In an increasingly interconnected world, IT is more important than ever to economic development and social connectivity. According to a survey prepared for international consultant Raúl Luciano Katz, digitalisation has generated some 41,725 additional jobs every year over the past decade in Peru, and the sector has the potential to contribute significantly more to the economy. In a country like Peru, the significant socio-economic inequalities that prevail are compounded by a stark digital divide, between higher-income urban dwellers and those on more modest incomes, and particularly those living in rural and isolated areas. To a certain extent, the advent of mobile internet technologies in recent years have begun to narrow the gap among those who can afford them. The significant investment already under way in developing the National Fibre Optical Backbone Network (Red Dorsal Nacional de Fibra Optica, RDNFO) should succeed in narrowing this gap further.
Performance
According to the National Institute of Statistics (Instituto Nacional de Estadística e Informática, INEI), the ICT sector of “other information services” experienced far weaker performance than its telecommunications counterpart in 2016. In fact, other information services expanded in volume terms by only 2.3% – as compared to the 9.6% growth experienced by telecoms – over the full year, marked by a sharp deceleration in quarterly performance from 5.8% growth in the second quarter to 1.9% growth in the third quarter, before contracting by 1.8% in the fourth quarter. INEI attributed this contraction to a slowdown in production activities, distribution and display of movies as well as software programming.
Evidence suggests that this weak performance carried over into 2017, with the other information services segment contracting by 4.3% in the month of February alone, with falls across all four of its sub-segments: TV and radio programming (-6.2%), editing (-4.9%), software programming (-2.7%), and the production and display of movies and TV programmes (-0.9%). According to Dominio Consultores, a market intelligence consultancy, Peru’s IT sector contracted by 3.1% to $3.89bn in 2016 from $4.02bn in 2015, which was enough to see its share of GDP decline moderately from 2.1% to 2% over the same period. In 2015, 22.9%, or $893m, of IT sales were accounted for by the household sector, 13.1% ($510m) by the government, 18.8% ($732m) by large corporates, 19.6% ($763m) by big enterprises, 17.1% ($664m) by medium-sized enterprises and 8.5% ($331m) by small firms.
Investment
In an effort to bridge its digital divide, Peru has been stepping up investment in ICT. According to the IMF, ICT investment reached 2.57% of GDP in 2015, ahead of the Latin American average of 2.06% and above countries such as Argentina and Mexico. In fact, Peru trailed only Colombia, where ICT investment reached 2.66% of GDP. A big driver of this investment has been the purchase of smartphones, which accounted for 39% of the total. In contrast, Peru’s investment in corporate hardware and internet-of-things projects is behind continental averages. “IT investment in Peru is not as mature as other countries in the region, and investment in hardware still has a big weight compared to software and services,” Rafael Steinhauser, president of Qualcomm Latin America, told local media in December 2016. “Additionally, investment by the corporate sector is less than that of consumers, which is different to what we see in countries like Chile and Colombia.”
Low Penetration
While the number of installed fixed internet lines continues to grow and has more than doubled since 2010, the penetration levels are still very low. With just 2.1m fixed lines installed at end-2016, this equates to less than 10% penetration, and pales in comparison to the 17.9m mobile internet devices in the country at the time. In many respects, the failure of fixed-line internet penetration to make rapid progress mirrors that of fixed-line telephony, to which number it appears to be converging, because it faces many of the same challenges: notably the installation of fixed-line infrastructure in remote Andean highlands and Amazonian lowlands, where low population densities provide weak economic incentives for investment. Even where fixed-line internet connections are available, the majority tend to be provided using DSL technologies delivered through fixed telephone lines. According to OSIPTEL these accounted for 1.26m of 2.12m fixed internet connections in the country at the end of 2016. With the implementation of ambitious plans to deliver the RDNFO across the majority of Peruvian territory by early in the next decade, this infrastructural constraint is likely to become less binding, facilitating significant further growth in fixed and mobile broadband connectivity.
Market Structure
Like the mobile telephony market of several years ago, the fixed-line internet market is still dominated by the same two, long-established incumbents. As of the end of 2016 Spain’s Telefónica had a 76.9% share of the market while Mexico’s América Móvil held 20.4%. A multitude of much smaller providers account for the remaining 2.7% of the market. This market structure has remained relatively stable, although América Móvil has managed to double its market share since the end of 2012.
Hardware Sales
Although sales of hardware have predominated in Peru in the past few years, sales have been relatively weak in more recent times as broader weaknesses in the economy have begun to bite.
For example, Javier Díaz, general manager at iShop Peru, pointed to the knock-on impact of the slowdown in the country’s mining sector. “Lots of jobs have been lost, and mining royalties are much lower than they have been in previous years. This means there is much less liquidity in the market, resulting in lower consumption and investment, and therefore lower sales in durable goods,” Díaz told OBG.
According to figures from Dominio Consultores, hardware still accounts for more than two-thirds of IT investment in Peru, but its share has been falling steadily, from 72.1% in 2015 to 69.5% in 2016, with a further decline to 67.1% projected for 2017. Between 2015 and 2016 sales of hardware devices – making up around two-thirds of IT investment in Peru – was the only segment to experience a decline, falling by 7.9%, but this was enough to see IT investment as a whole contract by 3.1%. At 38.4% of hardware sales, the household sector is the biggest single buyer group, while the government accounted for only 8.5% of sales in 2016. The remainder is made up of private companies, split between corporates (12.9%), large firms (13.5%), medium-sized enterprises (15.4%) and small companies (11.3%).
Having contracted by 8.4% in 2016 to 555,272, the number of desktops sold is projected to increase moderately to 578,503 in 2017. Having experienced an even steeper 15.4% drop in 2016, the recovery in the number of laptops sold, to 654,337 in 2017, is projected to be even more modest. On these figures, unit sales will remain below 2015 levels until 2018 at the earliest. The decline in sales of tablets has been even more significant and looks set to continue; unit sales declined by 25.6% in 2016, while a further decline to 512,349 units is anticipated for 2017.
Software
Data from Dominio Consultores shows that services’ share in Peru’s IT sector investment has grown steadily, expanding from 21.9% in 2015 to 24.1% in 2016, with a further increase to 26.3% projected for 2017. The share of software increased marginally over the same period, from 6% to 6.7%, but remains relatively small. Between 2015 and 2016, all software segments experienced growth, in contrast to the hardware segment: data-centre systems increased by 18.5%, but remains the smallest segment. Enterprise software advanced 4.3%, while IT and communication services grew by 6.8% and 6.6%, respectively.
Speaking to OBG, and citing the Business Software Alliance, Guillermo Guzmán-Barrón, former general manager at Microsoft Peru, identified weak intellectual property rights (IPR) as a major impediment to future growth in Peru’s software segment. “Peru ranks as one of the Latin American countries with the most piracy challenges,” he said. “Regulation is inadequate, and it doesn’t help that there is a high level of informality both in the IT sector and across the country more generally. I would even say that Peru still lacks an IPR culture”.
In The Cloud
An important trend in recent years in Peru has been the growth in cloud computing, even if the segment remains underdeveloped. Fernando Grados, director at Dominio Consultores, told local media in November 2016 that 44.8% of medium and large enterprises in Peru – those with sales of at least $10m – already use cloud computing services and invested some $20m in these technologies in 2016. He expected this investment to increase by 30% to more than $25m in 2017. A further $25m is also being invested in hosting services. Grados identified Microsoft as the market leader in Peru, with a 20.7% share, followed by Amazon (17.4%), Google (12.4%), Telefónica (7.8%) and IBM (7%).
“We expect to see continued strong growth in the ICT sector, with cloud computing an area with particular potential,” Luisa Márquez, managing director of Oracle Peru, told OBG. “We are seeing a lot of corporate VPs – in sales and human resources, for example – leading demand for cloud services. By 2025, we expect the penetration of cloud computing to have reached 80%. To reach that level, however, continued efforts to improve the network are essential.”
These sentiments were echoed by Guzmán-Barrón, who sounded a note of optimism for growth in the IT sector once the right conditions are in place. “The internet of things will come to Peru once big data, cloud computing and mobile data are at a more advanced stage of development.”
However, he identified two challenges to be overcome in making Peruvians feel more comfortable about adopting these technologies. “The main concerns people have about cloud computing relate to privacy and security. People want to be sure that the service provider does not misuse their private information. At the same time, they want to be sure that the information is secure and that nothing happens to it accidentally. Currently, there is no clear legal framework governing data ownership in Peru, and this is definitely something that needs to change.”
Policy & Regulation
Launched in late 2011, Digital Agenda 2.0 was the government’s overarching long-term ICT strategy until 2015. The authorities have also put in place a medium-term strategy to develop the country’s backbone broadband infrastructure by 2021, although the new government of President Pedro Pablo Kuczynski has yet to publish a comprehensive successor to Digital Agenda 2.0.
Important issues on the regulatory horizon for ICT include net neutrality, censorship, biometric verification and the move to internet protocol version 6, the new internet protocol in which Peru is one of the early adopters in Latin America.
Meanwhile, the National Society of Industries and others have called for the creation of a national agency tasked with developing Peru’s ICT sector, claiming that this could help add $1.15bn to the country’s GDP. There have also long been calls by industry for restrictions on the import of software to be eased, a move that could greatly reduce their cost.
Government As A Growth Driver
Government is traditionally one of the most important buyers of ICT technology and services in the country. However, as typically happens in Peru in an election year, government spending on ICT was scaled back during 2016. Even in the face of a relatively weak economy, one would therefore expect to see a cyclical up-tick in this segment from 2017 onwards.
At the same time, outsourcing of IT activities to the private sector has been growing more rapidly in Peru than elsewhere in the region. Allied with the government’s plan to digitise all public institutions in the country, government can be expected to be an important growth driver going forward.
With a view to streamlining public tendering, Álvaro Merino, general manager at IBM, told OBG that Peru should adopt the approach of countries like Colombia, where all technology and ICT services are purchased through a central portal, enhancing competition.
Human Capital
Apart from the infrastructure deficit, the other constraint often identified as holding back Peru’s IT sector is inadequate supply of trained personnel at all levels. Pervasive labour market informality holds back the development of the skills needed in the sector. “There is no homogeneity in IT courses in the universities, so you cannot always be confident that graduates will have the requisite training. Increased homogenisation could certainly help,” Gustavo Pinedo, commercial manager at Emerson, told OBG. “The authorities should concentrate on training the technical professionals of the future. There is a need for broad, technical training rather than the brand or product specialisation that we often see in Peru. It would also be a good idea to encourage the convergence of technical and management degrees so that graduates have a broader, more relevant skill-set.”
Outlook
Guzmán-Barrón identified four trends likely to impact the IT sector over the next five years. “First, smartphone penetration is likely to triple from its current level of 40-60%, thus improving mobility. Second, connectivity to the RDNFO will revolutionise access to broadband, providing coverage to about 80% of Peruvians. Third, the prevalence of e-money will increase significantly, supporting growth in the country’s banked population. Fourth, we can expect to see SMEs make much greater use of cloud computing, which should underpin their growth and competitiveness,” he told OBG. Investment in hardware and hard infrastructure can be expected to dominate in the short to medium term – until infrastructure coverage becomes near universal and hardware markets come closer to saturation – as significant scope for growth remains. Over the longer term, the gradual “hard-to-soft” transition seen in other countries can be expected, as software, services, local online and mobile data content become increasingly important.
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