Colombia: Orbitel Enters a New Space 

Author: Elizabeth Arias
Publication Date: July 2006

In 2006, long-distance operator Orbitel became the first company in Colombia to launch nomadic WiMAX commercially.  A WiMAX network for high-speed Internet access is now live in Cali, the third largest city in Colombia, enabling users to connect to the Internet within the network’s coverage area. Orbitel is working with hardware manufacturer Siemens to deploy the technology throughout the country, with US$10m plans to expand into 12 more cities by 2007.  This marks Siemens’s first WiMAX foray in Latin America and represents an opportunity for regional rollouts.  For the launch, Siemens utilized antennas and modems compliant with the IEEE 802.16e-2005 standard (fixed and mobile WiMAX) which the company says will be interoperable with future equipment.    Orbitel announced that its goal is to have 50,000 users one year after services are fully launched and for WiMAX services to represent 10 percent of total revenues.

Into Orbit

Orbitel’s catchphrase, “Mas Vida, Mas Orbitel” or “More Life, More Orbitel” encapsulates what the company hopes to achieve through its WiMAX offering— increase its service portfolio in order to attract more consumers before the long-distance market completely opens to competition in August 2007.  Orbitel and ETB, which both paid US$150m for their long-distance licenses in 1997, will face heightened competition from operators who paid a mere US$500.  This will surely cause a frenzy of new entrants and make revenues up for grabs.  In the long run, if Orbitel provides the right combination of broadband applications, the company will not only strengthen its relationship with consumers, but will also increase barriers to entry for competitors by achieving customer loyalty and, if successful, will ultimately drive ARPS upward.

The company touts the benefits of signing up for WiMAX on its Internet portal: fast installation and data transfer, a high level of security (anti-virus and anti-spam software), and flexibility (no contract is required).  Setting up WiMAX is relatively straightforward.  Orbitel’s offering comes with four easy-to-install items: a mini-antenna, a cable for the antenna, the Customer Premise Equipment (CPE)—a compact, boxlike device—and a power cord. 

Subscribers may choose from a wide range of plans at varying price points, from US$16.15 (100Kpbs) to US$235 (2Mbps), far cheaper than the rates offered by parent company Empresas Publicas de Medellin (EPM) for DSL connectivity.  Plans vary according to the connection speed sought, with current offerings at 100, 300, 450, and 650 Kbps, as well as 1 and 2 Mbps.  Each package comes with a predetermined number of e-mail accounts.  Additionally, any customer that signs up for a package that is 300 Kbps or higher can create his/her own web portal with a predetermined storage capacity.

WiMAX makes the launch of complimentary services such as voice telephony (e.g., VoIP) and accelerated data transfer (e.g., video streaming) possible.  Orbitel just began packaging its new WiMAX service with VoIP services.  For an affordable fixed rate, customers may make telephone calls over their broadband connection for unlimited minutes with an additional device dubbed the “Voipiador.”  Unlimited minutes are only applicable if making a call to another customer with a Voipiador.  Without the device, customers will pay reduced tariffs depending on the destination of their calls. 

Bundling software applications with these offers presents significant opportunities for operators and software providers alike.  In a country where broadband access remains low, building partnerships will become an important means for building customer awareness and a strong reputation. 

Exhibit 3: WiMAX Packages Offered by Orbitel (as of July 2006)

Source: Pyramid Research.

Wi-Colombia

The business case for WiMAX in Colombia is plausible, as broadband penetration in the country remains quite low relative to the region as a whole.  By YE2006, broadband penetration will reach 1.4 percent vs. a regional average of 2.5 percent and nominal GDP per capita continues to rise.

Exhibit 4: Internet Penetration in Colombia vs. Region

Source: Pyramid Research

Operators ETB, EPM, and Colombia Telecom will ensure increased competition in broadband, namely DSL, having made its advancement a top priority for 2006–2007.  Telefonica announced investment plans of US$300m over the next three years for the expansion of broadband services alone.  Although DSL will surpass cable modem this year as the dominant broadband technology, its lack of development and the fact that operators have spotty coverage in the country leaves the broadband space vulnerable to alternate technologies, such as WiMAX. 

The regulatory environment has also greatly facilitated the launch of WiMAX in Colombia.  The Ministry of Communications of Colombia expedited market entry by offering three inexpensive national licenses for 3.5Ghz spectrum in 2005.  These licenses, offered only to long-distance operators and purchased by Colombia Telecom, ETB, and Orbitel, are valid for ten years and grant each company 42 MHz of bandwidth for a yearly fee of only US$1.8mn.  In mid-August, the Ministry will auction off two additional blocks of spectrum (28 Mhz. each) in Colombia’s 32 departments.  This means that in the medium term, ETB and Colombia Telecom (now owned by Telefonica) will utilize this spectrum to launch nationwide WiMAX services of their own, in addition to two smaller, regional players.  Although ETB and Colombia Telecom will not benefit from a first-mover advantage, their responses will surely be calculated and aggressive.         

A United Front

EPM’s vision is to create a national unified powerhouse, rather than be a regional presence.  Orbitel’s WiMAX launch coincided with the purchase of the company by EPM.  EPM, which already owned half of the company, purchased Orbitel in its entirety for US$85m in June.  In local telephony, EPM is Colombia’s third largest player, offering services primarily to customers in its home base, Medellin, as well as 17 municipalities in the Antioquia region and cities such as Bogota, Cali, and Manizales.  By YE2005, EPM claimed 140,000 broadband Internet users and 208,000 cable TV customers, making it the second largest Pay TV provider in Colombia.

Things are moving swiftly for EPM.  In early July, the company’s telecommunications arm was spun off from the other functions the public utility is involved with (power generation, transmission, distribution, and wastewater treatment) in order to accommodate for faster growth.  This new arm launched the brand “Une,” or “Unite,” to integrate the company’s offerings commercially.  This comes one year after ETB consolidated its brand.  Telefonica will also surely consolidate Telecom’s telesociedades, as well as aggressively bundle its own services in the short term.  EPM correctly identified the threat Telefonica’s market entry poses and responded in kind by widening its service portfolio to emphasize bundling and secure its position.  The company has even spoken of not ruling out quadruple or even quintuple play.  This is certainly a turning point in the company’s strategy. 

Orbitel, EPM Bogota, Edatel, Emtelsa Telefonica de Pereira, Emtelco, and Colombia Mobil’s Ola (currently on the auction block) comprise EPM Telecomunicaciones.  The company needs to solve the various intricacies that come with these changes.  For example, Orbitel and EPM Bogota now compete alongside one another in Colombia’s largest city, Bogota.   Today, EPM offers fixed and mobile telephony, national and international long-distance, data transmission services, call center outsourcing, Pay TV, and several flavors of Internet access (e.g., DSL, cable modem, and now WiMAX).

EPM will need to ensure that it maximizes its revenues in the broadband market and sorts out its various value propositions for DSL, cable modem, and WiMAX.  If all three are offered, cannibalization is inevitable, although not necessarily a bad thing if handled correctly.  The major challenge for EPM will be managing these diverse functions, especially if new, more agile competitors enter the market.   

There are several issues which could impede the popularization of WiMAX in Colombia.  One concern is that the capabilities of the technology will not live up to expectations.  For example, Pyramid Research found that theoretically, under ideal circumstances, WiMAX base stations support 32–135 Mbps.  This reduces to approximately 40 Mbps for cell radii of 3–10 km and decreases further if users per base station increase.  If service quality issues (e.g., interference) become problematic and switching costs for customers are low (e.g., no contract, no penalty, etc.), WiMAX providers can expect low customer loyalty.    For WiMAX to deliver cost savings, Orbitel needs to deploy its network widely.  Additionally, Pyramid Research estimates that the cost of Customer Premise Equipment (CPE) will remain high in the short term, above US$300.  This expenditure will decline considerably when it is embedded in equipment subsidized by customers, but this will take time.  Orbitel must not only ensure that pricing does not become prohibitively expensive for the Colombian consumer, but also, that the prices and packages offered remain in line with offerings made by DSL and cable providers.  The current WiMAX offerings are competitive with DSL and cable offerings,  The question is whether these prices are sustainable in the long run.      

Viewed independently, WiMAX will deliver significant cost savings to EPM if quality levels remain stable and pricing remains attractive to consumers over time.  Prior to deployment completion, EPM will need to further develop and bundle WiMAX applications (for example, by allowing applications to be more flexible in order to increase customer loyalty).  Since EPM and ETB will compete against multinational Telefonica, operators will need to leverage their extensive local and regional knowledge to effectively target profitable segments of the population. 

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