Welcome to the first instalment in my three-part series on Macri’s policies for economic growth. My goal is undergo some deeper analysis of important sectors of the new economy: telecommunications, banking and technology. Please feel free to send any feedback to: @colincdocherty or firstname.lastname@example.org
It was all dream. The Media Laws were dismantled by presidential decree — effectively dissolving the AFSCA/ ENTEL corpse in a bathtub filled with homemade emergency decree (DNU) acid. President Mauricio Macri has swung the pendulum to the other side and essentially handed the keys to the castle over to his old pals at Clarín. “Wherever you want to take us, Magnetto.” Macri’s philosophy on remedying the telecommunications sector is clear: a little empresario wisdom is all the industry needs.
Look, that view isn’t crazy. Often modest changes — a boost in capital, some industry consolidation, a rollout of new technologies — can be sufficient for long-term revival. Even just normalizing the regulatory system alone could work wonders. After AFSCA’s notorious reign of uncertainty and politically-driven self-interest, some old-fashioned rationality and consistency could inspire a little business to be conducted.
At least, this is what Macri has told himself: a comforting narrative that sees a perfect alignment of Argentina’s greater economic interests and those of his main backers, the Clarín Group. But I see icebergs on the horizon for the S.S Macri.
By paving the way for Clarín to vertically consolidate — i.e purchase a mobile carrier in Nextel, now with a rumored interest in Telecom Argentina — Cambiemos makes it clear that, hey, we don’t think competitive industries are an important precursor for economic growth.
I thought they were supposed to be the good ones? I hear you say. So did I. Allow me to dissect exactly what’s wrong here.
Right now the media sector is a mess. Consumers are getting less and less value each year, and no companies are investing in anything — it’s as if it’s in collective autopilot awaiting systematic changes. So Macri’s decided that his first order of business was he’ll give a blatant concession to his key corporate supporters, who by my calculations made around US$500 million over the last year:
But that’s how you develop an industry, right? Free money at a pen stroke? I wish it were that simple. By not seeing the big picture, Macri may be missing a golden opportunity to spur much-needed growth in the most dynamic sectors of the Argentine economy. It’s no secret to the 30 million subscribers that Argentina’s telecommunications sector lags the OECD on just about every service quality indicator. And this presents problems for other high-tech industries who need solid “plumbing” to expand.
There is cause for optimism. The potential for innovative growth is enormous — with supporting tech industries standing to benefit the most. The tech sector in Argentina has some surprising big names in tech with Mercado Libre, Despegar, OLX and continues to prove itself as breeding ground for top talent — despite draconian regulations and the usual tax system incompetence. Unfortunately that talent often ends up overseas, and a big factor is the infrastructure, where expensive broadband and poorly developed supporting services (like payments) makes Argentina unappealing as a base market.
Think of what the new wave of entrepreneurs could do with reliable supporting infrastructure (not to mention the foreign capital they could attract). Better rural communication systems could lead to agrotech and drone development. Fast, reliable broadband would open up media streaming opportunities. And so on.
Yet Macri’s move was to blindly tear up the former Kirchnerite arrangements, generously raising his staunch supporter’s net worth and all without asking for a single thing in return. Not even a public commitment by any stakeholders to deeper reforms, nothing. This shows that either:
a) The absence of Cambiemos reform proposals, suggesting Macri & co are content with an innovative sector of the economy being a pile of dog shit
b) Any “plan” is centered around consolidation — i.e, Macri will let his friends at Clarín buy up assets (like Nextel) and attract additional capital, meaning a political giveaway to big business is all that is needed to fix the industry
c) He has an awesome, creative and innovative plan that will eventually be released, when the time is right.
If he’s chosen b) or c),
Price Caps and the Competition Conundrum
Let’s get our teeth into the details. Telecom Argentina (Personal) is majority owned by Telecom Italia. The market is serviced currently by three mobile operators — Telefonica, Telecom Argentina and Claro — but more interesting is the assets surrounding the wireless ones. This image shows the breakdown:
The first thing we notice is how no one company is present in each of the television, mobile and Internet service layers. This was a Kirchner-era regulatory decision — the Media Laws and its regulator, AFSCA, wouldn’t allow this market concentration, and certainly not for Clarín’s benefit. But with the new Cambiemos government, Clarín has been given the green light to purchase Nextel — albeit a tiny player with 2 percent of the market, but with valuable spectrum assets for servicing a 4G/LTE network. In essence Macri has declared: “Regulators will now allow inter-service consolidation to happen so every telco player can own a piece of each layer.”
This decision has put in motion an inevitable series of events — either buyouts, mergers, infrastructure-sharing, whatever — meaning that eventually, each telco will offer three different types of services (broadband, mobile and cable TV) all for one price, all in one bill. You may have seen these offerings in the US and Europe, where a shift towards service bundling, i.e “multiplay” and “quadruple play” packages has been a long-term consumer trend.
However Argentina is a developing market, with service standards below what you see in other countries. This poses an economic question: Would the ownership of multiple service layers help or hinder competition and investment?
Academic research on “quad play” bundling predicts the eventual market winner goes to whomever has the best premium service offering. If that premise holds, it’s hard to see Clarín not ending up #1: It already holds the best cable TV content rights and own the fastest broadband service.
Throw in Argentina’s best 4G network —a future acquisition of Telecom (Personal) by Clarín has been rumored — and the market quickly becomes stagnant and uncompetitive.
Let me put it this way: If any great telco war is already a foregone conclusion, why would Claro or Telefonica (Movistar) invest anymore than they need to? If you know you’re locked into 2nd/3rd place, there’s little incentive to start sprinting mid-race when you can’t win. Clarín would also know this, doing just enough to win, but nothing more.
This scenario describes the current Brazilian telco market, where Vivo dominates the premium market and the rest are zombie companies: low investment, low returns and consistent acquisition rumors that turn into nothing.
And the big policy to revive competition, the removal of these price caps — long chastised for reducing incentive to invest — would only further entrench Clarín’s position, as its premium product would now command a lion’s share of the most profitable consumers, all with little work. This does not bode well. Check out Brazil’s situation:
Does Macri want Argentina to become Brazil, with its lackluster investment and poor service? Where will the value creation come from? Perhaps he is waiting for the right moment to launch a plan c), like some kind of jedi president who can see the game five moves ahead. Unfortunately, the simplest explanation is often the correct one: Macri is sacrificing long-term prosperity to repay his most treasured backers.
In the end, by submitting to Clarín’s grand scheme of market consolidation, Macri has ensured that instead of capital going towards real production and resource creation — like infrastructure and quality assurance — it’ll be the finance warriors of investment banking and consulting who will see the spoils. Consumers, tech entrepreneurs and equipment manufacturers will continue to experience long-term economic malaise. And when Macri is desperate for real growth in 2018, he may lament this wasted opportunity to get it right.