By Business Intelligence Unit
The implementation of the 3G wireless telecommunications platform has suddenly become one of the strategic priorities of the Cuban government. Why? Because the revenue generated by access of Cubans to this platform is a financial channel that alleviates the lack of liquidity faced by the Cuban economy. The considerable reduction of Venezuelan financial support and the likely possibility of the total collapse of the economy of that country, has forced the Cuban government to look for means to replace said losses, providing oxygen to avoid the collapse of the economy. One of these means has been making the Internet more easily accessible to Cubans.
The offering of cell phone services to consumers has become one of the most profitable businesses currently controlled by the Cuban government. In just eleven years (2008-2018) since it became possible for consumers in the island to contract for cell phone services, the number of lines has risen to 5.2 million. See Figure 1.
Figure 1. Number of leased lines in the cellular telephone service in the Cuban market, 2004-2018
Source: Havana Consulting Group based on data published by the National Office of Statistics and Information.
This rapid growth of cell telephony has generated an estimated revenue of around 3,043 million dollars for the Cuban government for prepaid cellular telephony used by the Cuban population in said period of time. For 2018 it is estimated that prepaid mobile phone payments will be around 530 million dollars.
Currently there are three main ways for Cuban citizens to pay for cell phone service: (a) the remittances that these citizens receive; (b) Internet top-ups paid from abroad by relatives and/or friends; and (c) funds in the hands of Cuban citizens obtained from a variety of sources. When cellular telephony services began to be offered, remittances were the main source for the payment of these services; in 2011, payment for telephony services from remittances peaked at $102 million dollars. That same year, payment from other sources of income topped remittances as the main source of income for paying for cellular telephony, with a value of $104.3 million dollars. In 2013, Internet top-ups overtook remittances as the second most important source of payment for cell phone services. See Figure 2.
Figure 2. Payment channels for prepaid mobile telephony services, 2008-2017
Source: Havana Consulting Group
As mentioned above, telephone recharges over the Internet have grown rapidly in recent years. The most popular platform for rechargers is Cuballama, which has a portfolio of around 1 million clients and has become the main platform for telephone recharges to Cuba through the Internet[1].
According to data published by ETECSA, in December 2014 around 400,000 cellular telephone recharging transactions were made; in December 2015 the number had more than doubled, reaching a total of 836,854 transactions, which represented a volume of 124 million dollars[2]. It is expected that in the coming years the number of Internet recharges will continue to increase, given the continuing expansion of the number of cell phones on the island.
The growth in recent years of the private sector has been one of the main factors that has changed the dynamics of the cell phone market on the island. Although many services that could be offered using this technology have not been implemented, the influence they have had on the development of business-to-business (B2B) transactions in the emerging private sector has been significant. Cell phones have become a necessary tool for coordination, decision making and even promotion of businesses by many Cuban entrepreneurs.
Since ETECSA implemented the transfer of money between cell phones in 2015, many customers have converted cell phones into a payment platform to carry out transactions for the sale of products and services. The number of transactions has been increasing as the market has grown. ETECSA has understood that this is a very lucrative business and it is for this reason that recently it extended the allowed number of daily transfers to 3 and lowered the cost per transfer to 20 cents of CUC; previously the cost per transaction was set at 30 cents of CUC[3].
In a market of 5.2 million cell phones, ETECSA's revenue potential based on three daily transactions per cell phone, at 20 cents of CUC each is 360 million CUC, indeed a very lucrative business. This has compelled the government to launch a digital wallet to pay for various services, such as use of electricity, water, etc. However, this is a project that is still under development.
Currently more than half a million people are registered to engage in private work on the island and it is estimated that another million work informally. These are the segments of the population that make the most use of cell telephone recharges because they are the ones with financial capacity to pay for them and to use the services of a digital wallet.
These self-employed workers, who earn higher incomes than state workers, can potentially pay for the telephone services of one or more close relatives: mother, father, wife, or children. Thus, a cuentapropista telephone client has a greater possibility of generating at least another customer of the service than an average customer who is not self-employed.
The rapid growth of the island's mobile phone market highlights two very important aspects: the high demand for cell telephony that exists in the island and the rapid adaptation power of the population to the use of technology. These conditions make the Cuban market a virgin territory with enormous potential to introduce a digital wallet that would allow transactions such as receiving remittances, sending money, paying for services, making phone calls, paying Internet bills, etc.[4] The wallet that ETECSA launched recently does not cover these services.
PROJECTION FOR THE NEXT SIX YEARS
The cell phone market on the island is in a full growth phase. Even though the calling rates are very high (0.35 CUC / min), the market has grown dramatically in the last five years -- from 2,203,423 active lines in 2014 to 5,200,000 in 2018 -- still leaving a significant portion of the population without coverage.
The telecommunications sector in Cuba introduced the 3G platform in December last year, after executing investments valued a million of dollars over several years. Cuba is currently the most backward country in Latin America in terms of technological infrastructure in telecommunications, coverage of Internet service and cellular telephony. The region has begun the migration to the 5G (Fifth Generation) platform (Fifth Generation), while Cuba currently has a delay of more than 20 years compared to the rest of the countries in the region in terms of infrastructure and telecommunications services.
After a month of introducing the 3G platform, ETECSA reported that 1.8 million users made use of the Internet on their cell phones. The rates for its use are high compared to the average monthly salary of 30 USD that Cuban workers receive. To have 600 megabytes (MB) Cuban consumers must pay 7 CUC ($ 7 USD), for 1 gigabyte (GB) 10 CUC ($ 10 USD), 2.5 GB 20 CUC ($ 20 USD) and 4 GB 30 CUC ($ 30 USD). The plans include an additional 300 MB for local portals, those that end in ".cu".
The 1.8 million users paying for the package with the lowest monthly rate (7 USD), would represent annual revenues of 151.2 million dollars. If over the next few months the number of customers using the Internet in phones reaches 3 million users, this would mean revenues of 252 million dollars per year if we calculate with the minimum monthly rate of 7 USD.
Before the introduction of the 3G platform in the market, the existing commercial channels to access the Internet on the island were: a. the Wi-Fi points, which are insufficient to meet the demand of 5.2 million users; b. Internet payment through the Nauta Hogar service that allows Internet access from homes, but with very high rates that range between 15 and 70 CUC; and c. the navigation rooms of ETECSA located in all the provinces of the country.
Of these three routes, the most used is the Wi-Fi points; through these networks, more than 3 million users are connected to the Internet. Nauta Hogar has only managed to attract around 70,400 Cubans who connect from their homes; 95% of them use the lowest rate of 15 CUC, which represents revenues for ETECSA of 12.6 million CUC per year.
Meanwhile, the growth of the number of Wi-Fi points in the country does not correspond with the growth of the cellular telephone network. The demand for Internet use exceeds the offer at this time. Hence the importance of the introduction of the 3G platform to achieve mass service more quickly by offering Internet directly on cell phones.
For the period 2019-2024 the country is expected to increase the number of active lines by 37.5%, which would mean that by 2024 there would be 7.15 million lines in operation. See Figure 3.
Figure 3. Projection of active cell lines in the Cuban market, 2019-2024
Source: Havana Consulting Group
It is expected that together with the development and coverage growth of the 3G platform, the state will lower the rates of use of cellular telephones per minute, in order to attract new customers to the network. Undoubtedly, the introduction of the 3G platform is already increasing the income from top-ups. It is expected that by 2019, at least a half million additional customers will join the 1.8 existing customers who use Internet services on their cell phones.
Thus, revenues from recharges could reach 737.39 million dollars in 2024, which would mean a growth of 38.96% compared to 2018. In six years, the billing would grow by 206.74 million dollars. In the 2018-2024 period, the total billing for cellular telephony would be projected at 4,431 million dollars. See Figure 4.
Figure 4. Projection of payment channels for prepaid mobile telephony services, 2008-2017
Source: Havana Consulting Group
For 2024 the recharge through Internet is projected in 335.23 million dollars, which represents a growth of 105.89% with respect to 2018.
CONCLUSIONS
The Cuban economy is immersed in one of the deepest crises in the last 60 years. The accelerated fall of Venezuelan support, plus the misguided strategy adopted by the Cuban government not to open the market and continue betting on the development of a centralized economy has put the country on the verge of economic collapse.
The search for sources of income has become a desperate race for the government to try to oxygenate the economy and reverse the precarious financial situation in which it finds itself.
The development of telecommunications, specifically mobile telephony, has turned out to be a move that has provided millions of dollars to the country's economy. The introduction of Internet to the cellular telephony in the island is a new option that can contribute to adding to the empty coffers of the state. However, opening to the Internet brings very high political risk for the Cuban government, threatening the control it has always had over the handling of information that they consider sensitive. The internet creates the opportunity that Cubans have to access and provide information in a massive way, something that has been forbidden to Cubans even citizens all over the planet have been able to do.
Any event of political and social relevance that takes place in the country will be immediately recorded on social networks. In the coming months we will be able to know how broadly the Cuban government is willing to allow access to the Internet and to what depth. The prompt flight by Cuban President Miguel Diaz Canel, his entourage and the accompanying security corps from a situation where they were challenged by a small group of people affected by the tornado that affected several areas of Havana at the end of January who were unhappy about the very slow government response, illustrates the risk that the government supposes to offer the Internet in exchange for obtaining millions of dollars to oxygenate the precarious economy.
While they evaluate this dilemma, other new challenges are ahead for the Cuban government. They include the increasingly real possibility of completely losing the Venezuelan subsidy, the loss of revenue associated with terminated contracts of doctors working in Brazil, and the negative consequences that the crisis of sonic attacks has had on the Cuban economy, specifically on American tourism and the relationship with the US (and now with Canada) that have affected the attraction of investments. This situation urgently requires a change of strategy by the ruling elite to introduce real structural reforms to move the economy forward. Otherwise, the ghost of a new special period will become more likely than ever, in an international scenario not favorable for the Cuban government.
REFERENCES
[1] Beltrán, Federico. “Cuballama responde a acusaciones de fraude, hechas por ETECSA”. CIBERECUBA. Noviembre 2016. https://www.cibercuba.com/noticias/2016-11-21-u146802-cuballama-responde-acusaciones-fraude-hechas-ETECSA
[2] THCG Business Intelligence Unit. “The mobile telephone market: captive and lucrative”. THCG Business Report, December 2016 Nº 6, THCG & TECH.
[3] J. Pentón, Mario. “Nace una nueva criptomoneda en Cuba, el 'etecso'”. Mayo 2018. 14yMedio. http://www.14ymedio.com/nacional/Nace-nueva-criptomoneda-Cuba-etecso_0_2442955692.html
[4] HCG Business Intelligence Unit. “Cellular telephony continues to grow despite the economic crisis.”. THCG Business Report, June 2018 Nº 3, THCG & TECH.
