Telecommunications Sectors

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1 Adding Value to Information Since 1900 Latin America Telecommunications Sectors A Company and Industry Analysis October 2010 CONTENTS Current Environment Sector Overview Sector Performance Leading Companies Mergers and Acquisitions Industry Profile Industry Size and Value - Fixed-line Broadband Market - Mobile Broadband Market - Fixed-line Market Sector Investment Policy and Regulatory Environment Market Trends and Outlook The Rise of Mobile Broadband in Latin America Mobile Virtual Network Operator Market Set to Take Off WiMAX Gains Ground in Latin America Market Outlook Country Profiles Argentina Brazil Chile Mexico Peru Currency Conversion Table The Scope of this Report Key References Comparative Data Reports Coverage Current Environment Key Points The Latin American telecommunications market showed strong growth over the past six months despite the global economic slowdown still affecting several other world markets. Improved business conditions, the region s large geographical size and strong levels of consumer consumption spurred demand for mobile telephony, particularly in Brazil. The share prices of the top six leading companies dropped slightly by 1.22% on the NSYE over the March-September period, but all stocks had rebounded by late September due to sustained consumer spending and a recovery in investment. The level of merger and acquisition activity picked up in the region over the last six months, as international telecoms companies looked to the region to target new opportunities, as other world markets remained lackluster. Industry Profile Key Points Mexican and Brazilian telecoms companies dominate the Latin American telecommunications industry. After the Asia Pacific, the region is home to the fastest growing telecoms markets in the world. The Latin American fixed-line broadband market lags behind most other regions of the world, largely due to the costs of broadband for consumers and a lack of competition. Mobile broadband has grown in popularity in recent years due to the shift from fixed lines to mobile phones. Geographical constraints on infrastructure have also boosted the mobile markets. Nevertheless, fixed-line services retain some market share, particularly in urban areas with good infrastructure, where fixed-line costs challenge mobile services costs. Market Trends and Outlook Key Points Mobile broadband has become important to broadband services throughout Latin America driven by an increase in 3G network deployments and upgrades to HSPA high-speed mobile data networks. With mobile penetration rates already above 100% in Argentina, Chile, Uruguay and Venezuela, the mobile virtual network operator (MVNO) market is set to expand in Latin America. WiMAX is gaining ground in some markets, as there are many people in the region with no fixed connectivity. Most Latin American telecoms markets are expected to show strong growth in The wireless services markets throughout the region are particularly expected to grow robustly, thanks to the accelerating deployment of high-speed internet access networks. Even so, the high cost of logistics and advertising and customer acquisition costs will limit the number of players entering the market. 1

2 Publisher Jonathan Worrall Director John Pedernales Managing Editor Peter O Shea Research Analyst Kelly Ong Sheau Chi Website: Customer Service: or customerservice@mergent.com Sales Enquiries: Fred Jenkins - Executive Vice President, Sales fred.jenkins@mergent.com The Latin America Industry Reports are published by Mergent, Inc., headquartered in Fort Mill, South Carolina, USA. Each industry sector report is updated every six months. Mergent, Inc., a leading provider of global business and financial information on publicly traded companies, operates sales offices in key North American cities as well as London, Tokyo and Melbourne. Copyright Statement Copyright 2010 by Mergent, Inc. All Information contained herein is copyrighted in the name of Mergent, Inc. and none of such information may be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purpose, in whole or in part, in any form or matter or by any means whatsoever, by any person without prior written consent from Mergent. Disclaimer All information contained herein is obtained by Mergent, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information is provided as is without warranty of any kind. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY INFORMATION IS GIVEN OR MADE BY MERGENT IN ANY FORM OR MANNER WHATSOEVER. Under no circumstances shall MERGENT have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analyzing, editing, transcribing, transmitting, communicating or delivering any such information, or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if Mergent is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, any such information. 2

3 Current Environment Sector Overview The Latin American telecommunications sector showed signs of recovery over the last six months with growing demand for services and higher revenues reported by leading companies. Improved economic conditions and a strong rebound in consumer consumption spurred significant demand for mobile telephony, particularly in Brazil, with 174 million lines, a 15.5% growth in 2009, making the country the world s fifth largest mobile telephony market by users, according to the National Agency of Telecommunications (ANATEL). The total value of spending on information technology products and services in Brazil represented more than 20% of the Latin American market. This was driven by fierce competition among operators, while tax cuts led to a 3.9% increase in household consumption and more flexible terms of payment. The growth was also aided by plans announced by the Government in May plans to invest R$3.2 billion (US$1.88 billion) to offer broadband services for R$35 (US$20.60) per month through its staterun telecoms company Telecomunicacoes Brasileiras SA (Telebras). Industry experts forecast this will help boost the number of the internet users steadily in months to come, aided by government projects aimed at improving points of access throughout the country. In Mexico, mobile customer growth experienced a considerable slowdown in the first quarter, a 37.8% decrease from the previous corresponding period of 2009 to 1.75 million mobile users, due largely to a tough economic climate, according to the Federal Telecommunications Commission (COFETEL). Many rural parts of the country remain under-served by mobile network infrastructure, with operators having been generally slow to expand their business presence there. In September fixed-line telephone giant Teléfonos de Mexico SAB de CV (Telmex) (NYSE: TMX) announced plans to invest approximately US$765 million in optical fiber networks in some parts of Mexico to enhance the download speed by four times to 20 megabits a second. Chile meanwhile continued to be a highly developed telecoms market in the region, spurred by a combination of rising incomes, growing personal computer (affordability, and favorable demographics. According to the Chilean Telecoms Regulator (SUBTEL), mobile phones sales increased by 9.71% from the first half of 2009 to CLP$29.08 million (US$600,516) in the first six months of this year. Additionally, in an attempt to boost competition in both the Chilean mobile telecommunications and digital TV markets, Chile s Government announced in August it would create a telecommunications infrastructure provider to concentrate solely on service provision by renting out its infrastructure to third parties. The purpose of the plan is to encourage companies that enter the market to have the necessary resources to provide their best service quality to their customers. After Peru opened its market to private operators in the early 1990s, along with other market-oriented economic reforms, Peru s telecommunications penetration has risen. It had around 22.9 million mobile subscribers in June this year, with a mobile penetration of 79.3 lines per 100 inhabitants, according to data from the Ministry of Transports and Communications (MTC). It had nearly 772,000 internet subscribers, a 3.3% increase from 747,235 internet subscribers in June, thanks to government efforts to boost competition and encourage fixed-line investment. In August, the Peruvian telecom regulator (OSIPTEL) approved a 15% reduction in mobile phone termination rates (MTRs) a measure that could cut the retail price for mobile services and could result in a 30% rise in mobile traffic over the near term. Further south, driven by high demand in mobile broadband services and the large number of pre-paid subscribers in the market, the Argentine telecommunications market remained healthy. According to the National Institute of Statistics and Census (INDEC), Argentina s telecoms market remained one of the most advanced in the region. The total spending on information technology products and services amounted to US$3 billion in 2009, while industry experts forecast it could reach US$4 billion by About 92% of all internet users were broadband subscribers, with broadband charges cheaper in Argentina than in most other Latin American countries. As a result, industry experts estimate broadband subscribers are likely to grow this year even in the wake of the global economic slowdown, albeit at a much slower rate than previous years. 3

4 Current Environment Sector Performance For the period from March 22 to September 20, the stock prices of the top six leading companies by revenues as tracked by Mergent dropped slightly by 1.22% on the New York Stock Exchange (NSYE). Most stock prices were hit hard in May when investors became more concerned about the potential for fund withdrawals by foreigners from Latin America and Europe as the sovereign debt problems in Europe took their toll on markets. Weaker-than-expected US data also weighed on stocks and investor sentiment leading to a global sell-off on fears of a waning economic recovery. As such, out of the six companies, three Latin American telecoms company stocks examined by Mergent lost an average of 12.15% over the March-September period on the NYSE. These were Tele Norte Leste Participações SA (NYSE: TNE), Vivo Participações SA (NYSE: VIV) and Teléfonos de Mexico SAB de CV. After Brazil s largest fixed-line phone company Tele Norte Leste Participações SA, also known as Oi, announced it would sell R$12 billion (US$6.78 billion) in stock to existing shareholders as part of the Portugal Telecom SGPS SA (NYSE: PT) agreement to buy a stake in Telemar (BVSPA: TMAR5) in July, shares of Oi tumbled more than 17%. They fell to US$14.97 on July 16, the most since December 2008 on the NYSE. Oi s mobile-phone share fell 19.74% in August, from 19.93% in the previous month, after posting the smallest rise in new subscribers among its closest rivals. Overall, its stock prices dropped US$4.06, or 14.07%, to US$14.07 on the NYSE on September 20. Shares of the largest wireless carrier in Brazil, Vivo Participações SA, also fell (by 7.89%) over the period to US$25.92 on June 30, compared with US$28.14 on March 22 on the NYSE as the takeover battle between Spain s Telefónica SA (NYSE: TEF) and Portugal Telecom SGPS SA raised uncertainty surrounding the future of Vivo. But its share price rebounded and rose 13% from US$23.60 on August 17 to US$26.67 on September 20 on the NYSE, after Telefónica SA and Telecom SA reached an agreement under which Telefónica bought Portugal Telecom s stake in Vivo for US$10 billion. Its plans involved combining Vivo with its Sao Paulo-based fixed-line operator Telecomunicacoes de Sao Paulo (NYSE: TSP). The share prices of the biggest fixed-line telephone company in Mexico, Teléfonos de Mexico SAB de CV, remained insipid on the NYSE, closing at US$14.88 on September 20, compared with US$16.53 on April 23, after posting weak quarterly results as clients switched to mobile services or cable providers voice plans. As of Table 1: Leading Companies Share Price Movements on the New York Stock Exchange América Mõvil SAB de CV Vivo Participações SA TIM Participações SA Telecomunicacoes de Sao Paulo 10% 5% 0% -5% -10% Tele Norte Leste Participações SA Teléfonos de Mexico SAB de CV -15% -20% -25% 2010 April May June July August September Source: Mergent analysis,

5 Current Environment Table 2: Leading Companies Share Price Movements on the New York Stock Exchange Company Name Country Ticker Share Price on March 22 Sept 20 Rise/Fall (%) América Móvil SAB de CV Mexico AMX US$49.19 US$ Tele Norte Leste Participações SA Brazil TNE US$18.13 US$ Vivo Participações SA Brazil VIV US$28.14 US$ Teléfonos de Mexico SAB de CV Mexico TMX US$15.71 US$ Telecomunicacoes de Sao Paulo Brazil Telesp US$21.89 US$ TIM Participações SA Brazil TSU US$27.97 US$ Average Rise/Fall (%) Source: Mergent analysis, 2010 late September, all leading Latin American telecom stocks appeared to have recovered and were on the rise again. The share prices of these companies were boosted by a rebound in consumer spending and investment, after reassuring comments from the US Federal Reserve Chief that seemed to allay fears about the pace of economic recovery in the US. Leading Companies Mexican and Brazilian telecoms companies continued to dominate the Latin American telecommunications industry. A Mergent analysis shows that the top seven companies, as defined by total revenues in 2009, generated US$89.39 billion, a 34% increase from prior-year levels due largely to the still low penetration rate and government support for improving rural connectivity. In 2009, all of the companies coped better with the global economic downturn and continued to report solid growth in revenues, except Brazil s biggest fixed-line telephone company, Tele Norte Leste Participações SA (BVSPA: TNL3), also known as Oi. The company posted a net loss of US$ million in 2009, partly due to higher marketing expenses, mostly linked to the campaigns to launch the Oi fixed and Oi broadband portfolios nationwide. Nevertheless, its net revenues more than double to US$17.13 billion in 2009, from US$8.04 billion a year earlier, due largely to the expansion of its mobile user base and broadband internet user base. The user base for fixed broadband in 2009 grew to 4.21 million, up from 3.82 million in The addition of its 3G broadband service added 64,000 new customers in As a result, the number of broadband subscribers to mobile and fixed-line services rose 18.8% to 741,000 in Industry leader América Móvil SAB de CV (BMV: AMX) reported total revenues up by 20.86%, from US$24.95 billion in 2008 to US$30.15 billion in This was driven by a faster increase of post-paid subscribers, strong demand for wireless data services, following better coverage, quality of service and an improved technological platform. The company reported 36.79% year-on-year higher net income to US$30.15 billion for the 2009 full year. Despite the presence of large companies with a diversified range of businesses locally and internationally, another leading wireless operator in Brazil Vivo Participações SA (Vivo) saw its net revenues jump 41.37% from US$6.64 billion in 2008 to US$9.38 billion in This was due primarily to the growing substitution of fixed by mobile traffic as a result of the penetration of mobile telephone coverage in Brazil. The rise in its customer base in the last quarters, improvements in its post-paid customer mix and further activity in the pre-paid segment resulted in higher sales. Vivo reported its net profit rose nearly twofold from the previous year to US$ million in Mexico s top provider of fixed-line telecommunications services Teléfonos de Mexico SAB de CV (Telmex) saw its net profit grow 7.37% from year-earlier levels to US$1.56 billion in the 2009 full year, thanks to lower financing cost charges and income tax costs. However, Telmex s revenues improved slightly for the year, up 1.57% from year-earlier levels to US$9.1 billion as demand fixed lines weakened quite markedly. Demand for local and outgoing 5

6 Current Environment Table 3: Selected Financial Results of Leading Telecommunications Companies in Latin America (in US$) Company December 31, 2009 December 31, 2008 Total Revenue Net Income Total Revenue Net Income América Móvil SAB de CV 30,149,963,646 5,881,473,499 24,946,291,677 4,299,621,157 Tele Norte Leste Participações SA 17,128,690,937 (249,928,357) 8,036,028, ,960,314 Vivo Participações SA 9,379,872, ,536,852 6,635,069, ,138,319 Teléfonos de Mexico SAB de CV 9,097,458,090 1,563,521,272 8,956,810,157 1,456,189,672 Telecomunicacoes de Sao Paulo 9,054,614,909 1,245,613,699 6,853,521,177 1,037,945,933 TIM Participações SA 7,512,717, ,183,153 5,638,934,030 77,268,709 Telmex Internacional SAB de CV 7,068,665, ,460,268 5,485,345, ,390,215 Total 89,391,982,500 9,785,860,386 66,551,999,321 7,939,514,319 Source: Mergent analysis, 2010 international long distance calls picked up considerably in Its total operating costs and expenses were MEX$ billion (US$2.71 billion) 5% higher than the prior year levels after the company boosted its marketing and advertising expenses to improve product visibility and expand its market share. In Brazil, fixed-line carriers Telecomunicacoes de Sao Paulo SA (Telesp) and wireless carrier TIM Participações SA showed positive financial results, with double digit sales growth in Buoyed by strong demand for broadband internet services, higher access lines and installation fees, the Brazilian subsidiary of Spanish telecom giant Telefonica SA, Telesp s net profit rose by 20% in 2009 compared with the previous year to US$1.04 billion. TIM Participações SA reported its net profit grew by more than 59% from US$77.27 million in 2008 to US$ million in This was largely due to higher sign-up fees in its post-paid segment and continued demand for wireless broadband with 41.1 million clients, a 12.9% year-on-year growth for the 2009 full-year. With multi-service package offerings that include several telecommunications services with substantial discounts (of up to 42%), Mexican-based telecommunications group Telmex Internacional SAB de CV reported net revenues up 28.86% from US$5.49 billion in 2008 to US$7.07 billion in Its net profit also surged 79.7% year-on-year to US$ million in 2009, driven by higher demand for broadband services and other voice services. In an attempt to capture more of Mexico s broadband growth, Telmex has sold almost two million computers on installment over the last ten years. Mergers and Acquisitions Mergers and acquisitions continued to be the key means of growing market share or entering a new market particularly in Brazil. Many international telecoms companies increasingly eyed this new and growing market niche and continued to expand their presence in Latin America to take advantage of the large and increasingly affluent population. One of the most noteworthy deals in the industry involved Telefónica SA, a Spanish-based telecom company that signed an agreement with Portuguese-based telecom company Telecom SGPS SA to buy its shares in Brazilian mobile operator Vivo Participações SA at a value of!7.5 billion (US$9.75 billion) on July 28. The move complemented its faltering position in Brazil, with the company planning to integrate its fixed-line operator Telesp with Vivo and take a converged offering to the lucrative enterprise market. This would make it one of the leading telecommunications operators in Brazil. In July, the largest telecommunications service provider in Portugal, Portugal Telecom (NYSE: PT), paid up to R$3.73 billion (US$2.20 billion) for a 22.4% stake in Brazilian phone giant Oi operating unit Telemar Norte Leste and R$4.24 billion (US$2.50 billion) for shares of Telemar Participações, as part of a broader plan to expand in Latin America. The move allowed Portugal Telecom to gain a presence in Brazil, develop new technologies, gain 6

7 Current Environment scale in the growing Brazilian market and expand both internationally and local operations. With an aim to expand its market position in the fiercely competitive Mexican wireless sector, Mexican telecoms giant America Móvil SA de CV acquired 92.27% of the shares in fixed-line carrier Telmex Internacional SAB de CV in a cash and stock transaction valued at approximately MEX$1.9 billion (US$ million) in June. Simultaneously, American Movil also acquired a 99.4% stake in Carso Global Telecom SAB de CV, an investment holding company operating in the telecommunications industry. The acquisition not only made America Móvil a full-service provider to offer converged wireless, wireline voice, broadband and video services to over 250 million subscribers, but also created a telecom powerhouse better placed to take on rivals like Spanish-based Telefonica SA. Nevertheless, some analysts warned that the tie-up would be a drag on America Movil as shares of Telmex were the worst performing stock in Mexico s benchmark IPC index last year and had lost value since mid Despite uncertainty and concerns, the consolidation will dilute America Movil s value. Some analysts say the company has strong growth potential and its shares will keep expanding quickly over the next several years in Latin America as Telmex plans to upgrade its wireline broadband network with up to 20 Mbps speed capabilities. 7

8 Industry Profile Industry Size and Value The overall Latin American telecoms market is still relatively small as a regional service market, accounting for about 10% of total global revenues in 2009, according to the International Telecommunication Union (ITU). Nevertheless, the region has become the fastest growing telecoms market in the world, after the Asia-Pacific. A combination of large geographical size and population, rising disposable incomes and sustained investment in mobile networks in recent decades has driven significant growth in the region s telecoms markets in recent years. Brazilian telecoms companies dominate the market and accounted for 52.48% of total telecom revenue in A Mergent analysis shows that the top eight companies by 2009 revenues posted combined revenues of US$95.63 billion, while Mexican telecoms companies America Móvil SAB de CV, Telefonos de Mexico SAB de CV and Telmex Internacional SAB de CV stood at US$45.44 billion in Fixed-line Broadband Market Given the average fixed-line broadband penetration in the region is less than 10%, Latin America lags behind many other regions of the world. According to a study from the ITU, the total number of broadband internet users in Latin America jumped by 38.2% from year-earlier levels to 27.7 million in Apart from Caribbean islands, almost one third of the region s internet users were in Brazil, while the highest user penetration rates were found in Argentina and Chile. A report from the OECD shows that the northern band comprising the US and Canada enjoyed 73% internet user penetration, while South America stood at about 34% last year. This was due largely to the costs for broadband in the region and a lack of competition. For instance, the lowest monthly subscription rate for broadband in the OECD countries averages US$19 in purchasing power parity (PPP), while such services cost US$29 and US$35 in Mexico and Chile, respectively, in The average connection speed in those countries is normally 17 megabits per second (Mbps), while in the most advanced countries in Latin America and the Caribbean; however, it is no higher than 2 Mbps. Mobile Broadband Market In Latin America, mobile broadband has started to become increasingly popular as people use their mobile phones more often. Mobile service provider 3G Americas reports that mobility serves more than half a billion users in Latin America, with the average wireless penetration exceeding 86% in 2009, thanks to a hefty price drop, competitive pricing and a saturated mobile voice market. Many mobile operators offer very competitive capped data packages. As such, the mobile telephony market in the region performed strongly in 2009, with mobile subscriptions totaling 88.2% of the region s total population, compared with 55.2% in the Asia-Pacific and 90.4% in North America, according to ALACEL. The global system for mobile communications and highspeed packet access GSM-HSPA continues to be the overwhelming mobile wireless technology leader for mobile broadband deployments. The explosion of third generation partnership project (3GPP) mobile broadband subscriptions has highlighted the growing interest of mobile use of advanced 3G technology services and applications, and the growing proliferation of smartphones. The total number of GSM-HSPA subscriptions in Latin America comprises 91% market share in Latin America with more than 464 million connections in 2009, of which 9.4 million were 3G connections in Fixed-line Market Latin America s largest fixed-line operator in terms of lines in service is Telmex Internacional SAB de CV, controlled by Mexican billionaire Carlos Slim. In terms of revenue, Brazil s Oi (Telemar) is in the lead, having overtaken Telmex in The performance of Latin America s fixedlines services was hit hard by cheap deals for mobiles and mobile internet, the shift from fixed-lines to mobile phones and geographical constraints on infrastructure expansion particularly the remote Andean or rainforest regions. A 2009 study from ITU shows Latin America s fixed-line penetration comprised only 18.6% of the total population and the fixed-line market grew by an average of 2.5% per year in Latin America between 2004 and 2009, well below 8

9 Industry Profile growth rates for mobile subscriptions. Nevertheless, fixedline services will retain some market share, particularly in urban areas with good infrastructure, where fixed-line costs can challenge mobile services. R$1.75 billion (US$1.03 billion) in research and development to kick off the program. Sector Investment There are increasing numbers of foreign investors who are keen to invest in Latin America due to their large populations and the demand for high-speed mobile services. There is also a greater proportion of capital flowing within Latin American markets, with the deregulation of most countries markets in recent years. Last September, French entertainment and telecoms group Vivendi SA (PAR: VIV) announced plans to invest US$2.9 billion in a leading alternative telecom operator in Brazil, GVT (BVSPA: GVTT3). The aim was to seek growth in emerging markets like Brazil. The friendly all-cash offer for GVT was for approximately!2 billion (US$2.72 billion). The deal will not only give GVT much greater scope to expand, but could also accelerate the growth of its fixed-line telephone and internet services into cities dominated by the competition. In November 2009, Vivendi purchased around 37% of GVT shares and had signed a deal to buy a further 19% stake via irrevocable options with third parties. Other firms are also continuing their push into emerging markets, with some like Spanish telecom giant Telefonica last December announcing plans to invest R$1.14 billion (US$ million) in Brazil by end of this year. Telefonica has been facing a fall in revenue from its fixedline business in Spain. To address this Telefonica plans to offer more competitively internet access plans. It also announced it could acquire 21% of a pay television business, Digital+, for!470 million (US$ million) to develop audiovisual and other businesses in Spain to strengthen the content offering of its pay-tv service Imagenio. Policy and Regulatory Environment In May, the Brazilian Government launched R$11 billion (US$6.48 billion) broadband program to improve access to broadband internet services to low-income households. The national broadband plan (PNBL) not only aims to revive Telebras, the former state telecom monopoly, but also aims to quadruple the number of municipalities with internet broadband access by 2014, or the equivalent to 40 million households. A national fund for telecommunications investments, known as Funntel, will finance additional 9

10 Market Trends & Outlook The Rise of Mobile Broadband in Latin America Mobile broadband has become important to broadband services throughout Latin America driven by an increase in 3G network deployments and upgrades to HSPA high-speed mobile data networks. According to a study by a wireless industry trade association, 3G Americas, the Latin American and Caribbean regions continued to see a dramatic increase in market share for 3GPP technologies, rising to 92% at the end of the first quarter of GPP technologies added a total of 68.6 new connections, including 12.6 million Universal Mobile Telecommunications System-High Speed Packet Access (UMTS-HSPA) subscriptions, with a number of 486 million subscribers in the first quarter of This was due largely to the rise of flat rate mobile data pricing, further smartphone shipments and the greater availability of high-speed mobile broadband. The continuous effort of wireless operators in Latin America to invest in mobile broadband infrastructure, devices and innovative services, has produced a healthy jump in the data contribution to service revenues reaching 19% in the first half of The success of Apple s iphone and other smartphones that offer downloadable applications through their stores and allow customers to use thread-party VoIP clients over WiFi and cellular broadband networks is fueling the trend. Mobile broadband is a huge opportunity for the telecommunications industry throughout the region. Analysys Mason, a UK-based analyst firm, forecasts that Latin America s wireless network traffic is likely to reach a 86% in compound annual growth rate (CAGR) over the next five years. Mobile Virtual Network Operator Market Set to Take Off With mobile penetration rates already above 100% in Argentina, Chile, Uruguay and Venezuela, the mobile virtual network operator (MVNO) market is set to expand in Latin America. As of May 31, 2010, Latin America represented a small share of the world s 104 million MVNO subscriptions, with the MVNO market only having around 20 active MVNOs in the region, out of 550 MVNOs or resellers worldwide, according to ALACEL. As such, MVNOs could play a bigger role going forward. Mobile network operators now see MVNOs as a good opportunity to grow their subscriptions and revenues by offering mobile services. For instance, Telecom Argentina (NYSE: TEO) negotiated an MVNO agreement in August with Uruguay s stateowned telecoms company, Antel, to offer mobile telephony in Uruguay s mobile market. In Mexico, cable TV operator Megacable recently unveiled plans to launch an MVNO operation in Mexico in partnership with Telefonica SAB de CV. Megacable has over 1.7 million cable TV subscribers in more than 200 local markets, and is one of Mexico s largest triple play providers. Through the partnership, Megacable became the first firm in Mexico to offer quad-play offering of mobile, fixed-line phone, internet and TV. According to figures released by Informa Telecoms & Media, MVNO subscriptions in Latin America could grow at a CAGR of 28% to 6.6 million by WiMAX Gains Ground in Latin America WiMAX is gaining ground in some Latin American markets, as there are many people in the region with no fixed connectivity. WiMAX plays well in environments in which the business model is developing from being an alternative to wired broadband access into a means for strengthening operator offers through service bundling. Additionally, WiMAX is also used to penetrate markets where operators still do not have a fixed-line network. With relatively little construction and infrastructure in rural areas, it is easy to install a tower and power an area reaching up to 30 miles with high-speed internet. Major urban centers like Sao Paulo, Buenos Aires, and Mexico City won t be the only ones to benefit; eventually remote communities that currently have no broadband internet services will be able to access such wireless features. According to research from market intelligence company ABI Research, the number of WiMAX subscribers in the region will increase eightfold from 500,000 in 2009 to approximately 4.5 million at the end of Market Outlook Most Latin American telecoms markets are expected to show strong growth in The wireless services markets 10

11 Market Trends & Outlook throughout the region are particularly expected to grow robustly, thanks to the accelerating deployment of highspeed internet access networks, the implementation of mobile broadband along with packages targeted at lowincome and higher-income consumers. All these factors are likely to drive the regional equipment market. Meanwhile, mobile data revenues in the region are projected to grow rapidly, due largely to the acceleration in deployment of advanced technologies, an increasingly competitive market, and growing consumer demand for mobile data services driven by popular data-optimized devices such as Apple s iphone. According to the ITU, the mobile penetration rate in Latin America is well ahead of the world average, reaching 93% in mid-2010 compared to a global rate of around 73%. Given that mobile growth is slowing in Latin America and that there is intense competition over bundled services, the MVNO market should grow further, with many fixedline operators opting for an MVNO model to add mobile services to their current service portfolio of telephony, internet and in some cases pay TV. Nevertheless, the high cost of logistics and advertising and customer acquisition costs will limit the number of players entering the market. As a result, the Brazilian telecoms regulator ANATEL plans to launch new MVNO regulations this year, in order to attract more foreign operators into the market. The Mexican telecoms regulator COFETEL is also planning to work on a new rule to bring more competition to the industry, including the auction of wireless spectrums early next year. Looking forward, competition looks set to intensify as additional 3G spectrums are released and more MVNOs enter the market. Rural coverage will remain a major focus over the near term, while wireless technologies are likely to remain a popular choice for encouraging the continued expansion of telecoms services into remote areas. Broadband growth will be from investment in both fixed and wireless technologies, allowing remote towns and cities to get online. 11

12 Country Profile Argentina Sector Overview Argentina s telecommunications industry remained strong in 2009, with two of its top telecoms companies recording year-on-year increases in revenues fueled by improving confidence in the employment market. According to INDEC, Argentina has the largest mobile market in the region with many mobile users signed up for multiple mobile accounts. Its mobile telephony market has saw steady growth of 25.5% over the past two years, with 50.4 million mobile lines in service and a penetration rate of 120.6% at the end of Altogether, wireless telephony traffic reached 4.74 billion calls in December 2009, representing an increase of 24.7% compared to the same months in 2008, according to INDEC. Nevertheless, the number of fixed-line telephone subscribers showed tepid growth by just 0.2% in 2009, from 9.74 million in 2008 to 9.76 million in 2009, according to data from INDEC. The number of public phones nationwide dropped 8.5% year-on-year to reach 142,800 in This was because the Government fixed the telephone rate after a sharp devaluation of the Argentine currency. Many telecoms companies aggressively moved into internet access and mobile phone services where prices are unregulated by the Government. INDEC data shows the average annual rate of mobile broadband enjoyed the highest growth rate of 24% in 2009, followed by mobile telephony. Leading Companies Telefónica de Argentina Spanish-owned Telefónica de Argentina is the largest mobile operator in terms of revenue in Argentina. It provides broadband, local and long distance telephone services nationwide. In the first half of 2010, the company generated revenues of!1.44 billion (US$1.96 billion), up 8.2% over the same period in This was mainly due to higher sales from mobile and fixed-line sectors, which grew 17.4% to!920 million (US$1.25 billion) and 10.5% Table 4: Key Telecoms Statistics, Category Fixed Line Total Subscribers 9,430,000 9,740,000 9,760,000 Penetration Rate (%) Annual Growth (%) Mobile Telephony Total Subscribers 38,560,000 43,700,000 48,400,000 Penetration Rate (%) Annual Growth (%) Internet Total Users 16,000,000 20,000,000 23,000,000 Penetration Rate (%) Annual Growth (%) Broadband Total Subscribers 2,560,000 3,470,000 4,300,000 Penetration Rate (%) Annual Growth (%) Source: National Institute of Statistics & Census 12

13 Country Profile - Argentina to!566 million (US$ million), respectively, in the first half of As such, with strong growth in wireless accesses, the sharp rise in fixed broadband customers and stable fixed-line telephony accesses, the company reported a total of 22.4 million accesses at the end of June, up 6.8% over the same period the previous year. Telecom Argentina SA (BUE: TECO2) Buenos Aires-based Telecom Argentina SA is one of the leading telecommunications companies in the country, offering voice, data transmission, internet, telephone services and other wireless telecommunication services. In the first quarter of 2010, it saw its consolidated net revenues amount to ARS$3.25 billion (US$ million) in the first quarter ended March 31, a 15% increase from the corresponding period of This was due primarily to higher mobile service revenues, with further demand for smartphones, new applications and social networks services. Telecom Argentina SA saw its net income rise by 17% from ARS$ million (US$86.09 million) in the same period of 2009 to ARS$411 million (US$ million), due to a bigger subscriber base and strong growth in mobile services. Nevertheless, administrative and selling expenses for the quarter were up nearly 15% from the same period of last year to ARS$2.49 million (US$0.63 million) as a result of inflationary effects on the cost structure and greater expenses related to competition in mobile and internet businesses. Market Outlook There should be further growth in the number of mobile telephony subscriptions for the remainder of this year. Wireless broadband access services will become increasingly popular over the next 12 months due to a shortage of fixed broadband accesses outside urban areas, the expansion of 3G networks and the freeze on fixed-line telephony rates. Argentine telecoms operators estimate that broadband business may outstrip the income of their fixedline services, with internet business forecast to grow by 15% this year. However, the Government shut down Grupo Clarin SA s (BUE: GCLA) internet service Fibertel SA on August 19 after the company was accused of operating illegally in the telecoms and broadband industry. Industry experts estimate that the elimination of Fibertel will start the virtual monopolies on broadband service and choking off competing internet service providers. 13

14 Country Profile Brazil Sector Overview Brazil remained the largest telecommunication market in Latin America in terms of the number of subscribers in 2009, due to the country s growing fixed-line and mobile telephony base. The country had million subscribers in 2009, a 12.5% increase in 12 months, according to ANATEL. The number of mobile subscribers in Brazil rose from 174 million to 185 million between January and June 2010, accounting for 90.6% of the total population. However, Brazil had only 41.7 million fixedline subscribers, a 1.3% increase over the previous year, with demand for mobile telephony overtaking that for fixed-line. According to ANATEL, Brazil was the world s third fastest growing market for wireless users, after China and India, attracting both domestic and international firms to invest in the wireless segment. Industry Size and Value As of December 31, 2009, the Brazilian telecoms market, including fixed and mobile phone segments, had four major players. They were Oi, also known as Tele Norte Leste Participações (BVSPA: TNL3), Vivo Participações SA (BVSPA: VIVO3), Telecomunicacoes de Sao Paulo SA (BVSPA: TLPP) and TIM Participações SA (BVSPA: TCSL4). A booming mobile phone market and growth in fixed-phone and broadband segments helped Brazil s largest mobile network operator, Oi to expand its client base from million in the previous year to 62.6 million in the second quarter of TIM Participações SA also announced its mobile subscriber base grew 17.4% yearon-year to 44.4 million lines in June this year. With the country s economic recovery underway and the spending power of Brazilian consumers on the rise, demand should remain strong for telecom services over the next 12 months, particularly broadband and mobile telephony segments. Leading Companies Tele Norte Leste Participações SA (BVSPA: TNLP3, TNLP4) Tele Norte Leste Participações SA (TNL) is the largest telecoms operator in Brazil, offering services in the fixed and mobile segments, data transmission, broadband internet access, internet provider and other services. As of December 2009, its wireless segment had about million users while its traditional fixed-line telephone service had more than 21 million subscribers. During the second quarter, TNL saw its consolidated gross revenue rise by 1.3% from the previous corresponding period of 2009 to R$7.39 billion (US$4.35 billion), driven by the rapid expansion of mobile broadband services. Its consolidated EBITDA reached R$2.67 billion (US$1.57 billion) in the second quarter, with a 9.2% increase from the previous year. The increase followed higher profitability from customers in its mobile segment, better operating performances and cost reduction initiatives in the process of integrating management. TNL posted net earnings of R$444 million (US$ million) in the second quarter of 2010, from a net loss of R$146 million (US$85.98 million) in the previous year. Vivo Participações SA (BVSPA: VIVO3) Vivo Participações SA (Vivo) is the joint venture of the wireless operations owned by Portugal Telecom and Spain s Telefónic with a market share of around 30% in Brazil. Vivo provides mobile telecommunication services, cellular phone data transmission, mobile internet services, voice and ancillary services and wireless application protocol services. In the second quarter of 2010, Vivo saw its total revenue grow 9.9% from the previous corresponding period of 2009 to R$4.4 billion (US$2.59 billion), thanks to a higher number of mobile internet users. Vivo s wireless data service revenues grew by 10.7% over the previous corresponding period of 2009 to R$4.13 billion (US$2.43 billion) in the second quarter of Its EBITDA for the second quarter also rose, by 10.6%, from the same quarter of the previous year to R$1.34 billion (US$0.79 billion). However, the company recorded higher total operating costs from R$3.6 billion (US$2.12 billion) in the previous corresponding period of 2009 to R$3.9 billion (US$2.30 billion) in the second quarter due to a jump in advertising expenses, third party services as well as an increase in expenses arising from higher service revenues. Market Outlook Brazil s telecommunications market is expected to grow this year, with wireless services remaining the main driver of industry growth. The Brazilian Government s R$11 14

15 Country Profile - Brazil billion (US$6.48 billion) in broadband funding will also boost the market. The Government is also planning to distribute free mobile handsets to low-income groups to boost mobile penetration levels, while it s plan auction off frequencies for WiMAX and 3G services should also provide a boost to the market. The plan not only will reach 30 million fixed broadband accesses and 60 million mobile broadband potential subscribers, but should shake up telecoms operators and drive them to improve customer services. Nevertheless, a shortage of fixed-line infrastructure and expensive broadband prices may inhibit the growth of broadband to some degree. 15

16 Country Profile Chile Sector Overview The Chilean telecommunications market remained one of the most technologically advanced in Latin America over the last year. According to SUBTEL, it was the first country in the region to roll out services such as mobile WiMAX, IPTV, wireless TVoIP, triple play, EDGE, and mobile voice-to-text. As of December 31, 2009, Chile had become the first country in Latin America and the fifth in the world after Sweden, Norway, Japan, and the US, to test Long Term Evolution (LTE) technology. After the Chilean Government approved the introduction of mobile number portability and enabled new players to focus solely on rolling out services, the sector experienced aggressive competition with affordable and attractive pricing packages that include flat-rate or bundled cellular services. The demand for wireless mobile broadband connections was strong over the last year. A 2009 survey by SUBTEL found that Chile had million mobile subscribers in March 2010, with a household penetration rate of 92.5%, up significantly from 87.8% in the same period of The number of 3G mobile users grew more than threefold from 190,825 subscribers in the same period of 2009 to 894,682 in March of Leading Companies Movistar Chile Movistar Chile, formerly known as Telefónica Chile SA, is a subsidiary of Spanish broadband and telecommunications provider Telefónica SA (NYSE: TEF). It is the largest mobile operator in Chile engaged in data transmission, broadband, WiFi, public telephones, terminal equipment sales, leasing and other value-added services. In fiscal 2009, Movistar Chile posted a net profit of CLP$43.5 billion (US$89.83 million) in 2009, a 9.3% drop from CLP$48 billion (US$99.12 million) in Its total revenues also fell by 5% from the prior-year levels to CLP$711 billion (US$1.47 billion) in 2009, thanks to a drop in the fixed mobile interconnection charges introduced in January With a 4% increase in broadband revenues and a 9% increase in broadband subscribers to 774,656 in 2009, Movistar Chile estimates that market share of fixed-lines in service will decline over the next five years to reach approximately 40.8% in The company allocated US$600 million in both cellular and fixed networks sectors to build faster fiber-optic broadband networks nationwide. Empresa Nacional de Telecomunicaciones SA (BSAN: ENTEL) With a 39% share of the mobile market in Chile, Empresa Nacional de Telecomunicaciones SA is the second largest mobile operator in the country. The company also provides wireline services such as data networks, local telephony, internet access, long distance, IT services network rentals and wholesale traffic services. In 2009, Entel s customer base grew by 8% from year earlier levels to 6,457,335 subscribers due to the reduction in access charges, the roll out of new mobile broadband access solutions and other value-added services such as mobile internet and access. ENTEL posted a 26% jump in EBITDA from CLP$71.04 billion (US$ million) in 2008 to CLP$96 billion (US$ million) in Its total revenue also rose by 7% from year earlier levels to CLP$285 billion (US$ million) in 2009, driven largely by demand for Apple s iphone 3GS and other smartphones. Market Outlook The Chilean telecoms sector is set to see growth in the mobile and broadband markets for the next two years, with a highly developed infrastructure, growing incomes and a well-functioning financial market. Subtel plans to launch an auction for spectrum in the 2.6GHz band intended for 4G services at the end of this year, to be awarded mid This will not only coincide with the introduction of number portability, but also boost competition by strengthening other smaller network operators positions against top players in the market. 16

17 Country Profile Mexico Sector Overview The Mexican telecommunications industry enjoyed healthy growth of 12.9% during the first quarter of 2010, according to COFETEL. In the first quarter of 2010, COFETEL data shows the total amount of fixed-lines dropped 5.4% during the first quarter of 2010 to million after low-cost access to mobile telephony allowed lower income groups to boost their use of mobile phones. The total number of mobile telephone users was up 17.7% year-on-year to 85.3 million in the first quarter. With the expansion of new services and attractive promotional plans, the TV industry also saw growth. According to COFETEL, the number of cable TV subscribers grew by 5.8% year-on-year to 5.15 million users in the first quarter of The satellite TV segment registered a 78.9% surge in the number of subscribers, making it the fastest growing segment in the telecoms industry during the first quarter of Microwave TV (MMDS), on the other hand registered its worst performance ever, down 35.8% from previous-year levels to 439,000 users in the first quarter of 2010 due to the popularity of satellite TV channel options. Nevertheless, a lack of competition in telecoms held back growth to some extent. America Movil SAB de CV dominated Mexico s telecoms industry, with a 72% market share as of February 2010, while its subsidiary Telefonos de Mexico SAB de CV, known as Telmex (BMV: TELMEX), controlled about 80% of the fixed-line market. In an attempt to end the monopoly over the country s telecom market the Government in May 2010 started a tender process to auction off wireless airwaves. The auction will include 90 megahertz of spectrum in the 1.7 gigahertz band and 30 megahertz in the 1.9 gigahertz band, airwaves suitable for third-generation wireless services such as high-speed internet access. Leading Companies América Móvil SAB de CV (BMV: AMX) América Móvil SAB de CV is the largest mobile network operator in Latin America in terms of revenues. With most Latin American economies expanding throughout the second quarter of 2010, América Móvil saw its consolidated revenues jump by 11.9% from the previous corresponding period of 2009 to MEX$100.9 billion (US$8.01 billion) in the second quarter of 2010 due to strong growth in wireless data service revenue. The share of data in service revenues continued to climb in the second quarter, up 10.8% from MEX$80.14 billion (US$6.36 billion) in the second quarter of 2009 to MEX$88.77 billion (US$7.04 billion). The quarter s EBITDA also rose, by 9.4% from year earlier levels to MEX$42 billion US$3.33 billion). The company added 4.9 million wireless subscribers in the second quarter 30.7% more than in the same period of last year. Nevertheless, its second quarter net profit fell 17.9% to MEX$18.7 million (US$1.48 million) due to depreciation costs. Telefonos de Mexico SAB de CV (BMV: TELMEX) Telefonos de Mexico SAB de CV, known as Telmex, is a Mexican-based telecoms operator that has nearly 80% share of Mexico s fixed-line market. The company s service coverage comprises the operation of local and long distance networks. In the second quarter 2010, the company saw its net revenues fall 4.6% from MEX$27.09 billion (US$2.15 billion) in the second quarter of 2009 to MEX$28.4 billion (US$2.25 billion) due to lower average realized selling prices. The company posted a 37.5% drop in its second quarter net profit from MEX$2.25 billion (US$ million) in the same period of last year to MEX$3.6 billion (US$ million) after it continued to lose clients to wireless operators and other competitors. As a result, Telmex proposed building its internet business to make up for a decline in its fixed-line and long-distance telephone revenues. Market Outlook The Mexican telecommunications industry is expected to grow throughout the rest of The auctioning of access to the national fiber network and additional mobile spectrums is expected to boost the market and competition, which should help pull down prices for consumers. The move may also facilitate the entry of new competition in the industry, with the expansion of new services. Some 17

18 Country Profile - Mexico industry experts forecast broadband will remain the driver of growth for most fixed services providers. Fixed-line customers will likely migrate to wireless alternatives as they begin to rely on mobile only communication access, in part spurred by their need to reduce household costs. 18

19 Country Profile Peru Sector Overview After Peru opened its telecommunications market to private players in the early 1990s, the Peruvian telecommunications sector has seen tremendous growth, with the rapid expansion of telephony and mobile telephony services. According to the MTC, the total fixed-line subscriber base increased by 3.57% from 2.88 million subscribers in 2008 to 2.98 million in The total number of wireless mobile subscribers also rose by 12.07% from year earlier levels to million in 2009, according to the MTC. Nevertheless, the average telephone density in Peru remained the lowest in Latin America, with only 10.2 lines per 100 inhabitants in 2009 due to expensive calling rates. The local telephony market is mainly dominated by Telefónica del Perú SAA (Telefonica) with a 97% market share of the Peruvian fixed-line market, followed by Movistar, which is also owned by Spanish-based telecoms giant Telefónica SA. The Peruvian Government opened up its market to attract more mobile operators to improve competition in the country. In an attempt to maintain its market share, Peru s largest telecommunications company Telefónica del Perú announced early this year it would invest US$1.5 billion between 2010 and 2013 to develop a core fiber optic communications network to improve the speed and coverage of broadband internet nationwide. Leading Companies Telefónica Del Perú SAA Telefónica del Perú SAA (Telefonica) is a subsidiary of the Spanish telecommunication service provider Telefonica SA and offers various services including fixed and mobile telephony services, domestic and international longdistance calls, public telephony, internet access, facsimile transmission services, electronic voice messaging and cable television services. In the first quarter of 2010, the company saw its total revenues drop 3.8% from the same period of last year to S/.938 million (US$336.3 million), due to lower revenues in local telephony, long distance and interconnection services. Local telephony and long distance revenues fell 6.8% and 12.8% from the previous corresponding period of 2009 to S/.311 million (US$ million) and S/.66 million (US$23.67 million) in the first quarter of 2010, respectively. This was due largely to a decline in fix-lined demand, lower use of pre-paid cards and the shift of fixed-line minutes to the mobile network. As such, its net income declined 20.2% from the same period of last year to S/.155 million (US$55.57 million). Nextel Del Perú SA Nextel Del Peru SA is one of the subsidiaries of Bostonbased mobile operator NII Holdings Inc (NESDAQ: NIHD). Nextel del Peru offers a fully integrated wireless communications tool nationwide with a digital two-way radio feature, digital telephone interconnection, text and numeric paging and wireless internet access. In the first half of 2010, the company saw its net revenue increase 13.55% from US$149.2 million in the first half of 2009 to US$268.4 million as the results of improving growth trend in the wireless business and stabilizing growth in wireline business continued to drive the company s sales upward. The company added 60,400 net subscribers to its network, bringing its subscriber base to 965,900 in the first half of the year, a 29.1% increase from the first half of Nevertheless, the company suffered a net loss of US$22.8 million in the first half of 2010, from a net profit of US$400,000 in the first half of 2009 due to pricing pressure on mobile services, lower handset sales and a rise in expenditure. Market Outlook With intensifying competition in the telecommunications sector, MTC forecasts broadband prices in Peru could fall in The Peruvian Government announced in February it would invest S/.260 million (US$93.2 million) via the Telecommunications Investment Fund (Fitel) over the next five years to expand coverage in Peru s Andean highlands. The installation of telephone lines in isolated villages may help reduce agricultural costs and increase farmers income. FITEL announced in August that some US$400 million would be allocated to finance the deployment of a fiber optic transport network in areas that are not currently covered by private operators. This should help boost the Peruvian telecoms sector for several years to come. 19

20 Currency Conversion Table Currency exchange rates as of September 30, 2010 Currency Unit Units per US$ US$ per unit US Dollar (US$) 1 1 Argentine Peso (ARS$) Brazilian Real (R$) Chilean Peso (CLP$) Mexican Peso (MEX$) Peruvian Nuevos Sole (S/.) EMU Euro (!) Source: Federal Reserve Bank of New York Note: Base currency is US Dollar (US$) 20