Foglamp Overseas Insight: Q1 2011

We hope you enjoy this latest installment of Foglamp’s Overseas Insight, which covers trends and investment opportunities in overseas markets.  Don’t hesitate to contact me if we can help with your own investment idea generation and due diligence needs. – Kate Horn, Director, Foglamp (kate.horn@foglamp.org)

In this issue

FOGLAMP INSIGHT: Exploding demand for cell phone towers in Brazil

WHAT WE’RE HEARING: The latest chatter on overseas investment

CONTRIBUTOR PROFILE: Our teams on the ground

FOGLAMP INSIGHT: Exploding demand for cell phone towers in Brazil

COMPANIES MENTIONED

Telecoms: Vivo, Claro,TIM, Oi. Service Providers: Relacom, Embratel, QiS Engenharia

With the increasing availability of spectrum-guzzling mobile devices, Brazil had witnessed a more than 15% increase in the rate of cell phone tower installations since 2008. São Paulo, the wealthiest state in the country, has seen towers go up at a rate close to 20%.  As those numbers increase, tower providers and operators able to keep pace with the exploding demand stand to benefit.

Shifting landscape

Brazil has 203 million cell phones for 185 million inhabitants, according to January 2011 figures from Anatel, the country’s telecommunications regulator. Most of those phones, up to 80% for some mobile operators, are cheap, prepaid devices – so-called “burners.” There are four major mobile phone operators in the country – Vivo (owned by the Spanish group Telefónica), Claro (owned by Mexico’s América Móvil), Oi (owned by the Brazilian group Telemar, with minority shareholders Portugal Telecom, the state-owned Brazilian development bank BNDES, and the pension funds of Brazilian civil servants) and TIM (owned by Telecom Itália).  In a country where more than 2,500 cities lack raw sewage collection, only 19 cities in Brazil lack cell phone coverage.

Currently, the largest share of cell towers in the country belongs to Oi. Oi controls 4 in every 10 towers in Brazil despite providing service for only 1 in five 5 mobile phones. Vivo, with nearly 3 in 10 mobile customers, controls 25% of the towers. Claro (18% of towers) and TIM (15% of towers) bring up the rear.

In 2010, Anatel announced important auctions of high-speed 4G wireless spectrum. That new spectrum will require both upgrades to existing cell phone towers as well as new towers. Meanwhile, due to rising real estate costs across much of the country, acquiring sites for new towers has quickly become more and more expensive. A number of mobile phone providers – especially TIM, which controls only 15% of the towers in Brazil despite servicing 25% of the phones – are increasingly talking in public about the need to share tower capacity.

Sharing infrastructure a solution to tower shortages?

In a press conference in December, TIM’s president Luca Luciani said that to meet growing demand for network capacity, Brazilian cell phone companies needed to ramp up tower installations immediately.  “It’s like trying to fit 3 million people in the Maracanã stadium. It’s possible to do it, but you’d need 50 floors of seats,” said Luciani. Claro’s president João Cox reckoned in 2009 that to properly handle demand for 3G services in the country, mobile operators would need twice as many towers as they needed when rolling out 2G coverage.  The looming 4G auctions will compound the problem further.

Currently, installing a new cell phone tower in Brazil can take up to four months due to the red tape involved in site acquisition. The cost of site acquisition is increasingly becoming a burden thanks to a booming real estate market. In São Paulo, for example, square meter prices have shot up 267% in some parts of the city. Both factors – red tape and high real estate prices – are encouraging the cell phone operators to try and share their networks and towers as much as possible.

A number of the major operators already share towers and backhaul infrastructure, although that cooperation is often limited. Claro, Vivo and Embratel are preparing a shared fiber optic ring to support their data transmission networks, but they still maintain competing voice networks. A 2010 study by AT Kearney argued that sharing networks in Brazil would not have a meaningful impact in reducing the network operating costs of the major carriers.

In December of 2009, Anatel convened a meeting of six of the major cell phone companies. Jarbas Valente, Anatel’s superintendent for private services, presented the carriers with a proposal: they could share a common physical network provided that the traffic was separated. As of January 2011, public comments were still being sought to determine the feasibility and conditions under which such a shared network strategy might be allowed to occur.

The immediate winners

In the meantime, more towers will have to go up across Brazil.  Most of the network installation and maintenance of towers is done by contractors on a turnkey basis: the contractors, and not the cell phone companies, are responsible for maintaining the towers from site acquisition to tower maintenance. Since the contractors usually work for most or all of the mobile operators, a possible move towards a shared infrastructure model could also reduce some of the contractors’ own costs.

The biggest tower contractor in Brazil is the Swedish company Relacom. Their clients include three out of the four largest cell phone operators: Telemar (Claro), Telefonica (Vivo) and TIM. Relacom is responsible for the maintenance of more than 3,000 towers in the country.

Oi, which controls the largest number of towers of all the carriers, doesn’t use Relacom’s services. Oi has traditionally worked with Nokia Siemens; Nokia Siemens was responsible for installing Oi’s 3G network, at the time the first 3G network in Brazil. In 2007, Oi hired Nokia Siemens executive Eduardo Smith to manage their in-house tower contractor, Serede. Serede focuses primarily on Rio de Janeiro, where Oi has its largest concentration of subscribers. At the time, they reported spending R$500 million (US$300 million at today’s rates) every year for outsourced network and cell tower maintenance services, contracting with 24,000 employees in 16 Brazilian states.

Tower contracts are scattered among many smaller contractors as well.  One of the better-known small contractors is Tel Telecomunicações, created in 2004 and based in São Paulo. The firm provides a variety of services for the big four operators: Oi (turnkey site implementation since 2007), Vivo (underground fiber optic networks), Claro (towers in São Paulo, Rio and Espírito Santo, as well as linking towers with fiber optic fibers) and TIM (fiber optic services in the Northeast).

The industry has grown at such a rate that the larger tower contractors are now sub-contacting services to small firms.  QiS Engenharia, for example, installs cables for Relacom, repais fiber optic cables for Telsul, and repairs phone lines for Lider Telecom.

Regulatory changes: battery requirements increased for towers

Two recent Anatel regulations (numbered 379 and 394) could cut into those burgeoning profits, however.   Those new rules increase the requirement for regular tests of the commercial-grade batteries used in towers to keep mobile services going in the event of a power outage. The telecom carriers are virtually the only users of those types of batteries – 80% to 90% of the batteries are purchased by the operators. According to technical experts at CPqD labs, resolution 394 increases the amount of required tests by 50% and requires that batteries be evaluated every three years.

Regardless of any eventual regulatory changes, there’s no indication that demand for tower infrastructure in Brazil will recede in the coming years.  For the firms best positioned to meet that demand, the future is bright.

WHAT WE’RE HEARING: The latest chatter on overseas investment

The Middle East and North Africa are not surprisingly on people’s minds.  What’s striking to us, however, is how unprepared many investors have been when it comes to having the resources and expertise in place to rapidly respond to and evaluate the tumult roiling the region.  While Foglamp has seen demand for research in markets such as Egypt and Morocco steadily increase in recent years, fewer investors have significant in-house contacts in those markets relative to their interest in quickly capitalizing on the continued rise of the consumer class in the region.  Given language and cultural barriers, perhaps this shouldn’t be surprising.  Foglamp has maintained and grown research teams in Egypt, Morocco, Algeria, Tunisia, Jordan, and Yemen for several years, and we can attest to the fact that building relationships in those countries is far tougher than in most parts of the world.  We expect a growing number of both investors and operating companies to take a hard look at  the risks and the potential opportunities in these countries as industries like energy, transportation, consumer, and tourism are impacted by events as they unfold.

CONTRIBUTOR PROFILE: Our teams on the ground

This Foglamp expert maintains a focus on the impact of conflict on property rights and is currently a professor in political science and international studies at the University of the Philippines as well as a member of the Board of Trustees of ESCR Asia, Inc., an organization dedicated to the promotion of economic and cultural development in the Philippines.  He was formerly a professor in economics at the University of the Philippines and vice president for research and strategic studies at the National Defense College of the Philippines.  He has also been a visiting associate professor at the Graduate School of International Relations and Pacific Studies at the University of California-San Diego.

He has conducted research into civil resistance and democratization in the Philippines for an Oxford University Press volume and has published papers on the politics of property rights enforcement and protection in the Philippines. His other research interests focus on the interplay between the Philippines’ four economies (formal, informal, criminal, and war economies).