Voice over: the data revolution—late to Latin America but coming nevertheless—promises to change how people think of their cellular phones

Latin Trade, March, 2005 by Andres F. Velazquez

Cutting-edge mobile phone services Like satellite tracking of a cellular phone user or watching movie previews and soccer highlights on the very small screen has already begun to pop up in some parts of Latin America. Experts say that 2005 is the year that the mass adoption of mobile applications finally will take off in the region.

Part of the reason is less room to grow. The Latin American wireless industry has consolidated during the last four years. Now the three carriers that control 80% of the market--Spain's Telefonica, Mexico's America Movil and Italy's Telecom Italia Mobile--are honing their strategies to increase penetration while they update their networks to provide more data services, all aimed at increasing average revenues per user, an industry benchmark.

The carriers are well aware that the industry is changing and that they have to adapt to a new reality--people will want to use their phones for more than simply talking. "The data world is becoming increasingly important each day," says Ivan Ciganer, a director at the department of new projects at Telefonica in Peru. "Telefonica has understood this change. Today we have to sell services; voice has become a commodity."

Although it's clear that making calls is no longer the only reason to buy a cellular phone in the region, it remains to be seen how fast Latin Americans find new uses for their personal telephones and, beyond simple adoption, how much they will be willing to pay for data services. Between 10% and 15% of mobile operators' income in Latin America will come from non-voice services by the end of 2009, while in Asia and Europe the figure is already 20%, according to Pyramid Research, a Boston consultancy. In Hong Kong, for example, some operators already report half of their income comes from data transmission.

Today, however, just 5% of their wireless carrier income is from services that are not voice-related, according to Pyramid. Of that figure, the majority--between 85% and 90%--comes from short messaging service (SMS), also known as text messaging. In the United States, income from the use of applications other than voice represent between 5% and 6% of total sales, a figure comparable to that of Latin America. The difference is average revenues, which in the United States fall between US$50 and $60 per subscriber, while in Latin America the number averages $15.

Brazilian operator Vivo, a venture of Telefonica and Portugal Telecom that has 25 million subscribers and controls 55% of the Brazilian market, estimates that in only three years these mobile applications will generate 10% of sales. Three years ago, they accounted for 2% of total sales and today they are at 5%. Vivo executives are optimistic, arguing that a 10% slice of the Brazilian population is a key segment, and one that is just as wealthy as any comparable market segments in any country.

"In 2004, five times as many applications were sold compared to the year before," says Sergio Carpenter, president of Wiz Technologies, a Brazilian wireless applications developer serving Latin American operators, whose company has registered 1 million downloads in the region. "It wouldn't be unreasonable that in the coming year, this figure grows another fivefold."

The adoption of data transmission services like SMS and multimedia messaging service (MMS)--sending photos or videos via cell phones--vary a great deal from country to country. The Latin American mobile operator that has grown the most with this technology is Venezuela's Movilnet: Its SMS service accounts for 16% of its income, according to Pyramid. Telcel, also a Venezuelan operator, reported just under 10% of its revenue from SMS.

Operators have to choose from two technological paths toward modernizing their wireless networks, either of which eventually leads to the ability to offer third-generation (3G) services--by definition data transmission at minimum speeds of 384 kilobytes per second, according to the International Telecommunications Union. So-called first generation phones were the analog cell phones most people think of, while the second generation (2G) came with the arrival of higher-frequency digital service marketed as PCS.

One way of moving to the next generation involves adopting Code Division Multiple Access technology, better known by its initials CDMA. This technology is a product of San Diego, California's Qualcomm, which makes chips for cell phones meeting CDMA standards and, as a patent holder, then charges a royalty to mobile-phone companies that use it. For Qualcomm, it's all about mass adoption and volume.

Flexible. The other option is GSM, an open-source technology belonging to no company in particular and one that pretty much dominates the world for now. Both technologies have their pros and cons. The industry generally recognizes that CDMA is a more flexible, intelligent and advanced technology because, contrary to GSM, it doesn't assign a fixed frequency for each user, allowing carriers to use spectrum in the most flexible and optimal way. But GSM has been broadly adopted by carriers worldwide, so critics argue that CDMA ends up being more expensive because it lacks economies of scale. Many carriers already have invested heavily in GSM technology, too, which obliges them to continue using it.