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Argentina: Preparados para la competencia?
TelePress Latinoamérica / September 2000

By Larry Luxner

BUENOS AIRES--Argentina boasts the highest standard of living in Latin America, with a per-capita income exceeding $8,000 a year. Yet because of the lack of competition, its 36 million people have for years chafed under the region's most expensive telephone tariffs.

That dubious distinction could soon be history, thanks to the imminent passage of a new telecom regulatory framework set to take effect Nov. 8.

The package -- intended to lure foreign investment to the sector and introduce badly needed competition -- follows months of wrangling between Argentina's two incumbent operators, Telefónica de Argentina and Telecom Argentina-Stet-France Telecom, and a slew of new players who want in on the action.

On Aug. 9, the regulatory framework passed Argentina's bicameral privatization commission. But it still must be approved by government agency SIGEN (Sindicatura General de la Nación) and signed into law by President Fernando de la Rua; the presidential signature is expected by the first week of September.

An estimated $4 billion worth of foreign investment is riding on the planned market opening, with much more than that potentially down the road. De la Rua, facing high unemployment at home and widespread unhappiness with the state of the Argentine economy, is gambling that a rush of U.S. and European capital will ease his country out of its chronic recession while boosting his standing among the electorate.,

Among the largest potential investors: Dallas-based Hicks, Muse & Tate, which wants to sink $1 billion into a cable TV project; AT&T Latin America and IPlan, which plan to invest $500 million each in broadband networks; BellSouth's Movicom, which promises to invest $1 billion in a PCS network, and Velocom, which anticipates spending $300 million on wireless Internet.

Other major investors include Global Crossing ($100 million for fiber backhaul for undersea cable); MetroRed ($200 million for a metropolitan network); GE Americcom ($300 million for satellite communications) and Nextel ($150 million to expand network coverage).

"These companies are already building their networks, so they can start selling their services in November, the first day the market is open," says Buenos Aires-based telecom analyst Olga Cavalli of Atlantic Consulting. "The two big guys will lose market share in the most important cities, like Buenos Aires, Rosario, Mendoza and Córdoba. The rest of the country will remain for a long time with the existing telcos, because it's costly to build local loop to the customer."

Global Crossing, which is targeting multinational corporations with its $2 billion South American IP-based fiberoptic network, just completed the landing at its cable station in Las Toninas, which will be linked to Buenos Aires via a 350-kilometer terrestrial fiberoptic connection. From Buenos Aires, the network will connect Rosario, Córdoba and Mendoza before crossing the Andes to link Santiago and points north. The company says the Argentine portion of its network will be ready for operation Oct. 15, but won't actually start service until the first permissible day, which is Nov. 8.

"All of the companies are very excited about the deregulation," said Luisa Cerar, president of Global Crossing's Southern Cone operations. "The key significance is that there'll be fairer rules for all the new entrants in the market, and obviously this will be very good for Argentina. It's going to result in lower prices for international calls to and from Argentina, which will result in additional investment by companies in sectors that are information-based."

In all, 18 entities are currently holding operating licenses that have been issued in the last 12 months; the licenses are for general telephony, local, long-distance or a combination of the latter two.

"I am guardedly optimistic," says Kevin Landry, VP/Latin America at Infonet, a $700 million provider of value-added telecom services based in El Segundo, Calif., "Our people in Argentina want it to go through. All signs are that it's going to happen."

And that's precisely what terrifies Telecom and Telefónica.

Andrés R. Alcaraz, manager of corporate communications at Telefónica, says the new rules of the game clearly discriminate against the two incumbent telcos, which a year ago were given permission to invade each other's operating areas in the north and south. Currently, Telefónica has around four million lines, or 52% of the Argentine local and domestic long-distance market, while Telecom has the remaining 48%.

"We're not opposed to deregulation of the market for the simple reason that, in contrast to 1990, when Entel was privatized, the regulations were already established," said Alcarazs during a recent interview in Buenos Aires. "What we dispute is the model proposed and currently being reviewed by the new government to deregulate the market, because it establishes unequal conditions for all the companies in the telecom sector.

"For example, the old law determined that new entrants would have to demonstrate capital investments of $100 million. The new law requires only $5,000. And the old law required documents supporting these investments. The new law requires nothing."

According to a study released in July by The Yankee Group, the new regulation is establishes a single telecom operating license for all service providers.

"The single license applies to every provider, whether national or international, wireline or wireless, local or long-distance, facilities or non-facilities based," says the report. "Resellers of services must hold operating licenses, as must any company that leases infrastructure from a facilities-based carrier. The technology and service-independent licenses will be awarded for nationwide usage forever. And finally, perhaps equally as important as these guidelines, the new operating licenses will not carry any restrictions on foreign ownership or capital."

The regulation goes on to state that any company wishing to obtain an operating concession will have to cough up an administrative fee of $5,000, as well as present a description of their planned service portfolio, a three-year technical development and geographic coverage plan, and a three-year investment plan that correlates to the technical plan. Licensees must then initiate service within 18 months, submit annual data reports and pay a 0.5% tax on net service revenues to the Secretary of Communications -- while making annual payments to a newly established Universal Service Fund.

Most significantly, new operators will be free to establish their own tariffs as long as they are not the dominant operator, which is defined as any telco with 75% or more of total service revenues generated in a particular operating area. Dominant operators (read Telefónica and Telecom) will be held to pre-existing tariff legislation.

Finally, all newly licensed operators -- those without a previous concession -- must also commit to investing $2 per inhabitant in their coverage area prior to June 30, 2001.

Laura Babaraskas, an investor relations official at Telecom Argentina, told us the draft version now under review is "unfair because the obligations for new operators are not the same as for us."

"To get a new license, you don't have too many obligations. That $2 per inhabitant is nothing compared to the previous set of rules, which says you must cover 10% of the population per year in your service area in order to achieve 50% coverage in five years."

One of the biggest bones of contention is the issue of interconnection, or the rate which incumbents charge other operators to use their network. Current interconnect charges in Argentina stand at $0.0235 per minute, with legislation prior to the new regulation calling for that to drop to $0.0215 per minute as of Nov. 8 -- far higher than the $0.01 demanded a few months ago by the new entrants.

Even so, under new Secretary of Communications rules, this will drop to $0.011 per minute for the first six months of competition, then dropping 3% every six months thereafter, and finally falling to $0.00974 on Nov 8, 2002.

Observers say the telecom liberalization package could eventually push international long-distance prices down by as much as 50% to 80%, with calls to the United States costing as little as 20 cents a minute -- about the same as it now costs a U.S. resident to call Argentina.

"This is a very important step with regard to prices, which are expected to go way down," says Mark Alexander, a telecom analyst with International Data Corp. in Mountain View, Calif. "This will not only be a boon to Internet users, but also from a corporate standpoint. It will really open up the amount of services available. A lot of companies now offer niche services because they're not allowed to offer a broader range of services."

Adds Mikael Ekman, vice-president of new wireless accounts at Ericsson do Brasil, who just relocated to São Paulo after three years in Argentina: "Of course they're concerned. Telecom is the biggest cash cow for France Telecom. They've had a good situation for years. I'd be concerned, too, if someone were trying to decrease my profits and open up competition."

Asked about complaints from incumbent providers Telecom and Telefónica, Alexander just grunts.

"That would be expected, because they're obviously trying to protect the market they have," he says. "But just the mere fact prices will come down is good from a consumer standpoint. And it'll bring Internet development a lot faster to that country."

As an example of this, AT&T Latin America and FirstCom Corp. recently said they'll invest $500 million in Keytech LD, a startup communications company in Argentina that they recently acquired, creating about 2,000 direct jobs and 8,000 indirect ones.

The investment will be made in two phases: $150 million by mid-2001 and an additional $350 million through 2004 to develop Keytech LD's broadband fiber infrastructure, IP technology and fixed wireless platform. The company's network will be built out in the key business centers. Keytech expects to have a network of 2,500 kilometers utilizing advanced fiberoptic technology. It'll connect 40 cities in the next several years, providing a full range of telecom services for corporations and provide infrastructure for other carriers and Internet companies.

All of this is made possible by Argentina's new telecom regulatory framework.

"We believe that this new structure for operating concessions is a positive step to encourage the development of competitive service markets in Argentina," says Erica Eppinger of The Yankee Group. "By setting minimum investments and service launch dates, the regulators are effectively avoiding the proliferation of paper operators, or those companies that hold licenses but never launch services."

You don't have to be a telecom analyst to see how the lack of competition has made telecom and related services in Argentina so expensive.

At the Crowne Plaza Hotel in Santiago, Chile, for example, where competition was introduced in the telecom sector long ago, hotel guests can surf the Net all day and night -- using computers set up in the lobby -- at no charge; likewise, the hotel charges only $2 a minute for calls to the United States.

Yet the Crowne Plaza Panamericano in Buenos Aires charges $10 for 15 minutes of Internet use at its business center, and $5.50 a minute for calls to U.S. numbers.

"Argentina has always been a bit of an enigma," says Infonet's Landry, whose company has invested more in Argentina in the last 15 to 18 months than during the last five years. "In some respects, they're very advanced from an economic point of view, yet from a telecom point of view, they're somewhat behind. They are such a vital cog in the Southern Cone, but it's difficult to do business under two sets of rules."

Further complicating matters, telephone density varies dramatically from one region of Argentina to the next. Metropolitan Buenos Aires boasts 1.8 million lines for its 3.1 million inhabitants -- a teledensity of 58.2%. The province of Buenos Aires, home to one out of every three Argentines, has a teledensity of 22%. Other major Argentine provinces such as Mendoza, Tucumán, Córdoba, Santa Fe and La Pampa have teledensities in the neighborhood of 17% to 19%.

From there, teledensity suddenly drops to under 10% for poorer provinces like Catamarca, Salta, Misiones and Jujuy. At the very bottom of the list is the small northeastern province of Formosa, where only 20,498 lines serve its 457,592 inhabitants -- a teledensity of 4.48%.

The controversy between incumbents and newcomers has put Telefónica in the uncomfortable position as being on the same side as Telecom, normally a fierce competitor.

"We and Telecom have common interests, but we're not working with them on this because they are our principal competitor," says Alcaraz, adding that "we have always been in favor of competition. Telefónica competes in many countries around the world. It's not that we're afraid of competition."

But they are, says Eppinger. She says Telefónica, with around 4 million lines in service, and Telecom, with 3.7 million lines, will keep at least 85% to 90% of the residential market for the foreseeable future, but could take a severe hit in the more lucrative corporate market, centered around Buenos Aires.

"I don't think they'll lose much in the residential market because the new entrants aren't much interested in building copper to residential users. But it's the corporate market where Telecom and Telefónica will really feel the heat," she said. "It's the same in any market. The monopoly provider has been used to not having to focus on customer services. Argentines have been suffering under extremely high prices for years, and now they're getting even."

Analyst Cavalli says she understands why the two big incumbents think it's unfair that they have to continue providing service in areas that aren't very profitable, while newcomers don't have to fulfill the same obligations the big guys did several years ago.

"In a way, they're right, but in a way not," says Buenos Aires-based telecom analyst Olga Cavalli. "It's right if you assume the new companies coming in would be the same size [as Telecom and Telefónica]. It's really not true, though. Those two are such huge companies that any newcomer will be very small in comparison. They really have a lot of power, and enjoy relations with the government that newcomers will take years to achieve, or maybe never achieve at all."

Infonet's Landry agrees. "We welcome an open environment where everybody's playing on a level field," he says. "It's just fair for everyone involved. Let the marketplace dictate who the survivors will be."

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