|Latin America IV 1999
|Brazilian Telecom Markets: Consolidation ahead?
|Joao Migue da Rocha Filho
|General Manager, Marketing and Sales Division
Despite efforts, to foster competition, to fragment ownership and control of public telephone services, three companies already control almost 75% of, considered together, fixed and cellular services. These operators will, no doubt, be in a very strong position when the current restrictions on ownership and control are liberalized and when the regional companies are allowed to compete freely throughout the country.
The telecommunication field in Brazil has changed drastically in the last few years. Until recently, all public telecommunications services were controlled by Telebras, a giant, state owned, telecommunications company. In July of 1998, the government auctioned Telebras and its 30 subsidiaries; the system is now privately controlled. The passage of the General Telecommunications Law in June of 1997 and the General Concession Plan (Plano Geral de Outorgas) in 1998 set the stage for the re-configuration of the Brazilian telecommunications market. The law segmented the market, separating the cellular from the fixed telephony operators. Existing cellular operations were grouped into 9 regional companies. These companies were granted the concessions to operate using the so-called Band A frequency range. Concessions for the Band B frequency range in each of the ten regions were created and auctioned during the year 1997. The Telebras fixed telephony system was divided into three regional operating companies and one national/international long distance company. In addition, a telecommunications regulatory agency was created and charged with the responsibility of privatising the government’s monopoly, of guiding the transition to a fully competitive system and regulating the functioning of the industry. Telebras’ fixed services were organized into regional groups prior to privatisation: one region includes only the City and State of Sao Paulo, but the Tele Centro Sul region includes 9 states and the Tele Norte Leste region includes 16. Each of the privatised companies signed a contract with Anatel that set specific yearly targets for: Ÿ the number of telephone lines deployed; Ÿ quality standards; Ÿ the quantity and distribution of public telephones to guarantee easy public access. Specific performance and interconnect targets were also set for Embratel, the ex-Telebras, country-wide, long distance operator. To compete against the incumbent, privatised companies, four “mirror” licenses were sold, one for each fixed telephony region and one to compete with Embratel. The mirror company auctions were decided by a point system. Points were calculated based upon a combination of the price offered for the license, the promised speed of network construction and extent of service coverage. The parameters of the winning bid are incorporated in the concession contract with Anatel. Heavy fines, of up to US$27 million can be levied, or the concessions revoked, if these promises are not kept. The Telebras cellular subsidiaries were privatised in 9 groups of one to eight states; they operate in the 800MHz A-Band. Ten cellular mirror company concessions were auctioned as well. These 10 companies, operating in the 800MHz B-Band, compete with the nine privatised cellular operating companies. Brazil is expected to have 41.5 million telephone lines by the year 2002. The Ex-Telebras operators are expected to provide 70% of this total and the newer mirror companies about 30%. Today, Brazil has 27 million lines. Brazil is expected to reach a telephone density of 25 phones per 100 inhabitants by the year 2002. Today, in 1999, there are 13 million cellular subscribers; 8% of the population has cellular service; the A-band accounts for 72% of the market and the B-band the remaining 27%. The fixed market in Brazil, today consists of three large operators, and a few small, local, operators that for historical reasons were never incorporated into the Telebras system. The mirror companies are only scheduled to start operating shortly. There is a strong possibility that other operators will incorporate at least part of the 2.3 million line D block during 2000. A 1.6 million-line company, part of the 2.3 million block, will most likely become part of company C. Several of the cellular companies have concessions in both the A- and B-Bands and operate in more than one area. The following table (Table 2) shows the concentration of ownership of the cellular market. The four largest companies in the cellular segment already have 73% of the market. The introduction of the PCS in 2000 will bring more competition to the market and put even more pressure on the smaller companies. Anatel has yet to set the rules for PCS. It expects to do so in the first quarter of 2000 and set the stage for the introduction of PCS in Brazil. To permit the new PCS operators to compete with the existing, entrenched, companies with their large subscriber bases, the PCS concessions are expected to have a larger footprint, that is they will cover a larger area, than the existing cellular concessions. Several of the operating companies control both cellular and fixed concessions. The rules do not permit an operator to offer both fixed and cellular service in the same region but, as can be seen in the table below, by combining operations in different areas three operators already control almost 75% of Brazil’s telephone services. The table also shows the operators that will have the scale to survive when the market is liberated and consolidations begin a few years from now. Table 3 below exhibits the combined fixed and cellular line holdings per operator: The three operators that control almost 75% of the market are, clearly, in a very strong position to benefit from the second phase of the Brazilian deregulation program. In this later phase, the transfer of control of existing companies is expected to be considerably easier than it now is and fixed line operators will no longer be limited to their current regions, but will be allowed to compete freely throughout the country. The benefits of combining fixed, mobile and data communications services, including the Internet, are obvious; several companies are already basing their strategy for the future on this convergence of services. The smaller players have fewer business options; they will have difficulties in increasing their subscriber base and services to compete with the bigger players. On the other hand, even these companies will see their value soar as the consolidation and deregulation proceeds. At the end of 1999 and the beginning of 2000, the mirror companies will start to operate. Considering the experience and competence of their partners, the scale of planned investment and the huge, still unmet, demand for service, these companies can be expected to capture a sizeable share of the market. The B-Band cellular operators captured an average 27% share of the market in the first year of operation, given the differences in the market and the technology, we can expect that the new companies will soon control a significant portion of the market. It will not, however, be easy. The existing companies have aggressive investment and marketing plans for the coming years. Cellular operators are already eating into traditional fixed phone niches and the PCS services to be introduced will compete not only with cellular, but with fixed services as well. Conclusion A comparison of the number of fixed lines to cellular lines in service illustrates the gravity of this competitive situation: if we consider that 5% of the fixed lines are reserves and will not be put in service, and that 25% are for business and public telephones, there are about 18.2 million residential lines in service. Comparing this to the 12.8 million lines of cellular already in service, we can see that the cellular is gaining ground against the fixed service. If PCS is sold as a lower cost mobile service, both fixed services and cellular services will suffer heavy pressure. Brazil has close to 35 million urban families. This number limits the number of fixed residential lines. The market for mobile service, however, is estimated at 60 million and has greater potential than the market for fixed service – it is just a question of timing, marketing and pricing.