Share the land

Posted on Friday, September 21, 2018

The national backbone project in Peru has come under heavy criticism. A similar network in Colombia is limping along. The Mexican shared 4G network has finally signed up its first customer. What is wrong?

The Peru story is the most recent and most detailed so I will focus more on that situation.

Regulator Osiptel reported to the Peruvian congress that as of mid-summer, the network was only being used to 16% of its capacity. Operator Azteca says it lost US$1M in 2017 and while losses to July 31st, 2018 were lower, it still says it wants to leave. Members of congress questioned Osiptel and the Ministry of Transport and Communications why any more money should be spent on something that is clearly not serving the country. It costs taxpayers US$40M per year for maintenance.

The government says it has proposed contract amendments to improve the business model, principally allowing more pricing flexibility but the company has not accepted the amendments. Other press stories say Azteca wants to just walk away but that would cost it US$20M for breach of contract.

Negotiations continue.

The Colombian story is somewhat similar in that both Azteca (which also operates the Colombian network) and the Ministry have complained that there is not enough demand to justify the ongoing opex and pay for the initial investment.

To be fair to the Mexican network it is relatively new. It is also the most ambitious of the national network sharing models because it is providing 4G mobile service, not just a backbone. Landing Telefonica as a client is an important win. Previously, only very small players had been announced.

Pundits – like me – and vendors think the business case for network sharing is a ‘slam dunk’. Unless you are the biggest player in the game – think America Móvil in Mexico – you are going to have to provide coverage in a lot of low-population areas where your share will be small. Hard to justify going there on your own but by sharing costs with other smaller-market-share players, you may still not make much money but the pain would be much less.

In the Colombian case, the government asked operators what was their number one barrier to providing better service in remote areas. The operators said “backhaul costs”. So the government built them a backhaul network that gets to all but the 75 smallest and most remote of Colombia’s nearly 1200 municipalities.

The major operators do not use it.

Or at least not enough for Azteca to make money.

I frequently write that Latin American operators got low marks for “Plays well with others” on their kindergarten report cards. That may be one of the reasons but I still wonder why ‘bloody mindedness’ as the British call it would cause you to waste money.

A few weeks ago, I wrote that much of the problem was at the retail level. The Colombian Ministry thought that even if the operators did not go to, say, La Macarena in southern Meta, entrepreneurs would spring up to offer services themselves.

That didn’t happen.

I suspect that this is a factor in the Peru problem and may be one of the issues with the Mexican shared mobile network which, like the Colombian backbone was supposed to bring advanced services to rural areas.

In Peru, the government subsidized the Azteca network but operators went and built their own anyway, over 24,000 kilometers of fiber in exactly the same areas as the national backbone, according to figures that surfaced during the debate in Congress. The same thing happened in Colombia: if an operator wanted to provide more bandwidth than just the minimum required by their license commitments, they built their own backhaul.

To repeat, this must go beyond just bloody mindedness: there must be an economic argument.

In the case of America Móvil, the company believes that one of, if not its main, competitive advantage is its cost of capital. Parent Grupo Carso is a diversified conglomerate that generates buckets of cash. America Móvil benefits from that and so it believes that whatever utilization benefit it might get from sharing would be wiped out by having to pay (implicitly) a higher cost of capital.

It does not want to share its own network for the same reason: it does not want to give its competitors the benefit of a much lower cost of capital.

Telefonica may feel the same in many countries, particularly in Colombia where it owns the former fixed carrier of last resort and so has service obligations in many small towns and cities.  In Mexico, where it has never achieved the goals it hoped to achieve and does not have an extensive enterprise business (which would require it to have a big, high-capillarity fiber network), it is not surprising that it might opt for network sharing.

The national network sharing idea is not working, at least not in its present form.

I really do not want to admit this but there is more than a grain of truth in one of the conclusions from the hearings in Peru, that maybe the problem is structuring the business model so that private investors can run the show. If the problem is that the major operators do not want to go to some small town in the wilderness on their own, maybe that is an indication that no mixed public-private model will ever work. In such cases, the Ministry of Communications should just suck-it-up and build a network to serve such small towns, with no expectation of ever making a profit.

If the operators do show up or express interest in providing broadband somewhere, the Ministry could always sell it facilities to that town, even periodically offering bits of its network to the highest bidder in exchange for a commitment to provide service at such-and-such level of quality.

I really do not like that suggestion because we all should remember what happened with monopoly, government owned telcos. That was the disaster we were trying to get out of when we privatized in the 1990s.

But it does seem like maybe the only way that the urban/rural digital divide will ever get solved.

Sharing the land does not seem to work.

(Title reference: Maybe readers who grew up in the US will remember this 1970 Guess Who song from the album of the same name. It did get to number 10 on the US Billboard charts. Maybe not. North-of-the-49th-parallel readers will remember it because CRTC rules mean that Canadian content gets more airtime. You heard it more the first time and you hear it more as replays and on ‘oldies’ stations.)

 

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