Telefonica accelerates GSM migration in Latin America - 75% of Latin American base migrated to GSM by second-quarter 2008

A significant proportion of Telefonica's capital expenditure in Latin America, which amounted to some EUR2.4 billion in the first nine months of 2008, is being used to enhance the coverage and capacity of its GSM networks across its various local subsidiaries. The group has been gradually migrating its customer base in Latin America from CDMA to GSM for some years and GSMA Intelligence data suggests this has significantly accelerated over the last 12 months.

By the end of second-quarter 2008, Telefonica's total GSM Latin American connections surpassed 75 percent of total group connections in the region for the first time; in the majority of its markets GSM now accounts for over 90 percent of the base. By the end of second-quarter 2008, Venezuela was Telefonica's only market in the region where CDMA connections outnumbered GSM.

This week, Telefonica's general manager for Latin America, Jose Maria Alvarez-Pallete, hinted that the operator could begin shutting down its CDMA networks in the region from 2010.

Telefonica's largest market in the region is Brazil where it runs market-leading mobile operator Vivo as a joint- venture with Portugal Telecom. Vivo currently accounts for well over half of all Telefonica's CDMA connections in the region. Vivo's migration from CDMA to GSM began in June 2006 when the operator announced it was to build a GSM overlay on its CDMA network. Investment analysts at the time estimated that the migration project would cost around ␣2 billion and take three years to complete. Vivo's first Brazilian GSM network went live in Sao Paulo in January 2007. GSM connections at the Brazilian operator have since recorded triple-digit year-on-year growth and surpassed CDMA connections for the first time in second-quarter 2008. Telefonica noted in its recent third-quarter results that GSM gross additions at Vivo are now accounting for 90 percent of the total. GSMA Intelligence forecasts that GSM will account for 88 percent of all Vivo's mobile connections by the end of next year.

As the second-largest mobile operator in the Americas region in terms of connections – and its largest CDMA operator - Vivo Brazil's migration to GSM marks a dramatic shift in the region's network technology landscape. According to GSMA Intelligence data, the total number of CDMA connections in the Americas has dropped from around 67.6 million in Q3, 2006 to 45.3 million by Q3, 2008. It is forecast to drop to 33 million by the end of next year, by which point CDMA will account for less than 7 percent of the region's total connections.

Will Croft, Analyst, GSMA Intelligence:

Telefonica's move to GSM in Latin America has been motivated by three key factors: economies of scale; a range of choice and price points in the handset portfolio; and next- generation network evolution. Transitioning the Latin American networks has not only brought these markets in line with the group’s European businesses, but also allowed it to establish a common device and service portfolio across the Americas, leveraging the larger ecosystem of GSM equipment vendors. The move not only opens up the opportunity for increased roaming revenues across the group’s Latin American markets but also worldwide on the GSM platform. The challenges associated with network migration - building-out rapid coverage, balancing capex and managing customer expectations (thus avoiding churn) - have all been managed well, and the operator has been successful in enticing customers with the benefits of the network upgrade in each respective market. The investment also means that Telefonica is well positioned for possible future transition to WCDMA, HSPA and, eventually, LTE network platforms.