 | Issue: | Latin America II 2003 |
| Article no.: | 4 | |
| Topic: | Voice Over Internet – VoIP – in Latin America | |
| Author: | Dr Judy Reed Smith | |
| Title: | CEO | |
| Organisation: | Atlantic-ACM | |
| PDF size: | 176KB |
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Article abstract
VoIP, either over private networks or public Internet saves money. Individuals using pre-paid cards for long-distance calls, despite the many fly-by-night operators, save significantly. Businesses in Latin America, are starting to use VoIP for cost savings and, also, for unified messaging, voice portals, multimedia conferencing, eCommerce and, because of terrorism, to reduce executive travel. Adoption has been slowed, though, by quality and security reservations, interoperability challenges, regulatory hurdles imposed by some countries and due to foot-dragging by local operating companies.
Full Article
Competition results in price compression. This is the most basic of all business rules. It is no surprise, then, that competition in the telecommunications industry is resulting in revenue declines on a global basis† both domestically and internationally. This trend is evident in United States’ traffic with the world. In 2001, for example, revenue from U.S. outbound calls to North and Central America, Caribbean, and South America declined by 40 percent, 24 percent and 23 percent respectively, compared to 2000 figures. Beneath the broad blanket of competition and price reduction, exist a variety of factors impacting telecommunications provider revenues, network economics and long-term viability. Technology is often at the heart of these factors – impacting areas ranging from network capacity and margins to leading-edge products for customers. Such is the case with voice over Internet Protocol (VoIP) technology. VoIP Drivers VoIP comes in two forms – over private networks and over the public Internet. While both forms are economically compelling, the trade-off between them is price versus quality. In a private IP network, the ability to control configurations and routing provides predictable quality of service. Users may pay higher rates, however, because they must pay for line time, whereas public Internet users pay only for gateway access and termination. Other key trade-offs are depicted in figures two and three. VoIP Globally VoIP is increasing on a global basis. According to Telegeography, cross-border VoIP volumes increased from 7.5 million minutes in 1997 to an estimated 18.5 billion minutes in 2002, capturing six percent of the world’s forecasted international traffic. Telegeography reported that 32 percent of this traffic was Latin American as of the year 2000. While most of this growing pool of VoIP traffic is carried by wholesale VoIP carriers such as iBasis and ITXC, many minutes are originated by traditional public switch telephone network (PSTN) operators outsourcing some of their international traffic to VoIP operators. At the corporate/enterprise level, VoIP is gaining popularity because of its impact on corporate communications costs – especially among companies with multiple offices. IP-VPN (virtual private network) management costs are significantly lower than operating separate voice and data networks, and some estimates place the operating costs of an IP-VPN at 12 percent below that of a private line solution. For international calling, IP telephony provides significant savings, as is depicted above in figures two and three. In addition, the prepaid calling card industry has leveraged IP platforms to provide lower rates to their customers. Calling cards are particularly popular with people living in foreign nations that need to communicate with friends and relatives in their native countries. In addition, IP platforms are highly advantageous when it comes to deploying value-added services, such as unified messaging, voice portals, multimedia conferencing and eCommerce applications. Therefore, the wave of next-generation services will help drive demand for IP at large. Already, the markets for unified messaging, click-to-talk features and multimedia conferences exhibit attractive growth projections. Moreover, in the wake of increased awareness and concern over global terrorism, security conscious corporations reducing travel activities may speed the adoption of technology solutions, such as IP video conferencing to the desktop, that previously were considered for later adoption. VoIP Obstacles Quality and security are at the heart of many concerns over VoIP. Information Technology (IT) managers have lingering reservations about VoIP call quality, which is a carry-over from the technology’s early days. In today’s marketplace, VoIP providers have implemented jitter buffers and echo cancellation features to improve the quality of voice transmissions and can provide quality comparable to the PSTN. In addition, many managers have reservations about sending mission critical data over the medium – another carry-over that is no longer relevant in modern VoIP networks. Interoperability still challenges the industry. Providers that are upgrading and building IP networks are doing so with disparate standards. The proliferation of IP requires interoperability – especially for VoIP. Based on recommendations by the International Telecommunications Union (ITU), many carriers have adopted or are in the process of adopting the H.323 protocol as a standard for IP gateways. Regulatory hurdles also exist. Since calls routed over the Internet bypass local providers, some countries have outlawed the use of VoIP telephone calls. Most of these countries have state-owned telephone companies operating as government monopolies. The Latin American Telecom Industry The Latin American telecom industry is generating mixed results. A recent Morgan Stanly equity research report on Latin American economies indicates that the operating environment for wireline incumbent telecom firms in Latin America is worsening, with prices in 2003 having declined more than three percent compared to 2002. On the other hand, conditions for competitive telecommunications service providers have slightly improved in recent months because of competitive price stabilization – a recent development for firms that have historically operated on a downward price curve – and healthy revenue pipelines. Looking at a specific example, the Argentine crisis and local currency devaluations in 2001 and 2002 have adversely affected telecommunications spending in Brazil as well as Argentina. However, analysts are expecting strong growth in Brazil’s telecom market this year. According to Bear Stearns estimates, the telecom sector has increased its share of Brazilian economy from 2.42 percent in 1999 to 3.03 percent in 2003. Each element of the telecom sector has assumed a larger share of the total Brazilian economy over the same timeframe, save the long distance sector. While this segment has been affected by intense competition following the privatization of Brazil’s telecom industry, it has recently been fortified by regulations that allow local service providers to provide long distance services outside of their service territories. Growth in Brazil’s local telecom service segment is expected to stabilize as the wireless and data services become the overall telecom industry’s major growth drivers. VoIP in Latin America The VoIP opportunity in Latin America is significant in spite of the economic turmoil that has plagued the region in recent years. At the telecommunications carrier level, VoIP has gained significant attention because it helps customers cut costs and simplifies carriers’ networks by running voice traffic over new or existing IP and frame relay links. One leading wholesale telecommunications carrier that has a significant presence in the Latin American VoIP market is offering VoIP services in Mexico, Argentina, Chile and Colombia. Operators in Columbia and Uruguay now route their international voice traffic through the company’s Internet branch office (IBO), which is comprised of VoIP gateways and related interconnection equipment, quality monitoring and management technology. Another top-level wholesale telecommunications carrier is also a player in the Latin American market. The company recently signed an agreement with Venezuela’s CANTV – the incumbent telephone company – for the bilateral exchange of international voice traffic over its VoIP network. Earlier this year, the company inked a similar agreement with Intelig, Brazil’s second largest long distance company. At the enterprise level, VoIP is not very common among Latin American firms, which are not certain about the cost benefits of VoIP services. Latin American carriers are not keen on clearing up this confusion, as promoting VoIP is generally perceived as pushing a substitute technology that reduces their own long distance revenues. Because of these factors, successful penetration of VoIP in the Latin American enterprise sector will largely depend upon equipment vendors’ ability to educate and promote VoIP solutions. Nonetheless, great strides are being made in Latin America in the context of using VoIP to reduce intracompany, interoffice long distance communications costs among firms with multiple offices. Moreover, while some Latin American countries, such as Columbia, have strong legislation protecting traditional long distance carriers from competition via alternative communications networks, sufficient freedom exists for the deployment of IP networks, provided they are not connected with public infrastructure in the process. Overall, businesses that understand today’s VoIP technology and generate levels of communications traffic great enough to justify infrastructure investment have gotten a return on their VoIP investments. Although disparate equipment brands and technologies often delays adoption we believe that VoIP at the enterprise level will continue to gain traction as businesses gain better understandings of the technology and as their current equipment and networks become dated and obsolete. Prepaid – Concern for the Cheese The winds of change, however, have not stopped blowing. The prepaid mice’s cheeses of all sorts will not be easy to find in coming years. Our rosy predictions rest on our respect for the adaptability and clever minds of the prepaid industry players from each of the three categories of business models. Prepaid providers have long term and short-term concerns for the future of the industry. In the short term, 2003-4, almost half of our respondents worry about the “fly by night” competitors who sully the reputation of the industry and discourage usage. The International Prepaid Card Association (IPCA) and others have been doing their best to patrol the industry against these contract-sell-cancel-disappear artists and severe levels of fraud and industry slime. Also of concern in 2003, is the excessive competition and resulting falling margins. These are valid concerns, which will continue to haunt the industry. As players allow themselves to be pulled into price wars, the margins shrink for all. In addition to competition for minute pricing, the competition for effective retail distribution channels, with increasingly generous payments to the stores, also squeezes margins. Conclusion In the long run, 2004-2006, 50% of our survey respondents express a concern for the margin squeeze. The low wholesale rates which resulted from the margin squeeze on carriers has shown the prepaid players how powerful that pressure can be when the number of providers expands. With entrants still swelling the ranks of prepaid providers, the mid-sized players still experiencing strong growth, and the full-sized companies extending their marketing strength into prepaid products, the pressure will only increase. For the long run, players are still expecting the “fly by night” players to haunt the industry, to have continuing fraud, and to have growing taxes, government fees and regulations adding to the complexity of the business. Our observations support their opinions. As the industry matures, regulations will be needed to limit the fraud and clip the wings of flighty operators.
