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High Wireless Acts [Global Business magazine]

by Hope Katz Gibbs
Contributing Editor
Global Business magazine
June 2000

WALK THE STREETS OF SAO Paulo, Buenos Aires or Santiago, and it’s easy to believe you’ve dropped into the center of the global telecom revolution. Mobile phones are everywhere, giant billboards tout ISP services and new satellite dishes yawn up from atop apartment buildings and office towers.

Yet a decade after the sell-off of the region’s telecom companies began, the slice of society served by the latest communications technologies remains very shallow. As the e-commerce juggernaut powers across North America and Europe and parts of Asia, in much of Latin America more than half the population still await their first phone lines.

Finally, however, the process that began in the early 1990s is picking up speed. A few of the world’s biggest telecom companies are making big plays in the region, and hundreds of others of all sizes are making smaller plays, using all sorts of technologies.

“The telecommunications industry went through a rapid boom and a series of privatizations in the early 1990s,” says Charles Dusseau, a partner with Miami-based Meridian Capital Markets LLC. “Now, a highly competitive shake-out is going on, with various players vying for market share in each country.”

The results, Dusseau says, are rapidly falling rates—it is now cheaper to call the United States from Chile than to call Chile from the United States—several new services and, finally, a steady extension of the telephone frontier to more and more of the region’s people.

NOTHING VENTURED?

The need for new services and investment is clear enough. Briefly, in the early 1990s, there was hope that the initial round of telecom privatization and liberalization would clear the way for a flow of investment that would finally fix systems famous for their fallibility.

Yet this never really happened. Even by 1997, the most recent year for which figures are available, the penetration rate for telephone lines in Latin America was only 11.4%, barely a fifth of the level in the United States or Western Europe, says Eric Nelson, vice president of International Affairs at the Telecommunications Industry Association.

Investment simply never arrived in the volumes that most observers had expected.
One reason was that the first round of telecom companies that invested in Latin America quickly reported back that many of the systems they had acquired were in worse repair than expected, that revenues were lower, that local populations were not rich enough to absorb the cost of new investment, that governments remained almost as intrusive as ever.

Perhaps most damaging of all was the arrival of the mobile phone. With the popularity of wireless service surging, and prices dropping, most of the companies that took over Latin America’s existing telecom companies put on hold their plans to plow new investment into traditional wire infrastructures.

Now, somewhat perversely perhaps, telecom experts say this lack of investment over the last decade has left Latin America in very good position to take advantage of the latest technologies. With little infrastructure of value to burn off, even the biggest companies are moving ahead with plans to upgrade their systems.

The competition among both companies and technologies has become so volatile that it is almost impossible to predict who will be left standing five or even three years from now, Dusseau says.

“The advantage of working in Latin America, versus more developed countries, is that most telecommunications companies have not yet made huge investments there,” he says. “So, they can just about pick the best technologies available and implement them. It is good news for everyone, for Latin America is a market that is eager for telecommunications services.”

VILLAGE BY VILLAGE

Target markets for investors in Latin America are numerous, and there is vibrant activity across most of the region.

Dozens of companies are expanding village-by-village in Colombia and Ecuador, or even neighborhood-by-neighborhood in the suburbs of Lima.

But the market that will drive investment the most will undoubtedly be Brazil. With 160 million people, it is the core of South America’s industrial activity and it is four times larger than any other single consumer market on the continent. Brazil is also one of the neediest of markets. Despite being home to about half of South America’s population and roughly half of its economic activity, the country accounts for only 41% of the main telephone lines and only 42% of all cellular subscribers.

Brazil came relatively late to the privatization table, breaking up Telecomunicacoes Brasileiras SA (Telebras) and auctioning off licenses to potential competitors only in 1998.

Yet Brazil also illustrates why the process has taken so long. MCI WorldCom was one of the companies that won important concessions in the 1998 auction, with its $2.28 billion bid for Embratel, the long-distance operations of Telebras. At the same time, its arch competitor Sprint took a major stake in the Brazilian-based long-distance competitor Intelig.

This state of affairs was fine with Brazil’s government, but only until MCI WorldCom put up $115 billion last October to buy the worldwide operations of Sprint. Suddenly, the structure that Brazil’s government had so carefully constructed to ensure long-term competition in the country’s market seemed threatened.

By December, Brazil’s telecommunications watchdog Anatel had announced that if the MCI WorldCom purchase of Sprint is approved by the U.S. government, either MCI WorldCom or Sprint will have to cede their rights to operate within Brazil.

To complicate matters, Anatel threatened to cancel outright MCI WorldCom’s purchase of Embratel, charging that the U.S. company had refused to pay a $660 million tax bill dating back to when Embratel was state owned. MCI WorldCom responded by saying that it has no plans to pay the bill, or cede the company back to Brazil or sell it to another company.

But MCI WorldCom is threatening to reduce planned infrastructure investments in Brazil. And already, both MCI WorldCom and Sprint are putting many of their investments on a slower track.

The difference now is that such setbacks haven’t even slowed other telecom companies from vying for their share of Brazil’s telecom services market. The interest, however, remains strongest in wireless technologies.

When Brazil recently sold off a 20% interest in its eight incumbent cellular operations, it took in almost $7.3 billion. One of the winning consortiums was led by BellSouth, which walked off with B-band licenses in Sao Paulo for $2.5 million and in Brazil’s northeastern region for $512 million.

THE BIG BATTLE

Although many companies are competing for market share in Latin America, the clear leader is Spain’s Telefonica. The company expanded very aggressively into Latin America in the early and mid 1990s. Now, through a network of affiliates in Spain and Latin America, Telefonica can reach a market of more than 300 million people.

The effort has paid off. Since completing its own privatization in February 1997, Telefonica has emerged as Spain’s largest company, with 1999 sales totaling $13.7 billion.

And Telefonica seems intent on continuing its expansion. One strategy the company apparently is following is to consolidate its position in markets where it already holds a dominant position. In January, Telefonica proposed an all-stock buyout of four big phone companies that it controls—Telefonica de Argentina, Telefonica del Peru, and two Brazilian companies, Telesp Participacoes, a fixed-line company in Sao Paulo, and Telesudeste Celular Participacoes, a wireless operator.
Meanwhile, Telefonica has continued to extend its holdings to new markets. The company recently paid $250 million for a major share in Avantel, the Mexican long-distance carrier 45% owned by MCI WorldCom. And in El Salvador, Telefonica recently paid $41 million for a B-band cellular license, almost four times as much as the $11.9 million base price set by the government.

And Telefonica has continued to pour new investment into its existing holdings. In Argentina, the company recently said it plans to pump $1.2 billion into expanding both fixed and cellular networks, and to develop an internet protocol network.

Not that Telefonica can relax, even in the markets where it has a temporary lead. One reason is that one of the main companies targeting the region is cash-rich AT&T.
Last fall AT&T Corp. formed AT&T Latin America, a 700-employee subsidiary that company officials say will provide advanced technology, first-mile data and voice connectivity in major Latin American countries, as well as a full range of business communications services. AT&T officials say the company will make substantial investments to build out its networks.

AT&T Latin America was in part the result of a merger of Netstream, a local Brazilian exchange company AT&T purchased last year, and FirstCom, a publicly traded firm based in Coral Gables, Fla. that has telecom operations in Chile, Colombia and Peru.
In February, AT&T added the Argentine market to its new network, with the purchase of the newly formed local exchange carrier Keytech LD. AT&T President John Zeglis says he is optimistic about the company’s newest venture.

“Our subsidiary in Latin America extends AT&T’s reach to key economic and business centers in the region,” Zeglis says. “The opportunity for growth is manifest. Business communications services in South America are valued at $16 billion today, growing at a rate of 20% per year.”

CELLULAR REPRODUCTION

Something is indeed going on in the region, at least judging by the grins on many of the hardware companies that sell into the markets of Latin America. Wireless, especially, is booming.

“The one area of the Latin American telecommunications industry that is booming is the wireless market,” reads the 2000 MultiMedia Telecommunications Market Review and Forecast, a comprehensive report published in January by the Arlington, VA-based MultiMedia Telecommunications Association (MMTA), a subsidiary of the Telecommunications Industry Association (TIA).

TIA represents companies that last year manufactured and exported $121 billion in telecommunications equipment. Its some 1,000 members include Lucent Technologies, Nortel, and Motorola.

“Deregulation, privatization, and pent-up demand for wireless phones are boosting this sector,” the TIA report said.
Growth, the MMTA report adds, is being spurred by falling tariffs and
the emergence of prepaid services. The number of subscribers is roughly doubling each year.

More traditional technologies are also being bulked up. “Despite the economic underdevelopment problems facing Latin America, the telecommunications sector will continue to lure capital investment beyond the initial level,” the report concludes. “Carriers must provide the infrastructure to raise the penetration level of the region.”

Right now, Nelson says, one of the best markets of all is Latin America, where investment in telecom equipment grew by 19.6% in 1999 to $26 billion. Enterprise spending totaled $19.7 billion for services in support of voice and data equipment, 20.1% more than the amount spent in 1998. Spending on public networks rose 17.8% to $6.2 billion.

The high rate of growth should continue. Through at least 2003 MMTA estimates that spending on services in support of enterprise voice and data equipment will rise at a 20.8% compound annual rate, reaching to $42 billion per year.

At present, U.S. companies hold about a $4 billion share of the total equipment sold in the region, MMTA estimates. If TIA has its way, this share will continue to grow.

The arrival of AT&T and the expansion of activity by other U.S. firms is especially good news, Nelson says. “TIA likes to see U.S. operators investing in networks abroad—and taking U.S. technology with them.”

The growth may kick into overdrive with the arrival of third generation wireless (3G) technologies, which will “throw the market into a new paradigm,” Nelson says. “3G Networks can be established rapidly, at lower fixed costs, providing advanced services that will bring much needed connectivity to developing countries.”

Communities in Latin America that still do not have phone service may soon be able to tap right into the internet, if 3G lives up to its promise and indeed proves to be less expensive to set up than copper or fiber-optic cables.

“The incorporation of high bandwidth data communications is a vital step for growth policies for developing economies, for 3G wireless can be used for mobile as well as fixed applications,” he says.

The frontiers of telecom service in Latin America, it would seem, are about to expand a lot more quickly into the region’s population than they have in recent years.

“Third generation wireless will be driven by the demand of users for high bandwidth multimedia communications, and most analysts agree that the internet will be the primary driver behind 3G,” Nelson says. “Indeed, the internet is the most obvious justification for deploying data communications infrastructure in Latin America.”

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• STEVE BARRETT, portrait of Hope on Bio page: www.stevebarrettphotography.com

Contact HOPE KATZ GIBBS by phone [703-346-6975] or email.

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