The information and communications technology (ICT) sector plays an essential role in efforts to consolidate the diversified services sector. While the population may not be as sizeable as those of other economies in the region, the high adoption rate of new technologies has attracted players from around the world looking to tap into Panama’s voice and data segments.
According to the National Public Services Authority (Autoridad Nacional de los Servicios Públicos, ASEP), ICT revenues rose from $743m in 2007 to $957m in 2013, maintaining a contribution to national GDP of around 3%. Much of this has been generated through mobile services and broadband, which offer significant room for further growth. In addition, thanks to Panama’s location, foreign investment incentives and connection to the continent’s primary fibre-optic networks, it is well placed to become a regional ICT centre.
Cable & Wireless Panama (CWP) dominates the fixed-line segment with a market share of around 80%, according to 2011 figures. In 1997 the UK-based conglomerate acquired a 51% share in the Panamanian national phone company, Instituto Nacional de Telecomunicaciones (INTEL), while the government retained a 49% share. Although the government had expressed an intent to divest from the venture entirely, at the time of press no decision had been taken, mainly due to opposition from civil society groups. In 2009 Cable Onda, the second player in the market, acquired Telecarrier, a predominant corporate player that was ranked third. A year later, Advanced Communications, which held a 2.2% share, was also integrated and pushed Onda’s share to about 20%. Other players include Galaxy Communications, Movistar, System One and Skycom, most of which held less than 1% of the market in 2011.
According to figures from ASEP, which regulates the sector, the number of fixed-line connections in 2011 stood at 560,000, serving 15% of the population. Annual growth until that time had been 2.5% on average, but significantly improved over the course of 2012 when 80,000 lines were installed, up 14% on the previous year. A large share of this can be attributed to the reactivation of existing connections as operators have started to expand their fixed-line internet offerings. As such, in 2013 about 74% of existing lines were in use, down only slightly from the 75% recorded in 2007.
The number and duration of national calls also recorded growth, as did their share compared to local and international calls. As a result, from 2010 onwards national calls counted for about half of all outgoing connections, compared to 16% in 2007, while average call duration also increased dramatically. This is supported by the rising number of commercial clients, which accounted for 29.14% of the sector’s clientele in 2013, compared to about 25% in 2007.
The mobile segment has four operators, some of which are also active in the fixed space. CWP’s +Móvil and Telefonica’s Movistar have been active since the sector’s 2003 liberalisation. From the outset, both companies equally divided the market until the entrance of Digicel in 2008 and América Móvil’s Claro in 2009.
Anticipating moves by the incumbents, mostly in the form of significant cuts in call rates, led to a jump in SIM card penetration, which exceeded 100% by the end of 2008. This continued through the introduction of additional promotions and accelerated roll-out of communication campaigns and new services after the newcomers’ entrance, encouraging multiple SIM cards per user and pushing up the penetration rate, which stood at 163.5% in 2013. Between 2007 and 2013 the number of rotating SIM cards grew from 3m to 6.29m.
The mobile market has seen aggressive competition, with fast technology evolution and network capacity expansions enhancing mobile broadband offerings (3.5G/HSPA+) from the four operators. CWP’s +Móvil has been able to sustain it’s position of having the largest share of the market and is followed by Movistar in second, Digicel in third and Claro in fourth.
Anticipation of the introduction of mobile number portability (MNP) in November 2011 added to operators’ efforts to boost service and pricing, marginally encouraging market movements. As per ASEP figures, between November 2011 and July 2013 some 156,398 numbers were transferred, with Claro coming out as the biggest winner, attracting 95,000 new users.
While growth was exponential until 2010, the initial signs of saturation for SIM cards have started to surface. As such, the sector witnessed a slow-down, as penetration retreated from a peak of more than 180% in 2010 to 163.5% in 2013. This figure was still high compared to the region, which registered 109.4%, and developed markets, which averaged 128.2% in 2013. With only 4.25% of the population not yet using a mobile phone, annual sales rates are likely to remain modest. This is highlighted by ASEP estimates predicting 1.5% growth in 2014. Meanwhile, tariff cuts have had an adverse impact on average revenue per user (ARPU) which registered $13 per month in 2012, down 20% from 2008 levels, though slightly above the regional average of $12 as measured by ITU.
The multiple SIM-card nature of the sector translates into a dominance of on-net calls, accounting for 74% of all outgoing calls in 2013, and an overriding share of pre-paid customers, hovering at around 90-95% between 2007 and 2013. With little room for further rate reduction, operators have taken to alternative measures to maintain and conquer market share.
While more than 95% of the population uses mobile phones, not everyone has a smartphone capable of 3G or Wi-Fi access. As a result, operators have taken to subsidising dual SIM smart phones. “This will help to encourage the longevity of multiple SIM cards,” Edwin Castillo, director-general of ASEP’s telecoms department, told OBG. Moreover, an increasing number of smartphones will also widen the number of users able to access broadband services. Nevertheless, operators have started to incentivise post-paid contracts hoping to increase visibility on future revenue streams. One of the ways applied is through shorter contract durations.
With saturation looming in voice, mobile operators are counting on data services development to secure revenues and market share in the long run. According to the ITU, mobile broadband penetration stood at almost 15% in 2012. While this was ahead of the Latin American average of 10.6% in 2012, the organisation forecasts penetration will reach 45% by 2016.
This is backed by the recent introduction of HSPA+ technologies by Claro, CWP and Digicel to boost rural connectivity, in addition to earlier investment by all four players in 3G connections. Some operators, such as CWP, are already running 3.5G facilities in Panama City. Another penetration boost has come from the government’s Internet For All (Internet Para Todos, IPT) initiative, which comprises free wireless broadband throughout the country, especially in rural and underserved areas (see analysis). While the programme is still being rolled out, Autoridad Innovacion Gubernmental (AIG) findings show it is already having a significant impact on demand for services such as chat, social networking, file downloads, email and browsing.
Operators are now looking forward to the issuance of 700 MHz band (using a model based on arbitrage pricing theory) to deploy 4G/long-term evolution services. Three out of four operators have expressed interest in the technology and have announced corresponding infrastructure development plans. While 4G infrastructure is less capital-intensive to set up and maintain, faster speeds and higher capacities require additional spectrum that ASEP is lobbying to free up from broadcasting services. When deployed, 4G connections are likely to boost competition with fixed-line broadband solutions through mobile access on handsets and via mobile modems on laptops and PCs.
Fixed-line connections have been on the rise since the start of the millennium, driven by growing consumer demand, as well as the IPT project. As such, between 2000 and 2013, teledensity rose from 6.6% to 42%, according to ASEP, while fixed-line ARPU reached $26.
Growth is primarily driven by DSL, a space dominated by CWP, which owns the terrestrial network, cable modems and fixed-line wireless connections. These technologies have gradually replaced dial-up connections that had been dominant until 2005. According to figures from ITU, in 2009 there were 122,175 DSL connections registered, 67,160 cable modem lines and fewer than 10,000 dial-up links offered by national players such as CWP, Cable Onda, Columbus and ClaroCom. By 2013 ASEP registered a rise in broadband connections totalling 297,827, while the number of users was registered at 1.6m.
Restrictive access and underdevelopment of the fibre-optic network has given rise to the development of proprietary fixed-wireless networks operated by domestic players such as Panetma and Mobilnet. Besides the competitive rates, consumer interest has also centred on the fewer interruptions as a result of theft and damage which affect terrestrial cables. Nevertheless, availability and cost have thus far limited fixed-line access to urban, corporate clients while mobile internet remains preferred by most residential users.
In a bid to encourage development of and competition in fibre-optic infrastructure, ASEP is considering fiscal and financial incentives for investors. While these were in an early state at the time of press, regulatory changes are expected in 2014, according to Castillo.
Despite constraints in the terrestrial network’s capacity, Panama is well furnished with submarine cables, with five at the end of 2013, and work on a sixth was at an advanced stage. Meanwhile, a consortium including CWP’s holding company Cable & Wireless Communications (CWC), Aruba’s Setar, Telefonica’s Global Solutions and Telconet from Ecuador have contracted Alcatel-Lucent to install a 6000-km submarine cable linking Jacksonville, Florida to Manta, Ecuador, which will be named the Pacific Caribbean Cable System. Besides the British Virgin Islands, Colombia, Puerto Rico, Aruba and Curaçao, the 80-terabit per second submarine cable will land in María Chiquita and Balboa in Panama. At the time of writing, work was under way and slated to be ready before year-end 2014.
The regulatory framework has a reputation for being fair and transparent. Introduction of amendments and regulations generally occur in consultation with the private sector, which allows for the proper anticipation and transition of services, as was the case with the issuance of mobile licences in 2008. Nevertheless, some proposals for regulatory amendments have arisen from the side of the operators.
One such concern is upgrading regulations to existing technologies. Most of the framework has been in place since 1996 and is therefore no longer in line with current requirements regarding demand and technological trends. An example of this is convergence, such as triple play, for which the current rules and regulations do not provide. The sector’s fiscal regime is another point of contention. Despite its liberalisation in 2003, the taxes on telecoms users and providers have increased significantly. As such, consumer taxes applicable to the sector rose from 5% to 12% in the 2010 fiscal reform, and another 0.5% was applied in April 2012. A third issue concerns the long-term vision of the government, in particular with reference to broadband and integral ICT development.
Other countries in the region, such as Colombia, have taken a proactive approach regarding the sector’s medium- to long-term development with adequate incentives in place for foreign and domestic investment in strategic niches such as knowledge process outsourcing and software development. While the Panamanian government has taken strides to promote social inclusion through ICT development, operators argue it lacks a strategy to optimise the country’s geographic advantages and face up to emerging regional competitors.
Over the past few years a high number of multinational firms have flocked to Panama’s shores, encouraged by the investment bubble in the years before the 2008-09 crisis, as well as Panama’s tax-free terms for regional investors introduced in 2007. As a result, more than 60 corporations, including technology conglomerates such as Dell, Samsung and 3M, have set up in the country. This has had a knock-on effect on the quality of IT services, which have developed to levels exceeding other Central American countries.
While the rise in government demand for IT solutions has had an impact, up to 80% of demand comes from the highly diversified services sector including finance, telecoms and logistics. As a result, international certifications such as ISO and Sarbanes-Oxley have become the norm, obliging local companies to comply.
Moreover, the regional orientation of many companies has turned Panama into a test market for new products and services, including those related to IT and communications. Data security is one such example. “Where regional peers such as El Salvador and Guatemala are still on co-locations, Panama has moved on to adaptation to individual companies mindful of the value of securing their data,” Romy Aued, the regional marketing manager of Tecnasa, a Panamanian provider of ICT solutions, told OBG. ”For Panama’s IT companies this meant adapting or going under.“ Today there is a limited core of established Panamanian players offering internationally benchmarked competencies, as well as representing original equipment manufacturers such as Microsoft, SAP, Oracle and Sun Microsystems. The rapid deployment of new IT and telecoms infrastructure, notably in the mobile space, has also raised competitiveness among global providers with established bases in Panama, such as Ericsson and Alcatel-Lucent. These players are increasingly exposed to competition from emerging markets, notably China-based Huawei and ZTE, which are entering Panama rapidly with the support of aggressive marketing strategies and competitive pricing. Nevertheless, not everyone expects their rapid entrance to continue.
According to Aued, “The market has traditionally been US- and Europe-oriented and, while new players will have an impact on market composition, I believe incumbent infrastructure providers will continue to lead the market”. Among the advanced services experiencing increasing demand is cloud computing, both private and hybrid, which, besides proprietary storage space, is facilitating corporate and public self-services such as online banking and automated tax and utility payments. Shared and proprietary data centres are another growth area. Thanks to its geographical advantages and safe distance from earthquake- and hurricane-prone zones elsewhere in the region, Panama is increasingly becoming a destination of choice for regional data centres for IT and telecoms firms such as Cable & Wireless and Mexico-based KIO Networks.
One of the challenges facing development of the sector is a deficit in qualified personnel. Ivan de la Guardia, operations manager at D-Chain, a domestic IT firm, told OBG, “At the rate of current growth the industry will need about 25,000 IT engineers by 2015, while current output from Panamanian universities will match about a third of that”. To bridge this gap, de la Guardia suggests legal amendments to facilitate expat employment in competencies that are not sufficiently available locally and encourages knowledge transfers to Panamanian companies. Meanwhile, private sector lobby groups such as CAPATEC have been working with private and public universities in the country to ramp up the number and quality of IT-oriented degrees. The shortage of skilled workers is also noted by Miro Batista, general manager of APAC’s customer service: “Even if the BPO sector services in Panama still have a big demand, mainly from US companies, there are not sufficient skilled workers to cover it.”
More work is needed to encourage student interest; too often students prefer traditional career paths in legal, medical or business professions. “There is a significant lack of understanding of working in and with new technologies,” de la Guardia told OBG. While private sector efforts will go a long way to address the issue, the government has launched initiatives of its own. As such, the Ministry of Education is currently overseeing the distribution of 300,000 free laptops to teachers and students up until the 12th grade. Hopes are high that this will build students’ interest in new technologies and eventually result in higher IT enrolment figures.
Given the nascent stage of mobile data services, broadband internet and advanced IT solutions, Panama’s ICT sector finds itself at the start of an upward trajectory. This is emphasised by the rapid adoption of voice services in recent years, which provides evidence of citizens’ appetite for mobile communications. Provided the regulatory framework maintains the neutrality for which it is acclaimed and manages to develop in tune with new technologies, ICT players are likely to continue to invest in and experiment with globally leading solutions. This is further facilitated by a variety of submarine fibre-optic connections and foreign investment incentives, introduced in 2007, that encourage multinationals to set up their regional offices in Panama. Their demands for internationally benchmarked ICT services and solutions, as well as their own efforts to innovate and experiment, will push Panama up the global technology rankings.
The biggest risk bearing on these developments is capacity, primarily in human resources. While work is under way to ramp up the quality and quantity of ICT graduates, expatriate employment will be needed to facilitate sector growth, at least in the medium term. Meanwhile, a concerted public and private sector push will be crucial to facilitate the transfer of leading know-how to in-house personnel and the country’s youth.
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