This year will be challenging for the pay TV industry in Latin America and the Caribbean as it battles the impact of slowing economic growth and changing customer preferences. Nevertheless, Kagan projects growth in the fixed-broadband segment to remain strong and our projections indicate fiber to the premises, or FTTP, will have the most net additions in 2020. Regarding M&A activity, Telefónica Hispam and Fox Sports are key assets to watch in the year.
Pay TV to return to growth, while broadband growth strengthens in 2020
Kagan estimates Latin America's multichannel and broadband subscriber bases will expand by 1.2% and 5.4%, respectively, during 2020. We have revised down our multichannel forecast due to lower economic growth expectations for 2019 and 2020, coupled with customers ditching DTH.
Despite our expectations of economic slowdown, we have revised up our fixed-broadband forecast due to high demand supported by changing consumer preferences. We project the fixed-broadband penetration rate to grow past 50% by 2028.
Economy: Outlook for 2020
Economic expectations for 2020 in the Latin America and Caribbean region have weakened amid economic and social turbulence in key markets. In January 2020, the World Bank revised down its 2020 GDP growth projection to 1.8% from 2.5%. In December 2019, S&P Global Ratings revised down its growth expectation for the region to less than 2%, primarily due to political uncertainty restraining investment.
M&A: Telefónica Hispam spinoff, mobile consolidation in Brazil
Further consolidation in the Brazilian market could occur in 2020, with Oi SA exploring the sale of its mobile operations to its competitors as well as private equity firms acquiring FTTH regional operators. The Telefónica Hispam spinoff is another development to watch as Spanish group Telefónica SA looks to generate cash. Additionally, The Walt Disney Co. might have to sell Fox Sports assets in Brazil, Mexico and Argentina due to regulatory constraints.
According to media reports, Brazil mobile market leaders Telefônica Brasil, Claro Brasil and TIM Participações SA are negotiating to split Oi's mobile, tower and brick-and-mortar store operations among the three of them. Following a deal struck with creditors in December 2017, the embattled Brazilian telco is trying to sell its noncore assets. Its mobile operation is the most valuable asset — the company is Brazil's fourth-largest wireless carrier, with a 16.5% market share as of November 2019, according to regulator Anatel.
Brazil's broadband market may also see strong M&A activity during 2020 as regional ISPs increasingly become acquisition targets. In 2018, U.S. investment group ACON Investments LLC acquired three cable and fiber providers in the Southeastern states of São Paulo and Minas Gerais, adding to its existing portfolio in the Northeast. Meanwhile, private equity firm EB Capital acquired 60% of Rio de Janeiro's Sumicity, the second-largest independent ISP in Brazil. Vinci Partners USA LLC acquired eight fixed-wireless and fiber operators in Minas Gerais and is looking to expand its footprint to six new states. The investment group is currently negotiating with another two ISPs. According to industry association Abrint, Brazil has more than 11,000 small ISPs, of which only 8,000 are tracked by regulator Anatel, with the majority concentrated in the Northeastern region.
A sale may also still be on the horizon for AT&T Inc.'s DIRECTV Latin America assets after the failed IPO of DIRECTV Latin America LLC, now named Vrio Corp. In 2018, with Brazil's regulatory situation still unresolved regarding AT&T's acquisition of Time Warner, now named Warner Media LLC. Regulatory restrictions may force the company to sell SKY Brasil unless the country's pay TV law is reformed. While lawmakers have proposed four bills to change the SeAC Law, the proposals have stalled in Congress.
Brazilian regulator Anatel raised spectrum caps at the end of 2018, opening up the country's mobile market for consolidation. Nextel Telecomunicações SA was picked up by América Móvil SAB de CV's Claro Brasil in March 2019, and regional telco Sercomtel SA - Telecomunicações may also choose to sell its spectrum assets, now allowed following the approval of telecom law reform in September 2019, or even the whole company.
Spectrum is also at the center of another regulatory dispute for AT&T. The company is set to renew its licenses for the 2.5 GHz frequencies it acquired from former multichannel multipoint distribution system pay TV providers in order to offer LTE fixed-wireless broadband in Brazil, but disagrees with the price imposed by Anatel and may choose to return its spectrum assets.
Another regulatory decision may also spur M&A activity in Latin America's cable network market. On Feb. 28, Brazil's antitrust regulator approved, with restrictions, Disney's $71.3 billion acquisition of 21st Century Fox Inc., a deal first announced in December 2017. The Administrative Council for Economic Defense, or Cade, ruled that the merger would create a significant market concentration of cable sports networks and ordered the sale of Fox Sports in the country. Recent media reports, however, indicate the network was unable to attract buyers and will be allowed by the regulator to merge with Disney's ESPN. Mexico's telecom regulator IFT followed suit with a similar decision on March 13, given that the two networks hold a market share of 80% in the sports segment. According to the IFT ruling, the buyer must be allowed to retain rights to the Fox brand. Argentinean regulators might impose similar conditions to the Disney-Fox merger.
Telefónica's surprise announcement in November 2019 that it plans to spin off operations in Latin America, save Brazil, may also cause ripples in 2020. The Spanish telco follows a similar movement made by Liberty Global PLC in 2017 and attempted by AT&T in 2018. According to a January 20 report from Spanish newspaper "El Mundo, a group of Latin America businessmen have made a bid for a 51% stake in Telefonica Hispam for 10 billion Euros, effectively valuing the company at 19.61 billion Euros ($21.73 billion), or 166.63 Euros ($184.68) per RGU, with Telefónica maintaining a 20-25% share.
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Upcoming spectrum auctions and 5G
Brazil is set to auction off a record volume of spectrum in its upcoming 5G auction, originally planned for March 2019 but since delayed due to disputes regarding the format of the auction. Regulator Anatel has set the auction for the second half of 2020, which may be delayed further to 2021. While major carriers defend that the key 3.5 GHz frequency be licensed in large blocks, allowing for greater efficiency in 5G services, small ISPs argue for spectrum to be distributed in local tranches to allow regional players an opportunity to enter the 5G market. For satellite operators, the tender should be delayed until the issue of interference in free-to-air satellite TV is resolved. In Brazil, 32.5% of households still use satellite dishes to watch FTA broadcasts. Anatel will also be auctioning off leftover frequencies from previous tenders, including 700 MHz and millimeter-wave frequencies.
Mexico's telecommunications regulator is auctioning 5G spectrum in 2020. The regulator published an updated annual program where it included auctions for the 600 MHz and 3.3 GHz bands. According to El Economista, a Mexican newspaper, the IFT is coordinating different state and private actors to clear the 3.4 GHz-3.6 GHz band with the expectation to auction off the spectrum between 2020 and 2021.
Peru's Ministry of Transport and Telecommunications presented a plan for reorganizing frequencies in the 3.4 GHz to 3.6 GHz band to make space for 5G services. Virginia Nakagawa, vice minister of communications, told Peruvian newspaper Gestión she aims to finish the process by end 2020.
Ecuador's telecommunications minister, Andrés Michelena, announced in November 2019 they will auction off the 700 MHz, AWS, 2.5 GHz and 3.5 GHz in 2020.
So far, the only country with commercial 5G services in Latin America is Uruguay. State telco Administración Nacional de Telecomunicaciones, or Antel, launched its 5G network in April 2019 as a fixed wireless access service to provide a last-mile network for its residential fiber broadband services.
Already a client: Click here to access the full article containing a list of upcoming spectrum auctions in LatAm.
Fiber: Telcos migrating DSL customers to FTTP
Fiber broadband adoption in Latin America and the Caribbean is taking off, bolstered by Brazil. We project FTTP net additions to outperform other fixed-broadband platforms during 2020 with more than double the net additions forecasted for cable. Brazilian ISPs are the main driver behind the increased fiber adoption, with small and large operators turning to fiber to satisfy the increasing demand for faster broadband speeds. According to regulator Anatel, small ISPs' FTTP subscriber share has topped 50% in Brazil since 2018.
Moreover, in 2020, fiber additions in other countries of the region show a similar trend with FTTP net additions surpassing cable's in Argentina, Bolivia, Chile, Dominican Republic, Ecuador, Paraguay, Uruguay, Jamaica and Trinidad and Tobago.
IPTV to benefit from DTH demise
IPTV is benefiting from the recent trend toward convergent services. We project the distribution platform to add almost the same number of subs cable is forecast to add. Higher adoption in Argentina, Bolivia, Brazil, Chile and Mexico are driving the charge. Telefónica is one of the key IPTV players after the operator decided to upgrade its last mile to fiber and focus on IPTV for pay TV distribution in 2017.
Effects of election results
Uncertainty surrounds the telecommunications segment in Argentina after the election of Alberto Fernández in 2019. So far, the new government has not announced any plans concerning the sector. Besides macroeconomic stability, one important topic to pay attention to would be the new government's actions with respect to former President Mauricio Macri's telecommunications reform, especially how the new policies would affect operators' ability to provide convergent services. There are upcoming elections in the following countries: Trinidad and Tobago, Bolivia, Dominican Republic, Venezuela (Parliamentary election) and Peru (Parliamentary election).
Regulatory outlook
With the approval of Brazil's telecom reform bill in September 2019, telcos are expected to ramp up investments in broadband. The reform allows telcos such as Telefônica Brasil and Oi to migrate their public fixed telephony concession contracts to a private service authorization contract, as is the case with their mobile and broadband businesses. In exchange, the companies would have to invest in broadband expansion the value of the public fixed telephony infrastructure they would be incorporating. The value of these "reversionary assets" and where these investments should be made have yet to be defined by the regulator Anatel and may take a year to implement. The bill also tackled several other measures favored by the industry, including a reduction in tariffs for satellite broadband services, which is expected to encourage more competitive prices, allowing telcos to sell spectrum assets and exempting broadcasters from regulatory tariffs.
In Peru, Vice Minister of Communications Virginia Nakagawa announced they are working on an updated version of the country's telecommunications law, according to an interview with the newspaper Gestión. Nakagawa said the new law would focus on a new service classification, simplification and service quality. The Ministry of Transport and Communications would deliver the new law proposal to the incoming congress.
Global Multichannel is a service of Kagan, a group within S&P Global Market Intelligence's TMT offering.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.