Latin America

Although most countries in Latin America have privatized their telecommunications industries, competitors have a small share of the fixed-line market. Major competitive focuses are on high-speed Internet and intracompany data connections for businesses and cellular services. The three largest countries in Latin America are Brazil, Mexico and Argentina. Table 10.1 indicates the low penetration of telephone lines and mobile phones in these three countries in 1999. In Paraguay (60%) and Venezuela (57%), more people have cellular than fixed-line phones.

Telefonica SA, the incumbent telephone company in Spain, has the largest presence in Latin America of any single company. In November 1999, it owned one of three phone lines in Latin America. It owns Telefonica de Argentina SA, Telefonica del Peru SA, Telesp Participacoes SA of Sao Paulo and pending approval, half of the cellular users in Brazil jointly with Portugal Telecom. In addition, its subsidiary, Emergia Holding, is planning to construct an undersea fiber optic cable between Latin America and the United States. Half of Telefonica's revenues are generated in Latin America.

BellSouth International, under the brand names Movicom BellSouth and BCP Telecommunicoes, S.A. with over 6 million cellular customers as of March 2000, has a major presence in Latin America. According to the article, “The Crafty Globalizer,” published in Forbes, 20 March 2000, page 81, by Peter Spiegel, BellSouth's international revenues account for 10% of total revenues. It has cellular operations in 10 Latin American countries and Internet service in most of these. It launched operations in Latin America in 1989 in Buenos Aires, Argentina with its wireless carrier, Movicom BellSouth. In 2000, it launched a major branding strategy to identify its cellular holdings as BellSouth. Its goal is to gain business travelers' roaming traffic when they travel in South America. See Table 10.2 later in this chapter for key carriers.

While not as large as Brazil, Mexico and Argentina, Chile was the first country in Latin America to open its markets to competition. It has a large number of digital central office switches and many competitors. Argentina also privatized and deregulated telecommunications early compared to the rest of Latin America.

Brazil

Brazil is the fifth largest country in the world. It covers almost half the territory of South America and has 20 states within its boundaries. The largest city in Brazil, Sao Paolo is the third largest city in the world. Brazil is the most industrial of the Latin America countries. According to a U.S. Department of Commerce report, “Latin America Business Development Mission February 11–19 2000,” Brazil has one third of the total telephone lines in Latin America.

Fidelity Investment's Telecom Ventures Back in the 1970s, top management at Fidelity Investments recognized the importance of telecommunications in its own company and early on saw opportunities in telecommunications. Fidelity, a Massachusetts-headquartered mutual funds company, was an early investor in telecommunications pioneers MCI, local fiber network provider Teleport Communications (now part of AT&T) and other companies. Fidelity Investments saw the need of large financial institutions and major corporations for higher bandwidth services for call centers, financial transactions and data communications. Teleport supplied high-speed optical links from customers to long distance carriers that undercut incumbent telephone company prices. At this time, fiber was not available in metropolitan areas and implementation of T-1 over copper cabling took months. As telecommunications in the United States became more competitive, Fidelity saw opportunities in Europe where markets were wide open for metropolitan area data networks. In 1992, it founded City of London Telecommunications, now called COLT Telecom Group PLC, in London. When long distance was deregulated in the UK and later throughout Europe, Fidelity already had a presence and began selling long distance service. COLT expanded in the 1990s into Germany, Austria, France, Switzerland, Spain, Italy and the Netherlands. Fidelity successfully took COLT public in 1996 and added Internet services to its offerings by purchasing French ISP Imaginet. It linked its metropolitan networks together into a European-wide network that it is jointly building with Level 3 Communications. Fidelity formed two other companies, KVH in Japan and MetroRED in Argentina, Brazil and Mexico that it operates similarly to COLT. KVH and MetroRED are building fiber networks within large cities. They plan on connecting the networks in individual cities to each other and to undersea cables. MetroRED is connecting together its fiber networks across Latin America. KVH and MetroRED's strategy is to differentiate themselves by the data services they sell over their fiber networks. One of their focuses is on application infrastructure provider (AIP) services. In conjunction with their fiber connections, the AIP offerings include data center services such as network management, billing, hosting and firewalls for application service providers and large enterprises.

Table 10.1. Latin American Telephones Per 100 Inhabitants—1999

Economy	Total Population (M) 1999	Per Capita (US$) 1998	Telephone Lines Per 100 Inhabitants 1999	Mobile Subscribers Per 100 Inhabitants 1999
Brazil	167.99	4675	14.87	8.95
Mexico	97.36	4330	11.22	7.94
Argentina	36.58	8257	20.11	12.12
Chile	15.02	4912	20.70	15.05
Source: ITU data for population was provided to the ITU by the United Nations and per capita figures were supplied to the ITU by the IMF, the Organization for Economic Cooperation and Development (OECD) or the World Bank.

Background

Prior to 1962, Brazil's telecommunications infrastructure was operated by a wholly owned Canadian subsidiary of Canadian Traction Light and Power Company, Companhia Telefonica Brasileir (CTB). In 1968, the federal government took control of Companhia Telefonica Brasileir (CTB). In 1965, the military government created state-owned Embratel to operate Brazil's long distance services. Embratel's tasks were to build a network connecting all the capitals and main cities in each state and to provide international service.

Telebras was created in November 1972 to plan and operate a national telecommunications system within cities and to coordinate all long distance and international communications. Telebras created a separate telephone company in each of Brazil's 25 states. Embratel became a subsidiary of Telebras. However, investments in telecommunications infrastructure did not keep up with demand. By 1988, there were requests outstanding for 9 million telephone lines. In 1996, the average wait for a new telephone line was two years and only 2% of nonurban households had a fixed-line telephone.

With a goal of strengthening the telecommunications infrastructure, the government made a plan to privatize Telebras and Embratel and to open Brazilian telecommunications to private investments. Agencia Nacional de Telecomunicacoes (Anatel), the telecommunications regulatory agency, was created in 1997. Anatel approved the use of wireless local loop, cable television licenses and high-speed Internet access over the cable TV infrastructure.

In July 1998, the Ministry of Communications (MOC) sold off its holdings in the state-controlled provider Telebras and broke it into 12 companies: three fixed-line, eight regional cellular and Embratel, the international long distance company. WorldCom, the only U.S. firm to bid, won a controlling interest in Embratel.

Following the privatization and breakup of Telebras, the government issued licenses to four companies known as “mirror” companies to compete with the former state monopolies. Three of them are wireline and the fourth provides international services to compete with Embratel. To promote construction of new infrastructure, the “mirror” companies are allowed to provide telephone service via cable TV facilities and wireless local loop technology. The mirror companies and the companies spun off by Telebras are restricted to operating only within their regions until 2002. Local number portability is mandated to start in 2005.

According to the article, “Portugal Telecom, Telfonica Unite Their Mobile-Phone Assets in Brazil,” published in WSJ.com The Wall Street Journal, 25 January 2001, by Jonathan Karp and Keith Johnson, Brazil has five fixed-line and two long distance companies. The incumbent international long distance provider is Embratel, which owns the largest fiber optic network in Brazil. The Brazilian government gave a “mirror” concession to Intelig in 1999 to compete against Embratel.

The three fixed-line incumbents are:

• Brasil Telecom (formerly Tele Centro Sul) provides service in the nine central and southern states as well as the capital of Brazil, Brasilia. Brasil Telecom is owned by Telecom Italia.

• Telesp (Telecomunicacoes de Sao Paulo SA) is the fixed-line carrier for Brazil's wealthiest area—the state of Sao Paolo. (Sao Paolo is both a state and a city.) Telesp is owned by Telefonica.

• Telemar (Tele Norte Leste Participacoes SA) is the largest of the incumbent fixed-line carriers with operations in 16 states. Its territory includes Rio de Janeiro and the northeastern and northern states. In 2001, the Brazilian government took back control of Telemar on suspicion of cross ownership by three board of director members. Telemar is expected to bid for wireless licenses.

Cellular

The government increased competition to the original eight mobile providers by auctioning off eight licenses to regional cellular providers between 1997 and 1998. These licenses are for Personal Communications Service (PCS) spectrum in the 1.9-Gigahertz (GHz) band for code division multiple access (CDMA) and time division multiple access (TDMA) service. MCI, Telefonica de Espana, Iberdrola, Bilbao Vizcaya Bank and Portugal Telecom won the biggest licenses. There are now 19 cellular operators in Brazil. (See Chapter 9 for cellular services.)

Anatel held three auctions for nine licenses of PCS spectrum for GSM (originally, Groupe Speciale Mobile, but also known as Global System for Mobile Communications) service in 2001. Bids were made for only four of the nine licenses. Some carriers have made plans instead to create partnerships or buy existing cellular companies to avoid the cost of building new networks. For example, Telefonica SA and Portugal Telecom announced in September 2000 that they intended to merge their Brazilian cellular properties. If the merger is approved, the combined company will be the largest cellular provider in Brazil. It will control:

• Tele Sudeste Celular in the states of Rio de Janeiro and Espirito Santo

• CRT Celular in the southern states

• Tele Leste Celular in Bahia and Sergipe

• Telesp Celular in the state of Sao Paolo

The eight incumbent cellular carriers controlled 69% of the mobile phones as of June 2000. Telecom Italia has a controlling stake in three cellular companies: Maxitel, Tele Nordeste Celular and Tele Celular Sul. Telecom Americas, owned by Bell Canada International (BCI), SBC and America Movil of Mexico is the second largest cellular provider in Brazil. According to Anatel, the total number of mobile phones in service between July 1998 and July 2000 grew 243%. As of January 2001, there were 22.6 million cellular phones in service.

Internet

Following privatization in 1998, companies such as Embratel and Telefonica began investing in new IP-based protocol Internet backbone networks. The backbone is the portion of the network that carries the largest amount of traffic between sites. However, access to the Internet is problematic. Embratel has stated that it intends to invest heavily in access to the Internet for business customers.

Inhibiting factors to Internet access for consumers are the cost of calls, which are still billed on a per-minute/per-pulse basis. In addition, uneven delivery and postal service inhibit e-commerce, which depends on timely delivery of goods ordered over the Internet. The Brazilian government in January 2001 announced a program to build, sell and finance new computers for consumers with the goal of promoting Internet access by consumers. An Associated Press article, “Internet Access to Expand in Brazil,” published in The New York Times on the Web, 31 January 2001, estimated that between 8.5 and 14 million Brazilians surf the Web. The total population of Brazil is 169 million people.

Mexico

Mexico is the largest Spanish-speaking country in the world and the United State's second largest trading partner behind Canada. According to the U.S. Department of State, cellular grew from 3.6 million to 9.2 million users from 2000 to 2001. Much of this is attributed to the new policy of caller pays. Cellular users no longer pay for calls they receive. However, network capacity did not keep up with growth and service deteriorated. The regulatory agency, Federal Telecommunications Commission, Cofetel, has mandated investments in network infrastructure by incumbent cellular carriers.

While fixed-line service is growing rapidly, the number of telephones per 100 people is the lowest in Latin America. The U.S. Department of State, in its FY2001 Country Commercial Guide, stated that it expects 1 million new fixed wireless lines to be installed in the next few years. Fixed wireless installation is lower in cost and has shorter implementation time frames because it does not require digging up the streets and receiving permission to lay fiber optic cables.

Background

The regulatory framework for Mexico was established by The Federal Telecommunications Law of 1995. In 1997, the Mexican government authorized nine carriers to provide long distance service. However, the high interconnection rates that incumbent provider Telmex charged competitors for connecting calls to local customers inhibited profits of Telmex competitors and deterred competition. In December 2000, a four-year legal dispute was settled between Telmex and carriers in the United States. The settlement lowered local and long distance interconnection and collocation fees.

Telefonos de Mexico, SA de C.V. (Telmex) controls 75% of the Mexican long distance market. However, callers can presubscribe to the long distance provider of their choice. The interconnection settlement previously mentioned is expected to increase competitors' market share. Competition for local service was authorized to begin in 1999. However, until the preceding December 2000 agreement was reached, Telmex had refused to allow Alestra or Avantel to interconnect to the Telmex network, claiming that these companies owed them money for interconnection services.

Teléfonos de México (Telmex) is the incumbent fixed-line carrier. According to Business Monitor's Q4 2000 Quarterly Forecast Report, Telmex has 98% market share of local fixed-line service. Telmex is one of the largest, most powerful corporations in Mexico. Its owner, Carlos Slim, is the wealthiest man in Latin America. Mr. Slim bought Telmex in 1990 from the Mexican government through the holding company he controls, Carso Global Telecom, SA de C.V.

Of the following long distance competitors, both Alestra and Avantel have stated that they plan to offer fixed wireless service to business customers in Mexico City, Guadalajara and Monterrey. Mexico does not allow foreign companies to own more than 49% of any wireline company. There is no limit on ownership for cellular companies.

• Alestra

• Avantel

• Iusater

• Maxcom (formerly called Amaritel)

• Bestel

• Investcom

• MarcaTel

Competitors for local service are building out service via fixed wireless technology. Four companies acquired licenses in 2000 for spectrum for fixed wireless local service.

Cellular

Telmex's spun-off subsidiary American Movil SA (formerly TELCEL) is the largest cellular provider with a 70% market share. American Movil operates a TDMA network. The second largest cellular provider is Grupo Iusacell SA. Iusacell is licensed to operate in six out of the nine regions in Mexico. The vast majority, 87% of American Movil and Iusacell subscribers access the network via prepaid service.

Argentina

Argentina, which is second in size to Brazil, has the highest educational levels in Latin America. In 1998, its gross domestic product per capita was $8250. In the first half of the twentieth century, American company International Telephone & Telegraph Corporation (ITT) spent millions of dollars to help develop the Argentinean telecommunications infrastructure. In 1946, the government of President Juan Peron nationalized Empresa Nacional de Telecomunicaciones (Entel), the telephone company. When Entel ran telecommunications:

• Service was poor

• Rates were high

• Few investments were made in infrastructure

• People waited years for new telephone lines

In an effort to improve telecommunications services, the president of Argentina, Carlos Menem, split up Entel by geography in 1990 and sold it to two different organizations that had a duopoly. The Spanish telephone company Telefonica, through its subsidiary Telefonica de Argentina, was given a franchise for basic telephony service in southern Argentina and most of Buenos Aires. Telecom Argentina was given the franchise for service in northern Argentina.

Competition and privatization have led to improved services, more telephone lines per capita and lower prices for voice and data services. According to the U.S. Department of Commerce, in 1990 there were 3 million telephone lines installed. In December 1999 there were 9 million lines. The following is the privatization and deregulation time line:

• Entel was privatized in 1991 when it was sold to Telecom Argentina (at that time owned largely by France Telecom and Telecom Italia), which gained control of the northern parts of Argentina and Telefonica de Argentina, which gained control of the Southern part.

• The new owners immediately invested $1.9 billion into the infrastructure.

• In November 1999, Argentina opened competition to four companies for local, domestic and international calling. It also allowed the two incumbents to invade each other's territories.

• In 2000, the new president of Argentina, Fernando De la Rua, issued a presidential decree opening up the Argentinean market to competition for cellular, paging, trunked radio, data communications, cable television and value added services. The market was opened on November 8, 2000 and each license granted can be used for all markets. Separate licenses covering mobile or landline service are not required. A condition of obtaining a license for service is that carriers must invest $2 for every subscriber in their territory.

To foster competition, interconnection costs charged by incumbents for connections to their networks were decreased from 2.35¢ per minute to 1.1¢. A fund also was set up for universal service with contributions of 1% of gross sales mandated by the government. The fund is to be used to provide service in poor and rural marginal areas. In addition, 12% of the fund is earmarked for Internet access by schools.

In another effort to foster competition, local number portability is mandated. People changing carriers will be allowed to keep their phone numbers. To make it easier to change telephone companies, customers will not have to presubscribe to a particular service to use it. They will be able to access a carrier's network by dialing the prefix assigned to that carrier before making their call. In anticipation of further competition, the incumbents dropped rates by half between 1999 and the end of 2000 for long distance and international calls.

Argentina's deep recession and high unemployment are hurting competition and innovation in telecommunications. It has the highest debt of any country in the emerging world and is in danger of defaulting on its loans. Argentina's worsening financial situation is impacting other countries' economies with which it trades, particularly Brazil.

Cellular

In mid-1999, PCS licenses were auctioned off to the following companies, which started offering long distance rates that undercut those for fixed-line phones:

• Personal (the cellular arm of Telecom Argentina)

• Unifon (the cellular arm of Telefonica de Argentina)

• CTI Movil (part of Verizon)

• Movicom BellSouth

Argentina has the highest penetration of cellular phones in Latin America. Mobile phones grew from less than 200,000 in 1994 to 4.5 million in September 2000. Cellular services also are a key competitive area. In addition to the cellular providers listed above, Nextel International is expected to become active in Argentina.

Data Services

According to the September 2000 Newsletter by the Consulate of Argentina, data revenues are only 6% of sector revenues compared to 20% in Europe and the U.S. Many carriers see potential for more data services to business customers. In addition to the incumbents, CTI/AT&T and Impsat are investing heavily in the region. Impsat is building its own fiber network. In low-density sections, Impsat will utilize fixed wireless Local Multipoint Distribution Service (LMDS). Comsat Argentina SA is using a combination of satellite and fiber network to provide data transmission service. Comsat entered the Argentine data market in 1991.

Impsat and MetroRED are building fiber optic infrastructures connecting major cities in Argentina and elsewhere. They focus on high-speed connections to the Internet for business customers as well as fiber optic connections between companies.

High telephone rates have so far put a damper on the Internet service provider (ISP) market. Phone companies currently charge by the minute for dialup Internet access. This makes even free ISP service costly for consumers because of the telephone fees. However, the high education level of the Argentine population creates a possibility of higher penetration of Internet access by consumers in the future if local phone rates decrease and the economy improves.

On the residential front, cable TV competitors Multicanal and Cablevision SA sell Internet access to consumers. Cable TV facilities reach over half of the homes in Argentina.

Impact of Poverty

Income disparity between the wealthy and the rest of the population is a major issue in Latin America. This disparity is reflected in statistics on cellular and Internet access. For example, the article, “Latin America Looks to Wireless,” published in the online edition of The Standard, 9 May 2000, stated that in Argentina, only 10% of the population has a cell phone. The article further stated that in Brazil, 32% of the wealthiest people have Internet access but only 2.1% of the middle class has it.

Table 10.2. Key Carriers in Argentina, Brazil and Mexico

Entity	Owners	Details
Alestra	AT&T 49% Mexican conglomerates 51%	Provides local and broadband service in Mexico.
Algar Telecom Leste SA (ATL)	Temporarily under control of state but 15% America Movil	Cellular in Rio de Janeiro, Brazil.
America Movil SA (previously Telcel)	Spun off from Telmex	Largest cellular provider in Mexico. One of the ten largest cellular providers worldwide.
Avantel	WorldCom 45% Grupo Financiero Banamex-Accival SA 55%	Local service in Mexico.
Argentina STET France Telecom SA	Nortel Inversora, a holding company equally controlled by France Telecom and Telecom Italia SpA holds a controlling interest	Incumbent carrier in northern Argentina.
AT&T Latin America	AT&T Formed from purchases of FirstCom Corporation of Miami & Netstream of Brazil	Fiber networks in four Brazilian cities plus presence in Argentina, Chile, Colombia and Peru.
BCP Telecomunicoes S.A.	BellSouth International	Cellular operator in Sao Paolo state and six states in the NE region of Brazil. 800-MHz CDMA.
Brasil Telecom	Telecom Italia Opportunity, a Brazilian investment group	Fixed-line operator for 17% of Brazil's population. Serves central and southern states and Brasilia. Formerly owned by Telefonica consortium CRT until Anatel ordered divestment due to Telefonica ownership of cellular company Telesp Celular.
Cablevision S.A.	Ownership may be split up, now Telefonica 33.28% CEI Citicorp Holdings SA 33.28%; UnitedGlobalCom 28%	Largest cable TV operator in Latin America. Holdings in Peru, Argentina and Mexico.
Comsat International	The telecommunications arm of Lockheed Martin Corporation, which has stated it will sell Comsat	Mainly data transmission via satellite and wireline, also planning national and international long distance in Argentina. Argentina, Brazil, Colombia, Venezuela, Peru, Mexico and Guatemala.
Embratel	WorldCom	Incumbent long distance provider—Brazil. Plans to enter local data market January 2002.
Global Telecom	Portugal Telecom 49% of the common shares and 100% of the preferred shares	Cellular operator in wealthy Brazilian southern states of Parana and Santa Catarina must be approved by Anatel. Will become part of the Telefonica–Portugal Telecom cellular operation when approved.
Grupo Iusacell, S.A. de C.V.
Formerly Nuevo Grupo Iusacell, S.A. de C.V.	Verizon 37%
Vodafone 34.5%	Second largest cellular carrier in Mexico. Uses CDMA. Has joint ventures in Ecuador, Chile, Colombia and Nicaragua. Expanding to data communications.
Impsat Fiber Networks, Inc.	20% British Telecom, 21% Morgan Stanley, 59% IMPSA, an Argentine holding company	Data transmission, mainly Argentina but also Columbia, Venezuela, Ecuador, Mexico and the U.S. Long distance and local service in Brazil. British Telecom ownership being offered for common stock.
Intelig	50% National Grid (a UK company) 25% France Telecom and 25% Sprint	Brazilian competitor to incumbent long distance provider Embratel.
Iusater	Grup Iusa
Verizon Communications	Long distance services in Mexico.
Maxcom (formerly Amaritel)	The Aguirre family, owners of radio stations and programming that it syndicates throughout Mexico	Early competitor for local services in Mexico.
MetroRED	Fidelity Investments	Building fiber optic data networks in Argentina, Brazil and Mexico.
Movicom BellSouth	65% owned by BellSouth	Cellular provider in Argentina.
Multicanal	Grupo Clarin SA	Cable TV provider in Argentina. Grupo Clarin owns newspapers, magazines, TV and radio stations in Argentina and carrier CTI.
Tele Centro Oeste Celular Participacoes SA	BellSouth 16.5%	Cellular in capital of Brazil and Amazon region.
Pegaso PCS, SA de CV	20.1% Leap Wireless, also Pegaso Grupo, Sprint PCS, Citicorp Equity Capital, The Latin American Infrastructure Fund and Nissho Iwai	CDMA PCS cellular carrier in four areas of Mexico including Mexico City, northern Baja California.
Telintar	Grupo Telecom and Telefonica Argentina	Argentina international telecommunications services.
Telefonica de Argentina SA	Telefonica SA	Incumbent carrier in southern Argentina.
Telemar (Tele Norte Leste Participacoes SA)	Brazilian consortium	Largest fixed-line carrier in Brazil. Has an Internet access group.
Tele Nordeste Celular Participacoes SA	Telecom Italia Mobile Spa (TIM)	Cellular in northeast Brazil.
Telesp (Telecomunicacoes de Sao Paulo SA)	Telefonica	Fixed-line operator for state of Sao Paolo.
Telecom Americas Ltd	Bell Canada International and América Móvil 44.3% each
SBC 11.4%	Second largest cellular provider in Brazil. Cellular operations also in Columbia. Broadband fixed wireless in Venezuela and Argentina; cable TV in Brazil.
Telemig Celular	Telesystem International Wireless (TIW) operates Fido brand of cellular in Canada plus operations in Asia and Europe; TIW controlled by George Siros	The fifth largest cellular provider in Brazil; operates in the central region of Minas Gerais. Operates CDMA and TDMA at 800 MHz.
Telmex	Carso Global Telecom
SBC 10%	Incumbent phone company in Mexico. Owns prepaid cellular and prepaid local companies in the U.S. as well as numerous ventures throughout Latin America.
Telefonica Moviles—Portugal Telecom	Jointly by Spain's Telefonica SA and Portugal Telecom SA	Second largest cellular provider in Latin America if merger approved by Anatel. Holdings in Sao Paulo state and the southern states of Brazil (Telesp Celular), Rio de Janeiro state (Tele Sudeste Celular), Tele Leste Celular in Bahia and Sergipe and CRT Celular in the southern states.