Telefonica has been active in Latin America for decades – but in late 2019, it announced plans to withdraw from many of the markets in this region, divesting or spinning off its operations in a process that is ongoing. From a business standpoint, this made sense – aside from its Brazilian unit, Telefonica’s Latin American operations accounted for just a fifth of its operating profits.
We spoke to GlobalData’s Jesus Romo to learn more about how Telefonica’s continuing withdrawal from many of its Latin American markets is less an indicator of failure, and more of a reflection of the changes that have taken place in the region – and the strategies operators might need to adopt to face them.
Is Telefonica’s exit from Latin America an admission that its strategy didn’t really work out?
Well, I think that the region itself has changed a lot since Telefonica’s entry into Latin America [which] piggybacked on the privatisation wave of the 90s, the end of local monopolies. Telefonica and some other groups in Latin America expanded, building on that momentum of change in Latin America. This environment, that started to attract investments in the region, obviously changes as it matures…from privatisation goals to universal service, modernisation of services, etc. The region, being as diverse as it is, started to take a different look at how to attach those policies… because we also had government changes along the way, from one party to others, public objectives have changed.
I think that one of the reasons that [the market exit is] not entirely attributable to Telefonica is the diversity itself in the region; any telco that has operations in many Latin American countries faces a similar challenge [in] heterogeneous regulatory frameworks. The region is known for volatility, not only in economic terms, but also political terms. One thing that Telefonica has been exposed to, was to these changes of objective regulations policy that, at the end of the day, also translate into costs, or regulatory costs or different burdens on their end.
So regulatory challenges were a major factor?
I think that they tried to do their best, because they operated always as subsidiaries, and whenever you speak to people in Telefonica, they really know their markets. They often come from [them]; they really know [the] countries they are in. Brazil is the case in which the formula really translated into an important hub of not only earnings, but also utility, because they were attacking different segments - they got early into different kinds of services, wireless, fixed, B2B, etc. Telefonica Tech is also a good asset in Brazilian operations. One of the [ways] that maybe Telefonica fell short in select countries like Mexico, which is a special case – it was only a wireless operation. There was always expectation of Telefonica becoming a more integrated player; however they chose to stay on one end. I think that in El Salvador it was the same.
In some countries, they stayed in the wireless part of the business, which is understandable, because [this] has been growing in Latin America. The promise for Latin America was essentially [that] Internet access is going to come via the smartphone, or via mobile. Telefonica recognised that trend overall, but competition is also something that has come up; some groups in the region, Millicom, America Movil, this part of the world is essential to their operations. In the case of America Movil, it tried to expand into Europe and was operating in the United States as an MVNO. But recent changes in those marketplaces - more competition, movements from other competitors - guided those groups to restructure their reach and in the case of America Movil to really focus more on Latin America. Things are really changing, but one of the things that’s important is also - this is what Telefonica has said itself, the financial health of the group, with debt altogether, it became a group objective. Latin America being this group of units, or subsidiaries that really were struggling to get into the space that Brazil has, I think that they were the strategy that presented itself to Telefonica to minimise two things: to acquire a liquidity or to get cash, to lower the net debt in the first instance, and also to reduce the exposure to trends that are quite volatile in the region.
What do these trends include?
One of the things replicated in other parts of Latin America, but [that] we have seen in Mexico in a very acute way, is the spectrum fees. Spectrum payments that need to be done in cash or in some type of resource have grown or have stayed the same in the region, while the ARPUs have decreased. This is one of the key challenges that is transversal for telecom operators in Latin America, not only for Telefonica - but Telefonica, bringing this burden of being indebted, wanted to restructure.
I think that this was the sensible part that guided Telefonica to restructuring in 2018, and sell whatever assets they could on. One of the regions that they stepped out the earliest was Central America. Other assets are taking more time to get interest, or to place with different investors. I don't know if Telefonica is going to exit Latin America altogether, there are operations that have an interesting profile - maybe a reduced perimeter will be more palatable for Telefonica going forward.
Mexico has another challenge; Telefonica renounced their spectrum licences, [but] has been investing in infrastructure, so it's a lighter operation now, which maybe Telefonica is valuing as an MNO, but [possibly] as a full MVNO. These disconnections might make the complete exit of Telefonica a bit more difficult. In the case of Ecuador, for example - they are still there. We still don't have any decisive news on if there's interest, if they're going to exit that market. It's a market that is concentrated, so I know market dynamics play a part in in what these groups decide to do. But Telefonica didn't really make a crucial mistake that we can trace this exit. It's the conditions on the region and financial conditions in the operator that are guiding this strategy to seek investors or buyers of this operator.
Another thing that is ties into this - one of the things that the Hispam units have been doing is looking at efforts to share infrastructure. One of the mandates that we see on Latin America for Telefonica has been reduction first of CapEx, but also operational expenses. We have seen consistent efforts to tame that part of the operation.
You made the point about Latin America being very heterogeneous despite the common language, but the same could be said about Africa – which has a very wide variety of languages and cultures – yet there are a number of pan-Africa groups who have established themselves successfully across several markets. What are the main differences between these regions, and how has this impacted operators in Latin America?
One key difference when we speak about Africa and Latin America as a whole: Africa is really lacking in wired infrastructure. In Latin America, [for] these domestic groups, having Telefonica or AT&T getting into their markets was a wakeup call. Some of these operators purchased or inherited wireline operators; for example, [in] Mexico, Telmex acquired the voice telephony monopoly. In a lot of parts of the region, the liberalisation part was, let's sell local telephony or the state telephony, and get a group to get interested into it. I think that the local groups that were available that at that time, got the idea that there's a bigger fish coming: “We need to build an advantage; if I have a head start on fixed, I should look at ways to get into mobile.” There's obviously differences; some of these groups in the region, for example, in the case of Argentina, were strong in the audio visual sector, so they had a value added in those early days in which pay TV played a role, and Telefonica was not always in the position to provide a leading pay TV service so it had to circle around different types of value added. Overall, in a lot of countries, Telefonica tried to address the low-cost area of the markets anticipating that this part of the market will grow. They will differentiate themselves with pricing - but other groups could replicate it.
So it was a race to the bottom in terms of pricing?
About 10 years ago in Latin America, we believed, as analysts, that the ARPUs were going to stabilise and maybe grow a little bit with the region, but we have seen that ARPUs in the region are actually stabilising or decreasing at lower levels that are more comparable to maybe some countries in Africa. We at GlobalData see that the Latin American ARPU is closer to Eastern Europe, Africa and some Middle Eastern countries, but this prospect of the stabilisation of the revenue producer has really changed how telcos are getting their head around what they can do in mobility. From mass markets, they need to shift towards what they can do in the B2B space in mobility – get a head start in IoT and M2M connections, IoT connectivity for business. One of the things that Telefonica has as a key strength in their group is the B2B services: the Telefonica Tech arm [where] they are integrating the IoT services, it's a connectivity-based service with cyber security, with automation, and more of the cloud offerings.
But at the end of the day, it's the changes in Latin America. Some of them are regulatory - the landscape for this group in particular - and also the financial objectives change, because at the start of the liberalisation period, shortly after we saw that the focus was on a regional level, these new entrants have to invest, deploy a lot of CapEx, demonstrate that they are enhancing the services. The operators have had to read the cycles - for example, [they] are getting the licences for 4G, [they] need to expand in a couple of years, but then [they] need to moderate and recover the investment. But the recovery has been made, if not only because of the economic reality of ARPUs staying relatively low, but also because, in some cases in Latin America, you have to deal with municipal permits instead of federal permits to build up infrastructure. That creates costs; deploying fibre, and in the case of countries like Mexico, paying for spectrum itself, have become heavier costs in the structure of these operators.
Are B2C services such as mobile money less of a differentiating factor?
One thing that Orange is tapping now in Africa – and has been for some years - is mobile money and mobile apps as a way to transact [and] offer services. In Latin America, this hasn't really been the case, except Paraguay Tigo which has a really strong mobile money offering. We don't really see the mobile money trend translated here, but the moment that telcos are facing in Latin America specifically, is that they are pursuing their digital transformation, and they are trying to build their environments. However, the difference is that some operators in other parts of the world will select cases. For example, Korea Telecom, they started to build an ecosystem early - and players in Latin America are just getting into that conversation: What can we build? Do we build it around an app? Around a service? The mobile money train didn't really get into Latin America. But now, payments are super popular, and we see that some operators are thinking: how do I get there? Do I develop my own service? Do I develop a partnership? This is the next wave of challenges in the region.
How to digitally transform, and compete against things like Mercado Libre - marketplaces that started out as deliveries or marketplaces like eBay, and even fintechs - they are trying to develop their digital ecosystems. I think that they are now in this position. With Telefonica, [they] didn't have this way of making mobility a vehicle for value added services that were beyond entertainment or consumer related. The value added services in the region via mobility became essentially super rated social network access, and it was more like a competitive strategy. We didn't see digital banking inclusion or digitally transformation, that didn't stock up and offer a way for telcos to revamp or refresh their operations. It's not something that happened just to one player - it's a picture of the of the market itself.
