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Upwardly mobile: Brazilians are creating a thriving wireless market
Tele.Com / October 11, 1999

By Larry Luxner

About an hour's drive northeast of São Paulo along the Via Dutra highway to Rio de Janeiro, one crosses the Tropic of Capricorn at latitude 23.5° S -- the southernmost limit of the sun's vertical rays.

Continuing along the same highway, another impressive landmark soon comes into view: the sprawling factory where Ericsson now manufactures mobile phones and wireless infrastructure for Brazil's booming cellular market.

In one corner of the 67,000-square-meter plant, 71 employees assemble RBS-884 radio base stations. Wooden crates containing electronic components and raw materials are stacked neatly to one side, while Portuguese-speaking men and women sit quietly at their impeccably clean stations, testing equipment and painstakingly soldering printed circuit boards together.

In another area of the factory, operations manager José Ricardo Franchito oversees 370 employees devoted exclusively to assembling cellular phones. Last year, the factory produced 1.2 million handsets -- 53% of them for the Brazilian market, and the remaining 47% going to Chile, Argentina, Colombia and even the United States.

Not far away in Campinas, Northern Telecom has inaugurated a $125 million factory producing digital wireless systems for the local market. In the same town, Lucent Technologies -- which has invested over $100 million in Brazil -- recently completed a 15,000-square-meter factory employing 300 people and producing up to 500 analog and digital cell sites a year.

"The gigantic market potential was definitely a deciding factor in choosing Brazil as the location for this plant," says Art Medeiros, president of Lucent Technologies Network Systems for Latin America and the Caribbean. Rivals Motorola, Ericsson and Nokia are also making cellular equipment in Brazil, now that the country's mobile networks are being auctioned off to private investors.

The impetus for all this activity is the recent deregulation of Brazil's telecom market, particularly the B-band cellular concessions set up last year to compete with the state-owned (A-band) cellular companies that until recently belonged to Telebrás, the longtime Brazilian government phone monopoly.

This flurry of activity comes despite a general downturn in the Brazilian economy that has bled the economy of billions of dollars in foreign investment and caused the unemployment rate to edge up sharply, to over 8%.

In July 1998, Telebrás was auctioned by the government of President Fernando Henrique Cardoso for a whopping $19 billion -- marking the largest privatization of any kind in South American history. In all, 12 Telebrás entities were sold off, the key elements being the following:

* Telesp, São Paulo's fixed-line company, purchased for $4.985 billion by a group headed by Telefónica de España.

* National long-distance monopoly Embratel, purchased by MCI for $2.29 billion. Embratel has South America's largest long-distance network and is Brazil's main provider of high-speed data transmission and Internet access, with a 14,000-kilometer fiberoptic network.

* Tele Centro Sul, the fixed-line company serving eight south-central states and the Federal District, acquired for $1.8 billion by Telecom Italia and a Brazilian investment bank.

* Tele Norte Leste, the fixed-line company serving Rio de Janeiro and half a dozen other states, purchased for $3 billion by a four-member Brazilian consortium.

* Telesp Celular, the government-owned cellular entity serving São Paulo, purchased by Portugal Telecom for $3.1 billion.

In addition, Brazilian regulatory agency Anatel has opened up bidding for the so-called "fixed mirror" concessions for private fixed-line companies to compete against the privatized Telebrás entities in the same geographic regions.

On Mar. 19, three international consortia submitted bids for the purchase of the mirror concession for São Paulo state -- the richest of Brazil's 27 states, boasting 35 million people and over a third of the country's Gross Domestic Product. The winner was Megatel -- made up of Bell Canada, Qualcomm, WLL International and the Libermann Group -- which paid R$70 million ($41 million) for the license, will now offer basic phone service in competition with Telefónica. Megatel says it'll spend about $1 billion on the new network, which is known as Maxitel.

But Anatel has been less successful attracting bidders for phone service in other regions of Brazil.

"Since the original December 1998 submission of proposals for mirror concessions, the value of the real has plummeted and the cost of telecom equipment in local currency terms has climed," says Jason Dyett, a telecom analyst at Pyramid Research in São Paulo. After two failed attempts to sell off the giant Center/South concession, Dyett suggests, Anatel may now shift strategies and vidie the huge area into three sub-regions.

"By reducing the size of the concession, Anatel would help cut future licensees' buildout costs," he said. "Furthermore, the division of the Center/South concession would better position Brazilian companies with regional assets to submit bids or team with foreign players interested in smaller-scale investments."

One of the largest foreign telecom investors in Brazil is Atlanta-based BellSouth International, which has spent over $1 billion here. The company says Brazil's recent devaluation caused $172 million in first-quarter 1999 losses -- though it remains optimistic over the long haul.

BCP launched its all-digital TDMA cellular network in May 1998 after paying a whopping $2.6 billion for the license -- the most expensive per-inhabitant telecom concession in Latin American history.

"Latin America is the growth region in the world for the next decade," said CEO Duane Ackerman in recent comments to local reporters. "We have over 10 years of operating experience in the region, during which there have been periods of economic fluctuations. We have tremendous growth opportunities, as evidenced by the one million cellular customers we've added in Brazil in less than eight months."

BCP has also begun investing in impoverished northeastern Brazil, where it's offering mobile service to customers in the states of Alagoas, Ceará, Piauí, Pernambuco and Rio Grande do Norte.

As of December 1998, Brazil boasted 6.1 million A-band subscribers (83% of the total), versus 1.2 million B-band subscribers (17%). By December 1999, that'll increase to 9.6 million A-band and 3.8 million B-band subscribers. This means A-band will grow 59% and B-band by 211%, for an average of 85% growth over the next 12 months.

From a technical point of view, 79% of Brazilian cellular subscribers today use analog phones, versus 21% using digital phones. Within a year, however, analog will be 52% of the market and digital 48%, meaning analog growth of 20%, and digital growth of an astounding 329%. At the same time, prices have come down and pent-up demand has virtually disappeared -- forcing operators to come up with new ways to attract clients.

"Two years ago, you'd pay Telesp Celular $1,000, not including the handset, if a line were available," said Dyett of Pyramid Research. "Now, you pay the market price, which is around $300 (including taxes) for a line, and $250-300 for a handset. With the licensing of the B-band operator in São Paulo, competition has been introduced. There's no more wait for a cellular phone. For the operators, that means they have to make it easier to get customers to sign up, either by reducing the price of the handset or reducing the initial payment to start up service."

João Fernando Poletto, marketing manager at Ericsson Telecomunicações in São Paulo, says the Swedish giant has secured five B-band contracts throughout Brazil, representing a total of 1.4 million lines and a 54.3% market share (the remainder is held by Northern Telecom and Motorola). That compares to 3.114 million total lines in service in the A-band, which translates into a 40% share (putting Ericsson ahead of both NEC and Nortel).

"We are starting a new age in advertising," said Poletto. "Until this year, we had only one customer: Telebrás. The process of selling was via tender, so the power of adver-tising was not so strong. But now, we've started a new marketing plan, and advertising will be an important tool over the next four years, with the focus on the end user."

Ericsson's biggest B-band contract to date is a $360 million order signed in April 1998 by Tess S.A. to supply similar TDMA IS-136 cellular infrastructur for a cellular network covering the state of São Paulo (excluding the São Paulo metro area, which is being supplied by Nortel). Tess is a Brazilian consortium in which Telia Overseas owns 49%. Its concession area covers 18 million people. In December, it inaugurated service in Campinas, Santos and other major cities in São Paulo state including São Jose dos Campos, where the Ericsson factory is located.

Then in June, Ericsson in landed a $300 million contract to supply digital wireless infrastructure to Algar Telecom Leste S.A. (ATL), which paid $1.5 billion for its B-band concession area for the states of Rio de Janeiro and Espirito Santo.

ATL currently has 25% of Rio de Janeiro's cellular market, but expects to grab a 40% share within a year, says marketing director Brian Schicker. Under ATL's new "second-line promotion," customers can buy a handset for only R$299 (around $145 at current exchange rates). They get connected for free, and don't have to sign any long-term service contracts.

The day ATL launched that promotion, said Schicker, 700 people lined up outside its retail outlets to get their hands on the new phones.

"A few of our retailers even opened at midnight to accommodate the crowds," Schicker said in a phone interview. "There aren't too many markets in the world today where people would physically wait in line to buy a cellular phone."

ATL's only rival is Telefónica Celular (the A-band licensee owned by Telefónica), with 75% of the market. Since its inauguration in January, ATL has signed up 305,000 subscribers. In April, Telesp launched a new mobile product under the brand name "Baby."

The prepaid kit -- priced at R$599 -- includes a dual-mode handset with free activation and R$100 in airtime credit valid for 90 days. "Baby" subscribers pay no monthly service charges, and can add airtime credit either in person, at Telesp Celular shops, or electronically through "Baby Machines" linked to major Brazilian banking networks. Initially available only in metropolitan São Paulo, Telesp will gradually introduce "Baby" to the interior of São Paulo state.

Likewise, Telemig Celular, located in the key state of Minas Gerais, launched its own prepaid service in March -- thereby becoming the first A-band operator in Brazil to offer prepaid services. The operator is selling its Celular Card kit, which includes a Nokia 5120 TDMA handset and a R$10 ($4.65) credit, for R$449 ($209).

At the moment, cellular penetration throughout the country is 4.5%, though in the São Paulo metro area -- home to 18 million people -- it's closer to 8.8%, a number likely to climb significantly in the near future.

All major companies are getting into the act. Motorola, for instance, has just landed a $188 million contract to supply digital wireless phones to Telefónica Celular. The phones, to be delivered by December, will be manufactured at Motorola's recently opened $150 million factory in Jaguariuna, in São Paulo state.

"What do Brazilian customers want right now? To have a phone, to talk," says Ericsson's Poletto. "Today, the focus of cellular operators is to have coverage and capacity. But in one or two years, customers will become more sophisticated. They'll need value-added services like intelligent network, wireless office and short messaging. My job is to show the operators the advantages of these features."

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