Latin America: WiMax Set to Take Off

Author: Sergio Cruz
Publication Date: December 2005

Regional: Overview of the Status of WiMAX in Latin America

The development of Worldwide Interoperability for Microwave Access (WiMAX) has generated significant interest from telecoms firms, as demonstrated by the numerous solicitations for concessions and trials.  This new standard is significant because it brings the promise of expanding broadband access through decreased costs.  WiMAX is even more attractive for Latin America, while broadband penetration remains low. In addition, despite ITU recommendations to regulate spectrum and not technologies (such as WiMAX), some regulatory bodies are changing the rules or lacking transparency, which could hurt competition.  Nevertheless, there is plenty of pre-WiMAX activity in the region.  At the end of the day, we expect increasing competition in the fixed market will slightly increase broadband penetration and will be deeply interconnected with the developments happening on the mobile side of the game.

Broadband Penetration Still Remains Low in Latin America

Exhibits 1 and 2 show scatter plots of broadband penetration per 100 inhabitants versus nominal GDP per capita. A simple linear trend line is included for comparison but should not be considered a robust measure of the relationship between GDP and penetration rates. 

In Exhibit 1, at an aggregated level, North America and Western Europe presented the highest broadband penetration per 100 inhabitants at the end of 2004 (in actual figures). This is due to a variety of reasons. There are elements that are common, such as market liberalization, effective competition, and the presence of a separate regulator.  On the other side, broadband accounts in Latin America totaled 4.84m at YE2004.  This figure implies a penetration rate of only 0.94 percent at year-end.  Although we anticipate broadband accounts to grow substantially through the period, reaching 17m at YE2010, we are still talking about only 3 percent penetration rates, far away from the current rates of developed countries.

Exhibit 1: Global Nominal GDP per Capita versus Broadband Penetration per 100 inhabitants (actual figures, 2004)

Source: Pyramid Research.

As seen in Exhibit 2, in Latin America broadband penetration is very different across the countries.  In particular, Chile is expected to have 714,000 broadband accounts at YE2005 (i.e., a penetration rate of 4.59 percent at year-end). Meanwhile, Mexico is expected to have 1.4m broadband accounts (i.e., a penetration rate of only 1.33 percent, well below what could be expected, given its GDP per capita).  This is, among other reasons, due to the fact in the Chilean market the incumbent (Telefonica CTC) faces stronger competitors than Telmex does in Mexico.

Exhibit 2: Latin America Nominal GDP per Capita versus Broadband Penetration per 100 Inhabitants (estimated figures YE2005)

Source: Pyramid Research.

WiMAX Brings the Hope of Lower Cost…the CPE Is a Key Element in the Equation

The development of WiMAX has opened the door to significantly increase broadband penetration in the region largely due to the technology's low cost structure.  This is because WiMAX is a standard that is largely supported by the computer and telecom industries, and the standards have been designed to deliver low-cost services. 

For most of the fixed operators in Latin America, a key element in the business case is the CPE. This is because most (if not all) of the edge, core, and central office equipment is already in place.  In the CPE game, standards play a key role because they allow compatibility and interoperability (which will increase competition among vendors), and operators will not be locked into proprietary technology from one specific vendor.
Fixed Communications

At industry level, it has become clear that proprietary wireless access technologies are not the solution to the access problem.  Actually, technologies such as WLL did not succeed in the market because of technical problems and the high cost of CPE. For example, the case of ENTEL Chile showed that it was very difficult to expand broadband networks based on proprietary WLL solutions. In the end, ENTEL had to abandon its WLL original strategy and develop a dual DSL and WLL strategy, which reached an estimated figure of less than 10 percent of market share in 2004 (i.e., far away from its original expectations).  Other Latin American countries, such as Ecuador and Brazil, also deployed WLL networks, but overall the results were not as positive as expected.

Regulatory Aspects Are Different Across the Region

In our view, regulatory bodies should be autonomous, transparent, efficient, and credible in order to adequately regulate the telecom industry. However, it appears that some of these characteristics are missing in some countries, leading to strong debate around WiMAX and spectrum regulation in the industry.  For example, Anatel (Brazil) approved alterations to regulations for use of the 3.5 GHz band, which lead to auction licenses for 3.5 GHz. In Colombia, the Communications Ministry granted authorization to provide wireless broadband service to long- distance providers ETB, Orbitel, and Telecom. We do not expect regulators to change the rules of the game to create new bid opportunities nor allocate bands lacking the adequate levels of transparency.

ITU-T recommends regulating spectrum rather than specific technologies such as WiMAX.  Therefore, that should be the trend, as we have already seen in Chile and Argentina.

The band of frequency most of the countries will use in Latin America for WiMAX is the 3.5 GHz band (see Exhibit 3).

Exhibit 3: Regulatory Issues around WiMAX in Some Countries in Latin America

Source: Pyramid Research, BN Americas and Operators.

There Is Plenty of Activity in the Region…but There Is Not WiMAX-certified Equipment in the Market Yet

WiMAX has generated significant interest from telecoms firms in Latin America, as demonstrated by the numerous solicitations for concessions and trials.  Actually, most of the operators are developing trials and evaluating vendors’ technologies. For example, ENTEL Chile completed a trial with Alvarion, and is also evaluating several other vendors (see more examples in Exhibit 4).  In addition to the operators in Exhibit 4, Intel has announced that operators such as Axtel (Mexico), Telgua (Guatemala), BEC Telecom (Dominican Republic), Velocom (Argentina), and Digicel (Caribbean) will deploy networks from Alvarion, Airspan, Alcatel, and Redline Communications using Intel’s chips.

Many operators claim to be the first WiMAX operators in Latin America, despite the fact there isn’t WiMAX-certified equipment in existence yet.  Actually, certified equipment doesn’t exist yet because of a series of delays in the process of certification carried out at Cetecom Laboratories in Malaga, Spain.  It is interesting to note that the current round of tests covers only basic air protocol interoperability.  Tests related to QoS, indoor/outdoor CPE (in fixed and nomadic networks, i.e., 802.16-2004 standard) are expected to be completed during 2006. Finally, tests of 802.16e, which will allow mobility, will start in 2007.

As a consequence, it has become increasingly clear that the first WiMAX networks will start deployments during 2006, allowing for fixed and nomadic services. It is also clear that full mobility services will be in the market as early as YE2007.  In addition, it has also become clear the type of companies that will take the lead in the deployments will be CLECs (see Exhibit 4).  These companies see WiMAX as a technology that will allow them to reach more customers without making huge investments in outside plants. 

However, it is also important to realize because telecommunication is a game of volume, the evolution of WiMAX will be strongly influenced by the big players in the region, such as Telmex and Telefonica.  These companies also have mobile arms—America Movil and Movistar—and as the trend toward networks convergence increases, the strategy that these groups follow regarding W-CDMA will be also important in the evolution and future of WiMAX.  We expect that mobile WiMAX will force mobile companies to take defensive strategies, accelerating the implementation of W-CDMA networks.

Exhibit 4: Examples of Pre-WiMAX Activity in Latin America

Source: Pyramid Research.

Exhibit 5 shows some of the type of WLL services ENTEL Chile is already offering in the market, as well as pricing.  Actually, these are not WiMAX services, but WLL services. These services are interesting to see because they provide insights about where the market could move after WiMAX appears.  For example, ENTEL already offers VoIP, WiFI, security, and broadband bundled. When WiMAX takes place, we expect similar types of offers but at lower prices and higher speeds.

Exhibit 5: Example of ENTEL WLL Services Currently Offered

Source: ENTEL website www.entel.cl (November 23, 2005).

Looking Ahead

While we believe that WiMAX will increase competition in the market, we still think its impact will be reduced during its first few years of adoption.  We believe WiMAX will not replace DSL as the most adopted technology for broadband access in Latin America.

We believe WiMAX will remain an access solution and will not dramatically expand the total fixed wireless broadband market. By 2009, we project 2.2m WiMAX subscribers globally.  In 2012, WiMAX is expected to account for 84 percent of Fixed Wireless Broadband subscriber base with 9.2m users (1.7 percent of global broadband lines).

Exhibit 6: Forecast of WiMAX Subscribers Worldwide

Source: Pyramid Research.

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