Americas Market Perspective V O L. 8 I S S U E 36 O C T O B E R 2008 VoIP Service Adoption in Puerto Rico Analyst: STELA BOKUN Email: sbokun@pyr.com Tel: +1 617 494 1515 Broadband penetration of population in Puerto Rico, a prerequisite for sucessful VoIP adoption in the country, will grow from 8% in 2007 to 19% in 2013, reaching 755,000 lines by the end of the forecast period. VoIP s strategic importance to Puerto Rican telecom operators will also drive adoption. Its complementary role in converged offerings indicates an even brighter future for this service in the Puerto Rican fixed arena. Finally, the most important driver of VoIP adoption in Puerto Rico is its relative affordability. The high price of traditional fixed voice service has led subscribers to look for alternatives, making VoIP an attractive option. 2008 Pyramid Research While every effort has been taken to verify the accuracy of this information, Pyramid Research cannot accept any responsibility or liability for reliance by any person on this information. ID# 473 Pyramid Research Locations Worldwide www.pyramidresearch.com World Headquarters 58 Charles Street Cambridge, MA 02141 USA Tel: + 1 617 494 1515 Fax: + 1 617 494 8898 Latin America Waterford Business Park 5201 Blue Lagoon Drive Suite 971 Miami, FL 33126 USA Tel: + 1 305 629 3615 Fax: + 1 305 629 3100 Asia-Pacific Suites 2701/2801, Floor 11 AXA Centre 151 Gloucester Road Wanchai, Hong Kong SAR Tel: +852 3752 1806 Fax: +852-3752-1860 Europe Bloomsbury House, Suites 17/18 London, WC1A 2RP United Kingdom Tel: + 44 20 7430 2932 Fax: + 44 20 7430 2933
VOLUME 8 ISSUE 36 2 EVENT SPOTLIGHT In May 2008, ACN, a US-based international telecom operator that conducts business in 19 countries, launched VoIP and video phone service in Puerto Rico, marking the company's first expansion into the Latin America market. VoIP is already available in Puerto Rico, provided by the major cable companies: One Link and Liberty. Puerto Rico Telephone Company (PRTC), owned by América Móvil, also offers VoIP to its corporate clients over its DSL network. Centennial, another major player in the Puerto Rican telecom market, also offers VoIP to its corporate customers as a part of their integrated multiservice offering called Aptus. Some of these operators offer VoIP service within their double- or triple-play plans, bundling it with broadband Internet access service and pay-tv, while others offer the service as a stand-alone for users who already have a broadband service provider. The presence of five major VoIP operators in a country with a population of less than 4m indicates that this service is already seeing a steady demand in Puerto Rico. Furthermore, the fact that new VoIP operators, such as ACN, are entering this market indicates that VoIP service adoption still has room to grow. Pyramid Research expects that total VoIP service revenue in Puerto Rico will grow at a CAGR of 23% from 2008-2013, almost tripling from US$20m in 2008 to $57m in 2013. The main drivers of VoIP revenue growth will be expected high adoption of broadband lines, the strategic role of VoIP in the Puerto Rican converged services market and high prices in the circuit-switched voice market. BEHIND THE HEADLINE VoIP service revenue will almost triple in the next six years. Broadband penetration of population in Puerto Rico, a prerequisite for sucessful VoIP adoption in the country, will grow from 8% in 2007 to 19% in 2013, reaching 755,000 lines by the end of the forecast period. At the same time, narrowband penetration rates will decrease as broadband Internet access and VoIP alternatives to circuit-switched voice see even higher addoption (see Exhibit 1).
Penetration of population (%) VOLUME 8 ISSUE 36 3 Exhibit 1: Actual and projected broadband versus narrowband penetration rates in Puerto Rico, 2006-2013 30% Narrowband subscriber lines Broadband subscriber lines 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Pyramid Research Some of the reasons why broadband penetration will grow at a high pace are related to the unique socioeconomic conditions of the Puerto Rican market and specific government-led initiatives aimed at achieving this goal. Another reason is the large variety of technologies through which this service is provided: The importance of VoIP will grow as converged offerings see higher adoption rates. PRTC provides broadband Internet access and VoIP over its xdsl network. Realizing that the revenue from dial-up Internet access and traditional fixed voice is declining, this company has recently invested another $45m in the expansion of transmission capacity, infrastructure and coverage of DSL and VoIP services. In 2005, Centennial deployed Nortel's Communication Server (CS) 2000- Compact to merge its multiple voice and data networks into one IP infrastructure that supports VoIP service provision. In 2006, Islanet, now owned by Centennial, launched its broadband Internet access service over a pre-mobile 802.16e WiMAX network and licensed 2.5GHz EBS channels. Broadband Internet access and VoIP are also provided via cable technology. The two largest cable companies that offer broadband Internet access and VoIP, in addition to pay-tv service, are One Link and Liberty. With many different access technologies and service providers, the availability of broadband and VoIP is widespread and the competition is stiff, giving customers numerous options.
VOLUME 8 ISSUE 36 4 The future of the fixed access market is in service bundling; VoIP will remain the crucial component of bundled offerings VoIP s strategic importance to Puerto Rican telecom operators will also drive adoption. VoIP s complementary role in converged offerings indicates an even brighter future for this service in the Puerto Rican fixed arena. The role of VoIP in the convergence market is making this service even more important to the operators. Although the VoIP market alone will generate a cumulative $224m in 2008-2013, it will be a significant part of the much larger convergence market. Bundled offerings are convenient money savers and will likely become the most important differentiator of successful fixed market operators. Cable companies such as One Link and Liberty offer triple-play plans bundling VoIP, broadband Internet access and pay-tv services. Fixed operators PRTC and Centennial are both offering double-play bundles including fixed telephony and broadband Internet and will likely launch VoIP offerings as competition heats up for residential customers. Both operators also have special integrated offerings for their corporate clientele. We anticipate that PRTC will start providing IPTV by 2009 to complement its bundle and to strike back at the aggressive competitive positioning of the cable triple-play providers. Intensified competition combined with attractive commercial offers will generate higher adoption of fixed services. This will contribute to the increasing significance of VoIP, which will see even higher adoption rates. Demand for fixed voice is growing, but its prices are too high; VoIP is the solution Finally, the most important driver of high VoIP adoption in Puerto Rico is its relative affordability. The high price of traditional fixed voice service has led subscribers to look for alternatives, making VoIP an attractive option. High demand for voice services in Puerto Rico is evident. For example, a Puerto Rican mobile client speaks roughly four times more than an average Caribbean mobile customer. While the average monthly MOU for the Caribbean region was 381 in 2007, in Puerto Rico this number reached 1,450 in the same year. The demand for long-distance voice service is particularly high, given the high number of Puerto Ricans (approximately 4m) who live in the continental US. The ongoing migration of Puerto Ricans to the US presents an increasing opportunity for long-distance voice service providers. Despite the increasing demand for voice services, the number of traditional fixed telephone lines in Puerto Rico has been decreasing steadily since 2002. We forecast that the total number of circuit-switched voice lines will decrease from 898,000 in 2008 to 733,000 in 2013. While the migration of Puerto Ricans to the US may be one explanation for the decline in traditional landlines, the other more pronounced influence is related to the increased adoption of VoIP alternatives such as Skype, instant messaging, etc. Migration from traditional landlines to VoIP lines will continue through 2013 with the number of packet-switched voice lines tripling from 2008 to 2013, reaching 278,000 by the end of the forecast period. The primary reason why Puerto Ricans opt for VoIP rather than the traditional landline voice service is the significant difference in price. VoIP is a much cheaper alternative, especially in the case of long-distance calls, often 50% cheaper than traditional circuit-switched voice. Exhibit 2 compares international per-minute tariffs offered by PRTC over their PSTN/POTS network and international per-minute tariffs offered by two VoIP providers, One Link and Liberty, offered over their cable network. These tariffs apply to customers who sign up for the basic local unlimited plan, which from One Link costs $21.99 per month, from Liberty $34.99 per month and from PRTC
5 VOLUME 8 ISSUE 36 $21.05 per month. In addition to offering much lower international tariffs (within this basic plan), the two VoIP providers offer a wide variety of VAS gratis, while PRTC charges for each. Exhibit 2: International tariffs VoIP per-minute offerings and PSTN/POTS-based perminute offerings in Puerto Rico, US$ Country One Link Liberty PRTC Continental US 0.079 0.08 0.10 Argentina 0.23 0.42 0.52 Brazil 0.24 0.43 1.55 Chile 0.24 0.19 0.58 Colombia 0.23 0.40 0.50 Costa Rica 0.19 0.30 0.32 Spain 0.10 0.28 0.35 Dominican Republic 0.16 0.15 0.19 Note: PRTC s rates are approximately 40% lower than those indicated above for customers who sign up for specific international long-distance monthly plans. Their prices range from $4.95 to $6.95 per month for a particular regional international plan, to $15.95 per month for the so-called International Connection Plan, which applies to many countries worldwide. Source: Pyramid Research The overall decline in fixed voice lines and the increasing number of pocket-switched lines contributes to the expected decline in service revenue from circuit-switched voice and the growth in packet-switched voice service revenue (see Exhibit 3). In 2008, we anticipate that the fixed circuit-switched market will yield $615m in service revenue, while the packet-switched VoIP market will generate $20m. As VoIP service continues to see higher adoption, the proportion of circuit-switched and packetswitched revenue will significantly change by 2013, when these two markets will generate $502m and $57m in service revenue, respectively.
Revenue (US$m) VOLUME 8 ISSUE 36 6 Exhibit 3: Breakdown of voice revenue in Puerto Rico, 2006-2013 $800 $700 Circuit-switched Packet-switched $600 $500 $400 $300 $200 $100 $0 Source: Pyramid Research 2006 2007 2008 2009 2010 2011 2012 2013 CLIENT RECOMMENDATIONS Traditional voice service provider Provide VoIP over DSL even if it cannibalizes your revenue from PSTN/POTS lines. Though VoIP revenue is unlikely to offset the losses to fixed voice, they increase the attractiveness of multiplay packages. By launching a pay-tv solution, you will improve your competitive position in the convergence market and provide triple-play offerings comparable to cable operators bundles. Regulator As converged services become even more popular and IPTV service emerges, a new set of policies and rules will need to be implemented. Prepare for this by examining regulatory environments in markets that have already gone through these changes. VoIP providers The competition is already fierce in the VoIP market. Create attractive offerings such as family plans (discounts resembling mobile service offerings) for those Puerto Ricans who have relatives living abroad.
VOLUME 8 ISSUE 36 7 Recent reports and other products from Pyramid Research Chile Updates Regulations to Make VoIP a Real Fixed Voice Alternative Regional Perspective published October 2008 New regulations in Chile will make VoIP service equal with traditional voice service. In other countries such as Brazil, Colombia and El Salvador, hands-off approaches leave the watchdog with little control. This Perspective looks at whether the new regulations create a foundation for VoIP to become a real alternative to traditional fixed voice services in Chile and what effect they will have on adoption and overall voice revenue. Communications Markets in Puerto Rico Country Intelligence Report published August 2008 Pyramid Research expects the Puerto Rican telecom services market to expand at a CAGR of only 3.1% over the next five years. Most of the growth will come from the IPTV and fixed VoIP markets. Revenues from both fixed and mobile data will also grow at a fast pace. This Country Intelligence Report analyzes Puerto Rico s communications, media and technology industries, including key trends, regulatory pressures and the competitive landscape, making it an excellent complement to our Forecast products. Mobile Operators Continue Growing despite Lowering Interconnection Fees Regional Perspective published July 2008 Mobile interconnection rates are decreasing in all of Latin America as regulators learn that imbalances in termination fees have not lead to open and healthy competition. As mobile data revenue grows, mobile operators will become less vulnerable to the impact of changes in interconnection rates. This Perspective examines the role mobile data revenue will play in mitigating the drops in interconnection fees. CLECs Choosing WiMAX to Challenge Incumbents in Latin America Regional Perspective published June 2008 Latin American CLECs are choosing WiMAX because it allows them to offer convergent solutions and a faster time to market. Because of their small size, these companies are more adaptable to opportunities and restrictions inherent in the technology and the market. This Perspective looks at this new wave of adoption to predict how WiMAX will impact the Latin American market. Mobile Players and Handset Vendors Capitalize on Mother s Day Event Regional Perspective published June 2008 Mobile operators and handset vendors embrace Mother s Day to take advantage of the biggest sales event in the first half of the year. Seasonal promotions are seen as a way to position top sellers and launch new handset models. In this Perspective, Pyramid Research examines Mother s Day as the first big battle of the year for handset vendors to increase market share and to push multimedia phones among a targeted female segment. Handsets Get a Latin Beat: Mobile Users in Latin America Turn to Music, Cameras and 3G Research Report published June 2008 Latin America s mobile handset market has grown remarkably in recent years, and device sales will increase further through 2012. This Report examines that transformation and what it means to vendors and operators, providing extensive forecasts. It looks at underlying trends in the mobile market, including technology developments, mobile services demand, the competitive landscape, ARPS, the battle between the two main regional mobile operators, handset revenues, unit sales, ASP trends, marketing campaigns, demographic factors and market shares. The focus is on the seven largest markets in Latin America: Brazil, Mexico, Venezuela, Argentina, Colombia, Peru and Chile. Additional products Forecasts Updated on a quarterly basis, our Forecast products provide a complete picture of demand trends affecting each geographical market covered. The Excel output includes five years of historical data and five years of market projections, providing complete macroeconomic and market-sizing information. Available for: Mobile Communications, Fixed Communications, Mobile Data, Mobile Enterprise, Mobile Handsets, Mobile CAPEX, Internet and Media, Network OPEX. Country Intelligence Reports Country Intelligence Reports offer insightful analysis of a country's communications, media, and technology industries, including regulatory pressures and overall competitive landscapes. These data-intensive reports are published annually for 64 countries worldwide, and illustrate key trends within given markets, making them an excellent complement to our Forecast products. For more information or to purchase, contact Pyramid Research at: +1.617.494.1515 or sales@pyr.com or www.pyramidresearch.com