Home Latin America I 2001 IP Telephony – The Potential for Building a Legal Framework in Brazil

IP Telephony – The Potential for Building a Legal Framework in Brazil

by david.nunes
Esther Miriam FleschIssue:Latin America I 2001
Article no.:3
Topic:IP Telephony – The Potential for Building a Legal Framework in Brazil
Author:Esther Miriam Flesch and Luciano Costa
Title:Not available
Organisation:Baker & McKenzie, Brazil
PDF size:20KB

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Article abstract

IP Telephony can facilitate the universalisation of telephony services in Brazil. Notwithstanding, only specific companies are authorized to provide public telephone service in Brazil. Many of Brazil’s IP telephony providers are not authorized to do so. Anatel, has an obligation to preserve the quality of service and business potential of the sector it regulates. This may require protecting authorized players in the sector at the expense of new players with new technologies.

Full Article

Introduction and Market Background The transmission of voice over Internet Protocol (IP) has several advantages compared to the technology traditionally used for telephony. This is basically because IP transmission uses packet-switched technology; traditional telephony is circuit-switched. IP telephony could be described as telephony using IP technology. This makes it faster and cheaper than traditional switched telephony. Although IP telephony still has some problems with transmission, we expect they will soon be corrected. Albeit such an innovative technology is certainly welcome in the telecommunication sector’s constantly evolving environment, it is clear that due to several legal and economic reasons, the government must, in many cases, closely regulate the introduction of IP telephony. This is particularly important in developing countries where the telecommunications sector is not subject to free and fair competition, but rather recently subjected to a traumatic, privatisation process and in need of careful regulation. This is the case of Brazil, which in 1998 underwent a huge privatisation process. The legislation broke up Telebrás, the state-controlled holding company, and its monopoly of the public telephone service. Brazil then transformed the sector from a state controlled monopoly to an early stage regulated market. To prepare for this transformation of the sector, Brazil’s constitution was changed. A new regulatory framework was developed and a regulatory agency (the National Telecommunications Agency – Anatel) was created. Nowadays, all telecommunications services, including fixed telephony services – known in Portuguese as “STFC” – are provided by private companies. The government’s project for the sector aims at establishing free and fair competition among the telecommunications services providers. The fixed telephony sector, is currently a duopoly. There are two competing telephone operating companies in each of the four fixed service regions into which the country was divided. One company, the incumbent, is the original and privatised state-owned company. The other component of the duopoly is the is newly created entrant, also called the “mirror” company. The telecommunications sector in Brazil has also experienced a rapid increase in the number of providers of private network services. The government grants a licence to these companies that allows them to render any kind of telecommunications transmission (voice, data, video, etc.) through private networks. In such cases, however, the service must be rendered to a well defined “limited” group of persons or companies with the same interests (such as a company, its branches or a manufacturer and its retailers). These are called Specialized Limited Service (‘Serviço Limitado Especializado – SLE’) licences. The corporate market in Brazil, still relatively unexploited, is potentially very profitable. The competition among the SLE providers, as well as between SLE providers and telephony operators, for this market has been intense and aggressive. The incumbent telephony operators, who until recently were the only providers of all telecommunications services, are now facing strong competition offering services to the corporate market. The competing SLE providers have more modern and efficient networks and have been more agile in their use of innovative technologies, such as VoIP (voice over IP). The Brazilian telecommunications reform, depended upon several legal changes, chiefly the General Telecommunications Act 1997 which established the rules to create and foster competition in the Brazilian telecoms sector. The creation of a competitive, free, market was one of the chief aims of the reforms and of the privatisation of telecoms companies. Framework of the Brazilian Privatisation Process The objective of the Brazilian government in reforming the telecommunications sector, particularly telephony, was twofold. On the one hand, the government wished to guarantee free and fair competition, and, on the other hand, it was seeking to promote universal access to service throughout the Brazilian population. As part of the transition from a monopoly to a market ruled by free and fair competition, Brazil is passing through a “duopoly” phase; similar to the environment conceived during the reform carried out in Britain. In order to create this duopoly, Brazil’s privatisation of telephony companies took place into two stages. First, the Telebrás controlled state-owned companies (now the incumbent operators) were restructured and privatised in one of Latin America’s largest privatisation processes. The amount paid by national and foreign investors came to US$19 billion. In a second phase, after the privatisation, in compliance with the Brazilian telecommunications reform model, new telephony service licences were granted to four companies to initiate operations and compete with the incumbent, privatised, fixed telephony operator. These new competitors, called ‘mirror’ companies, also paid considerable sums to acquire the right, through government run auctions of the licences, to explore telephony services in Brazil. Yet, according to the rules set forth by legislation, the “duopoly” phase is temporary. In principle, the sector should be totally liberalized in January 2002. After this date, any company will be able to apply to the government for a licence enabling it to render any service, including telephony. Arguably, those investors have paid for only two things: firstly, the existing infrastructure of the Brazilian telephony system and secondly, the right for the incumbents, guaranteed by the Brazilian legislation, of a monopoly over telephony services for a certain period – and, for the mirror companies, a duopoly at least until January 2002. According to figures published in Brazil, the investments have been well rewarded. The four incumbent operators (three regional operators for local and regional calls and one national operator for long distance and country-wide international calls) appear to be obtaining a substantial return on investment. None of the regional mirror companies, however, are fully operational yet. Nevertheless, the incumbent operator of long distance and international services, Embratel, is facing aggressive competition from the mirror company, Intelig. In fact, except for Embratel, none of the incumbent fixed telephony operators have faced strong competition so far. Regulatory Implications of Voice over IP competition Despite this, one type of competition is exasperating both the incumbents and new entrants in the telephony market. It is competition from the telecoms services providers that are using IP technology to render telephony services, i.e., providing IP telephony. Anatel has already clearly stated that telephony services, which are described in the Brazilian regulations as the rendering of voice transmission services to the public at large, regardless of the technology used, can be offered only by duly licensed telephony operators. Several telecommunications companies, reportedly, provide IP telephony to any person or company interested in having it. According to Anatel, they are violating the legal exclusivity granted to telephony operators. Usually, those telecoms companies were licenced to render SLE, limited services. “Limited services,” by law, can only be used by a well defined, relatively circumscribed, group of related companies or persons. This situation led Anatel to investigate such services. Anatel, with the support of telephony operators – especially Embratel, which was suffering losses in its international operations – has mounted surveillance actions aiming at identifying and shutting down illegal IP telephony operations. They have been looking for companies that have been acting, in fact, as though they were regular licensed telephony operators. In addition to operating illegally, the telephony companies claim that the IP telephony providers are causing damage and financial loss to the public network. They claim the illegal operators are not adequately remunerating their use of the public network for the circuits they use to carry and terminate calls. Although there still are telecommunications services providers rendering IP telephony, operating furtively or supported by fragile judicial orders, it is clear that Anatel considers such activity illegal in view of its regulations. This situation is a bad beginning for the reputation of IP telephony in Brazil. Anatel, though, is clearly aware of the difference between IP telephony and the use of IP technology for voice transmission. Anatel certainly knows that the use of IP technology is irreversible and that it provides more efficient communication in terms of both price and quality. The telephony operators themselves are using more and more IP telephony in their activities. Nevertheless, although Brazilian laws and regulations permits public telephony services by means of any technology, including IP, these services can only be offered by duly licenced telephony operators. Anatel knows that those who paid to buy the rights to offer public telephony in Brazil expect them as legally set forth, to be preserved. These companies invested heavily based on the promise of the market situation, defined by the Brazilian reform model and respective regulations. Any change in this expected environment would damage the credibility of the regulatory authorities. Despite the fact that the tolerance of IP telephony would, no doubt, increase competition and reduce the charges for the end user, Anatel has been trying to maintain a balanced position. Anatel needs to guarantee the model by restraining competition and, thereby, ensure the credibility of the sector and the profitability of the established operators. In addition, one should bear in mind that the telephony operators must meet universal service and quality goals, defined in the licence agreements and also in the applicable legislation. By guaranteeing the earning power of the operating companies Anatel is also guaranteeing the funding and compli-ance with such goals. Furthermore, the use of IP technology by duly licensed telecoms providers, especially SLE providers, strictly within the terms of their licences, is fully supported by Anatel. In fact, the use of voice over IP is increasing considerably among SLE providers, due to the several advantages of packet switched trans-mission. IP for voice communication is becoming increasingly common as its quality improves and reaches a level similar to that of traditional telephony. Conclusion The emergence of IP Telephony has certainly increased the range of competition in the telephony market. The use of IP technology to facilitate the penetration of telephony services is particularly important for countries such as Brazil. Notwithstanding, in a regulated environment, authorities have the role of preserving the sector they regulate preserving not only the quality service but, as well, that portion of the business potential, that depends upon equitable regulation and enforcement. In certain circumstances, this may require protecting the companies that operate in the regulated sector to the detriment of potential new players or new technologies. The Brazilian telecommunications market is expected to be completely deregulated by January, 2002. From then on, any company will be able to apply for a licence to provide public telephone services. Anatel might well be awaiting this liberalisation to take place prior to evaluating the real impact of IP telephony on the market. If this is so, we can expect Anatel to define the rules for a number of controversial issues such as adequate remuneration for network usage and contributions by IP telephony providers towards the effective universalisation of service.

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