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Latin America dances to its own 5G beat

Podcast episode 33

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Like the rest of the world, Latin America is adopting 5G. Its roll-out may not be as fast as we’ve seen in Asia and Europe, but Omdia’s Wally Swain tells Michael Hainsworth, it’s accelerating the region’s evolution to Industry 4.0.

Below is a transcript of this conversation. Some parts have been edited for clarity.

Michael Hainsworth: By the end of 2019, more than 40 5G networks were operating around the world. Commercial launches in the United States and South Korea have gotten most of the attention with the promise of high-speed wireless for consumers. But 5G isn't just for developed countries, as installations in China and the Middle East show. But where's Latin America in the mix? I put that question to Omdia's 25-year veteran telecom analyst Wally Swain. He's been in Spanish speaking countries for almost half his life.

Wally Swain: Sorry, I just immediately started into Spanish. Well, Latin America is often later than many of the other regions of the world for various reasons. We have two commercial announcements, one in Uruguay, one in Aruba. Uruguay, we understand that's a fairly limited deployment at this point in time. And then we had a really good announcement just a couple of weeks ago in Brazil. So we're going to start seeing more announcements, more deployments. So perhaps really some commercial traffic, but so far, we've been one of the last reasons to get started. That normally happens as a result of the economics of the region.

MH: Well, recognizing that Latin America is not a single country, describe that macroeconomic environment for the region.

WS: The region has been traditionally behind other regions with respect to economic growth and with respect to, as a consequence, GDP per capita, or other measures of purchasing power. And that has really caused late ARPU growth, which is average revenue per user, that is the revenues that an operator can expect to get. We see a tremendous opportunity in growing productivity and growing, as a consequence, GDP per capita from 5G, and so that's why we're so excited about it.

Clearly there's a parenthesis or parenthetical comment about COVID-19 at this point in time, which has had a tremendously devastating effect on the region's economies. And that is going to be an asterisk, if you will, for almost every region. And everything we're gonna talk about this morning is going to be say, brackets COVID-19, notwithstanding, or COVID-19 may have an impact or these kinds of things. The macroeconomics are really the main determining factor for speed everywhere, but especially in Latin America.

MH: Since you brought up the COVID-19 issue explicitly, what have Latin American carriers done to help support the efforts to flatten the curve? We've seen a lot of telecommunications infrastructure step up in a lot of different ways over the course of the pandemic.

We see a tremendous opportunity in growing productivity and growing, as a consequence, GDP per capita from 5G.

WS: Well there's two sides of that answer. One is a question about revenues and collections and about whether or not we were gonna cut people off because they didn't have jobs, so they didn't have incomes. And a combination of the operators being flexible, and some of the regulators being very strict has meant that that hasn't been as much of a problem as we might've thought it was from the beginning.

The more important part is that traffic is up tremendously in some cases, as much as 50 percent, as people work from home, as people entertain themselves from home, as people shop from home. All those situations mean we've had a tremendous growth in traffic and the operators have responded. There have not been complaints either by governments or by consumers that they're not getting the experience that they expect, or more importantly, that they would need. And of course, being able to work, shop and entertain yourself from home is perhaps the most important thing that anyone can do to try and flatten the curve.

MH: I can only imagine that many of the CSPs wished they already had 5G rolled out because 5G is far more flexible when you have these types of unexpected surges in demand than even 4G was.

WS: Absolutely, as well the infrastructure that you have to install for 5G means that you're much further along on things like rolling out IP networks, like getting deeper fiber, much deeper fiber into your network. And so your network would automatically be much more resilient when this thing comes along. As well, we believe strongly that there’s fixed wireless access, that is opportunity for places that maybe don't get fiber can have or don't have cable infrastructure, or don't have DSL or high speeds, that 5G will be good enough for people to have an excellent, fixed broadband experience in their home. So if we'd been able to do that, we could have deployed much more bandwidth, much more rapidly because it would have been wireless for the last hundred meters.

MH: You have argued that 5G is essential to the region, but what does the macroeconomic environment mean for adoption of 5G at the three key levels, at the CSP level first of all, then you’ve got the enterprise level, and then again, back to the economic component. Is the consumer willing to spend the money for a 5G connection?

COVID-19, especially in Latin America, has exposed how dependent they are on people physically being in places to do things.

WS: We're gonna do this in backwards order. The question about whether or not the consumer's prepared to spend for a 5G experience, we've been seeing that although operators would like to be able to say that they're gonna be able to get a revenue hit from 5G. They may not be able to change the tariff. They may find that people are consuming more and therefore they're spending more, but I don't think that will be able to see an impact on tariffs. And as a consequence, the consumer is not going to be confronted with a tariff choice. They’ll maybe say, "Well, so much more expensive." He's going to say, "My experience is so much more, "I'm consuming so much more. Yeah, I can decide to pay more." And we are seeing that the mobile experience or the remote experience or the untethered experience is something that consumers are willing to pay for.

In the business category, we have a different equation. And we think that COVID-19 may, in fact, accelerate business plans to do digital transformation, which is what we call the basic transformation of the economy as a consequence of businesses investing in digitizing their processes. And COVID-19, especially in Latin America, has exposed how dependent they are on people physically being in places to do things. And so we believe that on the enterprise side, there'll be an acceleration of digital transformation, and that will bring along 5G as the necessary connectivity, if you will, to glue together some of these digital efforts.

I think there's no question that the statistical record would show that down the line, the operators have said that they're cutting back on their capex spending in 2020. And the money they have is going to deal with that problem I talked about a few minutes ago, which is the tremendous growth in traffic and therefore the need to expand their long-haul and short-haul networks and connections to the internet. So there is perhaps a kind of taking the foot off the gas in 2020. That's just a natural part of business activity for the CSPs. But we think those other two parts, in the enterprise case, perhaps even accelerating their digital transformation plans, and in the consumer case, much more disposed, much more aware of the importance of bandwidth as a consequence of all what's been going on, that the demand opportunity will be out there.

We're hoping that in 2021, when things settle down and people are less concerned about risk, let's say, then things are clear with respect to how the macroeconomic is gonna go. They're clear about where their revenues are coming from, then we'll see them get back on whatever track they had for 5G. It's a fact that the operator's revenues have not gone down as much as maybe some people would have thought they would, or maybe even they thought that would, but they've all pulled back on their CapEx plans, it's a statistical fact. And so that's why we're hoping more for 2021, when there's less uncertainty.

MH: In light of the economic environment in Latin America, does 5G increase ARPU for the CSP?

WS: I believe that even as a consequence of COVID-19, the consumers and enterprises see the value of bandwidth more than they did before. Now, it's absolutely essential, it's part of their daily lives and they suffer when they don't have a sufficient bandwidth. As a consequence, we think that there's going to be a shift in budgets, if you will, from one form of consuming entertainment, for example, on the consumer side to higher quality bandwidth in the internet. And in the business case, perhaps investing in the maintenance of older productive processes in things which are more bandwidth heavy.

As a consequence, we think there's a good chance that ARPU will at least stabilize. It's been going down year after year for many, many years now, a couple of decades practically. So we can see that at the very least ARPU is going to stabilize, but not as a consequence of higher tariffs, but as a consequence of higher consumption.

MH: If productivity in Latin America lags the rest of the world, how do you sell 5G as a productivity enhancer at the enterprise level?

WS: Well, I'd go back to the kind of fundamental economics, and the only way that you grow productivity is by changing your productive processes. And we've been through a number of major technological changes over the last 150 or 200 years. If you go back to 1810, and you think about what life was like in 1810, we still had people using spinning wheels in their homes. That was the productive chain only 200 years ago. And we've gone through some spectacular technological changes since that time and that's driven productivity, and that has driven the growth in income per capita. That has made the world that we live in right now, which would be unrecognizable to George Elliot or any of the Brontës, any of the writers from the turn of the 19th century. And as a result, what we believe it's important for these countries to encourage what we call digital transformation, this transformation of productive processes, using the power of computing, using the power of communication, digitizing their productive chains, their means of production.

Obviously, some things still have to be put together physically, but you can do the rest of the chain. The logistics part, for example, can be far more efficiently operated with digital processes. And when you do that, then you start increasing both your traffic load, and you start increasing your desire to have things come faster and faster.

My father-in-law was nearly a hundred when he died, and he would write to Bogota and say, "I need five cars." He was selling cars at that point. He had a car dealership. "I need five more Chevrolets." And then there would be a letter coming back, "I don't think five more Chevrolets we have in this week, but we can get you three." And this kind of thing was done on a timescale that was incredibly long by our own standards today. That's going to go down to microseconds, that's going to go down to milliseconds in some cases. Very, very low latency decision-making, feedback loops that have to move very, very quickly. And all those characteristics that businesses are gonna want for their business are gonna have to have for competitive reasons, are gonna drive them to lower latency, higher bandwidth services. Right now the best solution for that is 5G.

MH: Countries like Canada recognize the future is here, it's just not evenly distributed, that old William Gibson line. Efforts need to be made to encourage CSPs to build out into areas considered less profitable like the far North. What's the gap look like for developed nations in Latin America, where broadband penetration remains an issue?

WS: My wife, who's Colombian, loves to tell me when I came here, this is not the third world, all worlds are here. There's First World, Second World, Third World. All of them are here and they're all living cheek by jowl, right next to each other. Although there are geographic aspects obviously, when you go to rural Latin America, things are very different than they are in the cities, but there's also a gradient that goes across the city between the different neighborhoods and even within a neighborhood in different blocks, in the deployment of broadband. This is a big challenge that all governments recognize and all governments have, at the very least, policy statements, in some cases, explicit programs to encourage the operators to build out their broadband networks into areas that don't have the same coverage.

To some extent, just the demand drivers are pulling operators to increase speeds or bandwidth to different areas. They've exhausted the sweet spot and they're moving to the next area down the line. But also there are encouragements from governments, sometimes they're soft encouragement, sometimes it's just browbeating. Sometimes it's trying to make sure that the conditions on the field are conducive to putting up towers, to digging up the streets and putting in fiber, that kind of thing. And in some extreme cases, they'll look at subsidy programs and ways to get to the money directly to the operators and say, "Look okay, I know it's gonna be a long time for you to recover your investment in this area, let me help." But those are the three kinds of main areas. We're also seeing solutions from the vendors that are looking at how to lower the costs of deploying mobile services in difficult areas.

Everyone recognizes that this is a challenge, everyone recognizes that it's an issue certainly for the developing world, but also in the developed world. As you just said, there are communities in Canada, communities in the United States that don't have adequate service. And it's an issue for their governments just as it is an issue for the governments in Latin America.

MH: It sounds to me though that fixed wireless access, as you've sort of pointed out earlier, is one of the more critical advances of 5G particularly for Latin America. If you have cities where entire communities are without the broadband they need, because that happens to be a less well off neighborhood than the one across the street?

WS: Certainly fixed wireless access is one of the most critical components in the mass market. And in, as you said, in Latin America and in developing countries. We believe that we've quantified the opportunity in Latin America and in most countries it's pretty substantial, it's an attractive proposition. Clearly 5G, as we've said before, is gonna have impacts on the enterprise market. There's a piece that we haven't talked about, that 5G is going to enable mass market companies like banks or even retail to transform their processes, and there'll be benefits for consumers and benefits for the companies as a consequence of that.

But fixed wireless access, its ability to deploy customer experience that is almost fiber like, and to do that over the air in what I like to call low subscriber density situations where it may not be every house or every apartment in an apartment building or every house on a block that takes the service. And it's much more effective to deploy wireless solutions for those kinds of situations. That we see as one, tremendously interesting in terms of number of subscribers, and it's something which as you said, is going to be transformative for these countries.

One of the things that we found in doing the study was the least attractive country for fixed wireless access in Latin America was Chile, because Chile already has a very high level of broadband penetration with a very high quality broadband network. That's less interesting for fixed wireless access. You go to the other end of the scale and you look at some countries that have less than 50 percent of homes with access to broadband, and then the numbers get very interesting.

MH: 5G is widely considered to be more about Industry 4.0 than consumer advances in North America, Asia, Europe. How are companies in Latin America adopting this technology compared to their competitors elsewhere in the world? Is 5G more of a consumer thing for Latin America than an enterprise technology or is it just as it is elsewhere in the world?

WS: I think that, like everything in a region as large and as heterogeneous as Latin America, it's very difficult to give a simple yes or no answer to that. What we do see is that in certain industries, the two that come to most to mind in Latin America are mining and ports, which are very important to many countries. Mining is important to virtually every country down the western side of the Andes, and it's important in Brazil, important in Mexico. And ports are to everyone in almost every country in Latin America. There's only a couple of countries that are landlocked. Everyone else has huge ports and requires ports for exports and for imports. Those two industries are very fast to adopt private mobile networks. Now today, there're LTE 4G networks, because that's the technology that's available at this point in time. But Latin America is no slouch, if you will, for the adoption of private networks in large mines and in complex port situations. So there's two important verticals to the economies of Latin America that are adopting private networks, which is the precursor to being able to use Industry 4.0. They're at the same rate that we're seeing happen in other countries in the world.

At the other end of the scale, we see it happening in manufacturing in Brazil, but maybe a little slower in some of the other countries that have been a little bit more traditional. I think one of the interesting features of Latin America over the last 22 years that I've lived here has been seeing its economies trying to transform themselves from resource-based economies to higher value add economies, if you will, service economies, et cetera. That's been taking place. It's been taking place sometimes with less success than others. And I think part of the impact of 5G will be hopefully to accelerate that transformation.

Nobody wants to close a mine or stop exporting avocados, but it is important for the transformation of these economies, for the growth in wealth, that the higher value added services are involved, and that's where we see 5G having a big impact. There'll be a consumer opportunity, especially as we said, in fixed wireless access. There'll be many companies, enterprises, and verticals that are consumer-oriented, encouraging the operators to do advanced 5G because it'll make their business models, their digital transformation better. So we're gonna see a kind of a mix between the mass market and the business, but it's still gonna be very important. And, as I said a few minutes ago, there are some sectors where it seems to be moving as quickly as it is in other countries.

[CSPs are] struggling to compete against their more agile and newer companies like the FAANG.

MH: We've talked on Futurithmic about the problem of North American and European CSPs having a siloed culture of protecting one's turf at the expense of innovation and agility that you might attribute to a very Americanized view of work ethic. Are we all the same everywhere or is there a unique cultural issue within telecom companies in Latin America?

WS: Part of it is specific to telecom companies. I entered the telecom industry a long time ago, more than 40 years ago. And at that point, because they were almost public utilities, they were naturally very low risk cultures. Lots of people grew up that way, I grew up that way. And a hierarchical organization's measurement-focused cultures, et cetera. That got changed quite a bit during the 80s and 90s. And so, there's been change, but at the same time the leadership is still guys my age, or guys who grew up in the same culture I grew up in. So that is endemic to telephone companies all over the world. They're struggling to compete against their more agile and newer companies like the FAANG.

MH: Your Facebook, Amazon, Apple, Netflix and Google.

WS: Yeah, exactly. So they're struggling to deal with the speed at which those guys operate. At the same time, Latin America has had traditionally a fairly hierarchical culture as well. It's been very stratified and older managers have more power than younger ones, et cetera. All of those, of course, are under tremendous pressure from the crucible of the modern world, and once the change has taken place in the last 20 years. And so we see things happening, but you're right, it's going to be a struggle as always between the pace of change and the ability of an organization to adapt to that pace of change.

There are players in Latin America who have very traditional cultures and they're very successful. We have players in Latin America that are traditional cultures and they are less successful. We've got guys who are trying to bring themselves from the traditional into the modern world, to put it, to use that expression, and they're having varying degrees of success. And there are some new players that are trying to kick the old guys and get them into the 21st century,

MH: Wally, fascinating discussion. And thank you so much for carrying on in English as opposed to Spanish, I wouldn't have understood a word.

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