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May 18, 2009
Telefónica’s strategy of focusing on increasing the profitability of its customer base is paying off amid a challenging economic environment. For its Central American operation, the operator kept its Q1 2009 OIBDA margins above 40%, even as total revenue in US dollars declined 15% compared with Q4 2008 (11% of which is explained by a drop in ARPS) and as its mobile base shrank by 72,000 subscribers. These numbers mean that Telefónica is yielding results from a cost-cutting strategy launched in 2008 that included reductions in handset subsidies, promotion of in-net calls and a tight control of general and administrative expenses. Telefónica also took a conservative stand in investing Capex, which may have saved some depreciation expenses.
Mobile subscriptions were weak with a decline consistent with our estimate of a loss in market share to rivals Digicel and Tigo, as we described in our El Salvador country intelligence report. Telefónica posted additions in underpenetrated Nicaragua and in Panama. Movistar suffered net losses on its prepaid base in Guatemala and El Salvador, which might be due to low profitability clients switching to rivals and users disconnecting one of their multiple lines.
Nevertheless, Telefónica faces important challenges in the near term:
Total mobile traffic keeps declining (see Exhibit). According to Telefónica’s data, traffic in Q1 2009 was 1,690m minutes, down 2% from Q4 2008 and the third consecutive quarter of decline. Total traffic for Q1 2009 was even lower than total traffic for Q1 2008, even with 374,000 more subscribers. Telefónica has been promoting on-net calls to spur usage, but a steady decline in traffic means that if economic conditions worsen, minutes of use may decline at an even greater rate. I expect Telefónica to keep pushing its promotions to encourage more calls among its users, and since its competitors will do the same, the battle for traffic will heat up — not cool down.
Telefónica's total mobile traffic in Central America
 In addition to a decrease in total traffic, Movistar lags rivals Tigo and Claro in terms of a 3G network, and both rivals enjoy months of lead time in adding mobile broadband subscribers. Similarly, the lack of a 3G network stalls efforts to promote other value-added services, such as mobile Internet, mobile music and video, to compensate for a decline in its core business, voice. The users of those more advanced services are most likely postpaid subscribers and are the ones that every operator would love to add to its network because of their high ARPS. Thus, Movistar is racing against the clock in an environment where cash generation is also valuable. Telefónica already announced plans to deploy its advanced network in 2009, and I expect the company to allocate some resources there in the short term. By the same token, I hope to see a fresh strategy in terms of content. Movistar has been aggressive in the rest of Latin America in positioning its brand with mobile music and blogs, but I have not seen that leveraged yet in Central America.
Telefónica’s fixed operations are in nowhere land. For several quarters, the number of broadband access has been shrinking, and the company lacks a pay-TV offering to push bundles. Here we see a lot of competition from Claro and Amnet, and it is economically unfeasible for Telefónica to expand its fixed network without challenging its mobile expenditures. As a result, I see little chances of further growth coming from this area.
Telefónica had a good quarter and delivered excellent numbers even with headwinds. However, formidable rivals, a tough macroeconomic environment and the need to catch up with its competitors in terms of its network are immediate threats that the company will face through 2009.
— Jose Magana, Analyst
Related content:
Communications Markets in El Salvador
Country Intelligence Report published May 2009
The telecommunications market in El Salvador will grow at a CAGR of 3% over the next five years, below the Latin American average of 4%, as the mobile market reaches saturation and the fixed voice market continues its downward revenue trend. Pyramid Research expects that the lines of business that will support growth will be mobile data services, fixed broadband and pay-TV, all of which are underpenetrated segments as of 2009. This Country Intelligence Report analyzes El Salvador’s communications, media and technology industries, including key trends, regulatory pressures and the competitive landscape, making it an excellent complement to our Forecast products.
Latin America Media Forecasts, Q1 2009
Forecasts published April 2009
With telcos and mobile operators increasingly offering TV and video services, Pyramid Research’s Media Forecasts are designed to provide competitive intelligence on the pay-TV and mobile TV dynamics for 60 countries as well as regionally and globally. The Media Forecasts track demand patterns for free and paid TV services over terrestrial, satellite and mobile platforms worldwide, providing market share information at both the technology and operator levels as well as five-year adoption and revenue projections.
Latin America Fixed Communications Forecasts, Q1 2009
Forecasts published March 2009
Updated on a quarterly basis, our Fixed Communications Forecast products provide a complete picture of wireline voice and data communications in each of 19 Latin American markets. The Excel output includes five years of historical data and five years of market projections for metrics such as demographics and economic trends, penetration of broadband and narrowband lines, Internet users, business users, voice telephony lines, VoIP, PCs, IPTV and revenue. We believe our Fixed Communications Forecasts are superior because they capture granular data gathered through extensive field research and use a thorough methodology consistently applied to all markets.
Upcoming 3G/WiMAX Auctions to Trigger a Broadband Access Revolution in Latin America
Telecom Insider published April 2009
In 2009, 3G or WiMAX auctions will take place in Argentina, Brazil Chile, Mexico, Peru and Venezuela. We believe these spectrum auctions are essential stepping stones for the further development of broadband in the region and will contribute to overall growth in broadband subscription penetration. This Telecom Insider analyzes the impact of the upcoming auctions on the competitive environments and the expansion of broadband services in Latin America. The report includes case studies examining three markets in more detail: Chile, Brazil and Mexico.
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