|Issue:||Latin America IV 1999|
|Topic:||The Challenges behind the Mirror|
|Author:||Gilberto Geraldo Garbi|
The rapid introduction of competition in Brazil’s telecommunications market has already started to benefit the country. Foreign investments, new jobs, expansion of manufacturing capacity and increased availability, among others, are already having an impact on Brazilian society. The “mirror” companies, created to compete with the privatised, ex-Telebras, operating companies will soon start to operate. In nine months of incredible effort and heavy investment, they have built an organization, installed a basic infrastructure and are ready to commercialise their services throughout the country. In order to level the playing field and compensate for the competitive advantages of the existing companies, the mirror companies were given exclusive right to use WLL technology during the start-up phase. Although fibre and high capacity radio will be needed for advanced services, WLL will allow the mirrors to rapidly deploy basic services without the need to build hard-wired networks. The mirror companies face many challenges on the road to building robust and profitable operations, but with a professional, balanced, approach, they have a promising future.
From 1964 until the first half of this decade, Brazil’s Federal Government built, expanded and operated a large telecom monopoly, which was widely known by the generic name Telebras System. Almost 30 companies belonged to that group and, taking into consideration the financial and legal constraints they were subjected to, their accomplishments were not negligible. After all, both fixed and mobile telephone services were available all over the country, and even the existence of long waiting lists did not put Brazilian telecommunications in the same disastrous situation as other Latin American Countries. While many people, including experts, predicted that the introduction of competition and full privatisation of telecom services in Brazil would be a slow process, the opposite happened. Brazil can justly boast having been one of the fastest countries in the world to effectively put an end to the monopolistic telecom model after the decision was made. The visionaries behind this accomplishment were deceased Minister Motta and President Cardoso, who correctly foresaw the benefits the country would realize from this significant change. Millions of available lines, abundant new service offerings, lower prices for the consumers, strengthening of local manufacturers, increased investment of foreign capital, job creation and acceleration of the country’s global economic performance were the benefits which compelled the two policy makers to move quickly. And so they did, passing new laws in the Congress, restructuring the Telebras System to prepare it for privatisation, creating an independent Regulatory Agency and devising a competitive model that would maximize the benefits to the public and, of course, to the Government itself (best prices for new licenses and for the controlling shares in the existing operators). The process started in 1997, when licenses for B-Band operators throughout the country were auctioned. In July 1998 a second step was achieved, when all the fixed and mobile operators of the old Telebras System were sold. But the new model still required a last pillar to be complete: four competitors for the fixed operators created from the privatisation of the former Telebras System. One of those competitors would be a national and international long distance operator, a “mirror” of Embratel. The three others would be regional local and long distance operators, to “mirror” the operations of the three incumbents born the day Telebras System was sold. The four licenses were auctioned in the first half of 1999 and three of the new companies will launch their services at the end of 1999 or beginning of 2000. Two of those newcomers have a common brand name, Vesper, are controlled by the same shareholders and will cover 68% of Brazil’s territory and 75% of the country’s population. The regional mirrors are not likely to have an easy time, at least in the beginning, given the huge disproportion between their size and that of the incumbents. Understanding this, and wanting to foster competition; the Government offered the mirrors some advantages including pricing freedom, no universal service obligation, and the exclusive use of WLL (Wireless Local Loop) technology in both 1.9 and 3.4 frequency bands for a period of time. Those benefits are really strong and may provide a fair compensation for the obvious disadvantages the mirrors have compared to the incumbents. Another favourable wind for the mirrors is the opportunity to deploy the most technologically advanced systems, select and train competent professionals and develop a new corporate culture focussed on service quality. Not having inherited the burden of the past monopoly is a significant advantage and may eventually prove to be the primary reason for the mirrors’ success. WLL (Wireless Local Loop) is the optimal technology for covering a large region in a short timeframe and the two Vespers are using it intensively in their vast territories. After all, given the long waiting lists for fixed lines in the region, speed is the name of the game for incumbents and mirrors alike. WLL, though, at least the present generation, ,is by no means a panacea. For applications such as high-speed data other technologies must and will be used. Fibre and high capacity radio, for instance, are included in Vesper’s arsenal. In economic terms, sound performance must be achieved in order to allow for permanent and self-sustained growth. This implies an intelligent balance between the somewhat conflicting interests of gaining comfortable market share and high revenue per line. The mirrors can neither afford being niche companies, because they would remain forever too small as compared to the incumbents, nor being mass services providers too quickly, because their profitability would be hindered. Here, the challenge is to find the narrow passage that leads to success. Balance, compromise and equilibrium are the obvious guidelines. The market is anxious to see how the mirrors will present themselves. Everyone, from journalists to government authorities to customers, is counting the days until the mirrors will be in service. This is a very positive and stimulating aspect of launching a new operator but, at the same time, it creates an additional challenge for the management: how to smoothly launch services in a large and diversified territory, avoid bursts of demand in the first moments, offer high quality services from day one, and not frustrate the expectations of the country. Again, an adequate balance among various needs is the key to the success of this complex endeavour. The challenges are multiple and much more could be said about them. However, it is better to say some final words about why the mirrors feel confident that long-term success lies ahead. First of all, the pent-up demand is huge and the market does not accept anything else but immediate availability of services. Second, even in areas where the demand is reasonably satisfied in quantitative terms, quality is very far from being a general rule. Conclusion Last, and perhaps most important, Brazil has a stable regulatory environment. The way the regulatory agency, Anatel, was structured and is managed, free from political influences, fully and exclusively committed to the Country’s superior interests and staffed by specialized professionals, is a guarantee for investors who might be wary of unexpected changes in the rules of the game.