Convergencia Research, Consultoría especializada en Latinoamérica y Caribe
Thursday, October 10, 2019

MTC lays the foundations of a new business model for the fiber optic backbone network

Times of key decisions are coming: after a “brainstorming” phase, defined by the Vice Minister of Communications Virginia Nakagawa, around possible solutions for the backbone network, the MTC published two proposals for modifications to the broadband Law. With that, she advanced in the design of a new commercial model for the central project of the ICT sector, which represents in value 1% of Peru's GDP.

Almost five years after the award of the National Dorsal Fiber Optic Network (RDNFO), including three in operation, no one doubts its failure. If the 21 regional network projects associated with the number are taken into account, US$ 2.224 billion were invested, with disappointing results in every way: the network continues losing customers and is underutilized, with a demand for traffic that does not even reach 10% of initially estimated.

In mid-2019, before the demand of the whole sector of a new commercial model that would take advantage of the laying, the MTC finally advanced with the pre-publication of the draft Supreme Decree that modifies the current regulation of the Broadband Law. The text proposes that the RDNFO operator can offer any marketing scheme. It also redefines the concept of regional networks, so that winning operators can provide final services to users and not only the wholesale service, as currently established.

Months after this first proposal of modifications, at the end of September, a second version of the project was published, which added the qualification so that the backbone network operator can offer international connectivity services.

To reach these conclusions, the document collected the recommendations of the World Bank, which developed a diagnosis and proposed three alternatives of new business models for the backbone network.

The problems associated with the backbone network are several, and they had begun in the project design itself, in 2010:

-Initial planning: The original dorsal network approach pointed to high availability, high traffic capacity and multiple roads to offer redundancy outside Lima. But that design met the need of the market in 2010, when the reality was different. The overlapping of the Azteca line with private networks, which were developed alongside this “mother” project (and at the mercy of its delays) is one of the main causes of the current problems with the backbone network.

-The maintenance expense is US$ 18 million annually.

-Customer loss: Optical Networks and Entel, two of the first companies that signed a contract with Azteca in 2016, opted for other providers, due to the tariff gap: Azteca offers a price of US$ 23 per Mbps, compared to private operators of the market, which offer values ??between US$ 7 and US$ 10. Entel was the main client until 2017, hiring 80% of the backbone traffic at that time. Telefónica, Bitel and Internexa are the main recipients of these disappointed customers. In areas where Azteca is the only player - 30% of the provinces where it has nodes - it manages to keep its customers: an example is Fiberlux, which hires 100 Mbps.

-Quality of service: Azteca recorded 200 service interruptions in 2018, a dozen unresolved fiber cuts within the expected timeframe and 25 latency tests that did not meet the agreed values. In the first quarter of 2019, there were 1,821 incidents (delays in equipment repair, incorrect temperatures for the equipment and exceeding latency times in 23 of 144 measurements) and 100 service interruptions. For example, a serious incident occurred during 62 hours in La Merced, which affected the operation of Optical Networks, Plasmatronic, Fiberlux and LeliTV.

- Delays in the execution: In the first half of 2019 some of the 21 regional projects were inaugurated - such as Lambayeque, by Telefónica, and Huancavelica, by Gilat-. The delay in the implementation of these initiatives (involving investments of US$ 1.803 billion) is about three years, compared to the original plan.

It is expected that in the coming weeks the definition of this model will be completed, which will serve to take advantage of the 13,000 km line and the 21 regional projects under development. Time is a key factor, as the evolution of this initiative itself showed: it is urgent to define an equation that does not leave the deployment wasted, and it remains to be seen whether or not Azteca will be part of that formula. Although the last financial results of the Mexican company began to show favorable data, they do not respond to the performance of the Dorsal Network itself, but to rights that the State must pay to Azteca.

One of the alternatives that is outlined as a resolution of the mix-up is that Azteca moves away, finally, and that stretches of the tender are tendered to different wholesalers, with the possibility that the latter in turn commercialize services for the end user. From the MTC they will not put obstacles to an exit of Azteca, as evidenced by their officials in statements last year. And potential stakeholders have already expressed themselves in favor of an alternative like this, in particular Internexa: The Colombian company has a 5,000 km network in Peru, with extensions planned for this year to La Oroya and in 2020 to Cajamarca

If Azteca remains as a network concessionaire, the alternatives are to make rates more flexible, put into operation the 21 regional projects and focus on areas where the Dorsal Network has no competition. All this together with an effective modification of the Broadband Law that allows Azteca the possibility of managing with different marketing schemes, an option that will require the structuring of a competitive offer in areas where there are also private actors. The role of regional networks is, in turn, one of the components that could be reconfigured with respect to the project's approach, since they would offer services to end users.

The decisions of the coming months are key not only for the aforementioned actors and the closing of the digital divide in Peru. In all these evaluations, the country's path to 5G must be considered. The next mobile generation requires a fiber backing, and for mobile evolution to be a reality beyond Lima and the district capitals, the Dorsal Network project also needs to pay off the fruits promised in the past.

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