The telecommunications, media and digital (TMD) industry has a proven history of strong growth and attractive returns in Colombia and Latin America. In fact, the telecom sector in general has proven to be one of the most attractive sectors for investors in the last three decades.
This is corroborated by data from the IFC/World Bank, which shows that investments realized by the IFC in the telecom sector over a 30 year period up to 2009 generated the highest returns within its portfolio, outpacing that of other sectors including healthcare, consumer, energy and other utilities.
Whilst the story going forward will be more nuanced, the ongoing growth of the TMD industry in Latam and specifically in Colombia should allow investors, wisely choosing the right assets in the right locations, to generate attractive returns over the medium-to-long term:
- The economic growth in Latam is expected to gain momentum in the coming years after a further slowdown of the growth in 2013. IMF projects a real GDP growth for Latam and the Caribbean from 2.6% in 2013 to 3.3% in 2015 versus the expected growth of 3% for the US or 1.4% for the Euro area in 2015. Colombia is a true mirror reflection of the regional trends, with the projected GDP growth from 4.3% in 2013 to 4.5% in 2014 and 2015.
- Mobile and particularly data usage are driven by youth. According to Nielsen, 84% of Chinese youth use their phone beyond text and voice compared to 47% of adults, and 83% of American youth use advance data features compared to 32% of the adult population. Meanwhile, the UN predicts that Colombian population is expected to add close to 5m people between 2013 and 2020. The latter will remain relatively young, with an average age of 30.
- Mobile and data consumption is becoming one of the first discretionary consumables (beyond basic food and shelter) of the expanding middle classes. According to Angus Maddison at the University of Groningen in the Netherlands and Homi Kharas at the Brookings Institution in Washington, DC, the continued expansion of the middle class in emerging markets will result in sustained consumption growth as an increasing proportion of the population rises above subsistence levels and begins to enjoy discretionary disposable income. This income will increasingly be spent on products and services offered by telecom operators and other players in the TMD ecosystem. According to the World Bank, in the last 15 years Colombian middle class has grown significantly and will continue to do so as over 50% of the Colombians have improved their economic status.
Old game’s rules vs new game’s landscape
In the old game, telecom operators were able to take a simple yet highly effective approach to entering markets by adopting a ‘build-it-and-they-will-come’ strategy. Mobile operators selected markets with lots of latent demand for basic communication services, limited infrastructure, low penetration, what in hindsight may look like the under-pricing of licenses by regulatory authorities and limited competition. Mobile operators that used this approach typically generated strong returns on the strength of overall market growth for voice services. According to the GSMA, Latin America now accounts for 10% of the global mobile market in terms of revenues (USD 116 billion in 2013), and the 9% year-on-year growth rate in 2012 made it the second fastest growing region globally.
A new game with new rules is now emerging in the industry. Subscriber growth is slowing as penetration reaches maturity levels. According to GSMA, penetration in Latin America leapt from 51% in 2004 to 126% in 2014 (with Colombia already reaching over 110% penetration). Regulators have opened up markets aggressively, with multiple competitors jockeying for critical mass. An industry that was used to reporting double-digit revenue growth every year is now reporting single-digit top-line growth, with margins remaining constant at best. That said, Latam market operators may well be better placed relative to their developed market peers, the largest of whose returns on invested capital have now fallen to single digits. Telecom players in Colombia are evolving and will continue to develop new strategies to succeed in the market to maximize the opportunities generated by the current industry trends:
- Latest regulatory moves in Colombia are creating a business scenario where more competition and better quality of service are encouraged and the appeal for potential foreign investment is increased. For example, new licenses have been provided in 2013 (AWS and 2.5GHz) and an expected auction for 700MHz will come in the near future. Additionally, the regulatory entity has driven a more competitive environment by enforcing operators to provide “number portability” and to end with the “minimum stay period” clauses. The increased focus on the quality of services has been evident in actions such as ensuring that 4G operators provide the required 3G quality before allowing them to provide 4G services, including aggressive minimum coverage clauses for 3G and 4G networks, ensuring new and more demanding methodologies to measure network quality linked to higher penalties.
- Data connectivity and television are becoming the main growth drivers leveraged by a significant increase in penetrations of mobile data, fixed broadband and television. According to Pyramid Research and Wireless Intelligence data, the telecommunications market in Colombia is expected to grow from USD 8.2 billion in 2012 to USD 11.1 billion in 2022 (CAGR of 3%). While voice revenues will decrease by more than 20% in the period between 2012 and 2022, the main growth will be evident in mobile data (growth of 15%), fixed data (growth of 9%) and Television (growth of 7%). However, due mainly to the higher retail cost of smartphones and costly data, the current mobile data penetration in Colombia is below other comparable emerging markets in regions such as Asia Pacific (Philippines, Malaysia or Singapore), which creates a huge growth potential for mobile data adoption in the coming years.
- Colombia shows a strong potential driven by its high mobile penetration and attractive demographics (young urban population and growth of middle class). The new operating models are arising in the forms of full mobile virtual network operators (MVNOs) including several local players such as Uff!, Exito and UNE and international players such as Virgin (which already has over 1.2m subscribers) in Colombia. By the end of 2014 it is expected that these different MVNOs will surpass 2m lines, which will represent almost 4% of the total Colombian market. We expect that this market share of MVNOs in Colombia will double in the next 3 years with the entry of new international players and the increase of competitiveness of the existing ones.
- According to Pyramid Research and Yankee Group, in the last three years, the B2B Latam telecom market has grown over 10% year on year. This growth was mainly due to the ICT services, which grew at a compound rate of 37% while traditional services grew at a compound rate of 7%. In 2012, the ICT business represented 6% of the total B2B revenues, yet, the figure is expected to reach 16% by 2016. This growth will come mainly from cloud services and M2M communications. According to IDC, ICT services in Colombia have doubled since 2005 and it is expected that the continuous growth will be driven by both IT and Telecom services.
- The increasing difficulty to sustain copper-based businesses due to the technology disadvantages (increasing speed gap versus cable and LTE, higher cost to serve that cannot be passed on to the customer, value proposition disadvantage due to insufficient speed for key applications, lower service stabilities worsened by long local loops) and regulatory challenges in most countries are creating pressure over the economics of copper networks and calling for a radical transformation. This is supported by the Pyramid Research report “FTTx in Latin America”, which reveals that a combination of supply-push and demand-pull will boost the embryonic fiber broadband market in Latin America from 2.2 million accounts in 2013 to 11.8 million accounts in 2018. According to Dataxis, the number of fiber lines in Colombia will grow from 42 thousand in 2013 to 610 thousand in 2018.
- While operating income before depreciation and amortization (OIBDA) margins continues to be under pressure, capital expenditure in the telecom sector remains intense due to heavy investments on expansion and capacity enhancements of 3G networks, LTE roll-outs, fiber deployments, HDTV investments, etc. (17.8% CAPEX/Revenues in 2013 versus 15% CAPEX/revenues in 2010). This situation suggests that an increase of infrastructure sharing and business consolidation is expected to be seen in the coming years. In Colombia, the infrastructure sharing business has seen a significant relevance in the past years, in fact, in addition to the latest infrastructure sharing agreements achieved by the different operators for 3G and 4G networks, the tower management business has increased its relevance too (as per TowerXchange research, over 3,500 towers are currently managed by tower companies in Colombia).
Specific pockets of growth
Significant pockets of growth and associated investment opportunities remain in the industry and can be found across the value chain and across most geographies in Latam. Some examples include:
Opportunities in infrastructure
Telecommunications infrastructure continues to attract significant capital (expected average of 18% CAPEX/Revenues in 2014 for major Latam players). Businesses focused on improving telecom operators ROI represent an attractive investment opportunity in Colombia (OPEX and CAPEX efficiency solutions such as selling of towers, access to new customers through MVNOs, leverage on available real-time “big” data to reduce churn, improve cost efficiency through Self Organizing Networks, increase network sharing, etc.).
Opportunities around IT and telecom products
New emerging segments that are showing strong demand for a broad range of new IT and telecom-related products and services benefiting from better data connectivity. For example, with the rapid growth of emerging market economies the ICT needs and demands from corporate and SME customers are expanding while also becoming more complex. Comparing a sample of operators from across Latam with a sample of European operators reveals Latam (not an exception in Colombia) operators generate less than a tenth of their revenues from the business segment versus over a quarter in Europe, showing the magnitude of the opportunity that exists.
Opportunity for digital services and mediation
Telecom players are using their infrastructure and data assets to become enablers for a broad range of products and services that traditionally belong to other industries. We are seeing telecom players directly launching products such as mobile money that disrupt traditional industries and offer new services to previously unserved populations. Examples in Colombia include Tigo with Tigo Music or America Movil with the Transfer application. Telecom players are using their access to valuable subscriber data to provide a so-called “mediation layer”, serving as enablers for digital players to offer enhanced and innovative services to end customers through the operators. One example is micro-financial services via mobile operators leveraging the data and customer relationships of the operator partners. Additionally, the Ministry of Technology and Communications in Colombia is investing a significant effort to build an ecosystem around the development of digital applications that could better serve the needs of the Colombians.
These strong fundamentals with the identified opportunities in specific pockets of growth in Colombia should allow experienced investors to generate attractive returns by investing in the TMD sector. However, investors should have a profound understanding of the trends shaping the industry in the region and remember that opportunities and risks must be assessed on a deal-by-deal basis.
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