Competition is heating up with new players, better infrastructure and stronger regulation

As the sector becomes more competitive, Peru’s telecommunications environment is being shaken-up by the emergence of new players and better quality of service, as well as by large-scale investments. Over recent years the sector has been galvanised through investment by telecommunications operators aiming to expand coverage. Past efforts are now being compounded by a major government push to establish a fibre-optic network across the country, which is expected to begin deployment in late 2014. New regulations imposed by the Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL), the sector’s watchdog, are putting pressure on operators to provide better service. Meanwhile, a fourth mobile operator is entering the fray and the legal framework is being cleared up to allow for mobile virtual network operators (MVNOs).

According to OSIPTEL, sales for the telecommunications sector reached $5.5bn in 2013. The market is still largely dominated by the leading operator, Telefónica, with a less relevant role played by the second player, América Móvil. Stronger regulation aimed at opening the market to other competitors is set to lower the barriers of entry for smaller players and increase their participation in the different market segments.

Market Structure

The road to a privatised telecommunications sector started in the 1990s, with two major steps. The first was the creation of OSIPTEL to regulate the market. Operating under the supervision of the Presidency of the Council of Ministers, it became a legal entity in 1991, but started work in 1993. OSIPTEL remains in charge of monitoring service quality and coverage, as well as the management of legal instruments such as fines and other sanctions. The second major step came in 1994 with the sale of the two state telecommunications companies, Compañia Peruana de Teléfonos and Empresa Nacional de Telecomunicaciones (ENTEL) to Spanish operator Telefó nica. Other competitors have since joined the market.

Focusing on business customers, Nextel entered the Peruvian market in 1998, competing in telephony and internet services. América Móvil added additional competition when it started its operations in the country, with its Claro brand in 2005, and has since been challenging Telefónica’s market share in mobile and fixed communications, as well as internet access.

In 2013 Chile’s Entel acquired Nextel for $400m after it had lost the battle for the fourth mobile licence. In October 2014 the company announced that the Nextel brand will disappear from the Peruvian market, becoming Entel Perú. The company will also change its strategy, aiming for the whole market and not just the business niche where Nextel had been focusing. Entel Perú plans to invest $1.2bn between 2015 and 2018 in an effort to expand its coverage. The entrance of fourth mobile operator, Viettel, in 2014 is sure to boost competition, especially in the pre-paid segment of the market, given the Vietnamese operator’s experience in the low-cost segment of other markets. Currently, the Peruvian market is divided between 90% pre-paid mobile users and 10% post-paid.

Mobile Telecommunications

Since privatisation the mobile market has experienced a solid growth pattern.

Expansion rates have especially accelerated over the past decade, with the number of mobile lines jumping from 4.1m in 2004 to 30.6m in June 2014, OSPITEL figures show. Over the same time period, penetration has increased from 14.7% to 99.4%. Of the 30.6m mobile lines operating in Peru in June 2014, a total of 17.1m belonged to Telefónica, followed by América Móvil with 12.1m and Nextel Peru with 1.4m lines.

Mid-2014 saw the entry of Viettel after several delays that led the company to begin operations just days before its final OSIPTEL-determined deadline at the end of July. The Vietnam-based operator entered the Peruvian market with two licences. The first, won in 2011 for $1.3m in cash, as well as the establishment of internet connections in more than 4000 schools, allows the operator to offer mobile services on the 1900-MHz band. In August the following year, Viettel won a second concession, allowing it to service communications in the 900-MHz band. The operator launched the initial technical operations in 2013, under the Bitel brand.

“The government needs to facilitate the access to licenses for international companies, as the competition will be beneficial for the customers, but at the same time it needs to ensure that the incoming parties will invest in infrastructure,” Orlando Parodi, general manager of satellite television provider DIRECTV, told OBG. “The arrival of new telecommunication operators will help lower prices and improve conditions for customers.” The playing field is set to become even more competitive since the initial offering of 4G services by Telefónica in early 2014. Capacity is also set to be expanded with a new band in 2015. “With the 700-MHz band, which will be auctioned next year, 4G will no longer be a privilege of the big cities,” Gonzalo Martín Ruiz Díaz, chairman of the board of directors at OSIPTEL, told OBG. A tougher dispute might also arise for certain segments of the market, especially the corporate segment, after the Peruvian congress approved a bill in 2013 to allow for MVNOs to enter the market.

Despite the high penetration of mobile telephony services, differences abound between rural and urban areas, as well as between specific regions. For example, while the region of Lima and neighbouring Callao had a penetration level of 159.2% in September 2012, according to figures by OSIPTEL, for departments such as Loreto in the north-west of the country this was 42.1%. For all its successes in reaching high service levels in cities, Peru’s geography makes it difficult for operators to effectively cover rural areas. Authorities expect that the establishment of a national fibre-optic network will go a long way in solving these discrepancies.

Fines & Service Quality

Market discrepancies in terms of service are being addressed through a more robust set of regulatory instruments. OSIPTEL has increasingly been applying pressure to both increase the level of market competition as well as ensure that operators focus on improving service quality in the areas they cover. Fines on operators have increasingly been used as a way to promote better service.

Other measures are also impacting the market. In June 2014 the regulator reduced the time it takes for users to change mobile operators, from seven days to 24 hours. Number portability was first implemented in 2011, and only 268,911 users had changed operators up to September 2014, says OSIPTEL. However, OSIPTEL has noted that the average daily number of customers that migrated between operators rose from 231 in June 2014 to 355 in July 2014 after the shorter timeframe for switching operator was implemented. This 53% increase shows that the easier process for number portability is already having a positive impact in freeing up the mobile communications market.

Other measures being considered might further affect the market in 2015. Currently under discussion within OSIPTEL is the establishment of a law that bans operators from selling phones locked to their network, which has been a typical industry practice for subsidising more expensive models for post-paid mobile users in exchange for a permanence clause. “This measure is also linked to number portability, and would help make the entrance of new operators represent a real choice for Peruvian consumers,” Ruiz told OBG. “We also hope that this change would bring better prices and more choice to consumers, through a greater number of mobile phone plans,” he added. However, some observers fear that such a measure, despite opening up the amount of consumer choice, might have a perverse effect in terms of facilitating access to both better technology and broadband internet services.

“Mobile broadband requires, at least, 3G equipment. If we consider the price of a 3G mobile phone, it is something relatively expensive in a country like Peru, so this subsidising of phones through permanence contracts has been a good way to expand access,” Carlos Huamán Tomecich, CEO of DN Consultores, a consultancy specialising in the telecommunications sector, told OBG. For Huamán Tomecich, a more efficient implementation of this measure would more likely take place after the new fibre-optic network has been installed and services become available to a larger number of Peruvians. Early evidence supporting the claim is coming from Colombia, where the regulator recently banned permanence clauses, and the subsidising of mobile phones by operators. Less than two months after the measure came into effect in July 2014, the Commission for the Regulation of Communications reported that sales of high-end mobile phone equipment in Colombia had fallen slightly, and that sales of mid-market equipment had seen a 46% rise. This points to the potential risks related to regulation in telecommunications business. In Peru’s case, regulation allowing for blocked and unblocked mobile phone sales might better serve the market at this stage.

Fixed Lines

Contrary to mobile communications, fixed telephony figures have advanced quite slowly in Peru, increasing from 2.4m in 2004 to 3.7m as of June 2014. Despite the existence of 18 different firms offering fixed telephony services, the market remains dominated by Telefónica, which has 80% market share. Operators are waiting to see if enhanced dynamism can come from the recent introduction of number portability for fixed-line customers, which took effect in 2014. Additionally, fixed telephony is expected to grow in relevance in Peru as operators improve bundling of services, including fixed telephony with mobile, internet and cable television offers.

New Fiber Optics

The new countrywide fibre-optic network project is being handled by the Telecommunications Investment Fund (Fondo de Inversión en Telecomunicaciones, FITEL), the state institution in charge of government-oriented telecommunications projects. The network is expected to bring a new wave of dynamism to the sector through better access to telecommunications services in the country, but also through the rise in the level of competition. “Today, the monthly price for a 1-Mbps connection from the biggest operator, Telefónica, is on average $150-250. This network will reduce that price to $27,” Luis Montes Bazalar, technical secretary at FITEL, told OBG.

The new fibre-optic plan was formulated and put into law in May 2013, but could only be launched in June 2014 due to the bureaucratic process involved in preparing the legal context for the project to advance. The tender to build and operate the fibre-optic network was won by a consortium made up of Mexican company TV-Azteca and Tendai, which are set to begin the construction work by December 2014. The total cost of the project is expected to reach $333m and take 24 months to complete. TV-Azteca and Tendai will also be responsible for operating the network under a 10-year concession contract. The network will extend 13,000 km and connect 80% of the country, focusing on 180 provincial capitals. More will need to be done though, to further extend telecommunications links to the more isolated parts of the country. In addition to the central fibre-optic network, Peru is developing 21 regional projects, which will extend for an additional 30,000 km of fibre optics to connect 1800 district capitals at a total investment of $1.2bn. Four of these regional projects have already been tendered (see analysis). The new fibre-optic network will mean that some telecommunications operators based in Lima will have the opportunity to expand their business outside the capital. With national transport costs expected to be reduced by a sixth or an eight of the current price, barriers of entry for operators in other parts of the country will be brought down. The national fibre-optic network will add on to an existing 9900 km of fibre optics deployed by private firms since privatisation began.

A national fibre-optic network combined with efficient regulation is bound to push the sector in the right direction. However, growth risks being slowed down by a lack of coordination between the central government and regional and municipal authorities. Despite the increasing level of traffic pressure because of 4G and data services, some municipalities are limiting the expansion of telecommunications towers, and in some cases, demanding that existing ones be taken down.

Outlook

With the sector going through one of its most interesting periods since privatisation, operators’ profitability will depend on how effectively they adapt to this changing environment. Increased competition is being pushed through stricter measures from the regulator, as new competitors enter the market.

Rising living standards combined with improved infrastructure that will be accessible through the new fibre-optic network are bound to take the sector towards more segmented offers, improved variety of products and the bundling of services. However, for Peru’s telecommunications business to further expand, the differences in accessibility to technology and services between urban and rural Peruvians will need to be addressed.