Broadband tariffs in Latin America and the Caribbean: Benchmarking and trends by Hernan Galperin


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This paper analyzes the characteristics of broadband services offered in Latin America and the Caribbean. The analysis is based on a survey conducted in 24 countries of the region, to the leading operators of mobile and fixed broadband in each market, and was then compared to OECD countries. Data refers to Q2 2011, and comparisons are made against the same survey in Q2 2010.

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Broadband tariffs in Latin America and the Caribbean: Benchmarking and trends by Hernan Galperin

  1. 1. Broadband tariffs in Latin America and the Caribbean:Benchmarking and trendsHernan Galperin, University of San Andrés (Argentina).Supply characteristics are a key indicator of the broadband Internet access market performance. Theprice, quality, existing contracting options and other characteristics of the supply are also an importantdeterminer of service adoption levels in homes and businesses1. This paper analyzes the characteristicsof broadband services offered in Latin America and the Caribbean. The analysis is based on a surveyconducted in 24 countries of the region, to the leading operators of mobile and fixed broadband ineach market, and was then compared to OECD countries. Data refers to Q2 2011, and comparisons aremade against the same survey in Q2 2010.2Despite the increasing segmentation of the supply and access speed improvement, poor quality andhigh prices of fixed broadband are still common in Latin America and the Caribbean.The increasing segmentation of fixed broadband supply in the region is a positive sign of the gradualmarket development and the operators’ interest to expand the universe of clients served. This isreflected in the increased supply of entry-level plans, which offer a basic service (between 256kbps and512kbps of download speed with data download volume limits) at relatively affordable prices. Inseveral countries these plans are part of government initiatives to expand broadband access, eitherthrough state operators (as in the cases of Venezuela, Costa Rica and Uruguay) or agreements with theprivate sector (as in the case of Brazil). On the other extreme, we find a growing range of plans withvery high access speeds (> 30Mbps download speed) aimed towards the residential and SMEs marketin countries with more mature markets such as Argentina, Brazil and Chile, as well as the Caribbean(particularly Jamaica and Trinidad & Tobago).Nevertheless, as shown in Figure 1, the quality of the offered fixed broadband varies significantly in theregion. Less than half (11 out of 24) of the countries surveyed offer speeds above 10Mbps, and no oneoffers FTTH. The setback is particularly significant in many countries where the average broadbandoffer does not exceed 2Mbps. It is also worth mentioning that, on average, supply quality (measured byoffered download speeds) is four times higher in OECD countries. Still, the trend is positive and theaverage supply quality increased by 65% in the region compared to 2010, which, as shown below,entails a significant cut in service costs per Mbps.1 See Galperin and Ruzzier (2010).The broadband tariffs: benchmarking and analysis. In Jordan, V., Galperin, H., & Peres,W. (Eds.). Accelerating the digital revolution: Broadband for Latin America and the Caribbean. Santiago de Chile: ECLAC.2 The survey was conducted according to OECD guidelines (see 1
  2. 2. Figure 1. Quality average of offered fixed broadband (in kbps download speed), Q2 2011The tariffs of fixed broadband services in the region should be evaluated in relation to the restrictionson the quality of the service. On average, tariffs for fixed broadband in the region are three timeshigher than those found in OECD countries, although, as shown in Figure 2, there are significantvariations between different markets. On the other hand, the introduction of low-cost access plans hasreduced the price gap with OECD countries in the entry-level supply segment. In this segment, theaverage tariffs in the region exceed those of OECD by 80%, which represents a significant improvementcompared to the 2010 survey (on average, there is a 16% year-on-year reduction in the cost of entry-level plans in the region). Furthermore, countries like Venezuela, Uruguay and Brazil stand out giventhat they offer basic access plans with tariffs that are similar or below the level of most developedcountries.3The introduction of low-cost access plans has reduced the price gap with the OECD in the entry-levelsupply segment.Another trend that has reduced market entry barriers is the increasing availability of bundled services.They are offered in over half of the countries surveyed (15 out of 24) and provide broadband, phone(generally unlimited local calls) and cable TV services. In less than half the countries (11 out of 24) tripleplay bundles are available, although in some cases, these bundles include TV services provided byagreements with satellite TV operators. Service bundles can expand the market by reducing additionalcosts for users who already pay for other services. Nevertheless, as noted by the OECD (2011), it isnecessary to monitor these practices as to ensure an ideal combination of stand-alone services andbundle offers.43 Of course, even in these countries the relative cost is still higher due to lower income levels in the region. In thisregard see Galperin and Ruzzier (2010).4 OECD (2011).Broadband bundling: Trends and Implications. OECD Digital Economy Papers No. 175. OECD Publishing. 2
  3. 3. Figure 2. Fixed broadband plans (least expensive plan and average plans offered) in US$ PPP, Q22011Comparisons based only on tariffs do not take into account quality restrictions of broadband services inthe region. To introduce them, the unit of comparison must be the cost of the access service per Mbpsdownload speed, an indicator that considers both price and quality of the service promised. The resultsare shown in Figure 3. Given that the tariffs are non-linear; this indicator favors the more maturemarkets where there are higher speed offers (and therefore lower cost per Mbps). Hence we find thatthe average cost of Mbps download speed for a household in the region is 20 times that of a home inOECD countries. But again, there is significant price dispersion among countries in the region: analyzingthe extreme values, the average Mbps cost for a household in Chile is 25 times cheaper than for ahousehold in Bolivia (in US$ PPP). It should also be noted that in countries with very high speed offers(> 100Mbps) such as Brazil and Trinidad & Tobago the Mbps cost is similar to OECD reference values.The results show a significant dispersion in fixed broadband prices among countries in the region:analyzing the extreme values, the average Mbps cost for a household in Santiago de Chile is 25 timescheaper than for a household in La Paz, Bolivia.Moreover, the trend shows a remarkable improvement regarding 2010 given that, although nominaltariffs did not present much change, the supply quality improvement has resulted in a 36% reduction inthe average cost of Mbps in the region. The improvement is even greater in the case of entry-level 3
  4. 4. plans with a 44% year-to-year decrease in the Mbps average cost in this segment. Even though thistrend is positive, broadband price/quality ratio improvement must be accelerated in order to reducethe gap that separates Latin America and the Caribbean from most developed countries.Figure 3. Fixed broadband plans (least expensive plan and average plans offered) in US$ PPP Mbps,Q2 2011The causes of the persistent price gap between Latin America, the Caribbean and the OECD, as well asimportant price dispersions between countries within the region, are manifold and require anextensive discussion which exceeds the scope of this paper. However, some aspects that arise from thisanalysis are worth mentioning. First, a lack of intermodal competition can be seen (i.e. betweendifferent fixed broadband access platforms) in almost one third (7 out of 24) of the countries surveyed.This deficit in investment for alternative access infrastructures must be offset by rules that enablecompetition among service operators on the same platform (in general the one controlled by theincumbent operator of fixed telephony). However, high prices found in some of the less developedmarkets show the limited range of these rules in the region.In these cases, the only alternative to discipline fixed broadband access prices is mobile broadbandsupply. This requires defining up to what extent are fixed and mobile broadband complementary orsubstitute products; to be addressed in the next section. It should be noted that in most countries, theoperators who offer both services are the same, which reduces the incentives for direct competitionbetween the two platforms. 4
  5. 5. Price dispersion among countries in mobile broadband services is significantly lower than thatobserved in fixed broadband plans, indicating higher levels of competition in the mobile segment.Mobile broadband development is seen as an opportunity to address the competition shortage in fixedbroadband services and also expand existing market boundaries. According to ITU estimates (2011) thenumber of mobile broadband connections doubles that of worldwide fixed connections. This requiresanalyzing up to what extent are these services substitutes or complementary, and in turn, thecomparison of supply characteristics of both services. This comparison has some limitations. Firstly, thepromised quality of both services is not strictly comparable. Usually, mobile broadband services aremarketed under a single speed promise (in general between 1 and 3 Mbps), which, in many cases, isreduced once exceeded a threshold level of data download. At the same time, the supply of mobilebroadband plans has greater segmentation in terms of contract options (prepaid or postpaid), length ofservice (can be purchased from one hour to a monthly contract), data download and other demandsegmentation variables.This paper is limited to examining mobile broadband services as a substitute for fixed broadband. Inother words, the analysis is limited to examining the extent to which mobile broadband puts pressureon supply prices for residential fixed broadband. Therefore the analysis only compares mobile and fixedbroadband plans which -in terms of type of contract and service quality- are close substitutes. Thecomparison focuses on (monthly) subscription tariffs of mobile broadband services of at least 1GB ofdata download volume (regardless of the access device), vis-a-vis the tariffs of fixed broadband serviceswith similar quality (between 1 and 3 Mbps download speed).5Figure 4 presents the results of this analysis.6 Price dispersion in mobile broadband services issignificantly lower than that observed in fixed broadband plans: the gap between countries with thehighest and lowest average cost (Bolivia and Uruguay respectively) is reduced 14 times in the case offixed services and 5 times in the case of mobile broadband, while the standard deviation is three timesless in the case of mobile broadband. The greatest tariff equality reflects greater competition levels inthe mobile segment, where -with the exception of Costa Rica- there are two or more operatorscompeting in each market.5 Although data download restrictions make some of the mobile broadband services not strictly identical to those offixed broadband, the ITU criterion was used to establish a 1 GB minimum level of monthly use for the compared plans.See ITU (2011), Measuring the information society. Geneva: ITU.6 It is noteworthy that Belize and Suriname were excluded from this analysis due to lack of information on mobilebroadband offers in these countries. 5
  6. 6. Figure 4. Fixed broadband vs. mobile broadband monthly cost (average plans of up to 3Mbps and1GB download) in US$ PPP, Q2 2011The results reveal that, on average, mobile broadband services are 25% cheaper than equivalent fixedbroadband services. However it is worth noting that the difference is largely explained by the worstperforming fixed access markets; while in some of the more mature markets such as Uruguay and Chilethe tariff difference between the two platforms is significantly reduced. Taking only the cheapest plansfrom each market into consideration, the difference in favor of mobile services is extended to 32%.Again, in countries with less developed fixed services -like in most Central American markets- thedifferences are greater than in more mature markets.The results reveal that, on average, mobile broadband services are 25% cheaper than equivalentfixed broadband services. Taking only the cheapest plans from each market into consideration, thedifference in favor of mobile services is extended to 32%.In short, there is no doubt that mobile broadband development favors access market expansion byproviding an offer of higher segmentation level in terms of type of contract, length of service anddownload limits, as well as competitive prices regarding equivalent fixed access services. The resultsshow that mobile broadband supply is complementary to fixed broadband in terms of services focusedon mobility and prepaid access, and also a substitute due to the pressure it puts on prices in the entry-level segment plans.Lastly, it is important to point out the increasing segmentation by type of service (chat, mail, socialnetworks and navigation) in the marketing of mobile broadband services. Although these commercialinnovations allow the operator to segment the demand and improve traffic management -which in turnreduces deployment and network operation costs-, they also introduce potential competition problems 6
  7. 7. in the value-added services market, and must be monitored to ensure the markets competitive functioning.This paper was carried out with the help of funds allocated to the IEP by the International Development Research Center and the CanadianInternational Development Agency, Ottawa, Canada.This document is licensed Creative Commons type: Attribution - Noncommercial - Share Alike 2.5 Peru. You may: copy, distribute and transmit the paper and make derivative works under the conditions of the license: 7