Peru's ICT sector sees continued expansion, while new entrants drive competition

As economic growth has slowed in recent years, weighed down by a combination of volatility and relatively weak demand in the primary and extractive sectors, strength in Peru’s ICT industry has been a constant bright spot. The telecommunications sector has been particularly dynamic, spurred by increased competition, investment and consumer usage. The early signs are that these trends have carried over into 2017, with growth remaining in double digits, more new players entering the market and progress continuing to be made towards rolling out next-generation fibre-optic infrastructure nationwide. At the same time, the regulatory framework continues to be strengthened, with a particular focus on boosting competition, bringing down prices and otherwise protecting the interests of Peruvian consumers. While creating space for new entrants, these market dynamics continue to put pressure on market share and profitability among the longer-established incumbents.

Recent Performance

Driven largely by growth in the telecommunications sector, Peru’s ICT industry had grown in volume terms by a multiple of 2.5 times by end-2016 compared to 2007 levels, according to the National Institute of Statistics (Instituto Nacional de Estadística e Informática, INEI). The ICT industry posted average annual growth of 8.9% over the 2012-16 period. Overall, telecoms expanded by 9.7% over the course of 2016, with momentum picking up again, to 9.7% year-on-year (y-o-y) growth in the fourth quarter towards the end of the year, having moderated from 11.9% in the second quarter to 8.2% in the third quarter.

With growth of 14.9% in the fourth quarter of 2016, the mobile telephony segment was particularly dynamic, and was spurred by reductions in tariffs, increased competition between operators and the availability of new equipment. This was mirrored, however, by a 24.3% deceleration in fixed telephony, as the trend in consumer preferences away from fixed lines towards mobiles showed no sign of abating.

Early evidence suggests that strong growth in the telecommunications sector continued in early 2017, with y-o-y growth of 11.9% recorded for the first two months of the year. Again, this performance was led by out-performance in the mobile segment, which posted 16.5% year-on-year growth. Internet services also posted strong gains of 18.4% in the first two months of 2017, maintaining the double-digit (11.3%) growth rate seen in the fourth quarter of 2016. Cable television recorded mid-single digit growth (5.5%) in the first two months of 2017, coming on the back of a 6.7% increase in the fourth quarter of 2016.

Going Mobile

By far the most important dynamic in Peru’s telecoms sector in recent years has been the switch in consumer preferences from fixed to mobile telephony, as the technology becomes more accessible and affordable. Having peaked at around 3.7m in 2013, the number of fixed lines installed has begun to decline, falling to a little over 3.1m lines by end-2016. According to telecoms research firm Buddecomm, at less than 10%, Peru has among the lowest rates of fixed-line teledensity in South America, held back historically by inaccessibility in mountainous and jungle areas. Naturally, the recent fixed-to-mobile switching trend has seen steep falls in revenues, with the fixed-line segment’s contribution to the Peruvian economy falling by 24.3% in the fourth quarter of 2017 alone.

In stark contrast, the past two decades have seen an exponential increase in the number of mobile phone lines, which had reached a new peak of just under 37m by the end of 2016. The data shows a dip in 2012, when millions of registered but unused mobile lines were taken out of commission by the sector’s regulator, the Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL). Such rationalisation efforts could also dampen overall increases in 2017, with 393,090 unregistered SIM cards having been suspended by OSIPTEL in early 2017.

While this implies a penetration rate of around 113%, according to Buddecomm, when business lines and consumers operating multiple lines are stripped out, the penetration rate could be as low as 60.7%. This suggests significant further room for the mobile segment to grow, particularly among low-income consumers.

In terms of mobile phone traffic, OSIPTEL data shows the number of mobile-to-mobile minutes surged by 24.7% – from 38.7m minutes to 48.3m minutes – in the year to end-June 2016 compared to the same period two years previously. Over that same period, as the smaller operators have become relatively more important, the share of calls being made to other networks more than doubled, from 9% to 20%.

Market Players

For the past two decades, Peru’s telecoms sector has been dominated by a small number of foreign operators. Spain’s Telefónica acquired two domestic firms, Compañía Peruana de Teléfonos and Empresa Nacional de Telecomunicaciones, following their privatisation in 1994. Telefónica’s dominant market position – operating as Movistar – has come under threat from a series of competitors: first from US-based Nextel in 1998, then América Móvil of Mexico in 2005 operating under its Claro brand. Its market share fell below 50% for the first time in mid-2016. Claro’s market share has also declined from 40% to around a third in the two years to mid-2016. This came in the wake of an aggressive attempt by Chile’s Entel to grab market share following its mid-2013 acquisition of Nextel for $400m, and underpinned by a five-year $1.2bn investment plan that saw its share of the market more than double from 4.6% in mid-2014 to 11.9% by mid-2016.

More disruptive still was the 2014 entry to the market of Vietnam headquartered Viettel, trading as Bitel, which targeted lower-income consumers in the provinces and secondary cities. From a standing start, Bitel had achieved a market share of 6.8% by mid-2016.

Mobile Virtual Network Operators

In late 2016 and early 2017 the mobile telephony segment saw the long-awaited entry of leading mobile virtual network operators (MVNOs), which will further stimulate competition. Following the publication of draft laws governing MVNOs for public consultation in October 2015, Congress gave its seal of approval to the new legislation in early 2016.

Under the new regulatory framework, incumbent mobile operators with a market share greater than 25%, i.e. Movistar and Claro, now have to allow MVNOs access to their network capacity so that they can provide mobile services. In return, MVNOs are required to obtain a licence to operate from the Ministry of Transport and Communications (Ministerio deTransportes y Comunicaciones, MTC), pay a fee to the network operator for use of their capacity, also pay a fee to the government for use of the spectrum and contribute 1% of annual revenues to the country’s Telecommunications Investment Fund (Fondo de Inversión en Telecomunicaciones, FITEL), in line with contributions made by Peru’s existing mobile operators.

Following the granting of a 20-year operating licence in late 2015, and an investment plan estimated at $30m for the first quarter of 2016 alone, Virgin Mobile made its market debut in the second half of 2016. Operating by piggy-backing on Telefónica’s Movistar network, Virgin offers pre-paid packages competitive with incumbents, featuring unlimited data usage for WhatsApp and Facebook Messenger, for example. First testing the waters in Lima, the company rolled out its offering to Arequipa in early 2017, signalling its intention to expand further to the cities of Trujillo and Cuzco later in the year if all goes to plan. Virgin has signalled its ambition to capture a 3-4% market share, having achieved a modest share of 0.06% by the end of the third quarter of 2016, several weeks after its launch.

Dolphin Telecom, meanwhile, is set to become Peru’s sixth mobile operator and second MVNO, following the announcement in early 2017 that it would enter the market once it has signed a network-sharing agreement with one of the incumbent operators.

Chilean MVNO, Móvil Falabella, as well as AT&T of the US have also expressed interest in entering the Peruvian market in the past, but have not yet taken concrete steps in this direction. Continued investment in infrastructure such as telecommunications antennae will be essential to ensure the extra network traffic implied by the entry of MVNOs, coupled with organic growth in mobile users among the four existing network operators, does not lead to congestion.

Mobile Number Portability

One of the key regulatory reforms underpinning competition in Peruvian mobile telephony has been the legal assurance of number portability, which was first approved by Congress in 2007. Essentially, this means that consumers are allowed to switch operators while maintaining the same phone number, thereby reducing the inconvenience of switching. OSIPTEL introduced the necessary implementing regulations for the change – Resolución Nº166-2013-CD/OSIPTEL – in 2013 and made the process even easier in July 2014 by reducing the waiting period for consumers from seven days to 24 hours.

These regulatory changes have spurred a dramatic change in consumer behaviour, with OSIPTEL’s data showing an exponential increase in the number of switchers. From less than 10,000 in July and August of 2014, the number of monthly switchers had reached 246,234 by December 2016, bringing the total cumulative amount to 2.8m since July 2014. This dynamic has helped the smaller, newer entrants to the market to rapidly increase their market share, and its continuance can be expected to underpin growth also among the new MVNOs. OSIPTEL’s data shows that Entel was the biggest beneficiary among switchers, with a net gain of 633,109 by August 2016, a little higher than Movistar’s net loss of 568,558 over the same period. Claro had experienced a net loss of 66,489, while Bitel had seen a small net loss of 908. The only other operator to experience a net gain was Virgin Mobile, which saw a gain of 2846 clients in its first weeks of operation.

Lower Tariffs

Increased competition in mobile telephony has seen a steady, decreasing trend in tariffs per minute from an average of around PEN0.15 ($0.044) in early 2014 to PEN0.12 ($0.036) by early 2016. This trend was in evidence across all operators, most dramatically in the case of Entel, which saw its average tariff fall from around PEN0.19 ($0.056) to PEN0.11 ($0.033). In line with Entel’s new mass-market strategy, the company has moved from the highest-priced operator to being among the lowest, slightly above the PEN0.10 ($0.029) on offer by Claro. Tariffs on offer by Telefónica, at PEN0.14 ($0.042) in the first quarter of 2016, were above the market average.

Despite the downward trend in average tariffs per minute, however, OSIPTEL data suggests that average revenue per user had held up relatively well – falling back from PEN23.50 ($6.70) in 2014 to PEN23.20 ($6.88) in 2015 – having ramped up from PEN19.80 ($5.87) in 2011. This has been attributed by OSIPTEL to more intense line average usage by consumers.

Results

The competitive dynamic has had a predictable impact on the operational and financial fortunes of the main players. Telefónica saw its number of clients fall by 323,473 during the first half of 2016, 200,913 of which resulted from number portability alone. The firm’s latest quarterly results for the first quarter of 2017 show a continuation in this trend, with total mobile customers falling 7% y-o-y, and total revenue down by 8.5% across mobile and fixed segments. Despite its declining market share, Claro managed to buck the trend on the back of strong revenues from data, recording a 5.7% increase in revenues in the first quarter of 2017. As its market share surged, Entel recorded a 29% y-o-y growth in sales at its Peruvian unit in the first quarter of 2017, although costs relating to the consolidation of its operations in the country somewhat undermined profitability.

Mobile Data

Despite benefitting from the fastest mobile internet speed (10 Mbps) in Latin America, slightly ahead of Uruguay and Chile (both 9.9 Mbps), according to the UK-based telecoms research firm OpenSignal, mobile internet usage is only beginning to take off in Peru. By late 2016 the country was already among the countries with best 4G access in Latin America, with approximately two-thirds of mobile phone users having access to a 4G network. With an average speed of 19.96 Mbps, Peru also boasted the third-fastest 4G network in the region after Ecuador (24.92 Mbps) and Mexico (21.73 Mbps).

OSIPTEL data shows that over the two years to end-2016, the share of the population accessing mobile internet services surged from 39% to 59%, from a total of 17.9m devices, the vast majority of whom do so using smartphones. OSIPTEL has projected mobile phone coverage in 100% of districts across the country by 2021, up from over 90% today, as investment in the 700-Mhz 4G LTE network pays off. An important step in this direction was the award of 4G LTE spectrum to the three largest mobile operators – Movistar, Claro and Entel – by auction, raising some $911m, in May 2016.

Mobile e-commerce is also beginning to take off. Research published by the Interactive Advertising Bureau (IAB) in late 2016 suggests 69% of mobile internet users in Peru had made a purchase from their smartphone or tablet in the previous six months, while 55% of mobile internet purchasers have made their first such purchase only in the past year. This puts Peruvians second on the list of “new adopters” in IAB’s “Mobile Commerce: A Global Perspective”, an in-depth survey of mobile users in 19 countries, slightly behind Austria (57%) but marginally ahead of Colombia (52%).

Regulatory Framework

Created in 1991, and having begun operations in 1994, OSIPTEL is the government agency responsible for overseeing and regulating telecommunications services in Peru. In a market long characterised by high concentration, OSIPTEL has proactively promoted competition in more recent years, encouraging new market entrants, facilitating consumers switching between operators and forcing incumbent network operators with a market share greater than 25% to share capacity with new MVNOs. Other recent measures of note taken by the agency include the 2015 ban on the sale of “locked” mobile phones that cannot be used on multiple networks, as well as the imposition of a ceiling on contract termination charges. The year 2016 saw a 68% surge in the number of consumer complaints handled by the agency, to a new record of 2.13m, as customers were becoming more aware of their rights.

In further evidence of an asymmetric approach, favouring newer operators over established incumbents, OSIPTEL ordered Telefónica in March 2017 to cut its social tariff by 41% to PEN0.13 ($0.04). Then in May 2017 the agency fined the operator PEN141,750 ($42,000) for failing to sufficiently codify its customer complaints procedure.

Fitel

FITEL was established in 1993 with a view to promoting universal access to telecoms services in rural, often inaccessible, areas. Operated under the auspices of the MTC, FITEL is financed by the sector’s firms, which have to contribute 1% of their annual revenues. The fund managed 53 projects and services during 2016, for example, with a notable focus on increasing broadband connectivity in rural regions. In 2015, the latest year for which data was available, FITEL received $390.9m in total funding.

Outlook

Given regulatory efforts to further enhance competition and extensive fibre-optic infrastructure investment already under way, the recent trends of strong growth in mobile telephony can be expected to continue into the medium term. There remains scope for growth, particularly among lower lower-to-medium income consumers, where mobile phone penetration remains well below 100% and where tailored offerings are still a relatively new phenomenon. The proliferation of mobile operators, including newer MVNOs, should see the market share and profitability of the traditional incumbents remain under pressure. With broadening access to 3G and 4G networks, the use of mobile data can be expected to increase significantly. This can become an important driver of revenue growth among mobile operators and give rise to opportunities for entrepreneurs to develop tailored local content.