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Archived Report
Telecommunications in Argentina

Bruce Kramer

Copyright 2016 Faulkner Information Services. All Rights Reserved.

Docid: 00017779

Publication Date: 1607

Report Type: MARKET

Preview

The Argentine telecommunications market is going through a period of change.
A new regulatory agency has been tasked with reforming the market
and regulating the rates companies can charge. At the same time, two players in
the market – Telecom Argentina and Nextel – are going through ownership
changes, while the entire industry is investing heavily in upgrading and
expanding their networks to keep up with the increasing demand for bandwidth.

Report Contents:

• Executive Summary
• Market Dynamics
• Market Leaders
• Market Trends
• Strategic Planning Implications
• Web Links
• Related Reports

Executive Summary

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The telecommunications market in Argentina has experienced tremendous peaks and
valleys but, overall, it has been growing steadily. State-of-the-art
technologies, including next-generation wireless technologies, Wi-Fi within city
limits, and triple-play service bundles are all available. The area of largest
growth potential is broadband; several companies are offering at-home Internet
broadband as well as mobile broadband. Most broadband customers access services
using a mobile telephone. Nevertheless, the amount of competition in this area
is limited.

Related Faulkner Reports

Telecommunications in South America: State of the Marketplace

Much of the previous inconsistency in the market has been a result of a series of
economic crises that generated double-digit inflation rates, which seriously
devalued the peso and undercut foreign investment. The market improved
throughout the 1990s. In 1998, however, the economy began a long slide ending
in a disastrous recession in 2002.

This recession was followed by de-indexing of the peso to the dollar's so-called "pesofication."
Argentina's telecom sector was hit badly. The extent of the crisis is hard to
imagine outside of the country, but it resulted in a piling up of huge debt,
loss of savings for many individuals, and a reduced consumer spend. Companies
trapped with significant foreign debt found themselves caught between an income
in rapidly depreciating pesos and a debt denominated in relatively steady
dollars. The result was default and restructuring, exacerbated in the telecom
sector by a rate freeze, which is still in effect, and a simultaneous need for
new infrastructure. Since then, a slow and tentative recovery initiated in 2003.
In 2004, the sector began to recover, although the damage inflicted by the loss
of foreign investment still lingers.

Now that the economy has been recovering, the telecom
market is getting stronger and going through a period of change.

On his first day in office, President Maurico Macri
announced plans to combine the country's ICT and telecommunications regulators
into a single agency that will be charged with implementing reforms that were
passed by Congress in 2014 but never enacted. This new telecom policy defines
all telecommunications services except wireless as a public service, which
allows the government to regulate pricing like it does with utilities. It also
allows telecom carriers to enter the pay television market and offer
quadruple-play bundles.

But with all this positive growth, inflation and economic and political issues
continue to plague Argentina.

Overall, though, Argentina ranks number one in South America for overall teledensity among the higher population countries (15 million or more) and
number two for fixed-line and wireless teledensity, respectively.

Market Dynamics

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Argentina it the southernmost country in South America and the largest
Spanish-speaking country in the world. The mainland covers about 1.1 million
square miles and shares its borders with Bolivia, Brazil, Paraguay, Uruguay, and the
Atlantic Ocean. It also has sovereignty over the Falkland Islands, South Georgia
and the South Sandwich Islands and parts of Antarctica.

Argentina has a diverse topography and climate, and the country is organized
into 23 provinces, one federal district, and the autonomous City of Buenos
Aires. Each province has its own political, economic, and administrative powers,
similar to the states in the United States. The federal government has separate
judiciary, legislative, and executive branches. The current president is
Mauricio Macri, and he has been in office since 2015.

Argentina has the second-largest economy in Latin America, but it has been
volatile over the last 20 years. The country’s current round of economic woes
began back in 1989 when huge external debts, monthly inflation rates of 200
percent, and falling output were at an all-time high. As a result, the
government began instituting trade liberalization, deregulation, and
privatization measures, and many markets, including telecommunications, began to
experience dramatic changes.

By 1991, the government also implemented radical monetary changes by linking the
peso to the U.S. dollar and limiting the growth in the monetary base by law to
the growth in reserves. The government succeeded in dropping inflation, but it
occurred much more sharply than desired. The effect of all of this change on the
investment climate is as expected. Foreign investors, including France Telecom,
pulled out of many industries.

Figure 1 shows a map of Argentina.

Figure 1. Argentina

Source: CIA World Factbook

State of the Marketplace

Argentina’s modern telecommunications industry started in 1948 when the
government nationalized several regional telephone companies into a state-owned
monopoly called National Telecommunications Enterprise (ENTEL). A total lack of
competition in the market meant ENTEL had no incentive to invest in its network
or service levels, so the country’s telecommunications market quickly became
stagnant. By the late 1970s and early 1980s, ENTEL was losing $500,000 a day,
had $370 million in debt, and was providing terrible service. Incredulously, the
waiting list to get a new telephone line installed was 15 years long and 88
percent of all telephones in the country were rotary.

In 1990, the federal government split ENTEL into two companies and privatized
them. France Telecom purchased Telecom Argentina, which provided service in the
northern part of the country, while Telefonica acquired Telefonica de Argentina,
which provided service in the south. As a condition of the sale, each company
was granted a seven-year monopoly on local calling in their operating region,
although the government did start to allow competition in the long distance and
mobile sectors. France Telecom sold Telecom Argentina to Telecom Italia in 2003,
and Telecom Italia sold it to an investment firm in 2016.

Regulatory Environment. The regulatory landscape is changing in Argentina.
In 2016, President Macri announced plans to merge the Federal ICT Authority
(AFTIC) and the Federal Authority of Audiovisual Communication Services (AFSCA)
into a single regulatory agency called the National Entity for Communications
(ENACOM). This organization is tasked with implementing a policy called the
Digital Argentina Law that was passed in 2014 but never enacted. The
biggest change in the new law is that it defines all telecommunications services
except mobile as a public service, which gives the government the authority to
regulate rates. The law also allows telecom companies to offer pay television
service.

Fixed-Line Telephony.
Argentina has one of the most sophisticated telephony infrastructures in Latin
America. It is 100 percent digital and expands over 25,000 miles.

According to the most recent information published by the International
Telecommunications Union (ITU), there are 10.1 million local access lines in
Argentina, which puts the density rate at 23 percent.

As mentioned previously, the long distance market was open to competition in
1990. The local calling market was finally deregulated in 1999 when Telefonica
and Telecom Argentina’s regional monopolies expired and the government issued
licenses to CTI and Movicom. These two companies have largely focused on the
wireless market instead.

has made several small acquisitions since 2004 to become the third largest fixed
operator in Argentina; however, it is a long way behind the two incumbents.

The following chart shows how the fixed-line market has evolved over the last
ten years.

Figure 2. Argentina Landline Statistics, 2005-2015

Source: ITU-D

The long distance market is highly competitive, and VoIP is well developed
within the region.

Wireless. Mobile services have been around since 1988, when Movicom started providing
service in and around Buenos Aires. Miniphone, a joint venture between
Telefonica and Telecom Argentina, started offering service in the same area five
years later.

The rest of the country got access to wireless services in 1993, when the
government gave a company called CTI a monopoly on all wireless services outside
of Buenos Aires. That monopoly expired in 1996 and the two incumbent landline
carriers quickly entered the market. Telecom Argentina created Telecom Personal
for the northern part of the country, and Telefonica created TCP for the south.

Today, Argentina has a thriving wireless market. At the end of 2015, there were
60.7 million mobile subscribers, which puts the density rate at 143 percent. New
players have come into and exited the market over the years, and there are now
four companies providing service in Argentina: Claro, Movistar, Personal, and Nextel.

Argentina took longer than many of its neighbors to roll out 4G mobile services.
The government finally auctioned off four 4G licenses in November 2014 for a
combined price of $2.23 billion. Those licenses went to Telecom Argentina,
Telefonica, Claro, and a new company named Arlink. The three nationwide carriers
are building out their networks, but Arlink failed to secure funding to build
its network and subsequently had its license revoked.

The following chart shows how the mobile sector has grown over the last ten
years.

Figure 3. Argentina Wireless Statistics, 2005-2015

Source: ITU-D

Broadband.

Latin America is currently the world's fastest-growing Internet market, and
Argentina is a major regional power.
In 2015, 69 percent of the country was online and there were 6.8 million
broadband connections in the country, a density rate of about 16 percent. 

The following chart shows how the broadband market has evolved over the last 10
years.

Figure 4. Argentina Broadband Statistics, 2005-2015

Source: ITU-D Free

Prices for international half circuits to North America, which are crucial
building blocks of the Internet, are very high. The source of the problem is
that demand outstrips supply. Incumbent carriers anticipated the Internet wave
and captured a large share of subscribers at the outset.

Because the incumbent telcos dominate Internet access, they are naturally
reluctant, and even obstructive, when it comes to providing interconnection to
their networks. As a result, Argentina lacks peering points where national and
regional Internet traffic can be exchanged. The big four have reduced bandwidth
to public access Network Access Point (NAP), CABASE, which has resulted in a
slowdown in services.

As bad as international connectivity is, it is only one of the deterrents to
widespread Internet access. The biggest bottleneck has been domestic
connectivity. The nations of Latin America are addressing this by building out a
large fiber-optic network that will circle the continent. There are a number of
other projects underway to improve connectivity within the region.

With Telecom Argentina and Telefonica posting strong results, the federal
government has publicly urged these operators to forego
their annual dividend payouts and to reinvest in Argentina's telecommunications
infrastructure instead.

Market Leaders

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Telecommunications market leadership has undergone drastic changes since the
market was fully opened. Increased investment by major global carriers and
highly capitalized newcomers have changed the competitive landscape in the
country. Economic problems have continued to take a major toll in the telecom
market, however, and many foreign investors have withdrawn. Strict import
controls and currency exchange restrictions have continued to hurt growth.

Fixed-Line Carriers

There are two major fixed-line players in Argentina.

Telecom Argentina. Telecom Argentina is one of the incumbent local operating telephone companies
and the largest telecom carrier in Argentina. It has about 41 percent of the
local calling market and generated $2.7 billion in consolidated revenue in 2015.
The company’s fixed-line infrastructure is in the northern part of the country,
where it used to serve as a monopoly provider. The company is in the middle of a
major investment project where it will spend nearly $2 billion to upgrade and
expand its infrastructure, including $600 million in its 4G network. As part of
this, Telecom Argentina also announced plans to build a backbone network that will
connect Buenos Aires, Codoba, and Rosario that will operate at 100G bps.

Telecom Argentina has changed ownership several times over the last 15 years.
Most recently, Telecom Italia sold its stake in the company to Fintech Group, an
investment company.

Telefonica de Argentina.
Telefonica is Argentina’s other leader in the telecommunications market and
provides local service, long distance, broadband, and dial-up Internet access
with $3 billion in consolidated revenue. The company's incumbent position in southern
Argentina and solid business position results in strong cash flow generation.

Telefonica de Argentina is making significant network upgrades to meet the
demand for its broadband services and competition from cable competitors.

The following chart shows the market share for the local calling market in
Argentina.

Figure 5. Market Share for Argentina  Local Calling Market

Source: Carrier Information

Wireless

There are four mobile operators competing in Argentina.

Claro. Claro. Claro is the largest mobile carrier in Latin America, with 284 million customers
in Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic,
Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru,
and Uruguay. It is the fifth largest provider in the world and the largest
carrier in Argentina, with 23 million customers and 35 percent of the market. It
is owned by America Movil, a Mexican company.

Claro has aggressive plans to spend $2.7 billion between 2015 and 2020 on a
nationwide 4G network. Phase one of this project was completed in June 2015,
allowing the company to provide 4G service in Buenos Aires, Cordoba, Mendoza,
and Rosario.

Movistar. Movistar is Telefonica’s wireless operation. It has 20 million subscribers and
32 percent of the market. The company is investing heavily into building out its
4G network and expects to spend nearly $1 billion in 2015 alone on building
infrastructure.  As of June 2016, its LTE network covers 68 percent of the
country and has three million subscribers. As it builds out its next-generation
network, the company plans to start offering VoLTE in 2016.

Telefonica also offers a pre-paid wireless service in Argentina under the Tuenti
Movil brand name.

Personal.

Personal is the wireless division of Telecom Argentina. It has 20 million
customers and 30 percent of the market. Telecom Argentina plans to build out a
4G network that will cover 85 percent of the population by 2017, and it already
provides service to one million customers in Buenos Aires, Cordoba, and Rosario.
In July 2016, the company requested a loan from the World Bank to help fund this
$600-million project.

Nextel. Nextel is by far the smallest carrier in Argentina, filed for
bankruptcy in 2014, and is at a strategic disadvantage in the market because it
does not have a 4G license. In 2016, Grupo Clarin acquired the company and
announced plans to invest heavily into its network. In June of that year, Nextel
acquired five smaller wireless broadband companies for $138 million.

This table shows a snapshot of the wireless market and the chart below
illustrates their market share.

 

Table 2. Argentina Wireless Carriers

Carrier	Subscribers	Technologies
Claro	23 million	GSM, UMTS, HSDPA, HSPA+, LTE
Movistar	20 million	GSM, UMTS, HSDPA, HSPA+, LTE
Personal	19.6 million	GSM, UMTS, HSDPA, HSPA+, LTE
Nextel	2 million	iDEN

Source: Carrier data

Figure 6. Market Share for Argentina  Wireless Market

Source: Carrier data

Broadband

The three main players in the broadband market are Telecom Argentina, Telefonica,
and Group Clarin. The first two companies are covered earlier in this report,
but Group Clarin is the largest cable company in Argentina, generating $1.9 billion in revenue. The company’s flagship broadband service is called Fibertel
Evolution, and at 30M bps, it is the fastest broadband service in the country.

The image below shows how the three largest broadband providers have the vast
majority of the market.

Figure 7.  Market Share for Argentina Wireless
Market

Source: Carrier Data

Market Trends

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The Argentinean telecommunications market has experienced significant swings in
recent decades, caused mainly by systemic changes in the regulatory landscape in
conjunction with major economic shifts. Immediately after privatization, the
telecommunications and Internet sectors started off strong and with a lot of
promise, all of which came to an abrupt halt with the currency crisis of 2002.
The size and ramifications of this crisis are hard to imagine from outside the
country. The peso had been indexed directly to the dollar; as the economy
struggled, this structure was no longer viable, and it was dropped, with the
result that the peso spiraled immediately downward. Companies and individuals
with savings lost billions. Foreign debt, denominated in dollars, immediately
became oppressive for the business, as well as for the government, sector.
Moreover, cash generated within the country, as payments and in taxes, was in
pesos. These massive debts forced an exodus of foreign capital and
restructurings across the board, often resulting in negotiations for partial
debt payment.

The situation continued to worsen in 2002, as the ramifications of vastly
increased debt and reduced spending power among consumers began to take effect.
For a time, the whole industry went backward instead of forward; fixed-line
usage and mobile usage both decreased, and all Internet-related activity,
including ebusiness, was badly hurt. Of the 400 Internet portals that were
online in 2000, only 18.6 percent survived. Vendors coming into Argentina to
sell telecom equipment were left holding the bag in some cases, with the telcos
– stuck with large foreign debt due to infrastructure builds – unable or
unwilling to make payments. On top of this, the rate structure for telecom
services was frozen, and remains so today.

The overall market will continue to be dominated by Telefonica and Telecom
Argentina, but the two incumbent carriers operate in separate parts of the
country and do not compete with each other very much. This means the government
has to push the market to evolve through regulation.

As mentioned earlier, Argentina has classified most telecom services as a
utility so the country's new telecom regulator will be able to control pricing
structures. To help further competition, the government is now allowing
telecommunications carriers to offer pay-television services. They hope that
this will position Telecom Argentina and Telefonica as direct competitors to
Grupo Clarin, the country's largest cable operator. At the same time, the cable
company recently announced plans to purchase Nextel, the failing wireless
carrier, as well as a series of wireless broadband players.

Strategic Planning
Implications

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Argentina’s
stable government, early privatization, effective regulatory body, and
relatively rich customers periodically stimulate high expectations across the
globe that Argentina is a market of the future. As a result, foreign investors
flock to the country, pouring in billions of dollars into infrastructure
development. But great expectations are seldom met. For every high, there is a
corresponding low, and predicting what the government and the economy might do
is almost a hopeless exercise. Argentina’s Internet market rose to become the
third largest in Latin America, and it was expected to be the world’s fastest
growing sector. Argentina initially saw huge growth in its telecom market,
particularly with falling prices for basic services, dramatic increases in
fixed lines and the number of cellular subscribers, and the development of the
cable industry. And then it all came tumbling down.
Argentina slid into yet another recession. Instead of improving in 2002, the
de-indexing of the peso to the dollar – so-called "pesofication"
– was executed poorly, resulting in enormous losses in savings and in
investment. Many indicators went backward for a time, instead of forward, and
the ramifications continue to this day as the government itself attempts to
renegotiate its debt.

A recovery
began in 2003, and has continued, growing stronger in 2004 and continuing
through 2009. The global recession in 2009 set the telecommunications market
back somewhat, but strong gains were realized in 2010 and 2011 with moderate
ones in 2012 and 2013. But investors should be warned that significant negative
factors still abound in enormous debt loads, reduced consumer spending,
increased government intervention, and regulatory experiments. That being said,
there are also great opportunities for those willing to take the risk. Badly
shaken companies can be cheaply bought, and Argentina still has a lot of
elements that encourage growth, such as a literate and motivated workforce,
relatively high pay rates and consumer spending, a taste for technology, and a
traditional position as a regional hub. By 2005, most of the bargains had
disappeared as the industry emerged from a wave of consolidation. However,
getting in on the ground floor may still provide significant growth
opportunities. Certainly, some of the major investors already there – such as
Spain’s Telefonica – realize that it is better to wait for growth than to sell
out at the lowest point and take the loss. 

Argentine
market sectors will recover because there is no other option – and they have
done so in large part to this day. Much investment is likely to be local
because new foreign investors are likely to think twice for some time to come,
particularly with some of the recent decisions imposed by President Cristina
Kirchner. The kinds of funds that are needed to roll out large amounts of new
infrastructure are not likely to be available, however, despite fierce
competition in broadband and emerging LTE services. Growth is therefore likely
to remain relatively slow to moderate, but constant, for the immediate future –
unless the country or the industry stumbles into another crisis, such as a
refusal of lenders to restructure debt.

The mobile
and ADSL broadband areas are providing an exception, showing high rates of
growth, particularly in ADSL, as is the smartphone market. This is partly
because of pent-up demand, however, and some leveling off began in 2008. If
conditions remain stable, and carriers are able to raise tariffs, then new
markets for broadband and mobile content services and ecommerce are likely to
emerge. For example, triple-play services were introduced in 2007, and now
service offerings are expanding to many more cities.
With fixed and mobile operators combining to offer converged services, the
market generated USD 18.44 billion in 2012 and is expected to reach USD 26.58
billion in 2017.

However, the
future of broadband growth is in jeopardy because of the legislation ruling
against Telecom Argentina and Telefonica de Argentina S.A. offering pay-TV services, as these companies are not at least 70
percent Argentine owned. In addition, the government’s efforts to block the
merger of cable operators Multicanal and Cablevision
may have an impact on the increasing use of cable modems to access broadband
services.

According to
recent reports, companies are investing into telecommunications infrastructure
with the goal of developing service improvements that will grow the customer
base. These companies are focusing on research and development, technical
expansion, and infrastructure to meet the demands of customers requiring
advanced technologies to communicate and connect with each other. For instance,
Telecom Argentina has committed to investing USD 1 billion to
telecommunications infrastructure enhancements within Argentina.

Web Links

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• AFTIC: http://www.aftic.gob.ar/
• Claro Argentina: http://www.claro.com.ar/
• Groupo Clarin:
  http://www.grupoclarin.com.ar/
• Movistar Argentina:
  http://www.movistar.com.ar/
• Nextel Argentina: http://www.nextel.com.ar/
• Personal: http://www.personal.com.ar/
• Telecom Argentina:
  http://www.telecom.com.ar/
• Telefonica:
  
  http://www.telefonica.com.ar/
• Telmex Argentina:
  http://www.telmex.com.ar/

About the Author

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Bruce Kramer is a
regular contributor to Faulkner Information Services who has written
over 200 articles and white papers on the technology industry over the
last 16 years. In addition to working as an independent author and
analyst, Bruce is a former Senior Editor for Faulkner Information
Services and has over a decade of experience in the supply chain
management and business process outsourcing industries.

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