Telefónica: 'The predominant model today is simply not working and needs to be revised'

With profit margins shrinking across Latin America, telecom operators are betting on infrastructure sharing and consolidation as a way to gain strength in highly competitive markets.

The region faces the challenge of continuing to invest to reduce the digital divide, increase infrastructure capacity and keep deploying fiber optics and 5G.

Four years ago, Spain’s Telefónica adopted an approach to reducing its exposure in the region, which led it to adopt innovative alliances and strategies to continue its expansion plans.

Ahead of an event on digital inclusion that the company will hold in the coming week in Colombia, José Juan Haro, director of wholesale business and public affairs for the Latin American region at Telefónica, spoke to BNamericas about the sustainability issues of the telecommunications industry and the trend towards consolidation that is being observed in the region.

BNamericas: Telefónica has worked hard to reduce its exposure in Latin America and has relied on infrastructure sharing. What is the situation like today and what can we expect in the future?

Haro: Over the four years since we announced at Telefónica Hispanoamérica that we believed in sharing, it has indeed happened in Chile, Colombia, Peru and Mexico in different businesses, even in television, where we did something with Hispasat a few years ago.

We’ve been making progress in thinking of more efficient ways to better serve Latin Americans. Today it’s clear that we're the "advanced student" in the sharing class.

We're ahead of our competitors and we want to continue being so and extending that because this allows us not only to be efficient, but to accelerate deployments and have a cost structure that allows us to address the sustainability problem that our industry is experiencing.

BNamericas: What are margins like now?

Haro: This industry, when we have mobile operators of an adequate size, around 30% market share, used to operate with Ebitda margins above 30% in almost all countries. Today the regional averages are around 20% and even lower in some countries.

When you discount investment, the ability to generate free cash flow, and therefore shareholder remuneration, is in question in a number of markets. I’m not saying anything new when I say that this is a structural problem.

In Chile today, virtually no player can guarantee the recovery of the resources invested. The same is true in Colombia, but this is something that's generally perceived in all markets and has led to the exit of some operators.

The predominant model today is simply not working and needs to be revised.

BNamericas: In Colombia, you announced infrastructure sharing with Tigo and then the news came out that Tigo is exploring acquiring Telefónica's operations in that country. Can we expect exits from other markets as well?

Haro: Colombia shouldn't be seen as an exit, but rather from the perspective of integration, consolidation and gain in scale.

In the mobile sector, with the margins we've just mentioned, maintaining four or more operators doesn’t make sense, so it’s necessary to move towards consolidation in all territories.

We’ve already seen this in Brazil and Panama, and we’re seeing the processes in Chile and Colombia. We think that it will occur virtually throughout the region, and it’s desirable that this happens so that operators can become stronger and expand their networks.

Now, this consolidation has several models. It could happen that operator A buys operator B or operator B buys operator A or that they decide to manage the integration together afterwards. We're pragmatic.

In the case of Colombia, I won’t reveal the course of the negotiations, but Millicom [Tigo] was willing to make the investment to acquire our stake and, eventually, if there was interest, also to acquire the minority shareholders of the two companies participating in this integration. It’s an operation under construction.

The central issue for us is that we must seek consolidation, and a secondary issue is what is the specific path in each country. In the case of Colombia, it's this model, but in Chile we've announced a different strategy because we appear there as consolidating agents. 

[Editor's note: Halo is referring to the agreement with América Móvil to evaluate a joint acquisition of WOM.]

BNamericas: Colombia and Chile appear to be very difficult markets to achieve this sustainability due to their market structure. What other markets do you see as requiring more urgent consolidation?

Haro: I would talk about more than consolidation, because it’s part of the solution, not the only possible one. In the past we’ve talked about sharing... there is no silver bullet.

But we see problems of unsustainability in different markets. Peru, for example, is a market that’s also showing signs of exhaustion, and we’re seeing that Copaco is also having difficulties in Paraguay. There are tensions in different territories.

Honestly, where you haven't seen an earthquake, I think it's going to happen soon.

BNamericas: How do you view the Argentine market?

Haro: Argentina adds to the challenges of sustainability a macroeconomic expectation that remains an unknown.

As for the future, we’ll see what happens, but I would say that as soon as there is growth and elements that allow us to predict a better future, we will surely see the market move more intensely. But I’m optimistic.

BNamericas: In Argentina there are three big players and then many small and medium-sized fiber and pay-TV players that are currently in great difficulty. Do you think that consolidation will happen among the medium and small players instead of among the big players?

Haro: Due to the country's large size, Argentina has a set of small agents, cooperatives and internet service providers of different nature, which is somewhat similar to the highly fragmented ecosystem in Brazil. This isn't common in all countries in the region.

Indeed, we’ve made alliances of different types with some of these players [such as Iplan and Sion] and that is what differentiates Telefónica, which is its flexibility and intention to reach agreements and develop commercial alliances.

In this process, they may probably see an interest in consolidating and strengthening their positions. This has already happened in Brazil, where these operators have been growing by acquiring small operations. Now, we’re talking about futurology regarding decisions that others have to make.

We’re very open to exploring different formulas for collaboration, sharing and, eventually, consolidation where they make sense.

BNamericas: You have talked about the pressure to continue investing in fiber and 5G. What we’ve seen is the support of investment funds for capital contributions and also the creation of financial trusts. Can you expand on what solutions you’re finding to be able to maintain capex?

Haro: Well, in Argentina we haven't done anything like OnNet [a wholesale fiber network in alliance with KKR], but we're by far the operator that has deployed the most fiber in the country.

We have more than 4mn homes deployed with our own resources and more than 1mn in alliances with other players. So, we’re proud of our fiber footprint in Argentina.

As happened in Chile and Colombia, there may be an opportunity to move forward even further and expand the fiber footprint with structures like those we’ve tried in those countries, but everything depends on the appetite of the investment community, which, again, is connected to the macro. And it also depends on whether these businesses can be structured. The tax issue, for example, in Argentina has its particularities.

BNamericas: We’ve been talking for some time about the sustainability problem in the industry and the need for regulatory changes. What have you seen as positive in the work that regulators have done?

Haro: We’ve seen changes, but the urgency of the moment demands that decisions be made quickly. Where have we seen changes? Not in all countries, but the issue of spectrum prices is a major trend, as they've begun to be reduced both for renewal and for new tenders.

There are countries where, unfortunately, this change hasn't occurred, for example, in Mexico, where, seeing that spectrum prices were not going to change, we had to decide to return 100% of our holding, but in the rest of the countries we’ve seen this change. It hasn’t been an easy task, we've had to open financial information, we've had to deepen the public-private dialogue, we've had to generate trust, but we've seen a change in the governments' expectations of tax collection.

We’re also seeing moves on issues of reviewing portability conditions and security. But we would like it to be done more quickly.

Today much of the regulation has become obsolete.

Now that the spectrum task is complete, we’re focusing on proposing that the criteria with which competition authorities approach merger operations in our sector be reviewed.

BNamericas: What changes are needed in this regard?

Haro: We have a statement in which we say that changes are required at four levels: the review of market structures, expectations of revenue collection – this has to do with spectrum but also with taxes – the release of commercial restrictions and asymmetry between telecommunications operators and the major traffic generators in the market.

This inefficiency needs to be structurally corrected so that operators can recover their margins.