Sponsored By
Channel Partners

July 1, 1999

8 Min Read
Carrier Channel: Latin America

Posted: 07/1999

Latin America:
New Frontier for U.S. Carriers
By Judy Reed Smith and Marne Turk

Americans are constantly on the move. The pilgrims came on the Mayflower to find a new
way of life, the pioneers left the East Coast to find gold and amber waves of grain out
West. Thus, it is no surprise that American telecom providers are packing up their
switches and heading south of the border to find their fortune in Latin America.

We know that developing countries offer attractive opportunities for telecom. And
regions such as Latin America increasingly are contributing to the growth of international
minutes. In fact, according to a new report published by Boston-based consultancy
ATLANTIC-ACM titled "Global Telecom Markets: Exploring New Opportunities
1999-2002," international traffic originating in developing economies has grown
faster than international outbound traffic from developed economies. The report states
that the share of total international outbound traffic attributed to developing economies
has increased from less than 9 percent in 1985 to 15 percent in 1990 and almost 20 percent
in 1995.


Effective and prudent investments by U.S telecom companies may mean hitting the
jackpot, but it also offers a chance to improve the social status and living conditions of
a great number of people. Communications are an increasingly critical component of
economic growth, serving as the engine of the constantly changing global information
society. The World Bank experience indicates that increasing the availability of telecom
services to a developing country helps to develop and maintain a competitive advantage,
deliver public administration, improve social services and reduce poverty by increasing
productivity and extending the sphere of economic activity. Food for thought.

Buy, Borrow or Build?

Seeking to capitalize on the increasing business and consumer demand for international
telecommunications, telecom providers are investing in Latin America through a variety of
options: strategic partnerships, alliances and subsidiaries. Strategic partnerships offer
attractive opportunities for foreign investment, permitting rapid network and/or service
expansion with less capital-intensive development. Such partnerships allow companies to
expand their reach without diverging from a core focus or experience. Established carriers
are expanding their global footprint by acquiring strategic stakes in foreign, state-owned
carriers. Spain’s former monopoly, Telefonica S.A., for example, has purchased stakes in
CTC in Chile, Telefonica de Argentina and Telefonica del Peru, and may be negotiating for
part of MCI WorldCom Inc.’s controlling stake of Brazil’s EMBRATEL.

Generally, conditions including government limits on foreign investments, the desire to
share market risks and the need for local political and regulatory understanding through
alliances and partnerships motivate people to pool their resources. Hamilton,
Bermuda-based RSL Communications Ltd. (RSLCOM) recently signed an agreement to purchase 44
megabits of capacity (2,800 simultaneous phone calls) in the Caribbean-based Maya-1 cable,
due to go into service in March 2000. The cable will have landing points in the Cayman
Islands, Colombia, Costa Rica, Florida, Honduras, Mexico and Panama. It will, according to
company officials, play an important part in RSLCOM’s expansion efforts in Latin America.

The ability to create subsidiaries has resulted from some of the market liberalization
and the trend toward deregulation. However, building a facilities-based operation in a
foreign land offers the prospect of lower operating costs and total control over the
quality of calls and, thus, over customer satisfaction. The cost structure of this model
is not cheap, though. Large amounts of capital are required to build and maintain
facilities. In addition, a facilities-based operator needs an organizational structure in
place that has network management capabilities, customer service and care personnel, sales
and marketing and a multilingual billing system. It’s a daunting task.

Take, for example, Hamilton, Bermuda-based Global Crossing Ltd.’s South American
Crossing (SAC), a subsea and terrestrial fiber optic network directly linking the major
cities of South America with Asia, the Caribbean, Central America, Europe, Mexico and the
United States. This immense network will cost nearly $1 billion to construct and is
scheduled to commence service in 2000. According to the company, continent-to-continent
capacity will increase more than 10 times over.

Competitive Spirit

In general, telecom reform started in Latin America as a way to help countries recover
from the regional financial crisis of the 1980s. The crisis stifled most public sector
investment. Governments encouraged privatization of state-owned companies to stimulate the
private-sector economy. Due to the high cost of supporting network upgrades and expansion
costs, the telecom sector became one of the main targets for privatization.

As Latin American regulators and government officials reflect on the relatively low
phone penetration rates in Latin America, compared to those in North America or Western
Europe, they focus on their countries’ need for infrastructure. This has led to buildout
requirements for new licensees in most Latin American nations. However, a limited number
of licenses awarded should create a higher price per license and keep the number of new
entrants at this stage of liberalization relatively low. Thus, we expect, aside from the
Chilean experience, a more gradual transition to competition than the past year of
competitive explosion in Europe.

While the region is a very attractive investment option, it does offer risk. The
financial crisis in Asia spilled over into Latin America last year and the ensuing
recession is expected to continue throughout 1999. However, a bad recession may lead to a
strong and dramatic recovery as investor confidence returns. There are other bright spots,
including the intraregional agreements with the North American Free Trade Agreement
(NAFTA), Mercosur and the Andean Pact. These agreements offer opportunities and the
promise of stability and growth. Even better news: Many people believe that a South
American trade zone soon will develop and increase global opportunities.

Location, Location, Location

Finding the best opportunities for U.S. telecom dollars in Latin America can be a
challenge. We do know that Chile’s telecommunications market is one of the most open and
competitive markets in the world. Following privatization of the main telecommunications
companies in the late 1980s, the number of telephone lines quadrupled from about 500,000
to more than 2 million today. Competition introduced in the late 1980s in data,
value-added and cable TV services and private networks–and since 1994 in domestic and
international long distance telephony–has brought about rapid network modernization, new
services and prices that are among the world’s lowest.

Chile’s global outbound traffic grew at a steady 12.6 percent compound annual growth
rate from 1990 to 1994, but almost doubled in 1995 as CTC, the traditional local company,
was allowed to compete in the long distance and international markets. ATLANTIC-ACM
estimates Chile’s outbound traffic will reach 527 million minutes in 2002, as teledensity
increases and international rates decrease due to competition (see chart, below).
Accordingly, as competition increases in Chile, rates will continue to decrease, boosting
outbound traffic. And outbound traffic also will increase as teledensity levels increase.
It is estimated, too, that by 2000 teledensity will reach 21.1 lines per 100 inhabitants.
Another impressive fact: According to TeleGeography, calls between Chile and the United
States grew 65 percent from 1996 to 1997. With this said, however, though this region
boasts a wide-open market, the telecom sector already is highly competitive and offers a
tight situation for new entrants.

Chile’s Projected Outboound Global Traffic Growth

Brazil or Bust

Brazil on the other coast offers impressive opportunities for U.S. telecom investment
due to the fact that it accounts for a large portion of the Latin American economic
landscape. However, cautious entry into this region is advised due to the currency
devaluation of the real in January.

Outbound traffic in Brazil is likely to exceed 1 billion minutes by 2002, benefiting
from higher teledensity levels and increased competition (see chart, below). The country
plans to install 25 million lines by 2000, 75 percent of which are expected to be digital.
Once Brazil increases its surprisingly low 10 lines per 100 inhabitants teledensity
levels, demand for international long distance should increase even more quickly. Brazil
also is a leading financial center in the region, which will increase telecom usage. The
high proportion of business use in Brazil may give growth a steady, predictable nature.
That’s good news for investors.

Brazil’s Projected Outboound Global Traffic Growth

Strategies for a Big Move

When developing strategies for foreign-market entry, a company should:

  • Analyze markets with identifiable regulatory hurdles;

  • Assess market growth potential for the services it offers;

  • Identify markets that can provide sufficient revenues to justify entry;

  • Identify current and expected competitors and differentiate itself from them; and

  • Build a business model that offers it a sustainable advantage in that market.

Generally speaking, investing in Latin America offers strong opportunities for U.S.
telecommunications providers. Despite economic uncertainty, the region remains one of the
most attractive untapped telecom markets with increasing needs for infrastructure and
telecom service provisioning. This region appears increasingly ripe for the high-capacity
and high-quality service that Americans count on in everyday life. And while macroeconomic
financial crisis and the unpredictable regulatory climate in the region do present some
risk, Americans prove time and time again that they are not afraid to take a risk. If the
pioneers did it, so can we.

Judy Reed Smith (pictured) is CEO and Marne Turk is project and marketing manager
at ATLANTIC-ACM, a Boston-based international strategy consulting and research firm
serving emerging and converging networked communications industries worldwide. They can be
reached by phone at +1 800 771 6226 or by e-mail at [email protected]

Read more about:

Free Newsletters for the Channel
Register for Your Free Newsletter Now

You May Also Like