Latin America: The Business Trends And Business Developments
By Julie Blondeau Samuel
In 2004, the Latin American economy began to take an upward turn as its gross domestic product (GDP) increased 5.5 percent from the previous year, reaching $1.871 billion, and inflation rates dropped to 7.7 percent. Experts expect this recovery trend to continue through 2005 with a growth of 4 percent in the regional GDP and forecasted inflation rates below 6 percent. These encouraging numbers could be a sign of better times for the satellite industry in Latin America.
With 515 million inhabitants, the satellite industry looks at Latin America as a market still having potential after its economic downturn a few years back. Brazil alone represents 35 percent of Latin America’s population, with Mexico accounting for another 20 percent. Looking at the volume of potential customers, it is understandable why the satellite industry is eager to continue developing business in the region.
Vast transmission capabilities also make satellite technology particularly efficient for point-to-multipoint applications, such as video and broadband services. According to a Frost & Sullivan research report "Commercial Geostationary Satellite Transponder Markets for Latin America" published in May 2005, video and corporate networking applications accounted for almost 75 percent of the total leased transponders in Latin America in 2004.
Loral Skynet estimates that the Fixed Satellite Services (FSS) industry currently generates roughly $600 Million dollars a year in revenues from its business within the Latin American region. The operator expects that the demand for FSS will grow about 5 percent annually until 2010 and that the Ku-band supply will progress and surpass the C-band supply by 2010, currently dominating the market at 60 percent.
Latin America Today
Executives working within the Latin American market relate its business today to being where the United States was 20 years ago, although technology has progressed at a much faster rate as the region continues to increase its demand for two-way broadband. In fact, distance learning and corporate network platforms enabled by satellite technology have been successful business ventures from Mexico to Argentina.
But such ventures have not succeeded without overcoming obstacles. Industry executives and analysts working in Latin America say the market poses challenges when it comes to supply and demand, and local regulations. In fact, companies seeking business in this region cannot assume that the strategies that proved successful in North America or Europe would be as successful in Latin America. It is a capricious market, with customer demand remaining somewhat fragmented, volatile and at times unpredictable.
Near-Term Growth: Challenges Remain
One of the factors executives may want to watch closely in Latin America is the region’s political climate, which could directly affect satellite-enabled services. Maria Velez de Berliner, president of Latin Trade Solutions, says, "We are following the policy-changing activities of previously disenfranchised groups, such as those in Bolivia and Ecuador." Monitoring political activity is particularly important when governments are involved in the regulation of rates, and when governments claim that telecommunications is a public good.
This would allow the governments to intervene and change rates previously agreed on by operators or service providers.
Another factor to watch closely is the influence of local economies on the capital-intensive satellite industry. Satellite services are not cheap and the acquisitive power of the Latin American population is very limited. "If you look at DirecTV in Latin America, the estimated cost is going to be $700 to $800 per person, in countries where the average salary/wages is $89 at most," Velez de Berliner says. "[This explains why] margins will continue to be low and problems with overcapacity may persist."
The overcapacity situation the satellite industry has been facing since the turn of this century is not over. This is particularly true for Ku-band, for which the market did not grow as fast as expected, despite the development of broadband, distance learning and other e-governance applications. According to data compiled by Aon Explorer, a French consulting company for the aviation, aerospace and telecommunications industries, the growth in total satellite capacity sold in Latin America from 1998 to 2004 was about 5 percent annually. Even so, the company estimates, in its report "Prospects for Satellite Services in the Latin America Telecom & TV Markets up to 2014", overall satellite fleet fill rates to be at 57 percent, whereas Ku-band fill rates are estimated at 38 percent, resulting in a revenue drop per leased transponder from $1.49 Million in 1998 to $1.18 Million in 2004. This oversupply situation creates a downward pressure and causes companies to keep cutting prices in order to make a sale. Likewise, the fact that government contracts tend to be low-bid, this results in the space segments that are purchased to support these contracts to be low-bid.
Most executives in the satellite industry would typically not shy away from competition, provided it is on the merits of the hardware and the services that are delivered. Rick Mortellaro, vice president of global sales at Loral Skynet, says, "The disappointing part is that, in many cases, it is reversed. It always almost comes down to a pricing issue and we don’t want to be in that position. We have actually walked away from business that was just priced too low. It is bad for the satellite industry and for the market as a whole to commoditize the satellite and drive the pricing down. You cannot justify building satellites over a region when prices are that low."
Carmen Gonzales-Sanfeliu, vice president of Latin America operations at Panamsat, adds, "When you sell a commodity–a product that many companies sell and there is no differentiator–you sell it at a commodity price. … It is important to stay away from that. … Instead of moving toward commoditizing our price, we must move toward providing a service that truly is a benefit to the customer. The customer will recognize that value."
Other difficulties in successful business ventures in Latin America include high import prices and the duties cost for bringing equipment into these countries, which is a barrier for starting new businesses. Each government has its own regulatory agencies, sets of rules and trade restrictions. For instance, the importation fees to get Ku-band equipment in Latin America are high, almost prohibitive. And it is not the sole issue when it comes to Ku-band.
For some operators, the problem was to convince local customers of the benefit of Ku-band, particularly in Brazil, where it was perceived of inferior quality because of its susceptibility to atmospheric disturbances.
Brazil was one of the early adopters of satellite technology and has a C-band mentality. Mortellaro says that although the satellite Telstar 14, carrying 41 Ku-band transponders, was launched last February, Loral had been in the planning stages since 1999 when the company started a series of meetings with regulatory bodies, and training sessions to educate the market about Ku-band.
And the strategy worked. Loral managed to get Brazil to buy into the concept of Ku-band. In 2004, Brazil leased some Ku-band capacity on Telstar 12 to be used as backup for the broadcast of the soccer championship and ended up using this capacity to broadcast the final game in high definition to movie theaters around the country.
But Brazil is not the only country to pose challenges for satellite services. One challenge for the troubled Mexican operator Satelites Mexicanos S.A. de C.V. (Satmex) was dealing with a bankruptcy battle split between two countries. With Satmex filing in Mexico a voluntary concurso mercantil, which is similar to a bankruptcy filing in the United States, the future of the company had become uncertain. Satmex filed the concurso mercantil "in order to continue its efforts to achieve an equitable financial restructuring and is hopeful that a consensual restructuring can be implemented in the near future," according to a company statement. The voluntary filing came after an ad hoc committee of U.S.- based holders of certain Satmex debt filed an involuntary Chapter 11 bankruptcy proceeding for the company at the end of May in the U.S. Bankruptcy Court for the Southern District of New York.
Satmex finally reached an agreement under certain conditions, with U.S. debt holders, to file a petition under section 304 of the U.S. Bankruptcy Code in the U.S. court.
The Keys To Success
For operators in Latin America, much like the business models succeeding in Asia, it is important to partner with customers who can offer full solutions and equipment financing. Gonzales-Sanfeliu, says, "Combining our partners’ local infrastructure, their ability to provision certain types of equipment, our space segment and our joint knowledge of the market and of the customer, gave us the formula to provide value services."
As mentioned earlier, regulatory bodies in Latin America, however, can become burdensome. This is the case in Brazil, for example, where operators cannot sell space segment to a provider that is not licensed by those regulatory bodies, which tends to limit the market and business offerings of the service provider.
It is important to understand the regulatory and legal rules in order to do business in a specific country, which can be a challenge given the number of countries and diversity of governments. Some satellite services companies even have a dedicated regulatory staff working out the complexity of the trade.
On-site staff also allows international businesses to get access to the high level decision makers in each country, which can pose its own challenges. "In Latin America, having relationships at all levels is mandatory, but maintaining relationships at the decision-maker level increases your probability of success. This is why Gilat chose to open local offices in each of our major markets in Latin America. This allows us day-to-day contact with our customers and the ability to develop strong relationships at all levels," says Mike Mazza, Gilat’s regional vice president for sales, Americas.
Finally, understanding the cycles and foreseeing the local problems is always a key in doing business within local markets, but it seems to be even more important in Latin America. Being flexible, responsive and innovative, patient and creative are what analysts cite as the keys to successful business.
Latin America in the Near Term
Analysts at Aon Explorer forecast that the satellite market will continue expanding, going from the current 501 transponders to 694 by 2014. Likewise they see a 3.2 percent compound aggregated growth revenue (CAGR) and revenues from operations expanding from an estimated $584 million in 2004 to $834 million by the end of 2014.
Within the next 10 years, Aon Explorer expects that C-band services will remain strong in the region, though declining from a current 76 percent to 66 percent by 2014. Television is expected to continue to generate nearly half of the demand for satellite transponders, while the Internet share is forecast to expand from 26 percent in 2004 to 39 percent by 2014.
In addition, industry analysts at Frost and Sullivan predict that, in the case of networking applications, the demand for satellite transponders will most likely stem from higher bandwidth requirements in videoconferencing, distance learning and telemedicine especially from large countries such as Argentina, Brazil and Mexico.
According to region analysts and industry executives, there is much revenue in Latin America ready to be invested. In particular Latin American governments have vested considerable amounts of money in the satellite industry by initiating programs to increase connectivity across villages, schools, universities and colleges through satellite- enabled broadband solutions. Such programs have been a driver of the satellite industry in recent times and are expected to increase the satellite bandwidth consumption in the region for the near term.
Velez de Berliner also sees a tendency for more mergers and acquisitions fostered by private equity funds. She considers Latin America to be an investor-friendly market but believes that private equity funds will only invest in Latin America if the satellite industry "puts its thinking cap on and comes up with the next technologies or innovations, such as the delivery of medical services."
One factor not to be overlooked is the investment influence of Carlos Slim’s Grupo Carso through Telefonos de Mexico and Brazil’s Star One, an Embratel company. Given its liquidity, Grupo Carso can very well set the trend for the direction of DFI in the telecommunications industry throughout the region for years to come, adds Velez de Berliner.
So what applications are generating revenue? Educational and social government sponsored projects, enabling cross-border connectivity. These e-governance projects include:
- E-training and e-learning projects such as eMexico, aimed to install and connect 10,000 digital community centers to provide the Mexican population with electronic services for distance learning, Internet access, government, health and commerce.
- E-voting projects, such as the one currently underway in Venezuela. Here, the government asked for the design and implementation of an e-voting system including fingerprint data to conduct a decisive political referendum. Last month, Venezuela became one of the first countries to use an e-voting system when 9 million Venezuelan citizens participated in the presidential referendum, among which 5.5 million voters used the satellite-enabled VSAT network with peak numbers of 6,300 votes per minute.
- Telemedicine services, such as the one Telespazio Brazil is using, delivering content through a satellite-enabled platform.
- Rural connectivity projects, such as Telerep’s in Peru that implemented a satellite-based network in order to provide 1.5 million people in rural communities across Peru with telephony and to some, high-speed Internet access.
Other prospective applications for governments across Latin America to consider implementing include agriculture monitoring and border patrol monitoring.
Broadcasting and Broadband
Broadcasting, along with advanced broadband applications remain strong as well. Panamsat, for which broadcasting represents 60 to 75 percent of its business in Latin America, is now looking in particular at special sporting events, such as the upcoming World Cup 2006 and the Olympic Games as very good opportunities for revenue.
Likewise, media-rich applications will also increase satellite usage for e-governance and enterprise solutions as the need for distance learning increases. Other promising applications include advertising and particularly, digital signage. "Certainly in the last six months to a year, we have seen an increasing interest in digital signage," says Nick Marzella, vice president of sales for Latin America at Hughes Networks Systems.
Finally, broadband IP services will also keep driving the market in a positive growth direction. Pegaso Banda Ancha, for example, will provide DTH platforms, local telcos and cable television operators with nationwide two-way broadband service for consumers and enterprise customers. Panamsat is supporting Pegaso Banda Ancha with a combination of satellite and terrestrial services including dedicated national Mexican coverage on its PAS-1R spacecraft as well as high speed Internet connectivity and ground support for Pegaso’s Surfbeam.
"By and large, the largest users of satellite VSATs in Latin America from an enterprise perspective are banks," says Marzella. Satellite is particularly well suited for banks for many reasons: its ubiquity of coverage, providing a uniform service across a large area and backing up the customer’s existing terrestrial infrastructure, Marzella adds.
"There are still large untapped markets, particularly in the big economies like Brazil and Mexico, where there are enterprise networks for grocery store chains, for example in Mexico, and retailers and automotive dealerships in Brazil, in addition to banks," Marzella says.
So, the Latin American market remains on the business sheets of many satellite companies. Demand remains strong; resources are expanding and revenues are materializing.
Strategic positioning within the stronger countries, designing services around customer demand and put the right amount of effort in dealing with regulatory issues seems to be the recipe for success.
Julie Blondeau Samuel is the Managing Editor of Via Satellite magazine.