Argentina Telecommunications Report Q3 2012

BMI has revised up estimates for the mobile market over our forecast period to 2016. Growth, though muted, exceeded BMI expectations in Q411, according to end-of-year figures from INDEC. The figures state that there were 57.91mn subscribers in the Argentine market at the end of 2011. The market has hit 142% penetration. There are signs that growth is beginning to slow, which is expected in a market that is so highly penetrated. Net additions totalled just 351,000 in Q112, following Q411's 1.53mn. Operators are reporting mixed performance in terms of ARPU figures in Q112, with Movistar and Telecom Personal reporting gains but Nextel and Claro reporting declines. Claro improved its subscriber mix this quarter, which, coupled with a drop in ARPU, indicates it has launched promotional offers to improve its subscriber mix, at the cost of lower ARPUs. Personal, however, has performed very strongly, having a 100.8% share of market additions. Movistar's subscriber losses meant that it had -66.3% of net additions.

Telefónica's Movistar had a bad H111 in Argentina. It was served a US$41mn (ARS186mn) fine in April 2012 for service disruption, representing 11.8% of the company's earnings for Q112. However, it is not the only operator to suffer at the hands of regulators - the CNC is studying possible sanctions against mobile operator Claro, which suffered an outage on May 9. Claro argues that the outage was the result of damage to a fibre-optic cable caused by Buenos Aires city workers; however, given the government's need to raise cash, and seeming disregard for its own credibility among investors and the international community, we expect sanctions to be imposed where possible.

The Claro cut affected approximately 500,000 subscribers, considerably fewer than Movistar's 18.5mn. The regulator stated that it would be hard on operators responsible for such outages, and would apply the same criteria to Claro as it did Movistar. If the CNC were to impose similar sanctions, BMI could expect Claro to be fined around ARS5mn (ARS10 per affected subscriber - the rate charged to Movistar).

The harsh sanctions are no surprise to us. The government is under increasing pressure to raise cash to fund its expansionary fiscal policy, which is becoming more difficult as GDP growth slows and tax receipts diminish. Telecoms companies are an easy target given their high revenues. The progressively more interventionist nature of the government in private business is decreasing investor confidence in the country, while expansionary fiscal and monetary policies push inflation ever higher. Capital outflows are accelerating, causing downward pressure on the peso, which the Kirchner administration is keen to avoid.

As a result, the government has called repeatedly for foreign-owned operators to reinvest in the country as opposed to repatriating profits. The government has used the Movistar and Claro outages as examples that these companies are not investing sufficiently in their networks, and we expect to see more pressure on them to up investment. However, if Claro's argument that the May 9 outage was the result of city government damage is proven correct, this argument would not hold and the government would lose credibility.

The market enjoyed the entrance of one new player, Usicom, a unit of Argentine public services cooperative La Usina. The operator entered the Argentine MVNO market in March 2012. The service, to be provided under the Nuestro brand, is offered by telecoms cooperative association Fecosur under an MVNO agreement signed with Argentine telecoms operator Telecom Personal.

Based on new data from INDEC, we revised up our broadband forecasts. It appears that the national broadband plan is achieving the desired results, with a total of 9.5mn broadband subscriptions recorded at the end of 2011. We believe that there will be 15.3mn subscribers in the market by 2016 - representing a penetration rate of 35.8%.