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Latin America: Is It Safe To Get Back In The Water?

By | June 1, 2004

      Three words seem to sum up the Latin American economy: boom and bust.

      In the early 1990s, this region was a prime destination for satellite service providers. Then, economic and political chaos struck and the once hot market quickly turned into a financial funeral pyre for international investors.

      Consider the experience of Microspace Communications Corp., a U.S. provider of business television services since 1988. Responding to strong customer demand, Microspace launched business television services to Mexico in 1993. "We started with quite a few customers signing up for our Mexican offering," says Joe Amor, Microspace’s vice president and general manager. "However, within four weeks of our launching it, the Mexican government devalued the peso, destroying some of our customers’ business models in the process."

      Had the damage stopped there, Microspace would likely have weathered this storm. "Unfortunately, the Mexican government devalued the peso three times more between 1993 and 1997," Amor adds. "For us, it got to the point where it wasn’t financially viable to keep offering service into Mexico, so we stopped. Currently, the only business TV we provide into that market is paid for by U.S.-based firms."

      Even though business in Mexico may be down for Microspace, the company is not entirely giving up on Latin America. Recently, Microspace signed a new agreement with New Skies Satellites NV to broadcast video, audio and data content throughout Latin America over the NSS 806 satellite.

      Will, however, other satellite companies follow suit? Today, the 1990s are history, and although the Latin American satellite market is still tempestuous, signs of recovery are breaking the surface. But is it safe to get back into Latin America’s financial waters? Or are the sharks that devoured so many businesses a few years back just waiting to strike again?

      Things Are Looking Up

      Talk to people who do business in Latin America–a region that runs from the Rio Grande River down to Tierra del Fuego–and they will tell you that things are looking up for the satellite industry.

      "The region shows signs of strength and promise," says Maria Velez de Berliner, president of Latin Trade Solutions Inc. Based on her research, "the economic stability of Latin America, from Mexico to Argentina, rests on Brazil," Velez de Berliner says. Besides having the region’s largest economy, "Brazil is the most advanced technologically and the most underserved market. It is also the most competitive market, and margins tend to be lower in Brazil than in other countries."

      In terms of satellite prospects in Brazil, "the Commercial Reciprocity Agreement between India and Brazil holds great promise," Velez de Berliner predicts. "Under the agreement, both countries will share satellite research and technology in the mini-satellite sector, [and] India will launch Brazil’s mini-satellites…Given that agriculture is the key to the negotiation of varied free trade agreements, particularly the FTAA [Free Trade Area of the Americas], the type of industrial surveillance provided by the mini- satellites is becoming a key [tool] in competitive intelligence gathering."

      Velez de Berliner is not the only Latin American observer who is feeling bullish these days. Stephen Hester, president and COO of Aloha Networks–a developer and provider of two-way IP networking solutions over satellite–is also upbeat about Latin America. Aloha recently signed a three year, $8 million deal to supply Very Small Aperture Terminals (VSATs) earth stations to Andesat Corp. Andesat delivers IP networking services via satellite to the "pan-Andean region"–Bolivia, Colombia, Ecuador, Peru and Venezuela–and Central America.

      "Andesat is planning to deploy more than 10,000 VSATs in the pan-Andean region and connect them to the company’s teleport in Miami," says Hester. "Given its investment in us, and the forecasts we’ve been gathering, I am expecting the satellite services market to be promising in its target area. As well, the markets are improving in Mexico–where the government has made some substantial investments in satellite services for education–Costa Rica and Brazil. However, we’re not expecting significant business activity in Argentina at this time. Given the dynamics there, the market has been somewhat closed to outside investors during the past few years."

      Understanding Latin America

      The first thing to understand about Latin America is that this is a region of very different nations, each with its own histories, cultures and languages. For instance, although most people think of Spanish when they think of Latin America, the language of the regional powerhouse Brazil is Portuguese.

      Once you have grasped that each Latin American market has to be understood within its own terms, you must take into account the realities of buying power and politics. Although the early 1990s saw the beginnings of a Latin American middle class, the financial crises that followed badly hurt this same class. Today, much of Latin American society is more polarized than ever before along the lines of "haves" and "have nots." This dichotomy dynamically affects not just the buying power of potential Latin American customers–both business and consumer–but is destabilizing many of the societies they live and work in; a problem made worse in countries such as Colombia, where drug trafficking and guerrilla war "albeit curtailed, continue to affect the current peace negotiations of the Uribe government," says Velez de Berliner.

      Speaking of politics, "the regulatory agencies [here] are not as independent as they are thought to be," adds Velez de Berliner. "They respond to the political winds, which in some cases do not blow in favor of the companies. Keep tabs on the regulators and the political structure that supports them."

      Add this region’s frequent economic problems to the mix and one can see why "Latin America is not for the faint of heart," Velez de Berliner says. "Every company in the region must always have a plan B, [so] if something goes wrong, what are we doing now to mitigate the risk? Success will seek the prepared, and assuming that something might go wrong sooner rather than later is not a bad strategy."

      Juan Manuel Pinedo, Satmex’s executive vice president of sales and marketing, echoes Velez de Berliner’s sentiments, but uses more measured words. "No matter at what point in time you look at the Latin American market, you will find some countries facing economic or political problems, or both," he says. "At the same time, you will find other countries emerging from these same cycles and getting stronger. If you take this into account when entering the Latin American market, then you will be in a position to take advantage of the many opportunities that exist here."

      Selling To Latin America

      Ask Pinedo what is hot in the Latin American satellite market, and he will respond with two words: Internet Protocol (IP).

      "Whether it is business or government, users here want access to broadband IP solutions," Pinedo says. "The reason is that IP-based infrastructure is able to support a wide variety of applications, not just in terms of transmission, but also in business and government offices."

      In Velez de Berliner’s opinion, "cellular, wireless, Wi-Fi, Internet connectivity, data management and video are the key growth sectors [for satellite service providers]." The reason is, "Terrain configurations make fixed lines extremely costly," she says. "Under the best conditions, it can take up to two years to get a fixed-line phone installed; it takes hours to sign up for cellular or wireless. The region is underconnected and TV is a major source of entertainment."

      Clearly, Latin America has a need for satellite services. The question now is how to sell them successfully in this market?

      The first step is to identify business and governments that can afford satellite services, and have enough financial/political security to honor the contacts they sign. Determining this is a matter of research, attention to detail and a knack for making informed predictions.

      Step two is to decide whether your company has deep financial pockets to play in Latin America. "It takes years and money to do business in Latin America," says Aloha’s Hester. "People here want to get to know you personally before they buy. This means spending time getting to know them and spending time in-country to build a credible reputation."

      Of course, having deep pockets is not enough. Satellite executives must identify concrete sales opportunities in Latin America or risk losing the shirt off their backs. "The people who succeed here are those who have tangible prospects, not those with high-flying business plans," says Pinedo. "This is not a place where you can afford to take blind risks."

      If a realistic opportunity exists and you have the time to develop it, then the next step is to form partnerships with local firms. "Successful local partners know how to work in the market, which reduces your risk," says Pinedo. "This said, your chances are better if you already have assets in place, such as satellite earth stations, and/or other equipment capable of supporting the services you are talking about."

      Once you have formed partnerships and your sales process has begun, be prepared to wait, and work hard for success. In doing so, it is critically important not to get "over- exuberant" about your chances, says Hester. "You need to keep your expectations realistic at all times, no matter what people tell you." In addition, remember the boom-bust cycle of Latin America’s economies and the politics that can affect them. In particular, although it is important to find strong local partners who are well connected, be aware that those connections may leave you both "out in the cold" if there is a political power change in your target market.

      Should You Dive Back In?

      This is the big question. Is it time to re-enter the Latin American market in full force? The answer depends on all the factors above plus one more: an appetite for risk. If you are not comfortable taking chances, then Latin America may not be the place for aggressive business developments. But if you are willing to invest big for a chance at winning big, then this region is worth serious consideration.

      One of the main business objectives for satellite executives to consider when expanding business initiatives in Latin America is to discover whether the market conditions for satellite services and the return on investment outweigh the initial entry risks.

      As Via Satellite’s senior contributing editor, James Careless has covered all aspects of the global satellite industry for years.

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