another similarity between PCS and the other existing mobile communications sectors is that the subscriber base is projected to expand very rapidly. Important for the historic growth has been the growing awareness of mobile communications, due primarily to marketing in the cellular telephone industry. In addition, all these industries have been undergoing rapid consolidation. Cellular identified a need for two-way mobile communications, targeted the business user, developed the service and aggressively marketed their services. Growth in the paging industry has been spurred by an expansion in the number of frequencies being used for paging and in the number of channels constructed, and the entry of sophisticated management teams that have recognized the “commodity” nature of the business. Growth in both industries has been driven by decreasing unit costs and declining monthly fees. Therefore, PCS is expected to exhibit similar tendencies and trends. Conclusions: Evaluating the PCS Opportunity In order to evaluate PCS opportunities properly, sophisticated demand and financial models should be developed. These models must incorporate projections of wireless services nationwide and in the specific market. They must also include assumptions about market fractionalisation due to the competitive mix in the market. Economic factors, such as rate assumptions, expense projections and capital expenditure estimates will also have a significant impact on value. In addition, the model must lend itself to conducting sensitivity analysis on key variables. In developing a financial model to evaluate the PCS opportunity, it is critical to define strategies and make reasonable assumptions. For the incumbent, the priority will be on maintaining revenue and earnings streams, legacy systems, upgrading networks to digital, migrating high value customers, and controlling churn. For the new PCS entrant, the challenge will be to build a competitive footprint, to load the network quickly and retain these customers, to raise prices after the promotions finish, and gain a distribution foothold or find new channels. The new PCS entrants would be well-served to bear in mind that revenue is more important than numbers of customers. Price alone is not a differentiator, and maintaining a focus on cost per subscriber will maintain flexibility through sustained price wars.