Voice over: the data revolution--late to Latin America but coming nevertheless--promises to change how people think of their cellular phones.
Part of the reason is less room to grow. The Latin American wireless industry has consolidated during the last four years. Now the three carriers that control 80% of the market--Spain's Telefonica, Mexico's America Movil and Italy's Telecom Italia Mobile--are honing their strategies to increase penetration while they update their networks to provide more data services, all aimed at increasing average revenues per user, an industry benchmark.
The carriers are well aware that the industry is changing and that they have to adapt to a new reality--people will want to use their phones for more than simply talking. "The data world is becoming increasingly important each day," says Ivan Ciganer, a director at the department of new projects at Telefonica in Peru. "Telefonica has understood this change. Today we have to sell services; voice has become a commodity."
Although it's clear that making calls is no longer the only reason to buy a cellular phone in the region, it remains to be seen how fast Latin Americans find new uses for their personal telephones and, beyond simple adoption, how much they will be willing to pay for data services. Between 10% and 15% of mobile operators' income in Latin America will come from non-voice services by the end of 2009, while in Asia and Europe the figure is already 20%, according to Pyramid Research, a Boston consultancy. In Hong Kong, for example, some operators already report half of their income comes from data transmission.
Today, however, just 5% of their wireless carrier income is from services that are not voice-related, according to Pyramid. Of that figure, the majority--between 85% and 90%--comes from short messaging service (SMS), also known as text messaging. In the United States, income from the use of applications other than voice represent between 5% and 6% of total sales, a figure comparable to that of Latin America. The difference is average revenues, which in the United States fall between US$50 and $60 per subscriber, while in Latin America the number averages $15.
Brazilian operator Vivo, a venture of Telefonica and Portugal Telecom that has 25 million subscribers and controls 55% of the Brazilian market, estimates that in only three years these mobile applications will generate 10% of sales. Three years ago, they accounted for 2% of total sales and today they are at 5%. Vivo executives are optimistic, arguing that a 10% slice of the Brazilian population is a key segment, and one that is just as wealthy as any comparable market segments in any country.
"In 2004, five times as many applications were sold compared to the year before," says Sergio Carpenter, president of Wiz Technologies, a Brazilian wireless applications developer serving Latin American operators, whose company has registered 1 million downloads in the region. "It wouldn't be unreasonable that in the coming year, this figure grows another fivefold."
The adoption of data transmission services like SMS and multimedia messaging service (MMS)--sending photos or videos via cell phones--vary a great deal from country to country. The Latin American mobile operator that has grown the most with this technology is Venezuela's Movilnet: Its SMS service accounts for 16% of its income, according to Pyramid. Telcel, also a Venezuelan operator, reported just under 10% of its revenue from SMS.
Operators have to choose from two technological paths toward modernizing their wireless networks, either of which eventually leads to the ability to offer third-generation (3G) services--by definition data transmission at minimum speeds of 384 kilobytes per second, according to the International Telecommunications Union. So-called first generation phones were the analog cell phones most people think of, while the second generation (2G) came with the arrival of higher-frequency digital service marketed as PCS.
One way of moving to the next generation involves adopting Code Division Multiple Access technology, better known by its initials CDMA. This technology is a product of San Diego, California's Qualcomm, which makes chips for cell phones meeting CDMA standards and, as a patent holder, then charges a royalty to mobile-phone companies that use it. For Qualcomm, it's all about mass adoption and volume.
Flexible. The other option is GSM, an open-source technology belonging to no company in particular and one that pretty much dominates the world for now. Both technologies have their pros and cons. The industry generally recognizes that CDMA is a more flexible, intelligent and advanced technology because, contrary to GSM, it doesn't assign a fixed frequency for each user, allowing carriers to use spectrum in the most flexible and optimal way. But GSM has been broadly adopted by carriers worldwide, so critics argue that CDMA ends up being more expensive because it lacks economies of scale. Many carriers already have invested heavily in GSM technology, too, which obliges them to continue using it.
"There is a debate whether CDMA technology is more expensive," says Leslie Arathoon, an analyst at Pyramid. "However, if a CDMA network is installed, it requires less radio bases, so although the price might be higher the total cost of a CDMA network could be the same as GSM infrastructure."
Despite the difference of opinions over which technology is more expensive, the experts seem to agree that following the road to CDMA technology facilitates the move by carriers to 3G services. "Operators that have CDMA technology have a very easy transition to 3G," says Kevin Taylor, vice president of Latin America wireless networks at Nortel, an equipment vendor. "Whereas a GSM operator has to evolve from GPRS to EDGE." Both are GSM standards that target data transmission at speeds greater than 115 kilobytes per second.
Another problem with GSM is that big operators like America Movil, which have bet heavily on this technology, nevertheless would have to buy more spectrum from governments to provide the next generation of data services. Putting aside for the moment the costs these imply in investments in the region, these licenses have not even been put up for auction.
Luis Avelar, vice president for marketing at Vivo, says that CDMA allows a carrier to move to 3G technology without having to buy more spectrum. In addition, Avelar says, a mobile telephone company that uses GSM indeed can offer some multimedia services but its performance is not as good as with CDMA. Thanks to EVDO, a CDMA standard that allows for the transmission of data at speeds of up to 2.4 megabytes per second, Vivo now offers service at speeds similar to 3G requirements. GSM operators, on the other hand, do not have spectrum or licenses available and will have to wait to compete, he says. "We operate in an 850 MHz frequency, and with CDMA we can move to EVDO without having to buy more spectrum," he says. "A GSM operator operates in a 1900 MHz spectrum and will need to buy more spectrum and will be waiting for the Brazilian government to put up these licenses for sale."
Despite its apparent technological disadvantages, GSM today serves 1.30 billion users worldwide (it was heavily adopted in Europe) while CDMA has just 246 million, according to Pyramid. In Latin America, GSM has 48.5 million subscribers while CDMA has 41.1 million. CDMA, which is doing especially well in India and China, is growing but not as fast as GSM, the consultancy reports.
Jeff Belk, senior vice president of marketing at Qualcomm, says the competition is not between CDMA and GSM but rather between 2G and 3G. "If 3G prevails, Qualcomm wins," says Belk. "All electronic devices [video and photograph cameras, personal digital assistants, and digital music players] will become integrated into a cellular telephone."
In fact, in Asia, for example, a cell phone can do things such as read bar codes in a magazine and automatically open their Internet pages on the screen. It can also help people socialize: It can notify its owner when another subscriber is near that has similar interests. That's just the beginning for the next generation of interactive phones, which in Asia already resembles anything but a standard phone, taking on instead the shapes of video game consoles and mini television sets.
Television transmission to cell phones is the next frontier. Qualcomm's latest service, known as MediaFLO, transmits video clips--news, music videos and sports, for instance--to thousands of subscribers, downloading videos automatically when the network is less congested. Qualcomm has already met with mobile operators and television channels in Latin America, says Jeff Lorbeck, vice president and general manager for MediaFLO at the company, although no deals have been formalized.
Due to the fact that this video transmission service uses only a pair of high-powered transmitters to send signals thousands of square kilometers, it could be much more economic than installing dozens of towers needed to provide interactive telephone and data services using other standards. Data speed for this type of transmission can be as high as 11 megabytes per second, although six megabytes is the likely necessary transmission speed. "The fundamental idea is to dramatically lower the cost," says Lorbeck.
If Latin Americans end up adopting this technology, the possibilities are impressive. Qualcomm says that MediaFLO can transmit more than 40 television channels, 15 high-quality video signals at 30 frames per second and 10 audio channels. The signal would be transmitted encrypted, so only a subscriber could pick up the signal.
Only recently, Latin America's wireless subscribers outpaced fixed lines--157 million to 87.5 million, respectively. Yet the speedy adoption of data transmission among the masses of cellular users has faced some significant barriers. First, current annual growth of mobile subscribers has slowed to 6.2%, slower than in the last five years, as the market is approaching maturity, according to Pyramid.
In addition, 94% of the cell phone accounts in the region are pre-paid. While that does not mean those users cannot access applications other than voice, it does make clear that many lack the income required for next-generation data services. That has not been the case in Asia or Europe, where 3G services have been enthusiastically adopted.
On top of all that, there's the cost of new cellular handsets for next-generation services like high-speed data. Those can run up to $500 each, constituting an important barrier, at least for now. Qualcomm expects to cut costs for handsets by combining many of the different chips that go into 3G telephones--video, audio, data, voice and camera--into one chip, while working with phone manufacturers such as LG and Samsung to boost the base of CDMA users.
Qualcomm is working to take a new, integrated chip to market by 2006, one that will allow phone manufacturers worldwide to sell latest-generation phones for under $60. "They buy one chip from us, fully integrated and tested. What you'll see is single chip phones," says Herbert Vanhove, vice president of product management at Qualcomm. "We have to convince [manufacturers] that they can come to us for a modem but also for the camera chip. You don't need to go to Kodak or Epson for that."
In 2002, America Movil nevertheless installed an extensive GSM network in Mexico. The Telefonos de Mexico unit controls Telcel, the largest cell phone operator in Mexico, and operates in 10 other countries in the hemisphere, part of Mexican billionaire Carlos Slim's empire. The logic behind this investment called for spending on technology, that the market demanded, says the company.
Patricia Ramirez, head of corporate communications at America Movil, says that GSM allows for economies of scale and better synergies at the global scale for the group. "We believe that the important thing was to create a market for 3G services," says Ramirez. "It's not enough to say 'We have 3G technology' and that's it. In fact, technically, neither in Mexico nor in any other part of Latin America are there 3G networks in operation."
Apparently, the road taken by America Movil has been profitable. According to the company, Telcel's data transmission as a percentage of total revenues grew to 10% by the end of 2004 from 6% in February of that year. Ramirez says the rate of downloads of ringtones and similar applications are growing. Yet people, depending on who they are, are still evaluating whether this service is worth paying for. Unlike in Asia and Europe, Latin Americans are less interested in data, she says. "Culturally, we Latins are more interested in the warmth of voice" Ramirez says. Wired world. It's clear that, up to now, the majority of mobile applications in the region do not require more modern telephone accessories or networks with greater data-transmitting capacity. In Brazil, however, mobile telephony is beginning to provide things that were once unthinkable in the region: Watching television on a cell phone and using a phone as a GPS satellite-tracking device. Just talking, although always the bread and butter for carriers, will soon be passe as a new generation of young users swarms to all the wired world has to offer.
Although these latest-generation services are barely beginning to roll out on a massive scale, there are trends such as downloading ringtones and images, as well as games, that have been much more readily accepted in some market segments, especially in Brazil and Venezuela. If downloading these basic services in the short- or medium-term leads to Latin Americans watching television on their telephones, mobile phone operators in the region can boost revenues significantly. A lot depends on the price of these services--and how much new investment the carriers are going to have to make.
ANDRES F. VELAZQUEZ
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|Author:||Velazquez, Andres F.|
|Date:||Mar 1, 2005|
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