No Fourth Cellular Provider?

On Tuesday, January 30th, it was reported by the Barbados Telecommunications Unit: there had been no applications for a fourth cellular license in Barbados.

This should come as no surprise. The math doesn’t work.

As any venture capitalist will tell you, there are at least three things which are immutable: math, physics, and economics. When it is time to “sell the business plan” to those who might be paying for it, your numbers had better look good, from both optimistic as well as pessimistic points of view.

So let us quickly do a simple back-of-the-envelope analysis of executing a cellular play here in Barbados, and see what we see…

Let us say a cellular build-out here in Barbados costs $30 million to do properly. Let’s assume the market is 300 000 potential customers. This number allows for some of the customer base to have two or more cellular phones, and for visitor usage.

Further, let us assume the average customer will be paying $75 a month in service charges, that a market share of 25 per cent is expected to be achieved over five years, and that the gross profit margin before debt servicing but after all other costs is 30 per cent. Interest on the loan is ten per cent.

These assumptions are optimistic, and the results show it — the payback period for this proposal is approximately four years. Most investors want to see their money back, and then some profits, within three to five, so this could work.

However, the money people will also ask to see what happens with less optimistic projections. For example, what if you only reach 15 per cent market penetration (you are entering a mature market), and your average subscriber only pays you $50 a month (price pressure in the market)?

Humm… The payback period now extends to nine years. These kinds of results are not what potential investors like to hear proposed — or ever see. The money people start getting nervous… Unless you have something of value to trade (such as shares in a going concern), most investors would not consider underwriting such a proposal.

Now, admittedly, this is a very quick and rough analysis (all of the money is spent in the first year, for example), but it is what anyone thinking seriously about entering the Barbados cellular marketplace would have done, and then likely rated the proposal too risky.

And so it should be no surprise that there have been no additional applications for a cellular license. Nor, frankly, should it have been a surprise when AT&T became Cingular, and then disappeared.

This then begs the question: if not a fourth, what about the third? Will Sunbeach deliver a cellular service in Barbados? One can only hope and trust, based on recent news releases from Sunbeach, that they have figured out a way to do their play. In many ways, Sunbeach are one of the few existing Barbadian companies which might make sense as a third cellular provider, as they are a successful, going concern with related products and services to offer.

Most likely, there will only be two, or three, cellular providers here in Barbados. This is to be expected, based on the natural capital “barriers to entry” facing a cellular provider entering a relatively small, mature and saturated market, and the high-risk nature of telecommunications ventures.

The Barbados telecommunications marketplace should be less distracted by cellular, and more concerned about introducing real competition to those sectors where it is still needed, such as reliable broadband providers, VoIP, and international and local-exchange carriers.

Barbados has come a long way in its communications marketplace in the last five years. But it has much further yet to go in order to be competitive on the world stage.

Published in the Barbados Nation News Business Monday 2007.02.12.

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