Competition in Peru's ICT sector drives down costs and expands coverage in rural areas

 

Since new operators entered the market in 2014, investment and consumption have risen, boosting the dynamism of the telecommunications sector. A highly competitive market has ensured mobile usage has expanded rapidly, and companies continue to invest in the networks despite finding their margins squeezed. The sector has consistently grown at a faster rate than Peru’s GDP, according to latest data from Peru’s National Institute of Statistics and Informatics, expanding by 10-11.5% per year in real terms between 2014 and 2017. With regard to GDP, the sector has increased its share from 1.86% in 2007 to 3.54% in 2017. As of August 2018 telecommunications and other information services accounted for 4.8% of GDP, according to the Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL).

The issue now is how best to increase access to broadband services and boost connectivity to rural areas. Studies conducted by Ericsson and Imperial College in 2017 showed that with a 10% growth in broadband penetration, GDP increases by an average of two percentage points. However, a number of challenges surrounding the implementation of the proposed National Fibre Optical Backbone Network (Red Dorsal Nacional de Fibra Óptica, RDNFO), a 13,500-km fibre-optic cable network that was completed in 2016. As a result, officials are seeking innovative approaches to increase access, including by promoting ICT start-ups.

Structure & Oversight

Since its founding in 1991, OSIPTEL has been the primary body tasked with regulating the telecommunications and ICT industry, while the Ministry of Transport and Communications (Ministerio de Transportes y Comunicaciones, MTC) is in charge of granting concessions, permits and licences. Supreme Decree No. 13 of 1993, otherwise known as the Telecoms Law, is the legal framework guiding services. In the past few years, governing bodies have been working together to bolster service provision. According to the International Telecommunication Union (ITU), a specialised agency at the UN concerning ICT issues, OSIPTEL is “actively engaged in the promotion of a competitive environment and expansion of services to reach the entire population”. Indeed, OSIPTEL has taken several measures to increase competition in the market, including by relaunching number portability, unblocking mobile devices and enforcing a reduction in retail prices and interconnection charges. Meanwhile, regulatory incentives are generating more intense competition and allowing market players to make more investments in infrastructure and improve services.

In 2018 the MTC implemented a new methodology to calculate the charges for using the radio spectrum, ruling that all frequencies be issued via public tender. However, after an investigation, the MTC decided in February 2019 that the allocation of 2. 5-GHz spectrum to Vietnamese-owned operator Bitel in late 2017 — which was not carried out through public tender — was still legal and valid, though a similar situation was to be avoided in the future.

In October 2018 the MTC published a set of rules geared at redistributing radio spectrum. It is hoped that the regulatory changes will amplify coverage of existing services and help close the digital gap, José Aguilar, the MTC’s regulation and communications director, said in a press release in November 2018. Entel, the third-largest player in the market, said in its 2018 annual report that the changes had resulted in positive impacts on the company.

Penetration

According to the ITU, Peru’s challenging topography — with deserts, mountains and rainforests — gives mobile services a clear advantage over its fixed-line alternative. As of December 2018 there were 42.1m mobile phone subscriptions in Peru, equating to 136.5% of the population. This is up from 30m at the end of 2013. Telecoms research firm BuddeComm contributes such high figures to multiple mobile subscriptions per customer — a trend that is especially prevalent among urban dwellers. This phenomenon is becoming less pronounced, however, as network operators respond to competition by providing generous data and voice bundles, thereby negating the need for SIM cards from different networks. OSIPTEL is also seeking to remove illegal and counterfeit devices, and unregistered SIM cards from the market.

According to the GSMA, a global trade body for mobile network operators, Peru had the fifth-highest mobile penetration rate in South America in 2017 at 71%, behind Argentina (81%), Chile (83%), Venezuela (76%) and Uruguay (83%). By 2025 the association predicts this percentage to reach 77%.

Major Players

Peru’s four main telecoms providers are Telefónica del Perú’s Movistar; Mexican América Móvil’s Claro Perú; Chile’s Entel; and Vietnam’s Bitel. Before the entry of Entel and Bitel in 2014, the market was almost entirely dominated by Claro Perú and Movistar. However, since then, the two newcomers have steadily increased competition and put pressure on margins.

In the four years from 2014 Entel Perú has boosted its customer base from 1.7m mobile subscribers and just 5.5% of the total market, to 7.8m subscribers and 18.5%. At the same time, Movistar’s market share has slipped from 54.3% at the end of 2014 to 37.2% in 2018, while Claro Perú has seen its share drop more than one-quarter from 39.2% to 29% of total subscribers. At the end of 2018 Bital had accumulated 6.4m users, or 15.31% of the market.

Price Competition

The intense competition has led providers to drastically reduce prices in an attempt to regain market share. Aggressive commercial offers from the new entrants have enabled them to rapidly scale and take market share, principally from long-term market leader Movistar.

However, an environment of price undercutting has affected the bottom lines of all companies. Between 2014 and 2018 the average revenue per user (ARPU) fell consistently, with mobile internet prices dropping by 90%. OSIPTEL’s latest available data showed that while operating income at telecoms companies grew by 2.2% in 2017, figures were broadly expected to fall for the first time ever in 2018. In the previous 10 years the companies’ income had grown by 8.6% per year on average.

América Móvil’s results showed a decline in ARPU at Claro Perú from PEN22 ($6.66) to PEN20 ($6.05) between March 2018 and 2019. This is down from PEN28 ($8.48) at the end of 2013. Full year figures from credit ratings agency Fitch Ratings said that post-paid ARPU’s at Movistar had dropped by 25% in 2018. To compare, figures increased by 40.2% at parent company Telefónica del Perú’s Argentina, Paraguay and Uruguay operations, 11% in Brazil and 4.2% in Mexico. Meanwhile, the ARPU at Entel Perú registered PEN24 ($7.26) at the end of March 2019, down from PEN35 ($10.59) four years prior. In March 2019 ratings agency Moody’s attributed the disruption of a previously comfortable two-player market to the entrance of two highly competitive firms in 2014, Entel and Bitel. Since 2014 the landscape has been characterised by decreasing profitability of the previously existing players. Indeed, Fitch Ratings also highlighted an environment of overall revenue stagnation and negative aggregate cash flows.

Alejandro Jiménez, former director of OSIPTEL, told local press in April 2019 that Peruvian telecoms companies had the lowest earnings before interest, taxes, depreciation and amortisation (EBITDA) margin in the world, meaning that it was tough enough for established players to turn a profit — let alone new, smaller competitors. Claro Perú’s EBITDA margin, for example, fell from 40% of revenues in 2014 to 27.9% as of March 2019.

Although Bitel’s parent company Viettel does not publish financial statements for its Peruvian operations, the Vietnamese operator says it posted a profit after just two years in Peru, thanks to monthly revenues of around $30m. Bitel’s strategy involved concentrating on low-end, prepaid customers and rural areas before moving towards urban markets, and this approach has reportedly worked well, one Lima-based telecoms expert told OBG.

Meanwhile, Entel Perú’s efforts to gain market share have yet to bring profits, though losses have gradually narrowed and the company reported a break-even EBITDA in the fourth quarter of 2018, although it posted negative EBITDA of $82.5bn for the full year. This is compared to negative $113.4m in 2017 and negative $244.5m in 2015, the company’s first full year in Peru. Entel Perú attributed the performance to an 80% increase in hardware sales. Revenue growth at the company slowed to 6.2% in 2018 to reach a total of $745.2m, compared to 49.2% and 32.6% in 2017 and 2016, respectively. Results for the first quarter of 2019 showed that EBITDA reached positive territory in the first quarter of 2019, at PEN28.9m ($8.7m).

Turning the Tide

However, the era of undercutting prices may be nearing an end as companies focus on increasing profits. Entel Perú was the first company to shift strategy by raising prices and competitors have followed suit. Fitch Ratings gave Entel a negative outlook in March 2019, showing concern for the parent company’s increasing leverage ratio and saying that its primary challenge during the year would be to improve profitability at its Peruvian subsidiary. In the first quarter of 2019 Entel Perú reported improved margins on services and handsets, attributing this to offering lower subsidies on post-paid handsets. Fitch Ratings is now expecting “slower, but profitable” revenue growth for the Chilean group’s Peru operations, saying the subsidiary is likely to have more disciplined client acquisition costs. Meanwhile, Moody’s predicts a “more rational market environment” over the next few years, and believes Telefónica del Perú could return to positive free cash flow by 2021 thanks to upward subscriber trends. Nonetheless, as of the end of the first quarter in 2019 América Móvil was still being accused of engaging in disruptive commercial practices by players in the prepaid segment in Peru.

MVNOs

The intense competition in the mobile market is having an effect on mobile virtual network operators (MVNOs), which had been expected to broaden the number of players in the market. Virgin Mobile’s foray into the local market — the first example of an MVNO in Peru — lasted just a year. The operator landed in July 2016 and acquired over 89,000 customers within 12 months; however, the company failed to make a profit and exited the country in September 2017, with Incacel Móvil taking over its operations with the brand Inkacel. By the end of 2018 Inkacel had just 8341 users, having changed its strategy to focus on the low-end of the market, with top-ups offered as cheaply as PEN1 ($0.30). No other MVNOs have appeared on the scene.

However, there may still be a future for MVNOs in Peru, according to Jose Miguel Porto, senior partner at Porto Legal, a law firm focused on telecoms, digital and technological affairs. Virgin Mobile was trying to develop its business when Peru had asymmetric interconnection charges, meaning prices differed from one operator to another. “This created a distortion that made it harder to deploy an MVNO,” Porto told OBG. “Now that interconnection charges are close to zero and similar to all carriers in Peru, we could see another operator emerge and try to create competition not in infrastructure, but in service.”

In December 2018 OSIPTEL announced it would reduce interconnection charges between operators by 54% beginning January 1, 2019. Dolphin Telecom, which has had a licence to operate as an MVNO in Peru since 2017, is planning to launch operations in 2019, according to industry media.

Mobile Internet

Growth in the mobile sector has also connected more Peruvians online. OSIPTEL data shows that in the fourth quarter of 2018, 78% of Peruvians accessed the internet on a mobile device or tablet, up from just 38.6% in the first quarter of 2014. According to the GSMA, despite affordability challenges, smartphones comprise 49% of total mobile connections. In this measure Peru is only behind Bolivia in smartphone adoption, and the trade body is predicting that this figure will reach 70% by 2025. This compares to its prediction of 83% for developed economies by the same year. The quality of the connections is also increasing as operators have invested heavily in mobile broadband. Whereas in 2017 some 50.2% of mobile internet connections were made using 4G LTE technology, by the fourth quarter of 2018 this proportion had risen to 67.3%.

According to UK-based wireless coverage mapping company OpenSignal’s report published in the first quarter of 2019, Peru is one the best jurisdictions in Latin America for 4G availability, which is a measure of how often users can find 4G signal. All four of the country’s providers managed a 4G coverage score of above 80% as of December 2018.

By comparison, in Mexico only AT&T has reached a 4G availability score of above 80%, says OpenSignal, while in Chile and Colombia no providers have achieve this. Furthermore, the research firm noted that there had been some impressive improvements in latency across Peruvian providers.

Among Peru’s providers, in 2018 Entel exceeded its competitors in terms of service quality, ranking highest in 4G availability, download and upload speeds, and in latency experience, according to OpenSignal. The only category it did not win was video experience, where Claro Perú ranked highest. Indeed, the latest data from OSIPTEL shows that Entel’s 4G service offers downloads at 28.94 Mbps, followed by Movistar with 23.52 Mbps, Claro with 18.28 Mbps and Bitel trails with 10.53 Mbps.

Fixed Line

One reason for such strong take-up of mobile data services is that fixed-line broadband penetration remains low in Peru, as much of the country is geographically inaccessible. With just 2.6m fixed line subscribers in Peru as of December 2018, fixed broadband penetration rates are well below regional and global averages, despite 60% growth in total subscribers since the end of 2013 — more than the 40.7% shown by the mobile market.

In fixed-line internet Telefónica del Perú is the clear market leader, holding 75% of total connections. This is followed by Claro Perú with 467,705 fixed-line subscribers, or 18% of the total market, Entel (7674) and Bitel (56).

The established players’ dominance in the fixedline market can be attributed to their ability to offer truly convergent services. The strength Telefónica’s fixed line business has been key in mitigating the fall in mobile revenues. Indeed, according to Fitch Ratings, Telefónica’s recovery strategy “hinges on its ability to leverage its convergent platform to offer quad-play services through the new Movistar Total product”, which offers mobile, home internet, television and landline phone services in one package.

Rural Areas

However, geographical challenges are not only an issue for fixed-line services. According to Telefónica, 6m people in rural Peru do not have access to high-speed mobile internet, with 3.2m of these only having access to mobile telephony services and 2.8m with no access to any operator of any kind. Rural internet coverage has long been a challenge as technologies are not designed for areas with low population density, and business models are usually incompatible with the needs of the rural population. Large-scale infrastructural investments are also generally geared towards urban areas.

In an attempt to democratise internet access in rural areas, Telefónica reinforced Internet Para Todos (Internet For Everyone), its rural development arm, with investments from Facebook as well as Latin American development banks CAF and IDB Invest. According to CAF, Internet Para Todos offers wholesale access to Telefónica’s rural broadband infrastructure, allowing any mobile operator to use existing 3G and 4G infrastructure.

The company will invest in improving voice service and deploy new mobile internet infrastructure, implementing a new business model “under the principles of open access, cooperation and technological innovation”. Open technologies and agreements with local communities should reduce the cost of deploying the network, while using cloud architecture, automatic network planning, open radio access solutions, and a combination of optimised fibre and microwave networks. This is designed to prove that connecting communities in isolated areas can provide a financial return. Telefónica said when it announced the new partners that the programme had already brought 3G or 4G internet to 600,000 people in 2000 remote communities, with the ultimate aim of connecting some 30,000 communities. It is hoped that the project in Peru will pave the way for replicas in other parts of Latin America.

The Telecommunications Investment Fund provides subsidies for telecoms services in areas where there is little economic return for providers. One of the measures that have already been implemented to benefit rural areas is differentiated interconnection charges. In January 2018 differentiated mobile charges were reduced for operations in rural areas with the goal of encouraging investment in subpar infrastructure. In May 2018 OSIPTEL reduced mobile charges in rural areas from $0.0021 to $0.0004 per minute. Meanwhile, mobile charges in urban areas stood at $0.0066 per minute.

Internet

Issues with service provision in rural areas means Peru lags behind the rest of the Pacific Alliance in terms of internet access, with far slower progress than Mexico and Colombia in particular since the turn of the decade. As of 2010, around 34.8% of Peruvians were internet users, versus 36.5% in Colombia and 31.1% in Mexico. By 2017, the latest year with available data from the UN Economic Commission for Latin America and the Caribbean (UNECLAC), Mexico had easily overtaken both countries, with 63.8% of the country using the internet, compared to just 48.7% in Peru. Colombia also managed to extend its lead over its southern neighbour, registering some 62.3%. In South America, only Bolivia, Guyana and Suriname have a lower percentage of internet users than Peru.

When measured by households with internet access, the gap between Peru and its neighbours is even larger. While just 28.2% of Peruvian households had internet according to UNECLAC data, the rate was around 50% in Mexico and Colombia, 60.8% in Brazil, 81.3% in Argentina and 87.5% in Chile.

Infrastructure

Meeting the connectivity challenge has not been made easier by troubles with getting the RDNFO off the ground. As of 2017 there was approximately 61,473 km of fibre-optic cable, some 78% of which was privately owned, according to MTC statistics. The remaining 22% was part of the RDNFO, concessioned to Mexican multimedia conglomerate TV Azteca. However, the network has been criticised for its unattractive rates. The fixed tariff that operator TV Azteca is required to charge is no longer competitive given that a number of private operators have built their own networks, leaving only 16% of the RDNFO in use.

Moves to renegotiate the contract with TV Azteca have stalled, and there have been delays in the 21 additional regional broadband projects expected to complement the RDNFO’s infrastructure. These were designed to expand the network by a further 31,000 km, and increase high-speed internet access to rural and underpopulated areas; however, they are unlikely to be completed until 2021 (see analysis).

5G Developments

Given that large areas of Peru remain uncovered by high-speed broadband, upgrading the network to the latest 5G technology is likely to be a medium-term undertaking. The 5G infrastructure requires additional spectrum; however, Latin American regulatory bodies have been slow to meet recommended allocations. According to Fitch Solutions, no country in the region is fully prepared for operators to use the necessary spectrum for 5G, and Peru is one several countries undergoing changes to the regulatory environment, which will likely further delay implementation.

Still, progress is being made. Telefónica undertook 5G network tests in Peru in December 2017, while in August 2018 the MTC approved the re-farming of the spectrum in preparation for such networks. However, operators may struggle to justify mass deployment of 5G, given the high costs associated with the technology. According to the GSMA, Mexico will likely experience the fastest adoption of 5G, followed by Brazil and then Peru. The trade body predicts that Peru will have 4m 5G connections by 2025, comprising 10% of the market.

IT Growth

Major players have also been making efforts to develop IT capabilities. Entel, for example, saw 15.2% growth in business clients in Peru, strongly driven by small and medium-sized enterprises (SMEs), as it expanded its offering to include digital tools, such as automation and the internet of things. Meanwhile, in May 2019 Telefónica became the first company in South America to use artificial intelligence in its customer phone lines. That same month, Bitel won a $27m contract to provide IT infrastructure for 1837 schools across 25 cities and provinces. The firm is targeting revenue of $40m in the business-to-business segment alone in 2019.

In 2016 and 2017 Peru’s IT sector — including hardware, software and services — shrunk by 3.8% and 2%, respectively, according to IT consulting firm Dominio Consultores. However, in 2018 the sector grew by 4.4% to just over $4bn, comprising around 2% of Peruvian GDP. Of this, approximately $2.7bn was generated by hardware, $252m by software and $1.1bn came from services, which includes software development. Excluding mobile services, the sector was worth approximately $2.83bn in 2018. “The IT sector more or less grows in line with the overall economy,” Fernando Grados, founder of Dominio Consultores, told OBG. “After two difficult years returned to strong growth in 2018.”

Digital Economy

As Pablo Bello Arellano, president of the Inter-American Association of Telecoms Companies, said at the Peru Public Management and Infrastructure Conference in October 2018, while the IT sector is also a key driver of economic expansion, the drivers of the rapid economic growth between 2005 and 2013 are no longer significant, making a digitalisation strategy vitally important to future expansion. However, according to Grados, certain areas of government are far behind when it comes to the digital revolution. “Some government agencies such as the National Superintendency of Customs and Tax Administration, which enforces Customs and tax compliance, are very advanced in their use of technology, while others have some catching up to do,” he told OBG.

Start-Ups

One crucial ingredient to create a digital society is a robust entrepreneurial start-up ecosystem. Porto, whose firm helps start-ups to raise capital, believes that the local system is evolving and becoming more mature. “We are not yet as advanced as Colombia, Mexico or Argentina, who have their own unicorns, but we have the potential to become an important player in Latin America,” Porto told OBG. “This is partly because the kick-off from the state only came around five years ago.”

In 2012 the Ministry of Production launched StartUp Perú to provide financing to budding entrepreneurs and develop a start-up ecosystem. In January 2019 the initiative was entering its seventh phase, and as of May 2019 the programme had helped 164 start-ups via 18 accelerators and incubators, three angel investor networks and three entrepreneurial capital funds on its website.

There are encouraging signs that the efforts can pay off and that the model is feasible. Digital payments start-up Culqi, one of the second generation of companies to go through StartUp Perú, received investment from support from Wayra Perú, the Peruvian arm of Telefónica’s global accelerator Wayra. In February 2019 Wayra Perú confirmed that Krealo, the venture capital fund of Peru’s largest banking group Credicorp, acquired its shares in Culqi. It was the incubator’s third successful exit. “The transaction was important as it allowed the entity to return funds to new investments and keep betting on entrepreneurs,” Jaime Sotomayor, country manager of Wayra Perú, told OBG.

However, securing financing for start-ups is not easy, according to Roberto Persivale, co-founder of consulting firm Asesorandes and managing partner of the business accelerator Fledge Peru. “We are focusing on educating potential angel investors. There are a lot of people who have money but are afraid to put it to work in start-ups,” Persivale told OBG. “We need to teach people the value of becoming an angel investor, but making sure they do it the right way. For instance, you need diversity in your investments to manage your risk, and it is better to invest in 10 companies than in one.”

However, there is little doubt over the fact that there is an abundance of opportunities available in the country. As Persivale points out, in one sense Peru has traditionally been a big entrepreneurial country because it is by dominated small businesses. “However, these are mostly needs-based enterprises, rather than opportunity-based projects,” he told OBG. “For most people innovation is not currently a part of the conversation.” Persivale, whose focus is on companies that can make social and environmental change, says that Peru represents a significant opportunity for innovative companies, precisely because the country has real problems in both the public and private sectors.

The centralised nature of Peru’s development around Lima also makes it an interesting prospect for creating and testing a viable business model. Igniting the digital economy is not only about Peru developing its own technology. “There are also important opportunities for start-ups that we can import to make a soft landing here, thereby turning Peru into their gateway for Latin America,” says Persivale. Though mining is driving Peru’s economic growth, Persivale named agri-business as one industry where the country could become a centre for innovation. “Yes, we have a lot of mining, but I believe it makes sense to focus on sectors where we can be leaders, given few countries in Latin America have our levels of biological and cultural diversity.”

Outlook

In some ways, Peru is playing technological catch-up. Key indicators lag behind similar economies in the region, and slow progress in rolling out regional fibre-optic networks has stalled the government’s plans to digitally connect the entire country. However, a competitive market pushing operators to improve services and lower prices means that there has been progress in mobile coverage. With one of the most positive economic outlooks in Latin America, stable domestic demand and impressive growth in new segments such as agri-business, Peru certainly has the potential to be a centre for innovation. More agile government policy, including digitalising the state apparatus itself, could see Peru become a major player in the Fourth Industrial Revolution. “Soon, SMEs will have no choice but to embrace new technology,” Grados told OBG. “If you don’t use it for business intelligence or data analysis, or improve your processes with the internet of things, you will lose competitiveness and will lose market share.” In the medium term the dynamism of Peru’s IT should drive sectoral growth.

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The Report: Peru 2019

ICT chapter from The Report: Peru 2019

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