|Issue:||Latin America II 1997|
|Topic:||Update of telecommunications in Latin America|
|Author:||Sari J Mayer|
|Organisation:||Salomon Brothers’, Latin American Equity Research Group, USA|
The first half of the year has already witnessed numerous changes in the Latin American telecommunications landscape. Sari Mayer provides a brief tour of the developments in Argentina, Brazil, Chile, Mexico and Peru, and concludes that more changes can be expected, with developments driven by country-specific events as well as global forces.
Thus far in 1997, the Latin American telecommunications industry has experienced a variety of changes: new tariff structures have been implemented in Argentina, Brazil, and Mexico; gradual rate rebalancing has been continuing in Peru; equal access long distance competition has begun in Mexico; and merger discussions have been occurring in Chile. Argentina On January 31 1997, after years of negotiations between the Government and the telephone companies – Telefonica de Argentina and Telecom Argentina – the Argentinean government announced new, rebalanced telephony tariffs. Included in the rebalancing are a reduction in international long distance (ILD) tariffs by about 30% and domestic and domestic long distance (DLD) tariffs by about 33%, an increase in local rates by about 12% and fixed monthly rates by about 45%, as well as the elimination of free usage included in residential monthly charges. Since the rebalancing announcement, there have been provincial and regional rulings in favour of and against the initiation of the new tariffs. As a result, the Supreme Court of Argentina is expected to rule on the legality of the rebalancing in the next few weeks – we believe the Court will rule in favour of the new tariff rebalancing. As this new tariff structure should align revenues and expenses, the telephone companies will improve their competitive position before the wireline market is liberalised, which is likely to occur in November 2000. Although the new tariff structure appears to add incremental revenues from new lines in service, the Government has deemed that the new tariffs must be revenue neutral for the existing lines in service. If such neutrality – as measured by the Government – is not achieved, tariffs will be adjusted accordingly. We believe that, over the next few years, companies will experience about 10% annual revenue growth and net income growth. Brazil On April 3 1997, the Brazilian Communications Ministry approved a tariff rebalancing, which on average reduced ILD and DLD tariffs by 17% and 32%, respectively, while local tariffs and monthly charges increased by 61% and 59% respectively. In addition, the Government announced a future change in the installation charge – a price reduction of more than 70% and the elimination of the auto-financing system, a means by which new fixed-line telephony subscribers received new phone lines and shares in Telebras. The recent tariff changes (which aim to align tariffs more with costs) will have an impact on about two-thirds of Telebras’ total revenues. Unlike the situation in Argentina, the new tariff structure should have an immediate positive impact on Telebras’ income statement; and, like the Argentine situation, will better prepare Telebras for competition – the timing of which is uncertain. In addition, on April 7 1997, the Government accepted bids for cellular B-band licenses. The initial winners of the cellular auction will be announced in mid-June 1997, and we expect the winning consortiums to commence cellular operations in 1998. In the near future, other announcements are expected from the Government regarding telecommunications. This includes the timing of the privatisation of wire line and A-band cellular services as well as the passage of the General Telecommunications Law, which should establish guidelines for the creation of a telecommunications regulatory body and the privatisation process. The Government is likely to privatise the A-band licensed and wire line services separately with the process beginning in 1998 and the General Telecom Law will probably be passed in the third quarter of 1997. In early 1998, we expect that the Government will initiate the restructuring of the entire Telebras system, with the intent of privatisation. Chile The highly competitive nature of the Chilean telecommunications industry has already resulted in a variety of mergers and alliances. In late 1995, CTC merged its cable operations with those of Cristalerias/TCI to form Metropolis-Intercom, which today has slightly less than half the market. In mid-l 996, CTC merged its cellular operations with VTR S.A to form Startel, which currently has about half the Chilean cellular market. Earlier this year, CTC and VTR engaged in conversations to merge other operations – including their long distance operations. To date, no announcements of any future merger have been made, but we expect the situation to be clarified before the year-end. Although all telecommunication services in Chile are open to competition, CTC remains the dominant local provider and the number two long distance provider. In the local service market, where CTC controls more than 90% of the access lines, it is threatened most by VTR through the latter’s dominance in Chile’s cable television market. Accordingly, we believe that the aforementioned merger discussions between CTC and VTR are likely to come to fruition. The Chilean telecommunication industry’s single most competitive service is long distance currently with eight different operators. In 1994, during the initial stages of an openly competitive market, long distance pricing was so fierce that companies operated unprofitably. In 1996 and 1997, pricing has stabilised at profitable levels and the three companies with full nationwide networks (ENTEL, CTC and Telex-Chile) remain the dominant carriers for domestic and international long distance services. Another handful of companies control less than 30% of the international market and 10% of the domestic market. ENTEL, the former monopoly provider has maintained its dominant position: CTC’s CTC Mundo is the second-largest carrier; and Telex-Chile’s ChileSat is the third. (If CTC and VTR were to merge their long-distance operations; that is, assuming no additional effective marketing or promotional campaigning took place, the new entity, CTC Mundo NTR, would remain the second largest carrier after ENTEL.) Mexico In January 1997, the Mexican long-distance market was opened to equal access competition. Telmex, thus far, has fared well in the pre-subscription balloting process – the process currently in progress, which allows Mexicans to choose a long distance carrier by ballot – and we expect its success to continue. With the institution of long distance competition, Telmex will begin to collect an interconnection charge for all long distance calls connecting to its network. As the provider of nearly all local telephony services, the company will collect a per minute interconnection charge for nearly all calls carried by the competition. Telmex’s principal competition thus far has come from two consortia: Avantel and Alestra. Avantel is a joint venture between MCI and Banamex, Mexico’s largest bank. Alestra is a consortium between AT&T, Alfa (a Mexican conglomerate) and Bancomer (Mexico’s second-largest bank). In response to the newly instituted long-distance competition, on April 1 1997, Telmex instituted a single rate for long distance tariffs. In addition, beginning in 1997, Telmex accelerated its tariff increases and altered installation; local per-call charges increase monthly by three centavos giving Telmex an increase of about 48% from the year-end 1996 to the year-end 1997; monthly charges increase three pesos per month such that by the end of the year, the average residential charge will increase by about 50% and business lines by about 37%; and installation charges experienced a decline of about 50% for residential lines and an increase of about 13% for business lines. The introduction of long distance competition, the interconnection charges and the tariff changes should result in a different revenue mix for Telmex; nonetheless the company should maintain flat revenues in real terms. (In 1996, revenues were basically flat in real terms against 1995, and for 1997, we expect a similar performance.) By the year-end 1997, we expect that TMX will have tariffs in line with costs and that there may be no need for further changes; however, we would not be surprised if, to prepare for and combat competition, TMX were to reduce the 100 free calls currently included in the residential fixed monthly charges and/or change the measurement to per minute from per call. Peru The 1997 tariffs for the Peruvian telecommunications service have been altered for the most part in accordance with the concession of 1994. In conjunction with the 1994 privatisation, the Government established that tariffs would be rebalanced such that when Telefonica del Peru’s exclusivity of local, domestic and international long distance services expires in June 1999, prices should be more aligned with costs. The gradual changes – decreases in installation fees, international and domestic long distance per minute charges and increases in monthly service and local call charges – have occurred every three months with adjustments for inflation. We expect that, in the near future, Telefonica del Peru could make additional changes to the tariff structure. This includes the establishment of different packages for local service from the current inclusion of 25 three-minute calls in the monthly fixed charge, or a change in the billing interval from three minutes to one minute. If this change were to occur, we believe the impact would be positive for Telefonica del Peru: it would increase its revenues and further prepare it for competition. Regarding competition, although Telefonica del Peru retains its exclusivity in local, domestic and international long distance services until June 1999, it faces cellular, paging and cable competition today. In January 1997, about 59% of the company’s formidable competitor in Lima and parts of western Peru, Tele2000, was acquired by BellSouth, the US-based telephone company, which already had cellular operations in other parts of Latin America, including Argentina, Chile and Panama. In response to the BellSouth acquisition, Telefonica del Peru has continued to strengthen its cellular business such that it is the company’s single largest revenue component. Conclusion From the beginning of 1997 through to mid-April, developments in the Latin American telecommunications markets have concentrated on tariff adjustments. Since then, the recent announcement of Telefonica de Espana’s global alliances could indicate possible additional modifications to the Latin American telecommunications landscape. Telefonica de Espana formed strategic alliances with Concert (the British Telecom/MCI venture) and Portugal Telecom. These alliances not only will foster long distance synergies, but also will expand Telefonica de Espana’s Latin American footprint. Prior to these alliances, Telefonica de Espana’s investments included Peru, Chile, Argentina, and Brazil. With the Concert alliance, Telfonica de Espana will have the option to enter the Mexican teleommunications market and offer Concert services throughout its Latin American markets. With the Portugal Telecom alliance, its Brazilian operations are likely to expand. In the future we expect additional changes to occur within Latin American telecommunications, not only in the aforementioned countries and companies, but in other nations and firms. The developments will be driven by country-specific events, as well as global forces.