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INSIGHT: Latin America + MENA Markets
by Carlos Placido, Analyst, Satellite Communications, NSR

Latin America and the Middle East & North Africa (MENA) are regions with (some) similar macro economic and telecom conditions. Economic developments driven by commodity exports have been reflected in telecom infrastructure upgrades and have lead to increased demand for satellite services to support broadcast, broadband, GSM backhaul, VSATs, and military applications. The current situation in both regions is one of demand for satellite capacity outpacing supply. One wonders if the current supply-constrained situation could shift to a demand-constrained condition, given the amount of capacity planned to be added into these markets, just in time for a potential retraction in demand as a consequence of a global slowdown. Telco DTH and military demand could have a pivotal effect on the supply-demand structure of satellite capacity in these regions.

The Macro Picture

Latin America and MENA are quite similar, at a macro level. These regions are essentially net exporting economies with abundant natural resources, having benefited from the recent global expansionary cycle. Their regional GDP growth rates are above 5 percent for several years. Population in these regions ranges between 300 and 400 million. IMF GDP forecasts for 2008 range between US$2 and $3 trillion for both regions, and economists tend to suggest that, in view of tough economic times, the short-term picture for these regions will be relatively good, given growth inertia and twin surpluses in many countries. Clearly, there are downside risks associated with weakness in the U.S. economy and the continuing squeeze in the credit markets. However, downturns among these net exporter and commodity producing regions could lag those of Europe and North America.

With more than 60 percent of the world’s oil reserves, MENA has enjoyed the benefits of rising oil prices, a situation reflected on satellite-delivered vertical applications, which together with demand for the military, has lead to quite a solid satellite business. Latin America’s economic growth in recent years, driven by rising global prices for commodities such as food and oil, has also resulted in good times for the satellite sector. About half of Latin American exports consist primarily of products such as food, fuel, metals, and minerals, and the VSAT sector has clearly benefited from such expansion.

Satellite Supply During Challenging Times
Generally speaking, demand for satellite connectivity in both regions currently outpaces supply, a situation clearly reflected in the rising capacity costs. It appears that this scenario will not begin to change with the satellite launches and reconfigurations planned by large and small satellite operators until 2010.

In MENA, capacity is limited as a result of strong demand for TV broadcasting and government use for the conflicts in Iraq and Afghanistan. New satellites are essentially full. There are plans for the construction of a number of satellites that will considerably augment satellite capacity over the next five years. These satellites include Badr-5, Arabsat-5A, W2A, W3B, W7, NSS-12, Yahsat-1A and >-1B, Intelsat-17, Amos-4, Nilesat-201, and Telstar-11 N.

In Latin America, a similar situation of demand outpacing supply has taken place. Economic growth has facilitated the business of satellite connectivity for VSAT networks, cellular backhaul, and more recently for telco DTH. It is expected that between 2010 and 2011, the supply-demand situation could change with the planned launches that include Satmex-7, Simon Bolivar, ArSat, Intelsat-14 & -16, Amazonas-2, Telstar-11, NSS-14 and Hispasat-1E.

With so much capacity planned, it is important to keep in mind that Latin America and MENA are net export economies, thus these regions are subject to global economic shifts. There are concerns about the lagging effects of the U.S. financial crisis and how a global economic slowdown could affect these emerging economies. The supply-constrained satellite scenario could shift to a demand-constrained situation relatively quickly, as demand could be hampered just in time for the planned supply boosts.

Latin America, in particular, has a recently experienced this situation. Capacity tends to be initiated in waves, and the number of planned launches raises big questions about how fast the market can absorb this maximum amount in light of uncertain economic times.

In a hypothetical oversupply scenario, capacity prices could drop through competition in these two regions, which have shown simultaneous processes of consolidation and fragmentation in satellite supply. On one end of the spectrum is the world’s largest operators, including Intelsat and SES, with global economies of scale, which have augmented their fleets and coverage via acquisitions, (i.e., Panamsat acquisition by Intelsat and New Skies by SES).

On the other end of the spectrum are national governments and local private groups seeking technological independence that have launched, or are in the process of launching, national satellites with domestic and regional footprints. This is the case for satellite operators such as Simon Bolivar (Venezuela), ArSat (Argentina), NileSat (Egypt), and Yahsat (UAE).

Turning Points in Military and Telco Demand
One application that could have a pivotal effect on demand in MENA is clearly military applications. In the Middle East, a considerable amount of capacity is being used for U.S. military operations and, should the U.S. pull out quickly from Iraq, a fair amount of this capacity demand could evaporate quickly. The results of the U.S. presidential election will be a proxy of how this situation could unfold, given the presidential candidates’ divergent views on the subject.

There will possibly be demand to support cellular expansion as well as satellite broadband solutions (example is Yahsat Ku/Ka band satellite), but NSR expects broadcast to continue to be the main satellite capacity driver. One trend that could substantially affect the supply-demand situation will be linked to how fast incumbent telcos and PTTs introduce television to complement triple-play offerings.

Latin America and MENA show growing, but still low penetration rates of broadband connectivity, a situation that, when combined with the low penetration of satellite pay TV (MENA has high penetration for Free-to-Air satellite TV) and high piracy rates, could facilitate the case for telco-led DTH and telco-DTH partnerships.
Latin America and MENA have upside prospects for pay TV. With roughly 15 percent pay TV penetration, Latin America is expected to cross the 30 percent pay TV penetration mark in less than five years.

MENA can also see its pay TV subscriber base growing over 30 percent. The prospects are, however, not evenly spread in these regions of wide disparities. Argentina has more than 54 percent cable TV penetration (largest in Latin America), but it is Brazil that has the largest potential. Similarly, Qatar has over 40 percent pay TV penetration (largest in MENA), but it is larger economies like Saudi Arabia and Egypt that have growth potential. The situation for telco TV could involve both sector growth as well as churn fighting fronts.

As pointed out by NSR in recent studies, in the race to provide bundled services, players are increasingly adopting pragmatic moves across traditionally competing platforms. The business of telco TV is not absent from this push for cross-platform play, and NSR expects that in regions such as Latin America and MENA with good prospects for Pay TV, but limited penetration of DSL broadband, satellites can play a major role in facilitating the transport of bandwidth-hungry television to consumers.

Challenging economic times provide opportunities for strong telcos to gain market share in television. In contrast with past challenging times when consumers would eliminate certain services such as cable TV or broadband, it is quite likely that consumer spending retraction this time can accelerate the move to effectively priced service bundles.

A good example of the bundling telco-DTH power can be found in Telefonica’s DTH service launch in Chile. With aggressive pricing and the bundling advantage, Telefonica was able to hook more than 250 thousand DTH subscribers since the launch of the service in 2006, having captured almost 20 percent of the pay TV market in just two years — perhaps such sounds like a small number, but it is considerable, given the Chilean market size and especially when considering the fact that historical player DirecTV has reached only about 100,000 subscribers.

New DTH operations could naturally consider the use of advanced modulation and compression techniques like DVB-S2 and MPEG-4 AVC (H.264), but the low-ARPU environment will discourage these until the arrival of HD (possibly in 2009) and STB prices decline.

DTH bundled with two-way DSL could also help offset serious piracy issues. In Latin America, piracy is a consequence of users splitting analog cable TV signals. MENA piracy is more sophisticated as it involves DTH smart card cloning (some believe a 10:1 ratio of pirated versus legal pay TV users).

Cable digitization and the push for two-way connections to STBs provide better piracy fighting tools. Cable digitization also facilitates the case for the launch of “headend in the sky” platforms and the introduction of HDTV. The costs associated with upgrading headend infrastructure will prompt small cablecos to take this route.

Shifting Needs
The demand-supply scenario for satellite connectivity will be subject to economic, political, and technology shifts. Military operations in the Middle East and telcos deploying satellite television could mean turning points for the demand structure of satellite capacity in MENA and Latin America. Such is a situation that will need to locate a healthy match against current and planned capacity supply.

About the author
Carlos Placido has more than 12 years of progressive experience in the areas of consulting, program management, research and engineering in telecommunications and entertainment.

He has carried out independent business development, technology assessment and management activities, including market research studies for NSR, assessment of regional business potential for vendors and project management at Telefonica. Until 2004, he led a development team at Intelsat in Washington, D.C. where he was responsible for identifying and validating emerging video and data technologies for their potential applicability to new and existing services. Mr. Placido’s development efforts at Intelsat included advanced video networks, IP television, satellite multicasting and broadband, having made significant contributions including spearheading satellite IPTV, improving Internet throughput enhancement and pioneering high-speed satellite LAN-to-LAN.

Mr. Placido is currently based in Buenos Aires, Argentina. He holds an engineering degree from the University of Buenos Aires and an MBA from the University of Maryland, Smith School of Business. He is fluent in Spanish and English.