The Caribbean Role on the Path towards Consolidation

By Jose F. Otero, Independent Consultant
During the 1990s, the global telecommunications market experienced one of the fastest growing periods
of its existence. This growth was largely driven by the introduction of digital technologies and the uptake
of mobile and other wireless communications, which provided cheaper network deployment
alternatives in markets where burying copper cables or fiber-optic lines was prohibited. This period was
marked by arbitrary overspending and overbuilding across the industry, with little attention paid to the
specific demands of any given market. Some operators did attempt to adapt their models to local
markets.
Due to its belated market liberalization, the Caribbean only incited interest from international global
telecommunications players after the industry crash, creating a much different competitive dynamic in
the region. This analysis will examine the Caribbean’s evolving role in the global telecom scene and
provide a better understanding of the region’s new landscape, while answering the following question:
does market liberalization justify the large number of new entrants piling into many of these tiny
markets?
The Global Trend: Market Consolidation
While regions may vary on many issues, one trend that survived the test of regional differences was
consolidation. The boom led to an enormous proliferation of telecommunications service providers,
which increased the competitive pressures, thus forcing mature or saturated markets to commence a
period of realignment where weak players either exited the market or were acquired by their stronger
competitors. It’s important to note that this phenomenon didn’t limit itself to one specific segment of
the industry nor did it follow a pre-established schedule.
Consolidation continues to play out in every corner of the globe, defying any pre-conceived notion of
where it should happen first and which players will be more likely to combine their assets. Latin America
has not been isolated from this global trend and throughout recent years it has seen drastic changes in
its telecommunications landscape with segments such as mobile communications and IDCs becoming
some of the most visible examples of the industry’s development. With these occurrences, some
industry actors insist that the era of consolidation has essentially passed in most of the region and
especially in the mobile segment. However, this assertion is both shortsighted and inaccurate as ongoing
developments in Latin America and the Caribbean demonstrate that consolidation, even in the mobile
sector, still has to reach its zenith throughout the region.
Proponents of this school of thought say “consolidation is passé” because of the high market share
concentration of the remaining operators left in the sector. Looking at the seven to nine largest
telecommunications markets in Latin America, who has almost over 90% market share in almost every
segment of the industry (i.e., services, equipment, total revenues, subscriber base, etc.). Not to mention
that in markets such as Brazil the process will continue for the foreseeable future with attempts by CVC
Opportunity to consolidate its assets or by Telecom Americas to gain a uniform brand to approach the
market. The question that follows is: What happens with the more than 30 political entities in Latin
America and the Caribbean that range from independent countries to non-self-governed territories? In

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other words, mobile consolidation is much more than common ownership of telecom assets in Latin
America’s largest markets.
Narrowing the View: Looking at the Caribbean Islands
The Caribbean telecommunications industry is characterized by the asymmetry of competition in its
markets. The Spanish-speaking islands being the exception, intense competition started to arrive in the
region after the year 2000 – French and Dutch dependencies experienced competition at an earlier date.
Two main events acted as catalysts for this drive. The first was Jamaica’s opening to competition (and
the incredible success of one new entrant in Jamaica, Digicel). The second was the World Trade
Organization’s liberalization requirements, which, among other things, eliminated trade subsidies and
gave the islands an impetus to increase competitiveness and diversify their economies through the
modernization of the local telecommunications industry.
The significance of Jamaica’s liberalization to the rest of the English-speaking Caribbean is demonstrated
by the adoption of its ‘phased liberalization’ model by most Eastern Caribbean islands. Thus, Jamaica’s
regulatory experience has provided an excellent initial framework for the recently created national
regulatory agencies (NRAs) of the ECTEL member countries. However, key differences in the islands’
market size, their potential addressable market, network coverage, and business/individual market
segmentation will force the various NRAs to adapt their legal framework to address specific local
requirements – and this is in accordance with ECTEL traditions anyway. The Caribbean’s market
characteristics provide a slightly different background to that experienced in other regions of the world
where telecommunications consolidation more or less has followed the traditional industry maturity
model, displayed here:

Source: Created by the author, © 2003 Jose Felipe Otero.

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© 2003, Jose F. Otero

The main difference in the Caribbean’s path to the “balanced marketplace” is that the process towards
achieving this goal in the region will be asymmetric starting at different levels (some islands are more
advanced than others) of the traditional archetype of leveled competition throughout and from there
expand in both directions while encompassing the following approaches: locality, technology, and
portfolio. Thus, the Caribbean islands provide an excellent case study for the analysis of “short term”
consolidation trends in peripheral markets, which this trend is expected to reach its climax within the
next 2-3 years. Furthermore, this process will exhibit more dynamism and quicker development than the
one undergoing in other Latin American markets because of:

Belatedness of liberalization: full telecommunications liberalization has yet to arrive to most
Caribbean islands;

Small population density: the island’s small number of inhabitants will shorten the time period
necessary for the market to reach their saturation point, forcing operators with marginal market
share to exit the market;

Minuscule addressable market: limited organic growth potential will speed up operators’
expansion outside the horizontal marketplace, triggering a sequence of alliances, mergers, and
acquisitions;

Local scene: pan-regional operators approaching the Caribbean as a ‘single market’ will create
insurmountable pressure on small one-island operators, forcing their exit or merger with a
larger pan-island partner.

Having identified these characteristics, an assessment of the various developments leading to the
integration of operations in the Caribbean is necessary to better understand the dynamics of the
markets as well as to identify the potential problems it may face. Knowing that consolidation is pivotal
for the healthy development of the Caribbean telecommunications industry is not enough. It’s
imperative also to understand what it entitles and what would be its impact. To answer these questions,
three main paths can be identified and analyzed under a Caribbean context: geographic consolidation,
technical consolidation, and service consolidation. It’s important to note that these trends are not
exclusive and may occur simultaneously.
The following drivers will boost the adoption of these different approaches to consolidation in the
Caribbean:

Need for complementary services that will boost revenues: saturation of horizontal markets will
push the necessity for vertical integration as a tool to increase the operator’s potential
addressable market and return on investment;

Service providers understand that they cannot survive as local players: the arrival of
multinational players that benefit from economies of scale and can offer lower costs on the
provision of services will create enormous pressure on domestic operators without a
multinational partner and will make the survival of the independent local player
insurmountable;

CANTO 19th Annual Conference - Atlantis, Paradise Island, The Bahamas
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Technological homogeneity becomes crucial: having a homogeneous technology and
applications platform across regional operations allows a company to achieve better economies
of scale, decreases OPEX, and facilitates subscriber management;

Companies focusing on their bottom line: cost reductions become crucial as the Caribbean is
currently undergoing an economic slowdown and financial constraints open the door to
consolidation, as unprofitable companies will be forced to exit the market.

Geographic Consolidation
Typically characterized by mergers and acquisition, changes in geographic coverage constitute the most
recognizable or ‘news worthy’ of the various existing trends towards industry consolidation. Companies
qualified as undergoing this type of structural change could be catalogued under two categories: Macro
or Pan Regional Consolidation and Micro or National Consolidation.
Traditionally, operators justified their geographic expansion by highlighting elements such as economies
of scale, increased leverage when dealing with vendors, strengthening of the brand name, and the
expansion of their potential addressable market. Furthermore, it’s important to note that in many
instances micro and macro geographic consolidation takes place simultaneously as operators looking for
a pan-regional presence usually lack complete national coverage in some of the countries where they
hold operations.
Geographic consolidation may provide immediate benefits for companies taking this route only if the
expansion is accompanied with operational integration of the new entity. The most obvious benefit of
integration is cost savings, as inefficient task duplication is eliminated, allowing for the emergence of a
leaner and more efficient company. For example, the recent acquisition by America Movil’s local
subsidiary Comcel of MIC Latin America’s Colombian mobile operator, Celcaribe, serves to demonstrate
America Movil’s commitment to the South American country (i.e., micro consolidation) by finally gaining
a national footprint. Moreover, this also plays along the company’s pan regional strategy (i.e., macro
consolidation) of becoming one of the leading mobile players in the region’s main markets.
So what’s the next step? The ‘upgrade’ of this strategy as this approach becomes an integral part of
companies’ macro consolidation schemes. There’s no reason for a telecom operator such as Digicel to
maintain administrative offices in each Caribbean island where it has a presence if administrative
operations could be centralized in a main office while maintaining a local presence to attend to
customers. Cable & Wireless proved the attractiveness of this proposition in the Caribbean when the
company announced its intention to centralize most of its regional operations into three major hubs:
Jamaica, Cayman Islands and Barbados.

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Technological Consolidation (Standardization)
One of the main issues faced by mobile operators with operations in more than one region/country is
how to achieve a homogeneous technological platform for their operations. This difficulty seems to be
eradicated by the adoption and implementation of 2G+ technologies which act as a catalyst for
developing a uniform mobile digital standard. Some of the benefits that mobile operators gain from
homogenizing their networks include:

Better economies of scale when negotiating with vendors;

Increased efficiencies that decrease OPEX;

Allowances for the implementation of a coherent and uniform migration strategy for subscribers
from 2G networks to 2.5G/3G networks;

Facilitated introduction of new services that may help halt/reverse ARPU’s decline;

Increased efficiency in RF spectrum capacity usage.

Nevertheless, as Telefonica Moviles (TEM) has shown, a pan regional operator may decide to reach 3G
through different technological paths – TEM’s Brazilian joint venture with Portugal Telecom, Vivo,
commercially launched CDMA2000 1XRTT in 2002 while TEM in Argentina, Chile and Mexico chose to
move towards 2.5G through GSM/GPRS. The Caribbean’s competitive scenario includes pan-island
operators with different 1G and 2G legacy systems. For example, Oceanic Digital Communications
currently offers services (directly or by reselling) in the Caribbean on AMPS, TDMA, CDMA and GSM
networks. That said, the mobile operator has already announced its preference for CDMA2000 as the
technology of choice for new network builds and for offering high-speed data mobile services. Another
example is Cable & Wireless, which does not have the plethora of technological platforms owned by
Oceanic, but has announced its intention to homogenize all its Caribbean networks under a
GSM/GPRS/EDGE platform.

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Technological consolidation could be slowed by events outside the operator’s control, such as economic
crisis, corruption, obsolete regulations and delays in licensing processes. For example, mobile operators
without enough RF spectrum desiring to speed up their migration towards 3G could be deterred from
leaping directly towards UMTS (W-CDMA) as their ultimate goal as the European-backed standard
requires more spectrum than the other available alternatives, such as CDMA2000 and EDGE.
Service Consolidation
The third and least-recognized path to consolidation is the result of the exhaustion of operators’
horizontal expansion in a segment due to market saturation, which then drives a move towards
becoming vertically integrated. This trend is reflected by the emergence of the full service providers or
‘one-stop-shop’ operators that offer customers all the basic telecom services: mobile and fixed
telephony, local and international long distance, Internet, and broadband.
Companies such as Venezuela’s Telcel BellSouth, Tricom in the Dominican Republic, Chile’s Entel and
Bolivia’s Comteco are examples of Latin American full service providers. There is no doubt that achieving
‘full service operator’ status allows new entrants to better challenge incumbent operators in the
acquisition of corporate contracts while increasing the loyalty of individual consumers. Furthermore,
telecom operators that don’t have the necessary capital to expand outside their traditional concession
area are driven towards achieving ‘full service operator’ to secure their niche position in the market.
Ultimately, all of the world’s telecom operators are slowly moving in this direction of providing a full
portfolio of services, but in the small markets of the Caribbean, this process is likely to be accelerated.
The small number of inhabitants that characterizes most Caribbean islands provides mobile operators
with two clear messages. First, the size of the potential addressable market won’t sustain a mobile
operator without an ample service portfolio, and secondly, as the market reaches saturation point
mobile service providers will have to turn to organic growth to safeguard the company’s bottom line.
Mobile concessionaires in the Caribbean understand this predicament as many moved into the mobile
sector specifically to expand their already existing telecommunications portfolio (Sunbeach
Communications in Barbados, Paradise Wireless/Marpin in Dominica, etc.). Other operators are already
looking into new service segments (Digicel in Jamaica, Haitel in Haiti, TWTC in Cayman Islands, etc.)
Threats & Barriers to Consolidation
The telecommunications industry is not isolated from developments taking place in other segments of
the economy, changes in the political scenario, external pressures, or unexpected developments such as
natural disasters that may have a negative impact on a company’s bottom line. In other words, the path
towards consolidation of the industry might be blocked or accelerated by sudden volatility in any of the
previously identified market variables. The major threats or barriers to the development of
consolidation of the Caribbean mobile sector are:

Extreme optimism about the markets: the opening of the region’s telecom market has led many
governments to exaggerate the potential demand for services. Thus, these governments expect
small Caribbean islands to sustain a competitive environment with 3 or 4 profitable mobile
operators (as seen in most ECTEL countries). This overly optimistic approach will be detrimental
to achieving healthy market growth and although market dynamics will eventually decrease this

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excessive number of players, mobile concessionaires will have a difficult time recovering their
investment in the short to medium term;

Regulatory barriers impede consolidation: NRAs may present unintended roadblocks to market
development if they cannot avoid delays in licensing procedures (as seen in Trinidad & Tobago
and the Bahamas), if they are inefficient in enforcing the new pro-competition legal framework
(as in the interconnection disputes with Setar in Aruba or Marpin in Dominica) or if they impose
strict ownership restrictions that deter cash inflow into the industry.

Lack of capital to deploy new technologies: A government’s ‘rush’ to liberalize could leave
officials unprepared or unable to thoroughly assess a bidder’s financial capabilities. Thus,
concessions have been granted to entities without the necessary funds to build out a network to
launch services. As a result, the concession is ‘held hostage’ by the new owners who might try to
utilize their spectrum concession as a bargaining tool in their conversation with foreign
investors. The experiences of Gensat, CariGlobe, and to a lesser extend Oceanic Digital
Communications, serve to illustrate the dangers of granting a mobile license to a company that
does not have immediately accessible funds to finance the launch of a new mobile service
provider;

Phantom of populism: contrary to circumstances taking place in other countries of the
hemisphere, Caribbean islands have yet to be affected by a populist leadership that utilizes an
arbitrary process to change regulations in order to improve their position in front of their
constituents. Nevertheless, the phantom of corruption is still present in several countries of the
region that have failed to guarantee the independence of their regulatory entities (as clearly
shown by Haiti’s Conatel) or have allowed the liberalization process to stagnate without
exercising the necessary pressure to guarantee the opening of the market.

Future Outlook: Wireless to Save the Day
The impetus towards consolidation will increase the interest for wireless spectrum – for both fixed and
mobile technologies – as companies seek economically viable opportunities to expand their service.
Operators (mostly mobile service providers) will look into acquiring wireless local loop licenses that
would allow them to bypass the incumbent’s last-mile monopoly. On the other hand, incumbents that
couldn’t secure mobile spectrum have the alternative of reaching an agreement with one of the
market’s mobile players and, as done by Bolivian cooperative COTAS, launch a Mobile Virtual Network
Operator (MVNO) or resale operation.
The path towards consolidation in the Caribbean also includes strategic issues such as:

Operators should establish a homogeneous brand name in all of their service areas. Oceanic
Digital Communications offers the best example of a Caribbean player that needs to consolidate
its brand equity as it currently operates under four different names: Oceanic Digital
Communications, Cellular One, Paradise Wireless, and GlobalCom;

Coherent/simple rates and billing transparency are necessary not only to capture new clients,
but also to retain the current customer base;

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Companies that traditionally have not been able to provide excellent quality of service in their
core competencies will find it harder to convince potential users to subscribe to their new
services. This is vital for wireless services, as spotty coverage is a common malady of newly
deployed networks.

Furthermore, is important to note that consolidation in the Caribbean will emerge as a by-product of the
liberalization process and as a consequence of operators exiting the market. That said, the competitive
dynamics of the region provide mobile operators with the opportunity of being the main benefactors of
consolidation, as vertical integration will better position mobile service providers to compete against the
fixed-services incumbent. Mobile operators will be able to position themselves and better segment their
markets, facilitating specialization and the targeting of niche markets.

CANTO 19th Annual Conference - Atlantis, Paradise Island, The Bahamas
© 2003, Jose F. Otero