A change of mindset will open the tower market in the Caribbean and Central America

Cizmic Consulting was created in 2001 with the goal to support telecom companies in the Caribbean and Latin America to achieve better financial and business results. The company has since developed into a full service consulting firm with a focus on assisting clients in their transformational process at a time of increased technology demands.

In this interview, Richard St. John, Vice President of Business Development, shares his views on the current status of the Latin America market, its key features and future challenges.

TowerXchange: Richard, tell us about Cizmic Consulting, its footprint and key clients/projects.

Cizmic is an independent technology firm whose core competency is offering consulting services for telecommunications and utilities companies. In addition to our key services, we provide assistance in gaining access to capital as well as system integration, security and project management for large networks’ build-outs.

Our region of focus is the Caribbean and Latin America. We are active in Trinidad and Tobago, Barbados, Haiti, the Bahamas, Belize and Suriname among others.

We mainly work for independent telcos. Specifically, we assist companies that are not part of large global groups and who are either local incumbents or emerging carriers that have just won concessions to run local operations. Some of our clients are joint ventures between the local government and private initiatives. For example, we have assisted TSTT in Trinidad which is a private-public partnership between the local government and Cable and Wireless.

TowerXchange: What are the most challenging requests you get from your clients? What is currently on top of their agendas?

One of the key challenges our clients face is being an independent company and entering markets which are already mature and hyper-competitive.

Moreover, if a relatively small independent telco decides to expand internationally, it will need to acquire new competencies, enlarge its offering and ensure its ability to acquire market share in a new country. This is one core area where we are able to assist carriers: expanding their footprint and gaining credibility in other countries.

As you can imagine, if a telco partially owned by a government tries to expand into another country, there are quite a few delicate, political considerations to take into account. And again, this is one of our areas of expertise.

The telecom sector is moving at great speed and there is always something new to offer - technology, services, devices... Our clients might be struggling to keep up with innovation, especially because our region is experiencing a swift rush to develop 4G services. Not everyone is able to keep up with this pace. In a very short period of time carriers are required to acquire new skill-sets, IP-centric personnel, and new marketing messaging.

In summary, I’d say that our clients are very focused on diversifying their revenue stream and launching new products. These are among the key priorities on their agenda and our focus when assisting them in the execution of their strategic plans.

TowerXchange: With operations mainly focused in the Caribbean and Central America, can you give us an overview of those telecom markets, the key players and their characteristics?

There are three major players in our region: Cable & Wireless, Digicel and América Móvil and a variety of smaller, independent telcos.

A high majority of customers opt for pre-paid services. Therefore, carriers need to pay extra-attention in diversifying their bundled offerings. For example, we have been working in creating micro-bundles, daily passes and other flexible options to meet demand.

Many countries have recently released 700 MHz spectrum auctions for LTE which will facilitate the entrance of new players focused only on offering mobile broadband services instead of becoming a full service telecom operator.

In terms of penetration, the rates are pretty high across the region with some areas of the Caribbean reaching rates around 160%.

Most people in the region have two handsets from different providers. Customers are very selective and will make calls using one phone or the other, depending on the rate offered by each carrier. This results in competition among carriers being fierce.

In general, mobile penetration rates range between 125 and 160% depending on the countries, with the exception of Puerto Rico, which is an anomaly in the region and much closer to the U.S. standards. Its penetration rate is around 85% and mostly focused on post-paid offerings. Puerto Rico also has a more developed fixed line market than in the rest of the region.

TowerXchange: Is the role of tower companies widely accepted in those countries? What is the status of passive infrastructure - still in the hands of carriers or have they started to divest their portfolios?

I believe that the tower industry is just beginning to develop in the Caribbean.

We had the opportunity to evaluate the perception that carriers have of tower companies and I’d say that two opposite points of view coexist to date.

Some companies are starting to realise that divesting their portfolio of towers is a great opportunity to raise capital - much needed to upgrade their network to LTE. And I believe that this view will win out, eventually.

But in such a hyper-competitive market, there are also companies that see their passive infrastructure portfolios as a key advantage against competition. For example, think about a small island with 25 strategically placed cell sites. By owning them, the carrier retains a massive advantage against competition, ensures coverage where no one else can, blocks the entrance of new players and is the only one able to acquire customers in that area.

This might be an old school thought process but is still the reality in most areas of the region.

On the other hand, there are exceptions such as Panama and Puerto Rico, whose tower markets are definitely more advanced. SBA Communications has opened the market in Panama, Costa Rica and Guatemala for example, but the tower industry is far from developed.

Another aspect, from the perspective of tower companies, is that it’s quite hard to achieve economies of scale in areas where portfolios consist of just 40-50 towers. Towercos can hardly justify the investment and my feeling is that in the future, we might see tower portfolios in different islands being bundled and consolidated to then be sold jointly in order to make them more attractive.

That said, we are excited to be part of this wave. As carriers focus on innovation, the management of passive infrastructure will eventually become a burden they won’t be able to afford. I think it’s a matter of the speed of change, not if change will occur.

Carriers are considering a range of outsourcing options such as the possibility of utilising LTE core providers rather than building their own network in each country where they operate. This transformation process involves a change of mindset and selling tower assets will be considered as an option when companies are ready.

TowerXchange: How would you advise a carrier with regards to the possibility of outsourcing the management of passive infrastructure to towercos? Which key factors are to be taken into consideration?

The first step would be to assess the real cost of ownership of their tower portfolio.

Interestingly, when we start diving into the P&L of a carrier, they’d only have a few items related to tower management. However, when we start digging, we realise they have additional tower-related costs which they didn’t account for. Or we’d find out that 50% of the CTO time is spent on issues related to passive infrastructure. When we put together the final cost of ownership, we often get a different scenario from the one they’d have originally thought.

The second step is looking at the cost-benefit ratio of owning towers. Which means we’d compare what they would give up in terms of asset control versus the benefit of reducing opex and, furthermore, analyse the benefit of reducing opex and having cash in hand versus the potential monthly lease fee.

This equation is usually pretty attractive once carriers realise the management simplification that occurs once they divest their passive infrastructure. However, the key to change is in the mindset. Are towers a strategic asset or not? Although we see that the economics work out quite favourably towards divesting, there is still a lot of emphasis on the strategic role of towers.

In addition, regulators play a very big role in pushing the change. With very soft laws in place with respect to tower sharing, companies are still free to build and operate single tenant towers without offering capacity to other operators. In countries like the Dominican Republic, each carrier owns most of their towers - a move that I wouldn’t consider the best use of their resources and investments.

If new regulations mandating sharing are enforced, we will start seeing changes happening at a much faster pace. New players will consider entering Caribbean and Central American markets and towers won’t be seen as such a strategic asset anymore. At present, carriers aren’t really enticed to enter a new market when the business case requires building their own infrastructure. Maybe they can try and strike deals to share infrastructure with other players but without a firm regulation in place, such arrangements aren’t that common.

It’s likely that regulators will start getting involved in the telecom infrastructure sector also to preserve the natural landscape and avoid allowing too many new greenfield tower sites being developed.

TowerXchange: How is the telecom market evolving in the countries you operate? Do you think the industry is shifting towards consolidation?

Central America and the Caribbean aren’t really moving towards consolidation. In fact, most countries in the area are in a duopoly and might see the entrance of a third player thanks to the newly available LTE spectrum.

One growing trend is MVNOs and we might see more of them entering the market. New players will mean more choices for end users and even more pressure on traditionally strong carriers to innovate and keep up with the competition.

TowerXchange: What is the status of 3G and 4G deployment in the Caribbean and Central America?

The region has been able to keep up with technology and network development and I’d say we are two to three years behind North America. All the countries where we are active have at least HSPA+ networks in place and its adoption led to an exponential improvement in terms of customer experience - smartphone usage has boomed.

Now companies are already moving towards LTE which is an impressive and quite bold development. In fact, HSPA+ was deployed two to three years ago and now, over 50% of the countries in the region either have or are committed to adopting LTE. While technology cycles have usually taken four to five years, we are now seeing carriers moving forward faster than usual. This is a short turnaround and I believe that devices have driven this revolution.

In spite of this excitement, it is very important to determine the expected ROI with our clients and define their targets and payback timing.

CFOs don’t like to make new investments when they are still in the red from previous major capital projects. So it’s key to clearly map out the expected returns and timeline before committing. Currently, the payback is three to five years. Whereas initially companies were starting to see returns five years after the investment, now the payback trend is closer to three years.

Carriers are becoming much smarter in the way they do business. While data usage is actually higher with new devices, they are ensuring there are data caps on a lot of plans they offer. They are much more careful in creating additional capacity now than they used to. I think it’s a learning experience for them as well, as in the past quite a few experienced players got burned by acting too fast, without taking into consideration all factors behind an investment.

TowerXchange: You have advised some clients during the privatisation of the telecom sector. How has the market changed in the countries where the telecom industry is now liberalised?

Privatisation is an old topic for a lot of countries but not in our region as there still are quite a few government owned telcos. Governments benefit from privatisation as they are able to monetise assets such as telecom companies and, usually, very few of them are profitable. These moves are particularly good at times of fiscal prudence as they allow governments to cash in.

It is also particularly good for consumers as private companies tend to be more agile in offering products, adapting to innovation and bringing new services to market. Customers become more exposed to new options and this can only benefit the population.

Usually, along with privatisations, comes the commitment from the government to liberalise and facilitate market access to new competitors. This will eventually lead to more licenses being granted, lower prices offered and higher penetration rates. A win-win situation for everyone beside employees of former public companies. In fact, privatisations usually lead to a contraction of the workforce as private companies realign to become more competitive.

A few years ago we consulted one of our clients which was a public company on the possibility of selling their telecom towers. During a meeting, our client very openly told us that if they were to start selling their portfolio of towers, the local population as well as neighbouring countries might perceive it as a sign of weakness. I then realised it’s all a matter of mindset and privatisation can only be a positive factor for the tower management industry - it will take time, but it’s a move towards accepting it.

TowerXchange: Out of the markets where you operate, which one looks more advanced in terms of its telecom/passive infrastructure industry?

Puerto Rico is definitely quite advanced compared to other countries in the region. As previously mentioned, the country is very much aligned with North America in terms of products and services and its telecom market is quite cutting edge with five active carriers (notably AT&T, Claro, T-Mobile, Sprint Corporation and Open Mobile).

The Dominican Republic is another relatively modern market. It is a size which would allow tower companies to achieve economy of scale. To date, I believe there are approximately 1,500 towers in the country. With two major carriers - Claro and Orange (recently sold to Altice) - and Viva as third player, it’s a relatively well served and quite competitive market. I think we might see some levels of consolidation taking place in the next 12-18 months and this might lead to some openness towards tower companies and their entrance in the country.