A moving platform: Adding a fourth mobile operator should help to boost competition

In the past decade, Peru’s mobile sector has been dominated by two players: Telefónica under its brand Movistar and America Movil under the Claro brand. Healthy competition exists between the two, while Nextel, which was recently acquired by Chile’s ENTEL in a 100% share transfer from US firm NII Holdings for $410.6m, occupies a small but lucrative corporate niche. The Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL), the market regulator, has sought to increase competition by adding a fourth operator in an effort to reduce tariffs and boost penetration in rural areas.

New Blood

The 2013 introduction of Vietnam’s Viettel could achieve this goal as the operator is well versed in low-cost markets, as demonstrated by its presence in Haiti and Cambodia. While Viettel’s strategy to enter the Peruvian market remains unknown, bringing in a low-cost competitor could yield results, particularly in a country with a price-sensitive consumer base where average revenue per user (ARPU) remains low. According to the latest regional data available from 4G Americas at the time of writing, ARPU in Latin America was $14 at the end of 2011, while ARPU figures in Peru were significantly lower, with subscribers spending on average $9 per month. ARPU in the first quarter of 2012 registered PEN23 ($8.66) for Movistar and Claro, while Nextel reported double that amount with PEN47.30 ($17.81), thanks to its higher spending corporate clientele.

It is unlikely that Viettel will target the business segment of the market. It will likely seek to attract existing subscribers from Claro and Movistar in addition to new mobile phone users. Peru’s 116.1% mobile penetration rate hides the fact that a significant portion of the population, estimated to be between 20% and 25%, does not own a mobile phone, while many urban residents have more than one account. The untapped customers are generally rural inhabitants with low per capita earnings and less disposable income, suggesting price will be an important factor in new client acquisition. Recent estimates from Telefónica indicate that mobile coverage stands at almost 80% nationally, but just under 60% in rural areas.

Building Up

However, acquiring new clients will not necessarily be the main priority for Movistar and Claro, especially given the likelihood that new clients will spend less than existing customers. The main battle could be over the expansion of non-voice services and data packages to maximise revenues from existing subscribers. Mobile broadband data packages increase ARPU as they tend to be costly. In 2011 data packages made up roughly one-quarter of all revenue in the mobile sector, a figure that is more or less in line with regional averages, according to 4G Americas. Another aspect is the transitioning of subscribers from the pre-paid system to longer-term postpaid contracts. Post-paid subscribers generally spend more and are more likely to be loyal over time, a customer trait that will be increasingly important for operators as saturation is reached. Currently, around 73.5% of mobile subscribers use the costlier pre-paid model. While some subscribers simply cannot afford the long-term commitment associated with post-paid contracts, many are simply not aware of the benefits, particularly the lower costs, of the post-paid model.

Balance

Juan Rivadeneyra Sanchez, director of regulatory framework for Claro, told OBG, “In a market like Peru, it is more prudent to have two or three very strong firms as opposed to five or six smaller ones struggling to survive.” Competition between Claro and Movistar is fairly robust and has kept tariffs in line with regional averages. Moreover, infrastructure costs are exceedingly high, making it difficult for smaller operators to extend services to rural areas. The introduction of Viettel will likely intensify competition and help facilitate rural expansion. The introduction of a fifth operator in the short to medium term is now being pondered by OSIPTEL, a move that would assuredly substantially alter today’s competitive landscape.