Global Telephony / June 1996
By Larry Luxner
Chile, widely viewed as Latin America's only economic success story, is also head-and-shoulders above its neighbors when it comes to telecommunications.
The country, which stretches 2,500 miles from north to south, has enjoyed an average 6.1% annual growth in GDP growth over the last 10 years, and in 1995, Chile's 8.5% economic growth surpassed the inflation rate (8.2%) for the first time ever. According to the Geneva-based World Competitiveness Report, Chile ranks 15th worldwide in competitiveness, while the London-based Economist Intelligence Unit has upgraded Chile to an "A" rating -- the first Latin nation ever to enjoy that distinction.
On July 1, Chile -- led by President Eduardo Frei -- will join Mercosur, a customs union already embracing Argentina, Brazil, Paraguay and Uruguay. Under the agreement, tariffs on 90% of Chile's exports to the other four Mercosur nations will drop to zero over the next eight years; in return, Chile will get access to a variety of goods at lower prices.
Given Chile's newfound prosperity, and its per-capita income of $4,700 as of December 1995, it's only natural that its 14 million people would demand high-quality telecom services. As far back as 1978, the government under Gen. Augusto Pinochet considered privatizing its phone monopoly, and in 1992 finally began the liberalization process with the Telecommunications Policy Act.
In October 1994, Chile implemented a multi-carrier system, allowing users to select the company of their choice for both domestic and international long-distance calls. This, according to the International Institute of Wireless Communications, "has created a feeding frenzy among the nearly dozen licensed operators" in Chile. As of February 1995, says Chile's Subsecretaría de Telecomunicaciones (Subtel), the Chilean market for international long-distance was dominated by Entel (38.7% of the total), followed by Compañía de Telecomunicaciones de Chile (19.8%), Chilesat (21.1%), VTR (16.2%), BellSouth (3.0%), CNT (0.9%) and Iusatel (0.3%).
In a recent New York seminar on the Latin telecom industry, the IIWC predicted that "the perennial question of whether the Chilean market can support this many operators may lead to a market shakeout and consolidation period in 1996-97."
In the meantime, Chile's market for telecom equipment and services stood at nearly $1 billion in 1994, with annual growth over the next five years projected at 20-25% -- three times the overall economic growth rate. Between 1993 and 2000, CTC alone will have spent $2.6 billion to install three million new phone lines, with Entel spending $441 million and CMET another $350 million. The Chilean phone network is already 100% digital, with carriers tripping over themselves to install synchronous digital hierarchy (SDI) fiberoptic networks from one end of Chile to the other.
"It's one of the most open systems in the world," says Dean Alexander, director of Grant Thornton International's business center in Santiago. "Chile is being used as a testing ground for liberalization of the telecom industry. There are six or eight carriers providing long-distance service, and it's very, very competitive."
So competitive, in fact, that recent price wars have caused long-distance rates to the United States to dip as low as 10 cents a minute -- compared to the $3-a-minute charge in neighboring Argentina, which has among the most expensive phone rates in the world. While off-peak rates to the U.S. have since climbed back up to around 300 pesos (74 cents) a minute, signaling the end of the current fare wars, Chile is still the region's best bargain when it comes to long-distance calls. For that reason, ads for callback companies -- so prevalent in the rest of Latin America -- are virtually non-existent in Chile.
In late April, Chile's Ministry of Transport and Communications ruled in favor of CTC, dismissing a charge by Subtel that it had disclosed information about its competitors following a complaint by rival Chilesat that CTC had interfered with its long-distance traffic. On the other hand, Subtel upheld allegations made against CTC by Complejo Manufacturero de Equipos Telefónicos (CMET) regarding CTC's obligation to provide interconnect access to CMET. If upheld, CTC will have to pay a fine of around $54,000 a day, retroactive from Jan. 25, 1996.
CTC says it has offered to provide CMET with the increased interconnections access it is seeking, with the understanding that such increased access should be subject to a written agreement which would be based on existing interconnection, but that "CMET has refused to sign a new agreement or to amend the existing one to reflect the increased interconnection access being sought by CMET. CTC will not interconnect its network without such an agreement."
Meanwhile, CMET (25% owned by Harris Corp.) announced it would invest $32 million to increase the number of lines in its coverage area by 64%, reaching 110,000 by year's end. CMET plans to use Harris' digital switching technology to offer ISDN capability and expand the number of phone lines in and around metro Santiago from the current 60,000 to 150,000 lines within the next year, reaching 500,000 lines over the next five years.
Currently, its main markets are Santiago and surrounding regions, though the company has recently started to operate in Concepción and Talcahuano. Another company, Telefónica Andina -- a unit of TelexChile -- is already offering long-distance services in Santiago, and is seeking concessions to expand to Iquique, Antofagasta, Valparaiso, Rancagua, Temuco, Concepción and La Serena.
But the real battle is in cellular telephony. Chile has more than 140,000 cellular subscribers, up from only 38,000 in 1991. Penetration has already reached 1.03%, topped in Latin America only by Venezuela and Argentina.
CTC, which recently built itself a 32-story, steel-and-glass headquarters in downtown Santiago, announced in late April it would form a joint venture with VTR (itself 40% owned by SBC Corp.) to compete in the local cellular, paging, PCS, trunking and data communications services. The new venture, to be called CTC-VTR Telecomunicaciones Moviles, will have assets of $68 million, of which $49.7 million will come from CTC and $18.2 million from VTR. The venture is to start with a customer base of 150,000 -- or around half of the domestic market -- and will sell services through CTC branches.
Meanwhile, CTC plans to invest $605 million this year in expanding phone lines, developing its cellular and PCS business, boosting market share in the cable TV business and completing a fiberoptic network stretching from Arica to Puerto Montt. According to local press reports, it'll also spend $24.3 million to develop rural communications throughout Chile, and another $200 million on reinforcing its position in the Latin telecom sector. The company -- owned 43.6% by Telefónica de España -- is currently looking at projects in Brazil, Colombia, Mexico, Nicaragua, Panama and Paraguay. Among the most promising opportunities: privatization of Brazil's CRT, a stake in the Colombian long-distance market and a Mexican venture with Bancomer and GTE Corp.
Closer to home, a competing cellular firm, Compañía de Telecomunicaciones Moviles Chile (CTMC), recently ordered a D-AMPS/AMPS wireless network from Ericsson, offering a full range of digital services including PCS. "The addition of Chile to D-AMPS coverage in Latin America is an important step, enabling operators to provide seamless coverage throughout the region," said Sven-Christer Nilsson, vice-president of Ericsson Radio Systems.
Hewster Servicios Intermedios (HSI), whose parent, InterAmericas Communica-tions Corp., already operates a 100-kilometer fiberoptic network in Santiago, will soon be providing 38-Ghz wireless local loop services over five frequencies in the Santiago area, home to a third of Chile's inhabitants and nearly all of its multinational companies. According to LATR, the company already has a government concession for private lines thanks to a 12-satellite earth station network operated by a related InterAmCom subsidiary, VISAT Telecomunicaciones S.A.
Predicts IIWC: "The recent slow growth of cellular services, which is largely attributable to the widespread availability of basic main lines in urban areas and to the maturity of the cellular market, may provide an impetus for PCS growth. With its proposed inexpensive, high-quality service offerings, PCS could become the most dynamic segment of Chile's wireless communications market in the short and medium term."
Another think tank, Washington-based MTA-EMCI, says "usage characteristics of cellular in Latin America -- low mobility in desne urban areas, high usage rates and popularity of portable phones -- provide the precise conditions for PCS to compete directly with cellular, and may also serve as a platform for wireless local loop, providing basic services in nations with inadequate telephony infrastructure."
In Chile, at least, the PCS battleground is already well underway, with one joint venture -- made up of AT&T and Transfer Comunicaciones -- planning to invest $350 million in order to set up a single PCS network to be shared by the three companies that will soon be authorized to operate in the area. The CDMA network, to be called Red Unica Nacional, should be operational by the end of 1996.
Nevertheless, Subtel has been forced to postpone the bidding process for PCS concessions because of a lawsuit filed by VTR. The suit, which has the support of several other bidders, protests Subtel's requirement that the three license winners split the $96 million cost of clearing blocks of the radio spectrum that will be used for PCS. Another bone of contention is the $50 million deposit Subtel is demanding from winning bidders as a guarantee that they'll build their networks in the shortest time possible.
According to Grant Thornton International, "the telecom sector in Chile will continue to expand for a number of reasons, including a lack of market entrance barriers; convenience for multinationals worldwide to set up their operations in Chile to manage the Latin American region; continuous upgrading of existing equipment and networks; establishment of strategic alliances between foreign investors and local partners, and the willingness of Chileans to adopt state-of-the-art technologies."
Perhaps the most dramatic example of this is Chile's efforts towards developing interactive TV -- a rarity even in the United States. CTC plans to become a huge multimedia outlet with the ability to provide video conferencing, home shopping, home banking, video-on-demand and distance learning services within four to five years.
CTC's $140 million Multimedia Pilot Project, as it is code-named, involves the wiring of 450,000 to 500,000 homes in the Santiago area alone, and the installation of 12,000 kilometers of bidirectional fiberoptic and coaxial cable throughout the country. C-COR Electronics Inc. of State College, Pa., is among CTC's chief suppliers in the project, which is divided into four phases. Last August, C-COR announced it had received orders for additional 750-megahertz FlexNet line extenders and bridger amplifiers for the first phase of the multimedia network.
The first -- projected for later this year -- will offer pay-per-view and basic segmented cable (packets of channels oriented towards distinct socio-economic groups). In 1997, CTC hopes to initiate Phase II, which will include tele-education, video games and digital music. The third phase, planned for 1998, will offer "near video-on-demand" and interactive games. The fourth and final phase, expected to be implemented by 1999, will include telemedicine, full video-on-demand, home shopping and high-definition TV.
Meanwhile, competitor Entel isn't standing idly by. It has chosen Newbridge Networks Inc., through distributor and partner Coasin Chile, to provide a nationwide commercial (ATM) network. The $10 million system, which will connect Santiago to other Chilean cities, is aimed at providing multiple services such as electronic mail, home shopping, instant fax transfers and Internet access for businesses. It will also let private clients develop low-cost multimedia applications for local and long-distance transmission.
Entel -- which earlier this year sold 16% of its stock to Italy's Stet -- has also filed for permission to operate local phone services in 16 of Santiago's 342 municipalities. The company, which is investing $130 million in local service for Santiago between now and 2000, currently serves 3,000 customers in four upscale Santiago neighborhoods.