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Talk, talk, talk!

1.2 million people in Puerto Rico now phone home on their cellulars, as half a dozen companies fight for a piece of the $800 million–and growing–market.


March 15, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Talk is cheap: Lower costs, pre-paid plans, and the hottest technology make wireless phones as common as rice and beans

Wherever you go in Puerto Rico, whatever you do, someone nearby is talking on a cell phone. Carpenters, mail carriers, office workers, mall walkers, school kids, commuters, police officers…you might think everything that moves has a wireless phone.

And you would be almost right. Nearly one out of every three human beings on this island has a cellular phone. That’s 1.2 million men, women, and children out of a population of 3.8 million, and the number is increasing every day.

Celulares Telefonica, SunCom, Cingular Wireless, Centennial and MoviStar serve this talkative population and they will soon be joined by Sprint PCS. According to industry estimates, this fiercely competitive market still has plenty of room for growth.

The industry is reluctant to release figures but CARIBBEAN BUSINESS estimates the market at close to $800 million and getting hotter.

With its 31% market penetration, Puerto Rico is relatively behind the U.S. mainland’s 41%. Yet in some European countries, like Norway or Sweden, up to 60% of the population owns a cell phone.

A quieter past

Back in 1986, Celulares Telefonica Inc. (CTI), the Puerto Rico Telephone Co. wireless division was the sole provider of wireless communications on the island. Cellular service at the time was limited, equipment was cumbersome and the costs to consumers were high.

Fifteen years later, five companies provide islandwide service, with a sixth on its way. Handsets are so small that they fit in your shirt pocket and weigh just ounces. And, as happens eventually with all technology products, costs have dropped so dramatically that today, almost anyone can have a cellular phone.

"We should see consistent growth rates in the short term even with new competitors entering the market," said Carla Ussery, vice president and general manager of Celulares Telefonica Inc. "The reason for this is that new entrants invest more money in promoting the local industry and that helps the whole market grow even more."

A high-growth market

And grow it will. The number of new cellular users is expected to run into six figures per year according to industry sources. Some even expect that by the year 2004 half of Puerto Rico’s population will have cellular service.

"In Puerto Rico, penetration of cellular service [the number of people with cellular service as a percent of the total population, which today stands at an estimated 31%] is higher than that of wireline service to individual households, excluding businesses. In other words, there are more cellular phone numbers than fixed phone numbers to individual homes, which stands at about 992,000," said Bruno Haring, president of Research & Research.

The total number of fixed, or wireline, phones in Puerto Rico, including households, and commercial & institutional phones as well as government, is estimated at 1.4 million, equivalent to 36% penetration.

It is estimated that the growth of wireless service in Puerto Rico over the past four years has been in the 350% range.

"Between 1998 and 1999, the cellular industry in Puerto Rico achieved a 58% growth compared to just 32% on the U.S. mainland" said Raul Burgos, general manager and vice president of SunCom. "What we see is that the cellular phone is no longer a device used typically by a professional or business executive. Today it’s viewed more as a necessity and people from all income levels have access to one."

Burgos emphasized that cellular market growth has closely followed the economy. A growing economy in Puerto Rico in recent years has affected the cellular industry’s performance positively.

He also noted that the number of cellular handsets per household might be higher on the island than in the mainland U.S. "Here parents give their children a cellular phone instead of a pager. It’s a more attractive product at about the same price in some cases," added Burgos.

Industry sources believe that Puerto Ricans are prone to hold longer telephone conversations than their mainland counterparts, which translates into more airtime use on the island. "Use of our network, or the amount of time people use their cellular, is up 50% to 60% in the continental U.S. but in Puerto Rico it’s more than double. People here talk more," said Mario Garcia, president of Cingular Wireless-Puerto Rico. "The main reason is that the rates are so low now that people are using their phones more and allowing others to have their numbers. Also the market for cellular phones has expanded because today it’s so much cheaper to have one."

"Our results in Puerto Rico have been so good that we have decided to implement our local business strategies in other Caribbean markets we service," said Carlos Bofill, chief executive officer for Centennial Caribbean Operations.

Centennial expanded its Caribbean presence by launching service in the Dominican Republic last September and will launch it in Jamaica this summer.

Another boost to the local cellular industry has been pre-paid cellular service. This mode doesn’t require the user to have a contract with a company. Instead, people buy minutes in packages and use them as they need them.

"Post paid–the typical cellular user committed to a particular cellular company for X amount of time–will continue to be the center of our business. But pre-paid has allowed us to reach a larger base of potential customers who didn’t qualify or didn’t like the post-paid method," said Jeff Lazo, marketing director for Celulares Telefonica Inc.

Young people–mostly generation Ys who see cellular phones as a necessity not a luxury–fall in this market group. Also some people like the privacy a pre-paid phone offers because there is no need to have a contract or provide personal information

For carriers, pre-paid cellular service has the down side of having a high churn rate. That means that pre-paid cellular service subscribers tend to change wireless carriers more often. "In the pre-paid business, retention is the key because you invest so much in trying to keep the customer. You have to provide them with good service at an affordable cost because nothing ties them to the wireless carrier as is the case with post-paid," added Lazo.

"Consumers in Puerto Rico are highly-educated when making a purchase," said Burgos. "As a general rule, they don’t jump into a cellular service without first doing their research. They compare products and offers and then make a decision."

The future is here

So where is the Puerto Rico wireless industry headed? According to industry experts, we may be viewing just the tip of the iceberg. If market trends in Asia and Europe are any indication of what lies ahead, the local market is bound for continued growth. But it won’t be an easy ride for everyone in the industry.

"Puerto Rico is a very confined market so there’s a limit to how much you can expand," said Ussery.

"The industry will continue to grow but at a slower rate," said Lazo. "With so many carriers, the competition will just intensify and some people in the industry feel that after a while, carrier consolidation will be inevitable if companies are to survive."

"The merger of wireless carriers in Puerto Rico is a distinct possibility in the future–just as is happening in other industries around the world–but it is very difficult to predict," said Bofill.

"This year will be a big one for the whole wireless industry in Puerto Rico and we expect market penetration to increase to 35% by the end of the year," said Herman Duran, district director for Sprint PCS-Puerto Rico.

Sprint PCS, a separate sister company of the familiar long-distance carrier, is expected to launch its cellular service in the third quarter of this year. (See related story.)

Celulares Telefonica expects cellular market penetration to reach a peak of 37% at some point next year. After that the carrier expects growth will continue but more slowly.

Centennial’s Bofill agrees. "Besides slower growth over the next couple of years, there will be a redistribution of clients among carriers. Since every carrier will provide good coverage, competitive basic pricing, and the latest technology, those who want to survive will have to add value to their products, like new wireless data services. Otherwise, they will lose clients," added Bofill.

Others also say that the implementation in Puerto Rico of the Calling Party Pays (CPP) system is essential in order to maintain the growth of the local cellular industry.

Calling Party Pays is the system prevalent in most markets around the world where the person making the call pays for it. In the U.S., including Puerto Rico, the cellular owner is charged independently whether the call is received or outbound.

"Without Calling Party Pays the brakes will continue to be applied," said Claudio Hidalgo, business director for MoviStar, the local wireless subsidiary of Spain’s Telefonica S.A. "Every market that has implemented the system has basically doubled. Regulators and carriers must push for CPP if they want growth to continue."

Since CPP has not been implemented in Puerto Rico, MoviStar offers free incoming calls to emulate CPP on the user side. "We don’t penalize the client when he receives a call and our fast growth rate is evidence that the system works," added Hidalgo.

New technologies, new services

Growth also brings with it a free fall of prices, as carriers keep launching ever more aggressive rates and services in order to gain market share. Some examples are free incoming calls, free calls at night or weekends, and large minute-bundles on almost every plan. In the first years of cellular service the minutes were charged in increments of dollars; today it’s done in cents.

"The rates are so low that we have to find other revenue generators besides just what clients consume in air time. That’s why we have introduced additional services like insurance, road assistance, and the new Internet service e-Go," said Lazo.

The next two years will be critical for most carriers as they attempt to provide the latest technology with quality service.

Free falling prices could push some carriers out of the market. "Prices can never reach zero. The continued price war will have to be stabilized at a certain level," said Centennial’s Bofill. "Otherwise we could end up with just one or two companies controlling the whole market."

"Intense competition between carriers is pushing prices to new lows which at the same time diminishes the earnings per user," said MoviStar’s Oyarzabal. "In our operations in Spain, up to 5% of revenue now comes from the short message service (SMS), which complements revenue from regular calls. All these new services will be our way of generating revenue."

Short message service (SMS) allows users to send alphanumeric messages from cellular handset to cellular handset. Also, e-mail can be linked to the service and messages originating from a computer can be redirected to the handset and then answered.

But most industry sources caution about the downside of deploying new technologies too fast. "New technology is only important to the degree it’s useful to the end users," said Mario Garcia, president Cingular Wireless-Puerto Rico.

Another new service expected to be available by the end of the year is full Internet access using the wireless application protocol or WAP. With WAP, people will be able to access information on the Internet but a few bugs have yet to be worked out, such as access speeds. "WAP will appeal to a small number of users but nevertheless it’s an innovation wireless carriers can’t do without," said Ussery.

SunCom’s Burgos agreed that new features have to be relevant and functional before being considered as new revenue sources. He cited Japan’s biggest wireless carrier NTT DoCoMo’s success with its mobile data services called I-Mode. People in Japan can download music, new tones, and images right off the web to their cellular handsets. The service has been so successful that 13.5 million people in Japan use it. "The cellular was transformed into an information tool," added Burgos.

If speed of data transmission through wireless phones surpasses that of regular wireline, we could also see a migration of people to wireless in order to access the Internet at faster speeds. "For the second half of 2001 we should have capability for up to 144 kilobites per second. That’s almost three times faster than a regular modem connection, so you could see people using wireless instead of a regular telephone connection to surf the Net," said Bofill.

New developments such as Bluetooth technology (see related story) will help cellular service expand its appeal, further increasing the number of users and the amount of time they spend on the air.

Along with the latest gadgets, customer service ranks high on the list of priorities for both carriers and customers. "Anyone can have a network and good technology but not everyone can have world class service and this is one of our main goals; it will help us differentiate ourselves from the competition," said Ussery.

The Puerto Rico Cellular Market
Company Number of clients Pre-Paid Post-Paid
Cingular* 400,000 60% 40%
Celulares Telefonica 330,000 40 60
Centennial 180,000 80 20
SunCom 150,000 20 80
MoviStar 140,000 20 80
Total Market: 1.2 million
*Formerly CellularOne

Source: Caribbean Business estimate as of 12/31/2000 based on Research & Research study and industry sources. Does not include pagers or fixed wireless.

. Sprint PCS ready to tackle the local market

Sprint PCS, the wireless division of telecommunications company Sprint, is expecting to launch its PCS wireless service by the third quarter of this year. Sprint PCS is one of the leading wireless carriers in the U.S. with more than 200 million new clients in three years. The company has sustained continued growth for the past 10 quarters.

"We currently have the largest 100% PCS network in the States and now Puerto Rico will become part of it, covering major population areas, Vieques, Culebra, and the U.S. Virgin Islands," said Herman Duran, district director for Sprint PCS-Puerto Rico. "All the products and services we offer in the States will be offered in Puerto Rico emphasizing, our quality of service and clarity of transmission."

To make sure its local network is on par with the one on the mainland U.S., Sprint PCS is investing more than $200 million just in the initial launch. Most of it will be used to develop Sprint PCS’s own high-tech network supplied by Nortel and Samsung.

The network being deployed by Sprint PCS is third-generation (3G) ready, so implementing high-speed data and other future features will be just a new handset away. "This would be the first 3G network in Puerto Rico. The network will have a great capacity to grow. We are just waiting for third-generation handsets to be developed. They should be hitting the market by the end of the year," added Duran.

According to Duran the speed capacity of the new handsets combined with Sprint PCS’s network could go as high as 300 kilobytes per second (Kbps) or roughly five times faster than the actual modem speeds commonly used to connect into the Net through PCs. "This capacity will open the door to new possibilities and will change the whole industry," said Duran.

For the moment Sprint PCS will launch its Stateside Wireless Web service working at what they call enhanced 56K. "The current system allows data transmissions of just 14.4 Kbps but we have developed a compression system that allows you to receive and send a burst of data at up to 56 Kbps or the same speed you can achieve in you home PC," said Duran.

One nice feature of the Sprint PCS service is that all services follow the users no matter where they go in North America. "Since we operate the largest PCS network, all features the client has in Puerto Rico will follow him during trips to the States. This would be great for business travelers who need all modern cellular functions to be competitive," said Duran.

Sprint PCS will also bring its voice command service, which allows people to speak commands or request a number to be dialed from a predetermined list. "The nice thing about this service is that it resides in our network not on the phone so it works with any handset and it doesn’t matter if you change units. It is also safer since you don’t need to focus your vision and attention on dialing while driving or performing other activities," said Duran. --J.M.

Bright future for local carriers

From a regulatory point of view, the local wireless market has grown into a healthy industry with broad choices for consumers resulting in competitive pricing as carriers strive to expand their market share further.

"To jumpstart the wireless industry, the Federal Communications Commission (FCC) established the Omnibus Act in 1993 to give wireless carriers a slight advantage over wireline," said Phoebe Forsythe Isales, president of the Puerto Rico Telecommunications Regulatory Board (TRB). "The act prohibited the regulatory board from barring the entrance of a wireless carrier into the local market and dealing with tariff issues. That way, carriers were assured easy entry to establish a presence in the market and thus were able to compete with the wireline or traditional telephone companies."

The results? More than 120 new wireless companies have been certified by the Puerto Rico Regulatory Board since the Telecommunications Act was enacted in 1996 to open the markets. This number includes companies that offer a variety of services including cellular calling and pager services.

"We have seen a reduction in the use of public phones and this is the result of the widespread use of cellular phones. People are getting used to having access to a phone, any time, any place," said Isales. "We expect the market to continue to grow, but at a slower pace. We also think that there is enough of a market for the six companies offering service and this is good for the consumers."

Isales also added that once full Internet access through cellular handsets is enabled and coupled with advanced applications, the market could get a further boost.

When asked about the possibility of a merger of some wireless carriers, Isales said it is a possibility but before a merger could happen, it would have to be scrutinized by the board. "If it’s good for consumers, we will approve it," she added.

But such mergers in the telecommunications industry are more complex than mere agreements between two consenting companies with a nod from the local TRB. According to federal regulations, wireless carriers are only allowed a certain amount of frequency spectrum; in Puerto Rico the limit is 45. For example, Cingular and Celulares Telefonica, the two largest carriers, can’t merge with any of the others, but SunCom or Centennial could merge with MoviStar or Sprint, based on the amount of frequency spectrum they currently have. While this is a hypothetical scenario, it is not so far-fetched considering the worldwide trend of mergers in the telecommunications industry.--J.M.

What Is Bluetooth?

Bluetooth is the name of a new technology, set to be launched commercially in 2002. It promises to change significantly the way we use cellular phones, computers, and other electronic devices.

Conceived initially by Ericsson before being adopted by myriad other companies, Bluetooth is a standard for a small, cheap radio chip to be plugged into cellular phones, computers, printers, etc. A Bluetooth chip is designed to replace cables by taking the information normally carried by the cable, and transmitting it at a special frequency to a receiver chip, which will then give the information received to the other device.

Interest in Bluetooth is soaring among more than just telecommunication equipment manufacturers, and new ideas are constantly emerging. Examples include a headset that communicates with a mobile phone in your pocket, or even in the other room, without cables. The technology could also facilitate the exchange of information between a cellular phone and other electronic devices such as a handheld computer or the radio in your car. --J.M.

This Caribbean Business article appears courtesy of Casiano Communications.
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