I’d now like to hand over to Mikael Grahne, CEO.Mikael Grahne Thank you Emily. And [technical difficulty] is a great place to be and it’s a great business. The business models are constantly evolving we are facing lots of challenges. And I think the successful companies operate in this arena, the ones who recognize early on these changes, adapt to them and help driving them. And I think, our performance record has tested that we belong in that category. Let’s look at some of these evolutionary changes we’ve been facing here. Just a few things, growth factors, we used to grow from penetration market share. Increasingly our growth is coming now from data, mobile financial services and VAS. Penetration used to be all of our true level opportunities, now we are figuring out how we can extend our penetration profitable into the rural areas. Pricing ARPU, the last years we’ve been suffering I would say double digit ARPU declines. I think that’s very clear signs that we have most of our stabilization in this arena, in South America the last five quarters, positive ARPU growth in Central America in the last two, clear signs of stabilization. CapEx used to be about coverage, voice capacity, 3G initial CapEx. Now we’re looking much more into CapEx in IT and spectrum which will help the returns and efficiencies of our network. Skills, naturally, you need a telecom skills, sales, marketing and distribution. In the future, we need the same but also when I emphasize on financial skills or new media skills or mobile health skills if that’s the arena we’re going to go into. Customer profile historically outside Latin America, we were predominantly prepaid. Now with our data packages, we are moving increasingly into a postpaid customer base that’s fine to adapt and involve with the product services. Very simple in the past used to be single voice plus maybe some SMS packages. Now we have a huge amount of packet TIGOs as we call them multi-service products voice internet, entertainment and financial services, I’m going to talk a little bit about those.
And as and operate or it used to be all about single voice and SMS. In the future and already today, you can clearly say that we’re moving to a multi-plate platform of our internet fixed TV, mobile financial services. And you’ll see consolations as we’re having Central America where we have basically the full array of services in place. Someday we will have that in the rest of Millicom too.So, by being quick, by adapting, by recognizing and by leading, you really can create revenue growth. I think 2002, our VAS revenues were less than $5 million and in 2011 we’re going to cross $1 billion. How did we do it? You know, recognized the opportunity, put dedicated resources and lead the evolution, very simple. How do we keep this growth going on into the future? That’s really unique skill marketing, the best distribution platform, smart pricing, understanding the customers’ perception on pricing and the right value added services product that meets our customers’ need. How do you get there? It’s really the most important element that grey box there in the middle, be close to your customers. Truly understand their needs. And then develop package or products that meet these needs, what we call packet TIGOs. I will show you some examples of this, okay. For less than a $1, for example in Tanzania, you can buy 5 minutes on net or 100 SMS on net. And the target there would be young urban teenager, a young adult and people who are into intensive texting that is an example of this segment. DRC, slightly different, slightly different, 45 SMS on that or 45 MMS, yes we sell MMS also in our markets. For $1, basically common package that fits all our customers, 50 minutes on net or DRC 100 SMS on net, Guatemala, 50 minutes on net with some SMS on top of it and so. And so, again, segment the products to key segments. When you got the $5 packages, you’re starting to get into the data world, social networks you see a few examples of it. $10, you start to see more it, more capacity and into you know, even getting into the social network side, again, targeted packages, to targeted customers. And when you go higher up, it just increases. But again, it’s all about being targeted.
So the most important part is to understand what makes sense to our customer but equally you have to understand the value in the cost context of the customer’s wallet, how do they look at our offerings from a value point of view, just a few examples there? For example, in Paraguay, you can buy 200 megabytes of data for one day or one pack of chewing gum, which one would you do as a customer. I think we look quite good in that choice.If you look at Ghana, one soft drink for $0.80 or 40 on net. DRC one liter of gasoline or ten minutes of voice 60 SMS on net. Columbia, 2 cans of beer or TV on the mobile phone for a day. And Honduras, one movie ticket or Blackberry services for three days, this is our competition. This is what we compete for. And if we want to develop successfully new services, they have to make sense to our customer but they also have to be relevant to the other opportunities our customers have to spend money. Final point here before I hand over to the people who really do all the work, I just talk about it. We basically are brutally focused around four categories, communication, information, entertainment and solutions. We have a regional capability in driving this. And we also have the same capability in the marketplace. And the reason that we are getting head or ahead here is that we really penetrate deep in every category and figure out the customer needs and develop and market the products that is satisfied their needs. So, I will hand over to Ricardo and Tom. Each of them, lead the commercial operations. Ricardo in Latin America and Tom in Africa, and they’re going to talk a little bit more about the communication and entertainment category, Ricardo and Tom?
Ricardo MaizteguiGood morning everybody. My name is Ricardo Maiztegui, I have been working for Millicom the last 13 years. I started as General Manager in Paraguay, later I became Area Manager of South America and now I’m the Chief Commercial Officer for Latin America. I would talk about communication and entertainment categories in Latin America and Africa together with Tom. Okay, communication category is our biggest category of course. It contributes 74% of the total revenue. It’s growing at 8% rate last year. And penetration of the main product after voice is 51% in SMS. The gross margin is more or less the same that the average of the company. And the SMS gross margin is higher. I would explain our strategy on the category. We see, we always say that we see ourselves as a fast moving consumer. And the strategy has evolved as the same as the Tylenol [ph] strategy. Many years ago, Tylenol had just one problem which is Tylenol. To fix one problem, which is one pain we have it, the audience was all the adults. And then, they discovered that they have an opportunity segment in the market. They discovered there are many other different things that to focus on and to solve customer needs. So, they create their category stool. They make a broader value proposition for consumers to solve any kind of pain. They created categories which focus on which type of problem they are going to solve. They brought the segment from kids to adults. And they did the job on the packaging. So, in our business was more or less the same. One minute call used to be one minute call. But now depends on many different things and we have the opportunity to not to commonly decide [ph] the one minute and be different for every different segments.
And also the problem is much broader now, it is not, when you just make a call from your mobile, now is making calls, making SMS, accessing to internet, accessing to your Facebook from your mobile etcetera. So, we also have a broader value proposition that color all the products, communication and we offer the best quality for the best value for money. We also have our segments it’s in Arabic because Miguel doesn’t allow me to put the names of the segments, it’s confidential. We have our categories, communication, information, entertainment and service. And we also have our packet TIGOs that I will explain.Okay. Now we have the segmentation. How do we segment our market? We first understand who is our consumer, and how he use the services because this is the information we have. So, we know, what do our consumer use voice SMS, data, when they use it, what time they access to Facebook, at what time they browse, at what time they chat with their friends and then how much they consume. Then we cross this information with the use and attitudes, so who are these people from a demographic point of view purchase power, which are their motivations. So, we make deep research on understanding the different type of people use our service. And then we cross with lifecycle in the company and in the product because it’s not the same somebody that have just joined the company than the other one that is three year with us. He’s not the same a person that is starting to SMSing the other one that is now using full of our product, browsing and access to Facebook, to Twitter, whatever. So, we combine all the information and we come up with segments. Then, now we have, now that we have clear refined segment, now we have to serve each segment with a different approach.
So, in the past we have one minute call was the same for all. Now we discovered it’s very different when you have a hotspot need, let’s say a teenager needs to arrange a party for tonight, so he needs 100 minutes now, maybe tomorrow he will not be any minute, he just will SMS with the friends. But now he need to make many calls. So, he selects a hotspot need. So, what we create is the packet TIGOs. Packet TIGO is a package of one product or many products it could be a combination of them that offers significantly more value than the face value.Let’s say that our face value for a minute in the prepaid plan is $0.10. So, with $1 you can make 10 minute, okay. So, in packet TIGO maybe 30 minutes is one third of the face value price. But this packet TIGO expires tonight. So, you have to use it 100% of the packet TIGO before tonight. So, for the consumer it has a huge value he can do much more than the normal price list. But for us it is very good too because not all 100% of the consumer use 100% of the package. So, as we see in the graphic, only 35% of the consumer use 100% of the package, then we have another 15% that us between 75% and 100% another 15% use between 50% and 75%. And 33% use less than 25% of the package. So, on the total average we take advantage too. But the most important is that we prove that when our consumers start buying the proper package that we assigned for them, the ARPU goes up significantly between 6% to 18% in Guatemala for example. So, this is most important for us. Okay, so at the end, the consumer is significantly happy or much more satisfied. We drive ARPU up. And now the challenge is the learning cube which is the best packet TIGO for every person at the proper time. And also we save a lot of money in advertising, because we don’t spend a single dollar on advertising on this. We do the offer, we sell the offer with our Tag and Trigger [ph]. What is the Tag and Trigger [ph]? We tag our consumers based on who they are, at which segment they belong, how do they pay postpaid, prepaid, when do they recharge. And then, when we have all the consumers tagged, when even happen, we send them with Trigger [ph] a sales process. We send them an SMS offer at the proper time to buy the proper product.
As an example, if I run out of balance, immediately I receive an SMS offering me many options. I can go and recharge from my credit card if I subscribe for it. I can recharge, I can ask TIGO to lend me some money. I can ask some balance to a friend. So, immediately they would send them an option to act on that moment. Or let’s say that I called to Mario, he has a very cool backtone. So, when I finish the call, I receive an SMS saying did you like the backtone you have just listened, just press star and you have it. So, it’s another example of Trigger [ph].Why am I telling this? Because the Tag and Trigger [ph] have been shown much more effective than the typical massive brokers, it’s 10 times more effective. So, for us, it’s a very, very good tool to sell thousands of different packet TIGOs to the proper target at the right time they need it. In the future on packet TIGOs, now we are starting on doing Trigger events not based on me but based on other consumers that are important like me. As an example, your son have just run out of balance. So, if nothing happened to him but something happened to my son, I can act on this. Okay. In the category, our biggest challenge and opportunity for us is to convert SMS user into lifestyle user, what is this. Today, in the past we put a lot of effort making our consumers to do, to entering the SMS product, to use the SMS. We did a pretty good job because we have 50%, more than 50% penetration on the SMS, and we are taking into account that we have a literacy rates in our markets are pretty big and Central America is around 25% to 30%. So, having a 50% penetration is huge.
But what we discover is that the biggest opportunity is to compare SMS user which are people that use SMS time to time to lifestyle user are those people that use the SMS every day. So, it’s part of their lives. For every point that we convert, an SMS user to lifestyle user, we gain 5% of ARPU increase on the probe SMS and it’s a lot of money for us.So, I will hand off to Tom Gutjahr, that is our Chief Commercial Officer for Africa that will tell experience on Africa in the communications category. Tom Gutjahr Good morning. I’m Tom Gutjahr, I’m in-charge of commercial operations in Africa. I’m going to give you some examples on what we’re doing in Africa in terms of smart pricing. First we will see a short TV spot which we have done in DRC. No, it’s going to come later, I’m sorry. In their CB [ph] have launched something which we call the dynamic tariff, the dynamic tariff is a customer proposition where customers get a variable discount based on the sales sides where they are, meaning if there is a lot of capacity in a specific place where the customer is, he gets a higher discount. If there is less free capacity on the network side, the customer gets a lower discount. What is good about this service is, first of all, that we are using our network capacity very efficiently, making optimum use of our investments. It makes also the comparison of prices more complicated for the end customer which can be a benefit in markets where TIGO has a very high market share. [Video Presentation] Good. What I would like to show you next is the example of Tanzania. In Tanzania, we are extremely strong in the Darussalam and Coastal region. We still have more room to grow in our part of the country. So, what we have done is, we have differentiated our price strategy. On the left side, you see a promotion which we’re doing in the rest of the country giving double air time. So, we’re really focusing on our different market segments, market positions in different parts of the country. And this has also led to significantly up-tick in customer activations in Tanzania.
The Hogan Packs [ph] in Rhonda, in Rhonda the challenge was to really grow market share quickly, to grow revenues quickly but not to sacrifice ARPU. So, what we did is an African version of the packet TIGOs. We said the customers, look, if you pay $0.30 we will give you 30 minutes. But the customer needs to use the 30 minutes within 24 hours. The effect of this is a win-win situation for TIGO and for the customer because the customer gets actually a very nice per minute rate but TIGO gets a very nice ARPU because if a customer uses this kind of offer every day, we get to ARPUs, only for outgoing onward traffic of $6 and more.The strategy which we’re applying in places where TIGO is not the number one player is the dual sim phone. In Africa, customers obviously want to use offers from several mobile operators if they are very price sensitive. And normally a customer does not migrate from his existing operator to his new operator in a day, normally he will try the offer of the second operator and then step migrate. We are taking advantage of this phenomenon and we are actively proposing dual sim phones in some markets, where one simcard is locked to TIGO network and the other simcard is open. What we have seen is that customers appreciate this kind of proposition very much. Meaning, they’re actually able and they’re willing to pay the market price for this phone. And we do need to subsidize these phones anymore. We can even tell them with a small margin. In some markets basically all of the phones which we are selling are dual sim phones. It even goes so far that our distribution network of competition is selling our dual sim phones because also their customers will like to have this kind of phone which is exactly what we want.
One aspect which is I think a very positive signal for the future is the synergies which exist between the communications and entertainment category and mobile financial services. We’re going to have a separate presentation on mobile financial service a little later. But what I can tell you is, our first results show that there are some positive synergies. So, in Tanzania for example, we’re seeing that ARPU on uses of TIGO peso is twice as high as normal ARPUs. We are seeing in Ghana on a relatively still small customer base of NFSUs as their ARPUs are 15% higher. And the churn is 20% higher.And also, the air time which we sell in these places for the use of communications and entertainment product has a higher margin because many customers start by air time actually from the TIGO financial service account and not through the traditional distribution channel. Yeah, this is what I can tell you here. And I hand over to Ricardo. Ricardo Maiztegui So, conclusion at the moment for communication category is that our segmentation strategy is working. It’s driving ARPU up, churn down and increase our consumer engagement. The Tag and Trigger [ph] has proven to be extremely effective for us, 10 times more effective than the normal broadcast. And now we are able to deliver the proper offer at the right time to every segment and every consumer. And even for a high penetration service like SMS, we have a huge opportunity to continue growing from converting users to lifetime users. Okay. Now we will talk about entertainment category. Entertainment, we define entertainment as a service that are happened at the later time of our consumers. And use our network, where they’re paying, the consumer is going to pay for an entertainment service or that we create or generate advertising inventory, it doesn’t means that if I pay for my backtone, I am generating revenue for Millicom. But if I allow Millicom to put a backtone, advertising backtone from the Coca-Cola in MySpace, I am generating an advertising inventory that the company sells. And this is how we see all our advertising moreover said advertising strategy. We generate stock, advertising stock that we want to sell to other companies or to our customers.
So, the category includes Mobile TV, realtones, backtones, messaging, group messaging, games, TV both in infotainment and all kind of products, access to all these kind of social networks.Category, represent a 7% of the total revenue. It is growing at 14% rate last year. Our flag product which is the backtone, has a 25 penetration across all markets and still growing at 2% to 3%, 2 to 3 points per year. And the gross margin is lower because we have to share some revenue with our partners. Okay. So, how far can we go with existing moreover in the backtones? So, you see 25% penetration, you have a future opportunity to go. But when you analyze and we go to the enter in the segments, the high ARPU which represents just one percent of the population and the second tier represents 2% of the population, they have penetration that are more than 50%, from here it’s more than 50% the penetration. So, there are opportunities, there are other 50% of course. But in the lower segment, the penetration is significantly lower. And this is because we are facing purchase power problems because a person that spends $2 or $3 a month can’t afford a $0.50 per month backtone service. So, now what we are creating is content that don’t require to paying intellectual rights to fair parties. So, we are selling through tones, we are selling songs that are generic, that don’t pay price for other parties. And the way we are planning to grow this category. Tom Gutjahr Introduce you to the concept of star copy for ringback tones. I’ll move over here. You know, ringback tone is the service where you hear a music when you call somebody while you’re waiting for the other party to pick up the phone. Now star copy is a feature to make ringback tones easier to use, meaning, you call somebody, you listen to his ringback tone, you like his ringback tone, and you press star to copy the ringback tone and to buy it.
It’s a feature to increase usability for the customer to make it easier to buy the service and we have immediately seen huge pickup in ringback tone usage in several markets. In Rhonda the penetration has increased 4% in only the first week when we launched it. But also in Ghana we had 126% increase in daily ringback tone downloads. So, the point which I’m making here and I’m showing you our example from Tanzania is that it’s really important to constantly work in usability and push the services, you know, in order to achieve growth.If you remember a few years ago, when customers bought ringback tones, they needed to pay a monthly fee for the content. This was good, but there were some people who didn’t actually have enough money on their accounts to pay for the contents, so they were automatically dropped out of the service. Now what we did as a next said, we said okay if the monthly fee is a burden let’s spill them a day so we broke down this theme to 30 small payments. We then later worked on the ease of selecting content in the menu. We came up with short lists with local content, with smaller short quotes. And the newest evolution here is what I’ve just shown you this star copy. And we see a permanent increase in revenues but also in product penetration in Tanzania but also in other markets, and I think it’s the way forward for many, many other services. [Video Presentation] Read the rest of this transcript for free on seekingalpha.com