Latin American Cable Has
Room to Grow on HSD

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By Alan Breznick

Alan Breznick, a veteran business journalist, is editor of Television A.M. and Cable Datacom News.

Much to the delight of cable operators and equipment vendors, high-speed cable modems have become red-hot products in the U.S. and Canada. Just seven years after cable operators began installing the first, clunky cable modems in customers' homes, more than 13 million cable subscribers have signed up for broadband Internet access. The biggest cable operators report penetration rates of close to 15% or higher as they collectively add more than 1 million new data subscribers each quarter.

But south of the border, the story is much different. In Latin America, cable operators have enlisted no more than 400,000 subscribers for high-speed data service so far despite some ambitious plans three to four years ago. That figure amounts to a paltry 2% of the total cable universe in the Caribbean and Central and South America, far below the accelerating penetration marks achieved in the U.S. and Canada.

Call it a tale of two continents, or two Americas, one in which high-speed data, digital video, cable telephony and other new services have thrived and the other in which such advanced cable services have stalled. While in many ways it's been the best of times for cable operators in the U.S. and Canada, it's been the worst of times for their struggling counterparts in Mexico and points south.

Indeed, a severe economic downturn, the telecom implosion, runaway inflation, currency crises, monetary devaluations, heavy government regulation, low basic cable penetration rates, rampant signal piracy, fierce overbuilding and political disputes all have conspired to bring cable progress in Latin America to practically a dead stop over the last three years. In most parts of the region, new cable construction has halted or at least slowed considerably, plant upgrades have been shelved and new service deployments have been put off. As economic conditions in many places have worsened, hundreds of thousands of cable subscribers have pulled the plug because they simply can't afford the service anymore.

"It's been a pretty psychotic couple of years in Latin America," says Paul Savoldelli, CEO of Davivo, which manages the South American cable properties of Hicks, Muse, Tate and Furst Inc., a large private equity firm that invests in media companies. "We're in a depression. It hasn't been this bad since the 1930s."

Consider the three top MSOs in the region-Brazil's Net Servicos de Comunicacao (formerly known as Globo Cabo) and Argentina's Cablevision and Multicanal. In a recent report, In-Stat/MDR Research estimated that all three lost hefty numbers of subscribers last year, mostly due to deteriorating economic conditions, particularly in Argentina. Cablevision lost 22% of its 1.4 million subscribers, Multicanal shed more than 30% of its 1.3 million customers and Net Servicos waved goodbye to nearly 140,000 subscribers, In-Stat said.

Plus, even more than in other parts of the world, investment capital has dried up in Latin America. As a result, some large cable systems are now on the block, albeit with few, if any, takers. And even those cable operators who are in a position to upgrade their systems, expand their reach or launch new services are hard-pressed to do so right now because they can't raise the money they need.

"Some places need to be rebuilt," Savoldelli says. "Some places just need more capital to deploy."

Take Liberty Media-backed UnitedGlobalCom Inc. The Denver-based international MSO, which owns large cable systems in Brazil, Chile, Mexico, Peru and Uruguay, has chopped its expected annual capital expenditures worldwide from $2 billion in 2000 to less than $400 million this year. With this cut of more than 80%, UnitedGlobalCom has little left to spend on its Latin American systems, which pass 2.6 million homes and have about 600,000 video subscribers.

"There was some investment three to four years ago," says Mike Paxton, a senior analyst for In-Stat. But, he notes, "a lot of people have shied away from it (now) because of the volatility of the Latin American market."

Yet, even in this bleak environment, there are signs of hope. In a few choice spots of Central and South America, cable operators are starting to roll out high-speed data, cable telephony, digital video and even video-on-demand (VOD) services as economic conditions begin to stabilize.

By far, the new service that has advanced the most in Latin America is high-speed data, especially in the three regional powerhouses-Mexico, Argentina and Brazil. Despite the region's poor economic conditions, the service's additional cost and a very limited middle-class in most parts of Central and South America, broadband Internet access is catching on with consumers and businesses alike, just at a much slower pace than up north.

In Mexico, probably the healthiest economic power in the region, Megacable is now briskly signing up cable modem subscribers. One of the three biggest MSOs in Mexico with about 430,000 basic cable customers, Megacable closed last year with about 110,000 data customers, by far the most of any Latin cable operator. This means that about one-quarter of the company's cable subscribers now take data as well.

Similarly, Davivo's Cablevision operation in Argentina, one of the two largest MSOs in that nation with about 1.2 million basic subscribers, is now corralling 2,000 to 3,000 cable modem customers per month, Savoldelli says. While this figure is low by U.S. standards, it's pretty impressive by Argentinian standards, especially considering the contraction in its economy over the last three years. Cablevision closed 2002 with about 70,000 cable modem subscribers.

"The demand is definitely there," Savoldelli says. "There's a need for the service." Noting that Cablevision controls 50% of the entire nation's high-speed subscriber total even though it offers the service only in Buenos Aires, he says data penetration rates scale the 20% mark in some of the city's wealthier neighborhoods. As a result, he sees the company reaching data penetration levels of 16% to 20% in its more mature systems.

Other cable-modem leaders include Brazil's Net Servicos with about 55,000 data subscribers, Chile's VTR with 40,000 and Brazil's TVA with 21,000, according to the latest figures compiled by Kagan World Media. Even cable operators in such small, relatively obscure nations as Uruguay now offer cable-modem service.

Despite the economic collapse in key parts of Latin America, there's also clearly demand for cable telephony service, at least in those areas where government telecom rules allow cable operators to offer the service. VTR, the largest MSO in Chile, has blazed the path in the region, ringing up more than 100,000 circuit-switched phone customers. More than 20% of VTR's 450,000 or so cable customers opt for voice with their video and/or data.

"They're a shining star as far as cable operators go," says Leslie Hillman, editor of Latin.com, a Miami-based news service that covers Latin America. "They're a model for triple play services-cable, telephony and Internet."

Observers credit VTR's success at least partly to its extensive plant rebuilds. They also credit Chile's favorable investment climate and early deregulatory push.

"Chile has been wide open," Hillman says. "It has one of the best regulatory climates for entrants."

Unfortunately, though, most Latin American nations have not yet followed Chile's lead. As a result, local telecom companies still hold monopolies or semi-monopolies in much of the region. Plus, most cable operators have not been able to upgrade their systems for such technically demanding services as conventional circuit-switched telephony, not to mention the snazzier voice-over-Internet-Protocol (VoIP) service now developing in the U.S. and Canada.

"Voice services are generally a function of the infrastructure," Paxton says. "There's generally not a lot of advanced infrastructure in Latin America that can handle advanced services, even video services." He noted that much of the cable plant in South and Central America hasn't gone beyond 450-MHz capacity.

Several years after its highly successful launch in North America, digital cable is finally establishing a foothold below the U.S.-Mexico border. Digital Latin America (DLA), a Coral Springs, FL-based venture formed by Liberty Media, Motorola and Hicks Muse three years ago, has now signed up nine MSOs serving about 90% of the region for its digital service package. The package includes premium and pay-per-view programming, digital music channels, an interactive program guide and a line of enhanced TV and interactive applications.

"We have the bulk of what's going on," says Michael Pulli, CEO of Digital Latin America. "Every channel that you can think of, we have."

Thanks in large part to DLA's efforts, Pulli says, Latin America now has about 170,000 to 190,000 digital cable subscribers, with Mexico accounting for at least half of the total. But progress remains slow because many cable systems, struggling with low capacity, are jammed with too many basic, analog channels to make room for digital and premium services. In addition, most cable subscribers, used to paying only for basic cable packages, are unwilling or unable to shell out more for digital and premium services.

"A lot of what we are doing is helping them free up bandwidth," Pulli says. "Digital is still in its neophyte stage…Going to digital down there is a very big paradigm shift…It's not like launching HITS in the U.S."

Following in digital cable's signal path, VOD is now making its debut in Latin America. Intercable, Venezuela's biggest MSO with about 340,000 cable subscribers and 1.2 million homes passed, rolled out the service first last summer in Caracas, where the cable operator faces stiff competition from Galaxy/DirecTV Latin America. But, plagued by a lack of hit films from the movie studios and unfavorable movie release windows, the VOD service has gotten off to a rocky start.

Industry experts say they expect the market for VOD to improve eventually, once the Latin American economy turns around again. Likewise, they see strong potential for digital video, cable telephony and high-speed data services sometime in the future.

The big question, of course, is when. Unfortunately, nobody even dares to guess the answer to that.

"Latin America moves in waves, cycles, roller coasters," Pulli says. "It's now coming off a bump...We've just got to weather the storm."