HEAD IN THE CLOUD

Colombia 2015 | TELECOMS & IT | REVIEW: TELECOMS & IT

The IT sector has registered impressive growth over recent decades, and now, an increasing focus on services and hi-tech manufacturing is complementing rapid adoption of mobile technology by the country's younger population.

In the current economic climate, Colombia's best growth prospects no longer lie in its traditional economic mainstays, but rather in developing sectors such as IT. In addition to boosting overall economic growth, the country's leadership believes that massive investment in, and tax breaks for technology will spur innovation and entrepreneurship in activities such as coding, technical services, and hardware development, and lift millions of Colombians out of poverty.

This technologically intensive strategy is working well, and according to the International Data Corporation, from 2007 through 2012, total revenue in Colombia's IT sector alone grew by 177%, reaching $6.8 billion. With communications factored in, the Colombian IT and Telecommunications Chamber of Commerce (CCIT) estimates this number to be over $19 billion. While these policies are producing impressive results, the country still requires sustained efforts at the national and global level. Doing so will present both challenges, and opportunities in an increasingly diverse and globally oriented sector of the Colombian economy.

PHONES

Colombia's telecommunications market continues to be driven by government programs to increase access and penetration, especially in underserved regions. The mobile telephony segment has the broadest coverage, with 48.6 million registered lines—and a population of 46.5 million. Approximately 79% of lines operate through prepaid services, according to the Ministry of Information Technology and Communications (MINTIC). The rise of mobile internet is also rising among prepaid users, jumping from just 2.5 million in 2010 to 13.8 million in 3Q2013. Subscription internet services grew energetically as well, rising to four million for the same time period, up from less than a million in 2010. For fixed service, telephony lines have stabilized after dropping slightly in early 2012. With 6.7 million lines as of October 2013, penetration rates are approximately 13.5%.
eMarketer estimates that 14.4 million people in Colombia will use smartphones in 2015, up 23% YoY. While basic mobile penetration is almost always over 100%—simple mobile devices and sim-cards often cost a few dollars—adoption of smartphones implies a higher level of user sophistication, and opens the doors to e-commerce, mobile banking, and more advanced and cheaper methods of communication. In this regard, Colombia is one of the top regional smartphone markets in South America, with 45.3% of consumers owning a smartphone as of 2014. Industry analysts anticipate this trend picking up, as another 13% of consumers discard basic GSM phones for smartphones in 2015.

Colombia is Android territory, and that trend is consolidating. Mobile internet users in Colombia opted overwhelmingly for Google's low-cost platform, with 79.8% of mobile internet traffic driven by Android in August 2014, according to comScore. This represented a marked increase in over just a few months, up from 74.2% in May 2014. iOS was the most affected by the this expansion, shrinking from 11.1% market share to 8.8% during the same period. With the remainder going to Windows and Linux bases systems, it looks as if Siri will not be available to take your questions in Colombia.

Social media is an important platform for communication, as well as for commerce and advertising in the country. The top android and iOS app downloads mirror international trends, with the likes of Whatsapp, Facebook, and Instagram topping the charts. According to data from Neo Mobile, social media penetration has reached 48% of the population, with a total of 22 million users. Of these, a total of 15.6 million use mobile devices to access social media. This brings the percentage of social media users accessing via mobile to 71%.
From a market perspective, five Mobile Network Operators (MNOs) are currently operating in Colombia. There are also six Mobile Virtual Network Operators (MVNOs) in Colombia that obtain bulk access to network services at wholesale rates, and then repackage and sell services independently. One company, UNE, is famous in Colombia for being both an MNO and an MVNO. UNE also operates a 4G/LTE network in six major cities in Colombia. The three most popular phone companies in the country are Claro, Movistar, and Tigo.

VIVE DIGITAL

The first phase of the Vive Digital (Live Digital) plan concluded in 2014, and in retrospect, the plan has been immensely successful in improving internet access for Colombians. The plan set out three core objectives to be achieved by 2014. They were to triple the number of municipalities connected to the internet, by extending infrastructure to connect 1,053 of the country's municipalities to the national fiber-optic network. Secondly, with increased internet access, Vive Digital set out to link 50% of micro-enterprises and small- and medium-sized enterprises (collectively known as MIPYMEs) and 50% of homes to the internet. Overall, Vive Digital sought to increase total internet connections fourfold. By 2014, the government hoped to reach 8.8 million internet connections.

In more detail, Vive Digital has expanded and developed the country's digital ecosystem in four directions. At the outset in 2010, only 200 municipalities were connected with fiber optics, however by 2014, 1,078 municipalities covering 96% of the national territory were hooked up. After leading the region in launching 4G spectrum mobile services, operators were encouraged to extend coverage as widely as possible into areas where laying cable is especially challenging.

Efforts to lower barriers to entry were also successful, thanks to subsidies aimed at lower income inhabitants. At the same time, sales taxes and import duties were eliminated on computers, making Colombian computers significantly cheaper than those purchased in neighboring countries. With over half a million government-purchased computers installed in educational centers, computer literacy is now widespread. Two other important directives were the promotion of applications and digital content, and fostering ICT adoption and use. These efforts saw government and private functions move online, meaning that activities ranging from licensing to banking are now possible—and encouraged—on mobile devices. Half a decade ago, this was rarely the case.

While correlation does not necessarily imply causation, the economy is diversifying in tandem with increased internet use. Job creation is taking place, and with the reduction of underemployment, poverty is lifting at a promising rate. In 2010, 38% of the population lived below the poverty line. In the ensuing four years, over 2.5 million Colombians have been lifted from poverty since Plan Vive Digital's initiation. Internet accessibility has expanded from 2.2 million in 2010 to an estimated 8.8 million in 2014, bringing the rate of connectivity to an impressive 80% of the population. By 2018 the government hopes to achieve 90% accessibility, bringing Colombia in line with nations such as Belgium and Italy.

Reaching the remaining 20% is the hard part. Most of this underserved population lives in remote regions where providing electricity, let along fiber optic connection, is immensely challenging. In some rural areas, government funded computers lie dormant due to a lack of power. Access to reliable power will only happen in conjunction with comprehensive economic development. This means integrating remote economies with the centers of trade in such a way that power and transportation services become economically viable.

Phase II

The second phase of Vive Digital will continue to define the outlook of the ICT sector. Phase II will capitalize on the strengths of Phase I, and aims to triple internet connections from 8.8 million in 2014 to 27 million by 2018. With this level of penetration, Colombia would have internet penetration levels on par with developed EU countries in three years. The next step is to raise internet penetration in households from 45% to 63%, and in small businesses from 60% to 70%. Phase II also plans to raise the number of companies in the IT sector to 3,600, and triple IT sector revenues to $10.4 billion. This will involve increasing the number of IT employees to 117,000 by 2018. With internet rates already high in urban centers, and among the country's middle class, most of these increases will happen through continued subsidizing of low-income family purchases of PCs or tablets, and by maintaining the lowest prices for PCs in the region.

THE MARKET

Over the last decade ICT has been one of the fastest growing sectors of the economy, and unlike the country's more developed sectors, its growth potential is far from realized. Between 2002 and 2012, the sector grew by more than 20% annually, with IT averaging 13.7% versus 9.1% for telecommunications. In 2012, ICT contributed 5.5% to GDP.

Broken down into sub-sectors, the country's ICT sector has moved towards hardware and components manufacturing, away from ICT services and software development in terms of GDP contribution. Between 2003 and 2011, software development decreased slightly from 12% to 11%, while services shrank (as a percentage of the sector) from 37% to 30%. The real gains took place in hardware, which grew from 51% to 58% in the same time period, contributing $3.5 billion to the national economy. In second place, services were made up of outsourcing (40%), deployment and support (26%), integration and development (20%), consulting (11%) and the remainder in education and entertainment. Software revenues for the same time period were largely in software operating systems (53%), security systems software (18%), systems and network management software (18%), and storage software (11%).

Hardware broadly includes all computer assembly, repair, IT and related tech services. Strong demand for these services has made the Colombian IT sector the third largest in Latin America, with over 3,000 companies and 32,000 employees.

SMEs are quickly adopting IT solutions, but overall rates indicate that smaller companies are still lagging in sophistication. From 2010 through 2012 internet usage tripled from just 7% to approximately 20%. At this rate, close to half of such businesses will have made the transition by 2016. In fact, SMEs constitute 80% of the companies in the IT sector, with the average IT firm employing just shy of eleven employees.
As Colombia's IT sector claws its way into the international market, it is crucial that its hardware segment cedes ground to software development and services, which generate far more value and have a transnational dimension. A recent survey by the Colombian Observatory of Science and Technology found that approximately 66% of SMEs make no effort in terms of innovation. While government incentives lower the barriers to entry, it will ultimately be market conditions that force these recalcitrant businesses into the 21st century. As smartphones play an increasing role in the lives of average Colombians, businesses will be forced to accommodate them, and fortunately, the government has made this transition affordable and easy.