Assessing the impact of market structure on innovation and quality

Driving mobile broadband in Central America

Central America is lagging behind in mobile broadband adoption and deployment. Closing this gap requires the promotion of market structures that boost competition in investment and innovation, and public policies that take the entire digital ecosystem into account. Over the last 15 years, mobile broadband adoption and deployment in Central America have lagged behind the rest of Latin America. The delay first became apparent with 3G and has spilled over to 4G deployment, where it has become even more pronounced. On average, 4G connections in South American countries account for 30% of all connections, and population coverage is about 70%. In Central America, these figures are only 5% and 35%, respectively. This is problematic as new technology cycles bring new and better services at lower prices.

To close this gap, authorities should aim to create an environment that promotes investment and innovation. Market structures must give operators the ability and incentives to invest as a way to intensify competition, which will also be stimulated by the offers of other convergent players. This requires operators to have sufficient scale, margins and expected return on investment, and efficiency in the use of spectrum. Recent studies have detected a trade-off between the number of operators and levels of investment and innovation.

This study examines the role of market structures in the development of the mobile sector in Central America. The market structures of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama are analysed, exploring their impact on operator performance in investment and 4G networks. A comparative study of public policy in the region shows how policy can foster an environment in which operators acquire greater ability and incentives to compete in investment and innovation, to the benefit of consumers in the region.

Investment in mobile communications in Central America follows an inverted U relationship with the number of operators The analysis confirms that operator investment in Central and South America is not necessarily higher in markets with a higher number of players. It reveals the existence of an inverted U, where operator investment is maximised when operators have an EBITDA margin of 32-38%. Operators whose profitability is below these levels invest less. These findings come from an investment model based on data from 26 operators in 13 markets in Central and South America from 2001 to 2016.