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This is to certify that the

thesis entitled

rI'he Development of Cellular / PCS Telephony
in Argentina, Brazil and Chile.

presented by

Veronica Ana Nbrales

has been accepted towards fulfillment
of the requirements for

MA degree in Wication

Z/ ’
Major %sor

Date December 13, 2000

 

0-7639 MS U is an Affirmative Action/Equal Opportunity Institution

4* 4.

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LIBRARY

Mlchlgan State
Unlverslty

 

 

 

PLACE IN REFURN BOX to remove this checkout from your record.
To AVOID FINES return on or before date due.
MAY BE RECALLED with earlier due date if requested.

 

DATE DUE DATE DUE DATE DUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

'1 mo cJCWM

THE DEVELOPMENT OF THE CELLULAR/PCS TELEPHONY IN
ARGENTINA, BRAZIL AND CHILE

BY

Veronica Ana Morales

A THESIS
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of
MARTER OF ARTS

Department of Telecommunication

2000

ABSTRACT

THE DEVELOPMENT OF THE CELLULAR/PCS TELEPHONY IN
ARGENTINA, BRAZIL AND CHILE

BY

Veronica Ana Morales

The goal of this thesis is to understand how the internal or
in-country and external or international regulatory factors
that have shaped the current development of the cellular/PCN

market in Argentina, Brazil and Chile.

The three countries have similar patterns in their
telecommunication regulatory framework through their
privatization of their state—owned telephone companies.
However, the liberalization processes, through their World
Trade Organization commitments and foreign corporate
strategy give the different industry outcomes. A
descriptive regulatory and a comparative market analysis
help to understand the different outcomes that has prevented
the cellular/PCS industry from developing before the late

19905.

To my parents and brother

iii

AKNOWLEDGEMENTS

I would like to acknowledge the guidance provided by my
thesis advisors Dr. Steinfield and Dr. Muth in the
preparation of my thesis. I am grateful for both their
advice and availability. I would also like to thank them
for their help and encouragement throughout my stay at

Michigan State.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIST OF TABLES Vii

LIST OF FIGURES viii

CHAPTER 1

INTRODUCTION 1
Method 4
Outline 5
Restructuring Telecommunications in Latin America ............... 6
Mobile cellular development 14
Conclusion 17
Bibliography 19

CHAPTER 2

LITERATURE REVIEW 20
Conclusion 30
Bibliography 32

CHAPTER 3

REGUGULATORY FRAMEWORK 33
Regulatory Agencies 33
Argentina 35
Brazil 41
Chile 45
Conclusion 48
Bibliography 49

CHAPTER 4

THE ROLE OF THE WORLD TRADE ORGANIZATION IN

TELECOMMUNICATION DEVELOPMENT 50
Consequences of Negotiations 50
The GATS 51
The Negotiating Group on Basic Telecommunications ............ S3
The Reference Paper 54
Competitive Safeguards 55
Interconnection 57

 

Licensing Criteria 6O

Independent Regulator

 

Allocation and use of scarce resources
Results of the NGBT

 

 

The Group on Basic Telecommunications

 

 

Summary of Commitments
Conclusion
Bibliography

 

CHAPTER 5
FOREIGN CORPORATE STRATEGIES

 

BellSouth
GTE
Conclusion
Bibliography

 

CHAPTER 6
CONCLUSIONS

 

 

Bibliography

w

60
61
61
62
65
68
69

70
72
81
82
83

84
90

LIST OF TABLES

TABLE 1 - Comparison of Licensing Regimes

 

 

TABLE 2 - Degree of Market Liberalization

TABLE 3 - The Cellular/PCS Market Profile

 

vii

48

66

71

LIST OF FIGURES

Figure l - Schematic structure followed during the study ......... 4

viii

Chapter 1

INTRODUCTION

Wireless Communications has become one of the fastest
growing areas in the Telecommunication industry. This
development has been shaped by a wide array of internal or
(in-country) and external (international regulatory),
technical, and market (corporate) factors. The goal of this
thesis is to explain how these factors are shaping the
current situation in the development of the cellular/PCN

industry.

The countries of Argentina, Brazil, and Chile have been
selected to understand the role of regulation, international
institutions and foreign corporations in the development of
cellular/PCS industry. The thesis will be a descriptive
analysis in the shape of case study, using mainly secondary
historical data. The study will be based in two levels, the
in~country regulation strategy and the external influences
of the World Trade Organization (WTO) in order to explore
the cellular/PCS development from a trade on service
approach. In addition, the foreign corporate strategy such
as BellSouth and GTE will be analyzed in order to understand
the commercial structure of the market in these three

markets.

The selection of the three countries was based on several
factors that will be briefly summarized in this chapter.

The first factor is that the countries have over two-thirds
of the population and domestic product of the South American
Region. Thus, making them probably the most representing
group of countries in South America. Second the similar
patterns of political development they took through their
experiences in privatizing their incumbent telecommunication
companies. The third factor is the different liberalization
strategies that they employed when introducing cellular/PCN

competition to their markets.

Argentina was an early reformer of its telecommunications
sector with the introduction of private cellular service in
1987 and the privatization of its state—owned
telecommunications company Empresa Nacional de
Telecommunicationes (ENTel) in 1990 (Noam, 1995 p.135).
Despite these initial commitments to liberalize the industry
in the last decade, the Argentine government has revealed
the government’s hidden protectionist approach. Now the
country is struggling with ending of the duopoly (Telecom—
Telefonica de Espana) in basic telecommunications services
and the introduction of market access for wireless services.
The Argentina’s commitment to liberalize is in question
because contradicting legislation works to liberalize and
restrict market access simultaneously. While some laws

promise to allow competitors to enter the market without

restricted access, other resolutions other resolutions
create or decrees create obstacles for domestic and foreign
competitors to penetrate the local market for basic

telephone and value added services such as cellular/PCS.

Brazil is the 8th largest industrial economy in the world
with a population of over 171 million, makes up half of
Latin American density and an economy output of $800 billion
per year (Ettorre, p. 1). However, when it comes to
telecommunications policy, Brazil has lagged behind
throughout the Latin American Region. While Chile and
Argentina have moved towards liberalization and
privatization of the telecommunications sector since the
early ‘805, Brazil has kept the state—owned and operated
company Telebras, that has run the country’s
telecommunications networks since 1972. However, the
government has undertaken a complex restructuring of the
telecommunications industry within the past couple of years.
This includedpmivatizing in 1998 and reorganizing the state
telephone holding company Telebras into three—regional
wireline, 10 separate regional A—Band cellular companies and
a long distance carrier, which were privatized through

auctions.

Chile has led the way in reform and modernization of the
telecommunications sector as the first Latin America country

to eliminate the state monopoly on telecommunications

services. Through progressive legislation, Chile introduced
its market to gradual liberalization in the late 1980s.
Eventually, all regulatory barriers to the local, long-
distance and international markets were removed for both

service providers and network operator.

Method
The Key factors that affect the development of the
cellular/PCS industry and that will be used in this study

are shown in Figure 1.

Internal factors: External Factors
[Houxs

 

 

Regulation i—> Privatization

\ I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberalization + Foreign
Technology Corporate
Spectrum Strategy
Management
Operators WTO
Figure 1 - Schematic structure followed during the studv.

 

Regulation: regulatory policy aims to insure a harmonious
development of the sector. It implies an arbitration role on
numerous aspects such as frequency allocations, market
structure and, technology standards. Providing the guidance

for the processes of privatization or the sale of the

state owned enterprises to private ownership and
liberalization or the set of rules that assures that
privatization takes place through the opening of the

market to competition

International influences or factors towards the development
of the cellular/PCS market is going to be described by the
implications of the WTO Agreement, GATS (General Agreement
in Trade and Services) that these three countries have
signed after becoming WTO members. The implications of this
agreement for these countries will be shown by the
conditions of Most Favorable Nation, Market Access and
National treatment. As well as the commitments of these
three countries to further liberalize their cellular/PCS

industry.

Finally, the strategies of multinational companies such as
BellSouth and GTE will be described as the ones that are
using the cellular/PCS industry as the strategy to enter the

market in a new country.

Outline:

The objective of this study is to understand how the shaping
of a set of different factors has resulted in the current
situation of the wireless industry. In other words, this
thesis attempts to analyze and evaluate the past and present

factors that influence the development of cellular/PCN

telephony in the countries of Argentina, Brazil and Chile.
To gain a better understanding of the impact of these
factors, the study will take the shape of a case study
analysis, comparing the three countries. The second chapter
is devoted to the literature review and will describe the
model that will guide my study. Chapter three will analyzed
the internal or in—country regulatory factors that shape the
current situation of the cellular/PCS market. The external
factors for regulatory reform that influences the three
countries will be analyzed in chapter four through the role
of the World Trade Organization in promoting liberalization
of the industry and guidance for developing countries.
Chapter five will describe some of the most relevant foreign
corporate strategies as the outcome of the current internal
and external regulatory framework. Finally, Chapter six
will conclude that these countries share the similar
patterns of telecommunication development infrastructure
through privatization and not so similar patterns of

liberalization of the cellular/PCS industry.

Restructuring Telecommunications in Latin America

This section attempts to describe the historical origins of
the telecommunication systems in Latin America, and the
fundamental transformations that are currently remaking the
region's telecommunication environment. Reform in the
telecommunication sector has been widely spread across Latin

America over the last decade. Current trends are a shift

from the state as the supplier of telecommunications
services to regulator of network operations and services;
the gradual introduction of competition at all levels of the
network system and the privatization of the incumbent
operator. More than 40 percent of the countries have
introduced new legislation or modified existing legislation
to allow and consolidate this reform process (Peters, p. 2).
Traditionally, Latin America has been characterized by major
inequalities in access to telecommunications services in
comparison to developed countries and inequalities within
the region and within individual countries. By the end of
1998 the 800 people of the Americas region as a whole were
served by some 258 million main telephone lines, giving an
impressive overall teledensity (lines per hundred
population) of 32.3 percent (Petters, p. 5). However, that
figure is skewed by the fact that 198 of those 258 million
lines are in the USA and Canada. While this leaves half a
billion people in Latin America and the Caribbean with just
60 million main lines between them for a teledensity of only
7.5 percent. In addition, this number does not show that
two-thirds of the installed telephone lines are located in

Argentina, Brazil and Mexico.

System inadequacies have been another hallmark of Latin
American telecommunication networks. National telecom
:monopolies owned and operated partially or fully by the

state were the norm in the region. Domestic monopolies

failed to build widely accessible reliable public networks.
Common complaints included insufficient lines to meet
demand, poor—quality equipment, outdated technologies, and
infrequent maintenance and repairs. Decade long official
waiting lists for line installation reflected a high the
demand for basic service. In addition, the systems were
financially inadequate. For example, artificially high
equipment prices at several times the international average
direct payments to national treasuries transferred surpluses
from network investment (often supplied directly by new
subscribers who were expected to bear the full cost of line
installation) to large equipment manufacturers and the

national treasury (Noam, 1995 p. 140).

Although lack of capital and poor and/or highly politicized
management of national telecom companies, these problems
were as much a manifestation of general political crises as
direct causes. In many countries in the region, chronic
political instability, reflected by the alteration between
authoritarian and democratic regimes and political violence,
has had an enormous impact on the ability of national
telecommunication administrators to set long-term policy
goals and to carry out mandates that changed frequently.

For example, the rejection of the first attempt to privatize
the ENTel the Argentina’s telecommunications incumbent
company during the transitional government of President

Alfonsin (1982—1989) after 5 year of military control. In

1986, Alfonsin announced its intent to sell ENTel, to
Telefonica de Espana to improve the performance sector, and
gather the necessary resources to service the foreign debt.
However, the initiative was terminated by the Congress,
which was controlled by the opposition Peronist Party
President Menem eighteen months later, divested the company

within its first nine months in office.

The widespread changes in policy and industry throughout
Latin America are part of a broad transition caused by
diverse forces, both international and domestic. The brutal
military dictatorships of the 19708 and the rapid rise of
external debt during the 19808 have interrupted Latin
America’s progress. In the 19908, most Latin American
nations have emerged from the struggles of the 19708 and
19808 and are focusing on increasing their participation in
the global economy. Because political and economic clout
depends on access to information, many Latin American
government and business leaders are making efforts to
increase their nation’s technological power. Policymakers
began to recognize that the state-led, protectionist
development model employed over the previous decades had
finally exhausted itself. As a partial response,
governments in Latin America instituted a series of economic
stabilization programs with the twin goals of reducing
inflation and public spending and debt. In other words

governments focused on changing domestic market conditions

to stimulate private—sector economic activity. They
actively promoted the sale of state—owned companies and
foreign and private investment. For example, if countries
were interested in reducing national debt, then the primary
consideration would be getting the best sale price. In
Argentina, that goal led to contracts with strategic foreign
investors to by large shares of the telecommunications
companies, supposedly because that offered the most
immediate return. Domestic sales of individual shares or
small blocks of shares cannot usually be sufficient. The
main reason was that lack of domestic capitalization led to
reliance on borrowing, thus ending in debt problems.
However, Argentina is also taken as an example of a
privatization process that was overly rushed by
preoccupation with foreign debt, resulting in an inadequate
regulatory structure and disappointing results from the

privatization contract.

While the scope and pace of policy reform varied
significantly across countries in Latin America, some
regional generalizations are possible. The role of the
state, so prominent in previous decades, was diminished in
favor of the private sector and market forces. Between 1988
and 1993, Latin America accounted for more than half the
total value of worldwide divestitures, surpassing both Asia

and Eastern Europe

10

Deregulation and privatization of state enterprises fostered
greater competition and helped reduce distortions in the
economy. Finally, many countries unilaterally cut tariffs
and eliminated various barriers to trade, helping accelerate
regional productivity growth. Average tariff rates in Latin
America declined from more than 50 percent in 1985 to
approximately 10 percent a decade later. The creation of
trade arrangements such as the North American Free Trade
Agreement (NAFTA) and the Common Market of the South
(MERCOSUR) also contributed to increases in regional trade.
Stabilization efforts resulted in a significant decline of
regional inflation. By 1997 most countries in the region
had only single digit inflation, and the median rate had

dropped to 9 percent, the lowest in any year since 1977.

The organization of national telecom sectors is base in
these processes of sweeping reform of state
responsibilities. A8 subscribers both business and
residential were unwilling or unable to assume the burden to
finance necessary network upgrades an expansion, the capital
intensive telecom sector was a prime candidate for sell-of.
The transfer of responsibility for the state to the private
sector for network management and investment has ranged from
complete privatization of the public switched network to the
parceling out of value-added services or the so-called new
technologies such as mobile cellular and data transmission.

The impact of Telephone Company privatization on state

11

finances seems to have been most direct in providing large
infusions of cash and/or foreign debt forgiveness. The
transfer to private ownership of state—run
telecommunications entities began in 1988 with Chile’s
privatization of the CTC (Compafiia de Teléfonos de Chile)
and ENTEL, followed by Venezuela in 1990 and by Argentina

and Mexico 1991 respectively.

Established multinational equipment manufactures with
subsidiaries in Latin America were opposed to sector
organization. Since they have developed highly profitable
supply relations with postal and telecommunications agencies
(PTT), privatization threatened to disrupt their conformable
situation. Thus, governments implemented plans to extend

supply contracts into the postprivatization period.

The contemporary situation in the region is complicated by
the fact that as a result of privatization, private
monopolies, sometimes foreign-owned, have in many countries
replaced the old state monopolies. In the first
privatizations, the new private owners were guaranteed
periods of monopoly on all basic voice services and
preferences in the provision of other services. Governments
argued that this policy was necessary to provide sufficient
incentive in the form of monopoly rents to promote high

levels of investment and greatly expanded network coverage.

However, a central problem in the region is that consistent
regulatory controls of private monopolies have yet to be
instituted. As part of the initial sale agreements,
purchasers of telephone companies demanded policy changes
that undercut many of the supposed benefits to the public of
sector reorganization. For example, in Venezuela, the
government and the state telecom company, CANTV, re-
negotiated the company’s contract prior to the privatization
to ensure CANTV’s monopoly for the first 9 years after its
sale and its continued contribution to the National
Treasury; this policy was supported by the major political
parties in Venezuela. In Argentina, the government
increased tariffs prior to the sale of ENTel to increase

basic rates from which future increase would be calculated.

For Latin American countries, clear that the sale of stocks
to domestic and foreign strategic investors has certain key
advantages. In other words, investors may be bargained in
to buying at a higher price or they may be required under
contract to continue to invest in the telecommunication
operation for a period of years. For example, in Mexico,
the major domestic and foreign strategic investors have
signed a specific contract which guarantees them a 6 year
monopoly on fixed line services in return for a continuing

obligation to invest a $ 10 billion in network expansion.

13

Mobile cellular development

Mobile cellular services worldwide have grown much faster
than expected. At the end of 1998 there were more than 300
million subscribers around the world up from just 11 million
in 1990 (Vandenack, p. 2). Cellular networks, for instance,
have grown most rapidly in developing countries where wire-
line networks are scarce and basic telephone services

expensive.

There are three main reasons for the success of the cellular
industry in Latin America: competition, calling party pays
and prepaid cellular service. In Latin America, competition
like privatization, has gained great momentum in recent
years. The first service areas to be liberalized have been
mobile cellular service. This is in part a consequence of
the exclusivity periods that were granted to newly
privatized operators for basic fixed-line services. As a
result, governments have subsequently encouraged competition
in market segments where there is no exclusivity. While
privatization and foreign investment have spread through
Latin telecom market, the movement to full competition in
the mobile cellular market is not immediate. A8 in basic
telephony, most of the region’s government took a gradual
approach to competition. This means that the countries are
going through a transition process with often two—way

competition (duopoly) in cellular or PCS before a larger

number of entrants can compete. The fact that the most of

14

these nations have signed a World Trade Organization basic
telecom agreement also helped to increase foreign investment

in telecom companies.

In the USA and Canada the number of subscribers more than
doubled from 36 million at the end of 1995 to 74 million by
the end of 1998. However, in Latin America and the
Caribbean the growth rates continue to be more impressive.
The number of subscribers grew from just 4 million in 1995
to over 22 million by the end of 1998. By September 1999
that number had grown to 28. 6 million and its forecast to
surpass 40 million by the end of the year 2000. With full
mobile competition in the region's largest markets — Brazil,
Mexico and Argentina— the ITU predicts that the mobile
subscribers will have overtaken the number of fixed—line

subscribers in these markets by the year 2005 (ITU, 1998).

The introduction of calling party pays (CPP) has made a
significant contribution to cellular market growth. By
shifting the cost burden of incoming calls to landline—
calling customers, cellular subscribers are more willing to
answer calls and use cellular service in the first place.
CPP for example helped Argentina experience 179 percent
growth in 1998 (Vandeback, p. 2). Experience in other Latin
American countries shows that CPP tends to promote customer

growth from 50 percent to 100 percent.

Prepaid has penetrated the market faster in areas where
local fixed service is difficult to get and expensive.

Thus, making wireless a substitute for regular basic phone
service. In 1998, Mexico's operators were experiencing most
of their growth activation as prepaid, leading to a 100
percent growth in its cellular market. Of the country's
entire subscriber base, more than 40 percent are prepaid

customers .

CPP, coupled with prepaid, has had a synergistic effect on
the market. The reason is that subscribers can sign up for
prepaid with no monthly subscription and get inbound calls
for free. These services has helped operators reach into
the mass market of low—income marginal subscribers, who were
attracted to mobile service because of the region’s poor
landline infrastructure, crime rates, and the high status

accorded mobile phone users.

Regulation of mobile cellular has tended to be minimal. For
example, fewer than half of the countries that replied to an
ITU questionnaire in 1999 stated that their mobile operators
had universal service/access obligations or that their
mobile tariffs were regulated. The relative lack of
cellular regulation is partly due to the belief that fixed
networks have been too regulated, delaying innovation and
network growth. Since mobile has developed at a time when

this belief has become commonly accepted, regulation has

16

been limited. A related factor is that mobile cellular has
typically been defined as a value—added-service. Thus
falling outside the regulatory scope of basic voice
telephony. For Latin America, the question is whether
mobile cellular has grown so fast because of limited
regulation or whether it will grow even more rapidly with

greater regulation.

Conclusion

This chapter attempted to provide the framework for this
study in order to understand how the in—country regulatory
system and international forces, such as the WTO and foreign
corporations have shaped the current development of the
cellular/PCS industry in Argentina, Brazil and Chile.
Although each country has shaped the reform process to
accommodate its own political, economic, and cultural
circumstances, three themes emerge from the analyses.
First, the sublimation of telecom sector reorganization to
the powerful dynamics of the privatization and
liberalization programs that provided the basic policy
platform for telecommunication reform. Second, the lack of
basic telephone service via the public network also has a
significant impact on the speed of introduction and
acceptance of “new technologies”. Despite the high prices
and limited coverage, penetration rates for mobile cellular
telephony have far exceeded initial projections. Cellular

service became a replacement for, rather than an add-on to,

17

the public network. Finally, the struggle of current
regulatory mechanisms from governments to regulate the
telecommunications industry demonstratesthat government
officials need to make the necessary political and financial
commitment to create and sustain credible regulatory
agencies that will ensure that their privatization and

liberalization goals are met.

18

BIBLIOGRAPHY

Ettorre, Barbara. A business case for today’s: Brazil and

Argentina. [Online] Available email: moralesv@msu.edu
from tsupport@bellhowell.infolearning.com, July 12,
2000.

International Telecommunication Union. (1998).
General Trends in Telecommunication Reform 1998 (ISBN
92-61-06801-4). Geneva Switzerland.

Noam, E. (1995). Telecommunications in Latin America.

 

Oxford University Press Incorporated.

Petter, Phillip. Wireless Americas: A Regional Roundup.
[Online] Available

http://www.infoamericas.org/library/documents/wireless.
html, March 25, 2000.

Vandenack, Tim. Calling Party Pays Brings Mobile To The

Mainstream. [Online] Available
http://www.wirelessweed.com/intl/cpp315 htm, September
28, 1999.

19

Chapter 2

LITERATURE REVIEW

This chapter provides the theoretical framework that will
guide this study. Several authors have been chosen to help
answer the research question of how the internal and
external regulatory factors affect the development of the
cellular/PCS industry in Argentina, Brazil and Chile. In
other words, the literature overview section will cite some
of the previous work about how the processes of
privatization, liberalization and the regulatory structure

affects the development of the cellular/PCS industry

The different factors that can determine the performance of
the telecommunications industry are discussed by Bauer
(1993, p. 14). He argues that from an institutional
perspective, the overall performance of the sector is
determined by its institutional matrix, which consists on a
set of parameters at the various levels of cultural,
political and economic organization. In other words, it
comprises both informal rules such as code of conduct,
traditions, customs, taboos, as well as formal rules such as
the constitution, statutory and case laws and the specific

assignment of property rights.

An important subsection of the institutional matrix is the

governance structure of an industry, which is

20

operationalized as the set of rules that constrain and guide
the operations within an industry. These rules can be part
of the general legal framework of a country, such as
antitrust laws or constitutional principles that guarantees
the freedom of economic activities. For example, conditions
for market access, such as prices, service quality standards
and interconnection rules, as well as more discretionary
policies such as industrial policy are part of this

governance structure of telecommunications.

Bauer (1993) also notes that countries have pursued various
strategies with respect to the organizational structure of
their telecommunications industry. In other words,
countries have accepted various models to regulate
telecommunications that cover from the “internal” regulation
through public enterprise to the “external” regulation

through expert commissions.

Different approaches range from the traditional model of
public administration such as Portugal, Germany and France
to models of public corporations with much more degree of
autonomy in the public sector like Sweden. In addition,
national approaches can also differ in the degree of public
policy directed towards telecommunications. Denmark or
Sweden has pursued a rather open policy while France or
Germany has adopted a relatively high degree of public

planning of telecommunications infrastructure development.

21

Finally, the US has been characterized by a reluctance to

engage in any open policy for telecommunications.

Thus, Bauer suggests that similar levels of performance can
be achieved under different institutional settings with
various roles for the private and state sector. As a
consequence of that, privatization and liberalization do not
guarantee improved performance of the telecommunications
industry, however under the specific economic, political and
foreign policy constrains of many developing countries, no

better feasible solution might be possible.

Michael Paetch analyzed the key factors that influenced the
development of mobile communication systems, for the purpose
of this overview few of them will be described. He compared
the technological, regulatory and market environment of the
United States and Europe with respect to mobile
communications. He argues that the field of
telecommunications in general, and the sector of mobile
communications in particular, is affected by a wide array of
technical, economic, regulatory, market and socio-cultural
factors. To a greater or lesser extents they all

participate in the shaping of mobile communications systems.
The factors commonly mentioned as affecting the development
of mobile services are regulatory policy, technology and

market variables. The regulatory policy aims to insure a

22

harmonious development of the sector. It implies and
arbitration role on numerous aspects such as interconnection
tariffs, frequency allocation, market structure and
technology. The technological factors are determined by
the scarcity of the spectrum. Since the most useful part of
the spectrum is already allocated, the development of
cellular telephony depends upon the introduction of
technologies that use the less crowed and higher frequency
bands. In addition, technological evolution makes new
communication services and new features possible.
Manufacturers often allocate funds to the development of new
services before the allocation of spectrum frequencies.

Thus they attempt to impose a de facto standard to gain
competitive advantage influencing the standard setting
bodies. Finally, the market variables are determined by the
price of equipment services and service charges, the number
of year the first cellular system has been launched, the

gross domestic product, and the coverage/quality of network.

The organizational boundaries of the telecommunications
sector have changed dramatically. The pattern of evolution
from internal reorganizations to external alliances and
mergers has been set by the policies of privatization and
liberalization worldwide. Lerner, (1991 p. 279) outlines
the benefits and distinctions of privatization and
liberalization. He defines privatization as the process of

transferring to the private sector some or all the

23

operations, management, and/or ownership of the state—owned
telecommunication facilities. He argues that the term
“liberalization is often incorrectly used as a synonym for
“privatization”. Liberalization refers to the political and
regulatory changes that must accompany privatization to
ensure that private interests operate efficiently for the
public good. In other words it provides the framework for
replacing the rigid and all-encompassing state
telecommunications regulation with reliance in a competitive

industry structure and market forces.

Lerner also adds that with liberalization, the private
sector may provide both new and innovative facilities and
services in selected market segments such as cellular
radiotelephone or competitive pressures on the basic
monopoly network. Thus, the processes of privatization and
liberalization shift the countries' telecommunication system
towards greater commercial orientation, more efficient
operations, and better management and planning. In turn
these lead to an expanded and enhanced telecommunications
infrastructure and contribute to a country's economic growth

and development.

Regly (1997, p. 33) examines the use of wireless access as a
tool to further competition and sustainable development of
the telecommunication sector. The main focus of his

research is on the potential impact of wireless

24

communications through existing models such as cellular and
personal communications services/networks (PCS/PCN). He
suggest one potential alternative to the present
evolutionary course for wireless access, a policy called
strategic liberalization. Strategic liberalization is
defined as the implementation of specific policy measures to
increase competition in the market for wireless access
services, such as cellular, wireless local loop, and
satellite communications. It argues that a strategic focus
on wireless communications will provide a sustainable
foundation for the continued growth of the
telecommunications sector and the successful introduction of
new product and services in an environment of facilities

based competition.

A brief description of these theories is provided bellow for
comparison purposes. Some of the most prevalent theories
and perspectives on the future direction for the global
telecommunication sector are cultural and technological
protection, market subsidization, regulatory mainstream
theory, strong liberalization and techno-libertarians. In
addition, these schools of thoughts offer a basic
classification of some of the policies suggested for the
transition from a market dominated by state-run monopolies.
In the cultural and technological protection theory,
researchers such as Jill Hills, Gerald Sussman, and John

Lent in agreement have drawn heavily from the Dependency

25

Theory to advocate a central role for the state in
protecting the cultural heritage of various national groups,
as well as the technological capabilities of local firms.

In the market subsidization theory policy, researchers focus
on the same concerns as the advocates of cultural and
technological protection, but are more likely to suggest
subsidization and the imposition of certain social goals,
such as universal service, on information and
telecommunications providers. The economic and social
models that support this kind of thinking include the
traditional analysis of scarcity in the telecommunications
industry, and the belief that the sector cannot sustain
widespread facilities-based competition. Thus, in the model
for “market subsidization”, the government looks at the
evolving market, defines a need specific to the common good,
and invests to ensure that a certain kind of access and
service is provided. The goal of the Regulatory Mainstream
theory is to identify services that are most appropriately
competitive, liberalize them individually over an extended
period of time, controlling the marketplace through
traditional regulatory institutions. In addition, the focus
is on defining the most effective practices of regulatory
institutions. Thus ensuring that there are some
similarities throughout the world in terms of approaches to
telecommunications regulation. However, this approach often
allows for a greater degree of market oriented

liberalization because of the economic focuses of the

26

methodology, rather than the political economy of writers
like Noam and Gore. The term strong liberalization
describes a more complete liberalization of the
telecommunications industry than the regulatory mainstream.
The main argument states that liberalization in niche
services, such as data transmission and value added services
should take place in conjunction with the introduction of
competition for all services in the local loop. Thus, under
this theory, the introduction of competition at all levels
is an appropriate model for telecommunication development.
In the Techno-Libertarians theory argues that the
technologies of the emerging telecommunication marketplace
are inherently competitive, they do not promote market
hegemony, and provide more than sufficient opportunities for
direct, facilities-based competition between
telecommunications companies and information service
providers. Thus, if given the freedom to grow and expand,
technologies will provide sufficient foundation for

sustainable market conditions.

Finally, Regly (1997) suggests that strategic liberalization
policy can help both public and private sector managers
identify economic and technological trends and adapt
political entities to facilitate development. The word
strategic is meant to emphasize the fact that corporate and
public managers have strategic choices to make in order to

ensure the implementation of a successful policy. For

27

example, strategic choices about particular technologies are
critical to the success of liberalization. Liberalization
can start with low cost wireless technologies such as
cellular telephony that would have an immediate impact on

the establishment of competitive markets.

Several articles from the trade press have been used in this
study to show the impact of the World Trade Organization
(WTO) Agreement on trade of basic telecommunications
services. It is important to notice that the
telecommunications sector needed separate negotiations from
other service sector because it has unique attributes as a
backbone for other services and as a service itself.
Although the countries define basic telecommunications
services differently, overall the definition includes voice
telephone services, packet—switched data transmission,
telex, telegraph, facsimile, privately leased circuit lines
and mobile services. The impact of these agreement will be
shown based on the commitments that the countries agreed on

to liberalize their cellular/PCS market.

A rapidly growing concern is to understand and explain the
processes and consequences of the internationalization of
the telecommunication industry through the role of foreign
direct investment in host economies. Other major
developments in explaining FDI investment are the concept of

internalization (Buckley and Casson 1978) and the eclectic

28

approach to direct investment (Dunning, 1977). The concept
of internalization shows the need for internalizing the
intermediate products (technical and entrepreneurial
expertise) within the Multinational corporation. As a
result of such internalization, industry or firm specific
advantages are increased (Buckey and Casson 1978). In
addition, Internalization of intermediate activities within
a multinational firm is also cost effective since it reduces
costs of negotiation, buyer uncertainty, decision-making
time lags and governmental interference (Calve, 1981). The
eclectic theory states that a firm should possess the
following three conditions if it intends to undertake FDI:
(1) firm-specific advantages, (2) internalization advantages
and (3) location-specific advantages or country—specific
advantages. It is important to notice that the eclectic
theory provides an explanation of the fact that once a firm
possesses firm—specific advantages (knowledge advantage,
management, marketing and financial skills) and successfully
internalizes its proprietary know—how, the other variables
that further influence the specific location behavior are
country-specific characteristics. Location factors such as
high market demand and the imposition of trade barriers in
the host country would encourage foreign direct investment.
Location-specific characteristics also play an important
role in the choice of a particular location within a
country. In the telecommunications sector, the eclectic

theory can be applied to evaluate the ownership—specific or

29

competitive advantages, location specific or country
advantages, and internalization or coordinating advantages.
The ownership specific advantages, providing competitive
advantages may include knowledge intensity, access
technology and capital, scale economies such as the ability
to operate international communications network, access to
government channels in the home and host economies.
Coordinating advantages may emanate from the ability to form
consortia of firms to avoid large cost of operations. The
location specific advantages are the characteristics of
government regulation of trade and production, the
characteristics of the infrastructure of the host economy
and the need for FDI within the host economy (United

Nations, 1989).

Conclusion

The literature review outlines the work of different authors
in restructuring the telecommunications industry through
regulation. The chapter explains that privatization and
liberalization are the most common strategies employed for
the development of this industry. At the international
level the World Trade Organization shows the countries
commitment to liberalize the cellular/PCS industry through
the enactment of trade agreements in basic

telecommunications services.

30

Economic theories such as internalization and eclectic
theory shows the internal necessary reorganization of a firm
multinational firm to invest in foreign countries with the

use of joint ventures with local partners.

31

BIBLIOGRAPHY

Bauer, J. (1993). Regulatory diversity and telecom
globalization. Telecommunications Policv. 59, 230—232.

Buckely, P. and Casson, M. (1976). The Future of
Multinational Enterprise. Bassingstoke and London:
Macmillan.

Dunning, J. (1977). Trade, location of economic activity
and the multinational enterprise: a search for and
eclectic approach. The International Allocation of
Economic Activity, ed. B. Ohlin, 0.0. Hesselbon and P.
M. Wijkman. New York" Holmes and Meier Publishers Inc.

Lerner, N. (1991). Telecommunications privatization and
liberalization in developing countries.
Telecommunications Policy. 58, 279—284.

Paetsch, M. (1991). Mobile Communications in the US and
Europe: Regulation, Technology and markets. The Artech
House Mobile Communication Library.

Regly, W. (1997). Wireless: Strategically liberalizing the
telecommunications market. New Jersey, Mahwah.

United Nations (1978). Transnational Corporations in World
Development: A Reexamination. New York: United Nations
Commission on Transnational Corporations.

32

Chapter 3

REGULATORY FRAMEWORK

This chapter provides a comparative description of the
regulatory framework in Argentina, Brazil and Chile. The
goal of this chapter is to provide historical background of
the telecommunication development as well as the regulatory
framework for liberalization. The first part of the chapter
will describe the role of the regulatory institutions, which
covers the enactment of laws and decrees that give the
parameters for the management of the spectrum, the degree of
competition through licenses agreements, frequency
allocations, interconnection and number of operators. The
second part will state the most significant laws and decrees

that lead to the development of the cellular/PCS market.

Regulatory Agencies

In Argentina, Decree No. 1185/90 established a government
agency called the National Communications Commission (CNC)
with has regulatory power over the entire telecommunications
industry in Argentina. The CNC’s regulatory function
consists on issuing licenses, authorizations and permits to
facilitate telecommunications services. In addition, the
CNC monitors the telecommunications service, approves
technical plans and reviews the annual work plans of the
licensees in order to ensure compliance with mandatory

goals. However, a major limitation of the role of the

33

Secretary of Communications or the policy maker and the CNC
is their dependence on the government. The President of
Argentina appoints the President of the Secretary of
Communications as well as the 6 members of the CNC. Thus,
this lack of autonomy in the regulatory enforcement body

makes it susceptible to pressure from the government.

Brazil adopted the General Law on telecommunications in June
1997 that defined the infrastructure of it
telecommunications industry. This law establishes a
national telecommunications agency (ANATEL) with
administrative and financial independence and autonomy to
fulfill regulatory functions. The agency issues guidelines
for service provision, executes concession contracts,
manages the radio frequency spectrum and the use of orbits,
controls and define tariff reviews and issues norms and
standards for equipment. Like Argentina, ANATEL is required
to submit its budget to the Ministry of Communications.
Thus, there is potential of government control in ANATEL

decision making process (Noam, 1995, p. 245).

With the creation of the Subsecretaria de
Telecommunicaciones (Subtel) a division of the Ministry of
Transport and Telecommunications, the government of Chile
adopted a policy of market opening and privatization. As
the regulator, Subtel is responsible for studying the

sector’s development, making policy recommendations and

34

preparing the licensing of operators (Stehman, 1995, p.
669).

Thus, the three countries telecommunications regulatory
institutions are highly dependable of the national

government.

Argentina

The evolution of the telecommunications industry in
Argentina is indicative of its commitment to liberalize the
country’s telecommunications industry. Prior to 1990, the
telecommunications industry was controlled and operated by
ENTel the incumbent wireline company. ENTel experienced
important problems including outdated telecommunications
technology, exorbitant costs, poor telephone services, and
incompetent personnel. For example, during the 19808 a
potential consumer could wait between five to ten years
before getting access to a telephone and installation costs
averaged US $1,500 (Rubinstein, p. 12). Given the outdated
technology and poor quality of telephone services, the
Argentine government needed to drastically change the

operations of the nationally run company.

The government started the ENTel privatization process by
creating four corporations pursuant to the State Reform Act,
also known as Law No. 23.696. By privatizing ENTel, the
government hoped to demonopolize and deregulate the

telecommunications industry and thereby realize efficiency

35

gains and social benefits. The newly formed companies were
Sociedad Licensiataria Norte (SLN), Sociedad Licensiataria
Sur (SLS), Sociedad Prestadora del Servicio International
(SPSI) and Sociedad the Servicios en Competencia (SSEC).
Under the State Reform Act, the government granted a
monopoly privileges to SLN, SLS and SPSI on basic services
for seven years to potentially ten and a “service in
competition” license for SSEC. The government gave SPSI the
right to provide international basic telephone services,
international data, and telex services, data transmission
services, and value added services. The license granted to
SSEC allowed it to provide national telex and data; mobile
radio and land radiotelephone services but included no

monopoly privileges.

In 1990, Decree No. 62/90 initiated an international bidding
process that resulted in foreign private companies assuming
control of the telecommunications industry. Thus,

SLN sold 60 percent of it shares to Stet S. p. A of Italy
and France Cable et Radio (subsequently named Telecom
Argentina). SLN sold 60 percent of its shares to Telefonica
de Espana, (later renamed Telefonica de Argentina). SPSI
and SSEC became Telintar S.A. and Startel respectively. As
a consequence of the sale the government endorsed a change
in telecommunications organizational structure from monopoly
at the national level to monopoly at the regional level.

This change in telecommunications strategy served to

36

increase investor confidence since more effective and

efficient services were supposed to follow.

The conversion from state—owned monopoly to a privately held
duopoly had various reasons. Selling off the
telecommunications industry to two companies allowed the
government to create a market check in which the state could
evaluate the performance of two companies of comparable
economic size and market area. Thus allowing the government
to determine if any region was being under—developed.
Although consumers may have preferred free entry to the
market by any competitor, the government believed a duopoly
would provide the capital-intensive investments necessary

for the development of the telecommunication market.

The Argentina government granted each company an exclusive
seven-year license for basic services in their respective
regions. The seven—year license was supposed to end in
November 7, 1997. As an added incentive, however, the
government agreed to extend it for three more years as long
as certain minimum standards for basic telephone services
were met. These standards included providing services for
areas that previously had no telephone service, meeting
target levels for areas that previously did not have
service, service quality, market penetration, and public and
semi-public services. The services covered in the

exclusivity agreement also included telecommunications

services such as data, telex and leased station to station

circuits for telephones and data transmission.

As part of the conditions of the agreement, the government
set forth—mandatory goals to be achieved by the telephone
companies. Decree No. 62/90 approved a public auction for
the privatization of the telecommunications industry for
basic services. In addition, it set forth the requirements
for quality, development and growth in the industry. It
also authorized the government to extend the licenses for
both Telecom and Telefonica for exclusive control of the
basic services market for an additional three years as long

as the mandatory requirements are met.

However, the debate exits as to whether the obligatory goals
stated in Decree No. 62/90 were met by the telephone
companies in order to legally grant the extensions. For
example, the terms of the concession agreements gave the
government the option to grant the extension only if
obligatory goals were met, the extension was not an
automatic right. In Decree No. 264/98, the government
concluded that Telecom and Telefonica only satisfied a
majority of the obligatory goals. The language of Section
10.1.8.1 of Decree No 62/90 is ambiguous as to whether all
or a majority of the obligatory goals must be met to qualify
for an extension. To resolve this statutory ambiguity,

Argentine jurisprudence advances a method of interpretation,

38

which disfavors the party, granted the monopoly privilege.
In other words, the government’s argument that meeting a
majority of the obligatory factors qualifies Telecom and
Telefonica fails because the statutory language of 62/90 is
ambiguous and must be interpreted in a manner that promotes

a free market system in lieu of a monopoly.

If one assumes that the exclusivity extensions were granted
legitimately, Decree No 264/98 is a positive step towards
the liberalization of the telecommunications industry.
However, shortcomings in the language of the decree serve to
increase rather than remove barriers to entry. The strength
of this decree is that it provides a transition plan for the
liberalization of the telecommunications industry for basic
telephone services beginning November 8, 1999. Article 5
and 6 set forth the license requirement for basic services.
Licenses should be granted to two new operators for local,
long distance and international telecommunications services
by November 8, 1999. Thus, a general and comprehensive
framework is established to grant competitors the licenses

required to compete in the market in November 2000.

The objective to liberalize the telecommunications market by
allowing competitors access to the market the market fails,
because of various restrictive in Decree No 264/98.64. For
example, it states that various requirements that limit the

scope of potential operators, such as the condition that new

39

licensees must be corporations whose shareholders must
include a current operator of mobile telecommunications
services, a cable TV company operating in the major cities
of Argentina and Independent operators of telephone
services. Thus, the language of Decree No. 264/98 is under—
inclusive. CTI and Movicom are the only new cellular/PCS

companies that qualify for the licenses.

In addition to the limiting access to the field of potential
competitors, the restrictions of Decree No. 264/98 also
violate Article 14 and 16 of the Argentine Constitution.
Contradicting Article 14, competitors are inhabitants of the
country and are being denied the right to participate in the
telecommunications industry. In violation, of Article 16,
potential competitors are not given equal protection under
law because the restrictive terms create barriers to market
entry. Thus these constitutional violations are compelling
evidence that prove that certain provisions of Decree No.
264/98 are restrictive and that the government supports a
partially projectionist telecommunications policy. In
contrast to the disappointing government projectionist
policies in 1997, more recent legislation affecting the
telecommunications industry in the year 2000 and beyond
appears more promising such as the country’s commitments to
the World Trade Organization to liberalize the cellular/PCS

industry.

40

Brazil

Three factors formed the basis of the telecommunications
body of infrastructure development in Brazil. These factors
are the influence of the military, the need for
international communications and linkages, and the goal of
establishing a local equipment and technology—manufacturing
base. The three of them brought a variety of economic and
political interests together. The embodiment of that
consensus is Telebras; the former state-owned and operated

public telecommunications operator.

In the 19608, the Brazilian military began to assert
authority over the Brazilian economy and society,
instituting a system of authoritarian control that would
last through the 19708. The assertion of this control
included the reorganization of the country’s information and
telecommunications network and the creation of a single,
government-owned telecommunications operator, Telebras. The
first step to establishing a central authority for
telecommunications operations and development was made in
1962, with the passage of Brazil’s telecommunications code.
The Code granted the state a monopoly in the operation and
regulation of telecommunications activities and established
a National Telecommunications Council (CONTEL) to reduce
market fragmentation and rationalize equipment supplier
(Regly, 1997). It also created Embratel, the Brazilian

Telecommunications Enterprise that was in charged of the

41

national and international trunk operations and the
development of linkages with the farthest reaches of the

country.

A Ministry of Communications was established in 1967 as part
of a broader government reorganization that reflected the
military’s entrenchment in the government and the starting
of the period of political cohesion and terror. In 1972,
the government announced the establishment of Telebras as a
public enterprise to plan and manage financially and
technically the development of the telecommunications
system. Because Telebras was given a monopoly on the
purchase of telecommunications equipment, it had the ability
to dictate the technology policy and infrastructure
development of the state companies. Through a series of
purchases and mergers, Telebras gained the majority control
of the country’s telephone and telecommunications networks,
reducing the total number of major network to 37. The
government owned 80 percent of the enterprise, with Bradeci,
Brazil’s largest private bank, AT&T and Bell Canada as

minority private shareholders.

Telebras has been placed as the coordinative and structural
unit that the military government required in the 19608 and
19708. However, tension between local interest of various

governments and groups have been taken since the transition

to democratic government in the late 19808. The core of the

42

tension is based on the role of the pole companies, which
are organized within each of Brazil’s state and the
centralized role of Telebras. In many cases, the pole
companies started to build their own infrastructure to meet

demand.

The Collor Administration which took place in 1990 did open
the telecommunications market to limited competition in
paging, cellular, cable television, infrastructure
provision, and private data network as part of the
presidential decree entitled “The Regulation of Limited
Services" in July, 1991. In June 1995, the Brazilian
government began to take the difficult steps toward
privatization and liberalization. Provision 8987/95 removes
the Telebras monopoly in the marketplace and gives the
government the ability to privatize the company. The
following features formed the plan for the full

privatization and liberalization:

0 Finalization of constitutional reform, permitting
private investment in fixed telephony, cellular,

satellite and value added networks,

0 Licensing of the “B” band cellular services, which has
been delayed and has undergone various difficulties and
challenges from private sector companies wishing to be

involved in this portion of the market,

43

0 Privatization of band :A” cellular holdings, presently
owned and operated by the pole companies as part of the

Telebras system.

0 Establishing a regulatory body to oversee the
privatization process, as well as facilitate arrangements
on issues like the interconnection and ensuring
competition among the state operators and private

concessionaires, and

o Dividing Telebras into five or six “mini—holing”

companies by geography in advance of privatization.

The cellular telephony industry was divided into two bands,
following the monopoly pattern established in countries like
the U.S. in the initial phases of cellular development.

Band A has been allocated to the local pole companies and
Band B will be assigned to the private sector. In the
private service competition, Telebras makes a technical pre—
selection, and the local pole company makes the final
decision based on financial criteria. Foreign firm
participation is limited to 49 percent of the shares,
although supply and installation of the system can be
contracted out. To this day joint ventures have been
established between foreign technology providers and
Brazilian service providers, including some of Brazil’s

largest industrial and financial groups.

44

In 1998 the government privatized Telebras by dividing it
into 12 units. Three fixed—line phone companies and eight
mobile phone companies A—Band operators that will compete
with the new entrants or B—Band operators formed these
units. B—band operators were the first telecommunications
subsector to be opened in Brazil. The country was divided
into 10 regions with one license corresponding to each
region. However, 9 B bands were awarded due to there was no

bidders for the Amazona’s region. Q

Chile

In the mobile telephony market the country is divided into
two areas. In 1981 the government granted mobile and
cellular telephone concessions to Telefonia Movil CIDCOM, a
private company of local and North American investors.

Using International Mobile Tracking System (IMTS)
technology, the company started operating its mobile systems
in Santiago, Valparaiso and Concepcion (three of the largest
cities). In order to exploit the high-power coverage,
CIDCOM offered fixed wireless service (private and pay
phones) in rural areas within its service areas that

wireless network wouldn’t reach.

In 1988 CTC decided to establish a cellular system in
Santiago and Valparaiso, and it went into operation in early
1989. By the end of 1991 there were over 25, 000

subscribers on the two systems. Most large Cities in Chile

45

obtained cellular service in 1991 when two other companies
such as VTR and Telecom began operations in the rest of the
country. In the digital market the Chilean government is
following a new and more liberal approach than other
countries. It is a common practice for regulators in the
mobile network market to define certain standards, which
become compulsory for all operators in the market. Only
those transmission systems are approved which apply the

previously defined standard.

In Chile, the regulator only allocates frequency bands and
determines the number of players while leaving the choice of
standard and technology to the operators. Thus operators
are free to interoperability between the different systems;
operators are however, obliged to use switching facilities
which make interconnection feasible. By not harmonizing
standards, the Chilean regulator imposes additional cost on
mobile operators which have to use more sophisticated
switching technology to ensure the interoperatively of

networks.

Thus, in the long run this may become an advantage since
operators are not locked into a particular technology, which
may be out of date within a relatively short period of time.
Therefore, it is hoped that this more flexible approach will
encourage innovation in the Chilean mobile communication

market.

46

The National Telecommunications Policy of 1978 was the basis
for the elaboration of the General Telecommunications Law of
1982 and reflected the first policy changes. This law
established that parties rather than the state, by means of
concessions, permits and licenses would operate public
telecommunications services in order to permit ample
participation of the private sector. This law places no
limitations on the number of concessions that cam be granted
to provide specific services, except for those imposed for
technical reasons. Concessions are required for local and
long distance public services, cellular telephony, point—to—

point transmission and private data transmission.

The law also states that interconnection among concession
holders of public services is obligatory and must comply
with the technical norms established by the Subtel. The
terms of interconnection have to be worked out among them.
Prices were left to be determined by market forces. Chile
has placed no limitations on the participation of private
industry in the telecommunications industry, types of
services or the percentages of national or foreign ownership

(Neal, p. 4).

47

Table 1 - Comparison of Licensing Regimes

 

 

 

 

 

 

 

 

 

Argentina Brazil Chile
Public mobile Limited Limited Limited
voice Concession Concession Concession
telephony
Private License License License
Wireless
:1
Conclusion i

Thus, this chapter shows that the three countries present
similar telecommunications regulatory structure. The three
of them have encouraged the process of privatization of the
incumbent telecommunication company as the starting point
for cellular/PCS market liberalization. Table 1 shows the
similar structure that they shared for the licensing of
wireless technologies. The challenge that these countries
face is the ability of the regulatory agencies to provide
the adequate policy for further development and industry

growth.

48

BIBLIOGRAPHY

International Telecommunication Union (1998). General
Trends in Telecommunication Reform (ISBN 92—61—06801—4)
Geneva, Switzerland.

Neal, Christopher. Setting the latin pace. [Online]
Available email: moralesv@msu.edu from
tsupport@bellhowell.infolearning.com, October 1999.

Noam, E. (1995). Telecommunications in Latin America. .J
Oxford University Press Incorporated.

Rubinstein, Vanessa. Argentina and the telecommunications
industry: the difficult path toward liberalization.
[Online] Available email: morale8v@msu.edu from
tsupport@bellhowell.infolearning.com, July 2000.

Stethan, Oliver. Network liberalization and developing
countries. Telecommunications Policy, 19, (9), 667—
684.

49

Chapter 4
THE ROLE OF THE WORLD TRADE ORGANIZATION

IN TELECOMMUNICATION DEVELOPMENT

The World Trade Organization’s “Basic Telecom Agreement” had
a dramatic impact in the telecommunications sector (WTO,
2000). The agreement would open to foreign competition
basic services of the 69 WTO members committing to it. The
results of the WTO negotiations are important effects to the
consumers increasing market competition, thereby decreasing
the price of such services and increasing consumer choice.
However, the WTO agreement still faces many challenges such
as scheduling, regulator's independence, competitive
safeguards, and interconnection of telecommunications
suppliers. The resolution of these issues will allow market
access and foreign ownership in over 90 percent of major
markets. This section describes the consequences of the
negotiations, the difficult issues that negotiators faced,
and how those issues were resolved. In addition, it
provides the commitments of developing countries to the

development of wireless markets.

Consequences of Negotiations

The most important consequence of the WTO agreement is the
quantity and quality of commitments made by the countries
involved. In other words sixty—nine countries made

commitments to open their markets for some or all—basic

50

telecommunications services to foreign competition. In
almost all these countries, international services have been
provided by a monopoly that will face competition for the
first time. It is important to notice that in order to make
these commitments of market access and foreign ownership,
the countries agreed to adopt as binding commitments the
“Reference Paper" which consists on a set of procompetitive
regulatory principles. Thus, countries agreed to abide to
competition rules in a multilateral setting for the first

time.

Another way to measure the achievement of these negotiations
is by the size of the markets that will be open to
competition. For example, before the implementation of the
agreement only 17 percent of the top twenty-Telecom markets
were open to competition. As of the date of entry into
force of the WTO Basic Telecom Agreement, 92 percent of
major markets are committed to remove restrictions on

competition and foreign entry

The GATS

The General Agreement on Trade in Services (GATS) is one of
the trade agreements included within the WTO Agreement. The
GATS consist on a set of multilateral rules covering
treatment of foreign services and service suppliers and
government regulation on trade in services. Thus, combining

elements of both trade and investment agreements. Some of

51

the obligations of the GATS apply automatically to all WTO
members, while others only apply depending on the type of

commitment taken by each member. Thus, the extent of a WTO
member’s obligations can only e established by reference to

the text of the GATS and the Member's Schedule.

The GATS requires WTO to provide “Most Favored Nation”
treatment (MFN) to like services and service suppliers from
other WTO members, regardless of the individual member’s
commitments. The Most Favored Nation treatment or
obligation prohibits a WTO member from discriminating among
services or service suppliers of other Members. On other
words, a member that commits to open its market for a
certain service cannot close its market on a selective basis

to like services or service suppliers from any WTO member.

Another important provision created by the GATS is Market
Access. This provision requires WTO Members to treat other
members as is specified under the terms, limitations and
conditions agreed in its schedule. In addition, the
provision restrain from imposing certain types of
quantitative restrictions, economic needs test, or local
incorporation requirements in those services sectors where
the WTO Member has undertaken specific market access

commitments.

National treatment is a nondiscrimination rule that requires
a WTO member to treat like services and service suppliers
from other WTO members no less favorably than it treats its
own services and service providers. It is important to
notice that application of these obligations is subject to
negotiation on a sector by sector basis and is contained in
individual schedules of commitments. Thus, not all WTO
members have the same level of commitments with respect to

market access or national treatment.

The negotiating Group on Basic Telecommunications

In 1994, The Uruguay Ground established a “Negotiating Group
on Basic Telecommunications" (NGBT). The NGBT would address
the issues of scheduling, competitive safeguards, the use of
frequencies, as well as regulatory issues such as the

maintenance of an independent regulator.

The GATS members focused on scheduling issues that included
how to schedule services such as call—back or country
directly and whether public interest test must be included
as a market access limitation. Members agreed on a
“positive list" approach to scheduling. In other words,
participants only needed to list those services of
categories in which it is making a commitment. In the
telecommunications sector, it was necessary to distinguish
between subsectors-such as international, long distance, or

local—voice telecommunications services and technologies,

53

such as cellular services. Members also concluded that it
was not necessary to schedule specific ways of offering a
particular type of telecommunications service, such as call
back. In addition, if a member committed to allow
international service to be provided, it was not necessary
to describe the ways in which that service could be
provided. On the other side if a member committed to allow
international service, it was not necessary to specifically
exclude particular ways in which international service could

be provided.

The Reference Paper

The WTO members recognized the need to develop a set of
competitive safeguards against anticompetitive practices.
In other words, these safeguards would have the goal to
ensure that monopolies or former monopolies of basic
telecommunications could not use their dominant position to
disrupt market forces and competitors from supplying
networks or services for which commitments would be made.
In addition, the members would discussed the whether to
establish or maintain independent regulators. The term
“independent regulator” meant that regulatory functions
would be removed from the control of the basic
telecommunications operators and assigned to a separate

body.

54

In December 1994, US members arranged a meeting of selected
delegates to draft what became the Reference Paper, the core
regulatory obligations that would provide major changes to
telecommunications services. The Reference Paper never
answers the question of what entity will carry out the
obligations contained in it. In addition, it does not
specify how those obligations would be carried out.

Instead, negotiators agreed that it should focus on
effective outcomes, rather than the processes to which those
outcomes would be reached. In addition, negotiators agreed
that the principles needed to be flexible enough to
accommodate the differences on political, legal and market
structures among them. For example, in some countries the
obligations in the Reference Paper will be carried out by a
government ministry of telecommunications or justice, while
in other by regulatory agencies. Some countries may rely in
antitrust law, while other may develop a complicated set of
regulatory principles. Thus the objective was to ensure a
level playing field for new entrants, not to determine the

means by which the results would be achieved.

Competitive Safeguards

Prevention of anti—competitive practices in
telecommunications falls under different categories. The
first one consist on engaging in anti—competitive cross-
subsidization. The second one consist in based on using the

competitor information for anti—competitive results; and

55

finally, not making available to other service suppliers on
a timely basis technical information about its network
infrastructure, facilities and other relevant information
which are necessary for them to provide services. There was
a general agreement among WTO members that prevention of
cross-subsidization and misuse of information, as well as
transparency requirements, as essential to promote
competition and allow new entrants into the market.

However, much of the discussion focused on how detailed

these obligations should be.

The Reference Paper intended the members to adopt specific
measures to address competitive safeguard issues.
Preventing anti—competitive cross—subsidization may mean
requiring the structural separation of various lines of
business of a major supplier, such as fully separate
subsidiaries. Prevention may be accomplished by requiring
nonstructural accounting separation. Similarly, protecting
proprietary information may mean adopting prohibitions on
unauthorized release of competitors’ business and marketing
plans, trucking configurations, peak usage, network
architecture, and equipment types, supported by adequate
penalties. In addition, members need to adopt measures to
require public availability of technical and commercial
information, such as standards, network changes, additions
or deletions, processing requests, timing changes, and

billing arrangements.

56

Interconnection

This section refers to linking with supplies providing
public telecommunications transport networks or services in
order to allow the users of one supplier to communicate with
users of another supplier and to access services provided by
another supplier, where specific commitments are undertaken.
Members agreed that the interconnection definition needed to
be very broad in order to cover all types of services. The
definition of “linking with suppliers" rather than “linking
of suppliers” was used in order to guarantee access to the
networks or services necessary to provide services. In
addition, the phrase “where specific commitments are
undertaken” limits the interconnection obligation to those
services for which a WTO Member has scheduled commitments.
For example, if a country has made no market access
commitment for international voice telephony services, then
it assumes no interconnection obligations with respect to

providers of international services.

Major suppliers have three sets of obligations regarding
interconnection. The first one reflects the national
treatment and MFN obligation. In other words, it requires
the major suppliers to treat other telecommunications
services and suppliers as it treat its own services and
affiliated service suppliers, as well as treating all
nonaffiliated telecommunication services and service

suppliers without discrimination. Thus, it requires a major

57

supplier not to discriminate in location, information,
ordering procedures and intervals, billing arrangements,

credit terms, warranties or guarantees.

The second obligation requires that interconnection must be
timely. The terms and conditions (including technical
standards and specifications) under which interconnection is
provided must be transparent. In addition, rates for
interconnection must be cost oriented, transparent and
reasonable. The term reasonable will be judged in economic
terms. Interconnection element must be unbundled so that
the supplier need not pay for network components or
facilities that it does not require for the services to be
provided. It is important to notice that negotiators did
not try to define the scope of the many obligations
concerning interconnection. Thus the meaning of “timely”,
“cost-oriented”, “sufficiently unbundled”, “reasonable”,
“unbundled”, and “economic feasibility" will only be

determined in dispute settlement.

In the third obligation, negotiators rejected an attempt to
require unbundling only where technically feasible because
it seemed to be an excuse to deny interconnection. It was
assumed that there were standard interconnection points that
were normally available, and as long as a service supplier

was willing to pay the additional cost, it could obtain

58

interconnection at other points in the network not only at

the network termination point.

The Reference Paper imposes additional obligations to assure
that new entrants seeking interconnection will have the
information necessary to obtain it. The first one requires
that the procedures for interconnection to a major supplier

n“
v:

will be made publicly available so that all parties know

‘ .meuen.‘ A a

their rights and obligations. It prohibits a major supplier
from negotiating different interconnection arrangements with
different new entrants. The second one describes the
procedures for a dispute settlement. A supplier requesting
interconnection with a major supplier will have recourse
either at any time or after a reasonable period of time
which has been made publicly known to an independent
domestic body which may be a regulatory body; to resolve
disputes regarding appropriate terms, conditions, and rates
for interconnection within a reasonable period of time, to

the extent that these have not been established previously.

A WTO member has the right to define the scope of universal
service obligations based on it sown needs. As proposed by
the US these obligations will not be considered as anti-
competitive per se and they will be administered in a
transparent, nondiscriminatory, and competitively neutral

manner .

59

Licensing Criteria

WTO members must ensure that if a license is required, the
license criteria, terms and conditions of all individual
licenses will be publicly available. The reasons for
denying a license application must also be known to the
applicant. In addition, the each member is required to
establish a period of time that is “normally" needed to
reach licensing decisions. However, a member does not
violate its commitments if it occasionally exceeds that
period. It is important to notice that most of the demands
for a standard licensing period came from European and
Japanese negotiators and were targeted to difficult
(directed toward curbing) the ability of the FCC to hold

license applications for months without explanation.

Independent Regulator

When defining the role of Independent Regulators, it
required that regulators be separate from, and not
accountable to any supplier of basic telecommunications
operator. Thus, addressing the potential conflict of
interest that arises when the body regulating the
telecommunications industry is also the major
telecommunications operator. In addition, the regulator has
the obligation to be impartial with respect to all market
participants. This imposes a requirement not to favor the
local incumbent. Thus, adding to the obligations of

regulators contained in GATS Article VI to administer all

60

measures of application in a reasonable, objective, and

impartial manner.

Allocation and use of scarce resources

The procedures for the allocation and use of scarce
resources, which includes frequencies, numbers and rights of
way, will be carried out in an objective, timely,
transparent and non-discriminatory manner. The requirement
for transparency and nondiscrimination repeats obligations
already imposed by the GATS Article III and general
obligations of MFN and national treatment. In addition, the
current state of allocated frequency bands will be made
publicly available, but detailed identification of
frequencies allocated for specific government uses is not
required. Similarly, GATS Article III and Article XIV would
allow Members to protect frequencies assigned for sensitive

government operations.

Results of the NGBT

In making the reference Paper binding, members have to find
the way to make the regulatory principles in the Reference
Paper binding obligations and therefore subject to WTO
dispute settlement. Pursuant to the Article X of the WTO
Agreement, an amendment affecting Members’ rights and
obligations under the GATS only becomes effective upon
ratification by two-thirds of WTO Members. Thus, the United

States and others concluded that the most feasible way to

61

ensure that the regulatory principles would be binding was
to include them as “additional commitments” permitted by
GATS Article XVIII. Thus most delegations agreed to include
the Reference Paper in their Schedule in the additional

commitments column.

On April 30, 1996 the NGBT transmitted its final report to
the Council of Trade in Services. This report included
Schedules of Commitments (form the forty—seven countries), a
draft “Fourth Protocol to the General Agreement on Trade in
Services" and a decision on Commitments in Basic
Telecommunications". The Fourth Protocol set the
implementation date for January 1, 1998,where the Scheduled
Commitments would go into effect and the MFN suspension
would end. Finally, the Council of Trade in Services
established a group on basic telecommunications to continue

negotiations.

The Group on Basic Telecommunications

The Group on Basic Telecommunications (GBT) began
negotiations in July 1996. The GBT needed to resolve issues
related to international services. For the provision of
international telecommunications, the issue of market access
was the most important point of discussion. For example,
the United States was concerned that competitive markets
could face serious market distortions from WTO member

carriers that did implemented effectively full market access

62

commitments in international services. Market distortion
was possible in two ways. The first would be by a “one-way
bypass” of the accounting rate system. Carriers from closed
markets would have the ability to increase (exacerbate) the
traffic imbalance (and therefore the settlement payments) of
carriers from competitive markets by providing service into
the competitive market over private lines. The reason is
that all traffic sent over resold private lines is outside
the accounting rate system. Carrier from competitive
markets would not have the same opportunity to engage in
similar traffic routing in the opposite direction because
there is only one carrier that can terminate traffic. Thus,
according to the United States, one—way bypass would further
increase US outpayments under the current accounting rate
system. Many more calls are originated in the United States
for settlement purposes and the US settlement deficit grew
steeply from 990 to 1996. In 1996, the US settlement
deficit totaled $5.4 billion, double what it was in 1990.
The second way of distorting competition would arise from
the ability of a carrier from a closed market to cross—
subsidize its affiliate in a competitive market. Although
the parent and affiliate would have to exchange traffic due
to accounting system, any payments made to the parent would
be intra—corporate transfers and not “real costs” to the
affiliate. Thus the affiliate in the competitive market

could engage in a price squeeze by charging lower rates for

63

international services than other carriers in the

competitive market.

At the April 1996 meeting the FCC was able to convince the
countries that the effect of one—way bypass of the
accounting rate system was an important concern. There was
a consensus that protection of conditions of competition in
the licensing Member’s market was a legitimate licensing
objective. However, no consensus was made on whether a WTO
member could refuse to issue a license to prevent one—way
bypass. Thus each member was left to address the potential
for competitive distortions in its market as it wished,

within the parameters of its GATS obligations.

As the leader of the negotiations the United States
committed to provide market access and national treatment to
all basic telecommunications services. This included local,
interexchange (long distance within and between states), and
international services, delivered through any network
technology (wire—based, radio—based, satellite networks, and
cable television). Service could be provided either on a
facilities basis or through resale of existing facilities.
All types of services were included such as voice data,
telex telegraph, facsimile private leased circuits,
satellite mobile (PCS, cellular and paging).

The US offer limited direct ownership of a common carrier

radio license (wireless services) by a foreign government, a

64

non—US citizen, or a non—US corporate entity to 20 percent.
One hundred percent indirect ownership through US holding
companies is allowed. There are no restrictions on
nationality of officer or directors in the licensee or its
parent companies. It also included the Reference Paper as

additional commitments.

The GBT produced significant improvements in the number of
WTO members adopting the regulatory principles I the
Reference Paper. Thus, annexed to the “Report of the Group
on Basic Telecommunications” are Schedules from fifty—five
members. The report noted that these Schedules would be
attached to the Fourth Protocol to the GATS in replacement

of those attached on April 30, 1996

Summary of conmdtments

The commitments are effective as of February 5, 1998 (GATS,
2000). For Argentina, Brazil and Chile did not ratify the
Fourth Protocol. Therefore, their commitments are not
binding.

The current degree of market liberalization for
telecommunications service in the three countries is shown

in Table 2.

65

Table 2

- Degree of Market Liberalization

 

 

 

 

 

 

 

 

 

 

 

 

 

Argentina Brazil Chile

Local Service Monopoly Monopoly Competition
Domestic Long Monopoly Monopoly Competition
Distance

International Long Monopoly Monopoly Competition
Distance

Data Monopoly Competition Competition
Telex Monopoly Competition Competition
Leased Lines Competition Competition Competition
Cellular Analog Competition Competition Competition
Cellular Digital Competition Competition Competition
Paging Competition Competition Competition
Cable TV Competition Competition Competition
Fixed Satellite Partial Competition Competition Competition
Mobile Satellite Competition Not Available Competition

 

 

 

 

 

 

Argentina adopted the Market access and national treatment
limitations for domestic data and telex, domestic and
international fax, paging, trunk radio and leased circuits
(with a preference given to existing supplier until November
8, 2000). The Mobile Telephone Services (MTS) are supplied
under a duopolistic regime. However in the case of PCS, the
government or administrative authority will decide on a
number of suppliers based on the light of present and future
needs. In addition for the modes of supply cellular/PCS
services through cross—border, consumption abroad, and

commercial presence, the country had no restrictions under

the market access and national treatment categories.

66

However, these categories will be applied for all other
services as of November 8, 2000, including those provided
via non-geostationary, non-fixed satellite services. The
country adopted the Reference Paper and Most Favor Nation
exemption for access to geostationary fixed satellite

systems.

Brazil assigned market access and national treatment
conditions for enhanced services, paging and nonpublic
domestic and international services for closed user groups.
As in Argentina, the analog/digital cellular mobile service
will be provided in a duopoly basis in each designated
market. In addition the local wireline company may be
allowed to be one of the service suppliers directly or
through a subsidiary. Brazil allows 100 percent foreign
ownership of nonpublic service providers, 49 percent limit
on cellular and satellite service suppliers until July 1999.
The used of foreign licensed GSO space segment facilities is
allowed whenever they offer better technical, operational or
commercial conditions. The Most Favor Nation exemption for
telecommunications services supplied for distribution of
radio or television programming for direct reception by

service consumers
In Chile market access and national treatment restrictions
are applied for long distance and international wireline and

wireless (including satellites). The country did not make

67

any commitment on local service or one-way transmission by
satellite of direct-to—home, direct broadcast satellite and

digital audio services.

Conclusion

Implementing the WTO Basic Telecommunications Agreement will
be no less challenging than negotiating it was. Effective

competition needs more than simple deregulation or market

.. "mn’._.‘lu-’~e’
/. 1 - t - . ‘a

opening contained in WTO Member Schedules of Commitments.
It will be some time before the real effect of the agreement
can be measured, but the successful conclusion of the

negotiations is evidence that liberalization is inevitable.

68

BIBLIOGRAPHY

GATS: General Agreement on trade in services[Online]
Available: http://www.gats—info.eu.int, April 2000.

WTO: Negotiating Group on Basic Telecommunications,
Communication to the United States. [Online]

Available: http://www.wto.org./wto/ddf/ep/public.html,
October 2000

World Trade Organization: Developing Countries and the
Uruguay Round. [Online] Available

http;//wwww.wto.org/english/doc_e/legal_e/ldc2_512.htm,
visited June 2000

69

Chapter 5

FOREIGN CORPORATE STRATEGIES

This chapter examines the most relevant corporate strategies
in Argentina, Brazil and Chile. These firms are BellSouth
and GTE. This section will specifically examine investments
in types of service provisions being implemented in host
countries by the telecommunication companies of BellSouth
and GTE. The companies took similar paths in their Latin
American investments. The both decided to invest in the
three countries implementing joint ventures with powerful
and influential local partners, because the latter know the
market, the culture and its politics and how to move

proposals through regulatory and government agencies.

In addition, they both share one goal: to become full—
service telecommunications carriers. The first part of this
chapter is offers an overview of the current industry
configuration. The second part will describe the corporate
strategy of BellSouth and GTE as companies that invested in
foreign countries using the cellular/PCS technology as
market entry. Table 3 shows the current industry
configuration for the cellular/PCS market in the three

countries studied.

70

Table 3 — The Cellular/PCS Market Profile

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATOR OWNERSHIP NETWORK SUPPLIER SUBSCRIBERS
STRUCTURE PROTOCOL & m
LAUNCH DA!
Argentina
5, 220,854 subscribers
Compania GTE (53%) Clarin (24%) AMPS/ Luncent 853,846
de Telefonos TAICO (8.5% CAYMAN CDMA
del Interior (5%) Sep-94
(CTI) Tcw (4%)
Telecom Telecom Argentina (100%) TDMA Ericsson 1.217.400
Personal May-96
Movicom BellSouth (65%). Motorola AMPS/ Motorola 1,161,544
(CRM) (25%) CDMA
BGH (10%) Nov-89
Unifon Telefonica de Argentina TDMA Ericsson 1,220,000
(TCP) (100%) Mar-96
Brazil
18,193,673 subscribers
BCP Safra Bank (42%.5), TDMA Nortel 1,970,867
BellSoutj (42.5%). Splice May-98
(2%). OESP (6%), and R38
(7%)
Telesp Portugal Telecom (28.2%) AMPS/ MotorolaJ 3.1 13,000
TISA (71.8%) CDMA Luncent/l
Aug-93 Alcatel
Tess Telia (49%), Ligthel (20%) TDMA Ericsson 356,000
Eriline (32%0 Dec-98
ATL SBC and Telmex (51%) TDMA Ericsson 1.141.000
Korea Telecom 931%) and Dec-98
the Williams Companies
(18%)
Tele Telfonica lntemacional AMPS/ NEC/Nortel/Luc 2.001.000
Sudeste (92.2%) CDMA net
lderdola (75) Aug-90
NT!" 7 ltochu (.1%)
Maxitel Telecom Italia (43.15%), TDMA Promon/Nortel/ 569.0000
UGB (189.9%). Vicnha Dec-98 Ericsson
(36.95%)
Telemi g Telesystem International AMPS/TDMA Erissson/Nortel 1 , 148,000
Wireless (49%), Nov-91
CVC/Opportunity (27%)
and Pension Funds 924%)
Global Suzano (30%). DD1(30%), CDMA Motorola 205.9000
Telecom lnepar (21 %). Motorola Dec-98
(14%).
Tele-Sul Telecom Italia 9100%) AMOPS/TDMA Lucent/ 1.121.531
Aug—92 Ericsson
Americel BellCanada, Citybank TDMA Ericcson 254,000
(20%) and Banco do Brasil Jan-99

 

 

 

 

 

 

71

“I'm-“us... '7
. ’ A ‘1'.- ‘ a r. 1'

h..:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 3— cont.
CRT Telefonica lntemational AMPS/ Ericsson 1 .100,000
(52.93%), Portugal Telecom TDMA
(22.99%), lberdrola (6.99%). Dec-92
CTC (2.61%), Telefonica de
Argentina 91.12%)
CTBC Al gar Group (73.99%). AMPS/ N/a 162.100
Williams Communications TDMA
(20%). [FC (6.2%) 1992
Americel BellCanada, Citibank (20%) TDMA Nortel 236.000
and Banco do Brazil Dec-97
TeleCentro Splice do Brazil (100%) AMPS/ Nortel/ 920.000
-Oeste TDMA. 1991 Ericsson
Norte Tele Centro Oeste (95%). TDMA Nortel 56,000
Brazil and lnepar (5%) Oct-99
Telecom
Amazonia Telesystem (TIW) (49%). AMPS/ Eriscsson 400.000
Celular Opportunity (27%). and five TDMA
Brazilian pension funds 1994
(24%)
TeleLeste lberdola (68%), and TlSA AMPS/ Ericsson/ 574,734
(32%) TDMA, 1994 NEC
TeleNordes Telecom ltalia ( 100%) AMPS/ Ericsson 1.406.000
te TDMA. 1993
Chile
2,866,500 subscrimrs
Telefonica CTC ( 100%) AMPS/ Ericsson n/a
Movil TDMA
(CT C) M ar-99
BellSouth BellSouth 9100%) AMPS/ Nortel n/a
Entel PCS TDMA
May-89
Entel PCS Entel Chile (75%) GSM Ericsson n/a
Mar-98
BellSouth

Bell South Corporation is the fifth largest
telecommunications operating company in the world
(Wirelessweek, 2000). The Company is responsible for
providing exchange access, long distance calling within
LATAs, voice, data, and video networking, customer premise
equipment, mobile communications systems,

telecommunications—related software applications and

72

E‘s—l-

Q

 

F T4

directory publishing services. Internationally, the company
is involved in mobile communications systems,
telecommunications-related software

applications and advanced network services.

BellSouth’s business strategy for the future is wireless,
entering the new markets in the form of joint ventures with
other commercial companies or with the governments of other
countries. Bell South International is responsible for
handling the companies international operations. It decides
where the company will invest and with whom. The company
looks at historic and future projected revenues for a
specific telco before deciding to make the investment
focusing on countries with less developed networks because

there is potential for future growth.

The option for investing in cellular services is sometimes
simpler because there are less factors to consider with
cellular as opposed to basic service. For example, with
basic service, the investing firm would have to examine the
condition of the telco and the state of it infrastructure.
From this assumption, the company would need to assess the
amount of investment necessary to improve the

infrastructure.

In Latin America, the company has brought cellular services

to five countries. In this process Bell South International

73

has entered these markets through joint ventures with other
private companies and in some cases with the local
government. For example, since entering Argentina in 1989,
Bell South has expanded into Brazil, Chile, Ecuador,
Nicaragua, Panama, Peru, Uruguay and Venezuela. Only its
Chilean operations are 100 percent Bell South-owned.
Customer growth in BellSouth’s Latin American operations was
up 117 percent in 1998, revenue was $1.5 billion, up 90
percent over 1997. Subscribers number reach more than 4.6
million across the region. BellSouth most aggressive rival
is Spain’s Telefonica is in six countries. Unlike
BellSouth, Telefonica usually purchases the incumbent

wireline operator being privatized.

BellSouth’s Latin American strategy is comprised by four
major components: purchasing wireless assets rather than
wireline companies, avoiding privatized assets, preferring
to purchase licenses and build their own networks, and
evolving into other services, such as wireline or data

services.

In Argentina, the consortium Compania de Radiocomunicaciones
Moville SA (CRM) is located in Buenos Aires. The consortium
is made of BellSouth, which is a managing partner, Motorola,
Citibank, and two Argentine companies SOCMA and BGH
ARGENTINA, a $200 million communications appliance and

service corporation. All these companies together bid to

74

build and operate the first private cellular business in
South America. They have invested approximately US$220

million to create a network to serve 320,000 customers.

BellSouth has 65 percent ownership, Motorola 25 percent and
BGH Argentina 10 percent in Movicom. A Motorola distributor
BGH’s relationship with the vendor goes back to 40 years.
BHG owns two manufacturing plants. Like many large Latin
American companies, BGH is a family—owned business.
Originally, BGH and Motorola were bidding against a
BellSouth~led partnership, and then they decided to team
with BellSouth because they needed a member experienced in
running a cellular company. On the other side, BellSouth
benefited because the government required locally

manufactured handsets, with BGH built.

All decisions are made by consensus. The goal is to triple
Movicom’s size within four years. Depending on each country
regulations, the door is more or less open to expansion into
other services. Argentina's Movicom recently received a
license to offer local and long—distance services. It’s
building out a network that will support broadcast—quality
video, frame relay and asynchronous transfer mode, high-
speed Internet Access and IP virtual network services.

This year BellSouth also launched a regional branding

campaign Argentina, Chile, Ecuador, Nicaragua, Panama and

75

Peru, the Bell South name appears either on its own or
jointly with the local brand.

Since BellSouth International’s first efforts in Latin
America 10 years ago, its business model has been that of a
cellular provider. But now the RBOC plans to move forward
as a competitive local exchange carrier, and it is feeling
the pain of its competitive name tag as it waits for markets

to open up and lionesses to be granted.

Bell South International hopes to secure marketplace from
the traditional telecommunications carriers. To help secure
that market share, BellSouth International is taking an
incremental approach and is investing in various
telecommunications providers in the region rather than
bearing the brunt of building all its networks from the
ground up. But as it continues on that path, the
investments remain centered on the airwaves in high growth

areas .

The majority of BellSouth’s holdings are in Latin America.
Throughout the region, BellSouth is combining its own
current networks within that of local telecommunications
providers. BellSouth didn't get into that relationship for
free; it currently owns 65% of Movicom and has made several
similar investments throughout the region to lessen its
build out burdens. In Brazil, BellSouth has a part on the

cellular provider BCP (Tomlinson, p. 3).

76

Because of the region’s licensing constraints and the sheer
inadequacy of its wireline infrastructure, Bell South has
migrated from its U.S.—style wireline network-which was
later supplemented with wireless-to a variety of wireless
technologies in Latin America. Of Bell South holdings in
the region, roughly 98% percent is wireless, with a 2%
wireline infrastructure.

With the wireless model, new competitors can reach a good
portion of the untapped customers and attempt to win over
incumbents' customers effectively and cheaply. The
wealthiest 30% percent of Latin American households have 58%
of the region’s home telephones, while the poorest 40% of
houselholds have only 8% of the residential phones.

Cellular service is a necessity for business customers, it
also is a necessity for houselholds because of the dificulty
getting wireline service. For one—third of the cellular
users in Latin America, cellular service is the primary

household telephone service.

DeSpite on the abundant need in the residential market,
BallSouth International plans to concentrate on business
CuStomers and enterprises. The plan to reach those business
CuStomers varies from country to country and city to city.
TeChnology is based on how much capacity is needed. The
CGllular network itself has a backbone to interconnect the

Sites with the switches. In general that’s microwave but in

77

the densest part of the cities, that network is already
fiber. BellSouth infrastructure can be converted from
digital microwave, as it is currently to a fiber backbone as
more capacity is needed. Once the needs for capacity are
determined and the regulatory barriers are brought down,
BellSouth International plans to supplement its wireless

networks with some wireline infrastructure.

The carriers’ tactic is to strengthen and ingrain the
BellSouth International brand through the cellular service
it is allowed to provide now in most countries, which will
then be parlayed into fixed services. BellSouth will
leverage its presence in the cellular market to enter the
fixed business as markets open up. Their intent is to
dominate in all aspects of communications—not just cellular.
For example BellSouth plans to offer local telephony, long—
distance telephony and data business. Bell South will
generally meet those needs through fiber when appropriate
and through different types of wireless, such as microwave,
local multipoint distribution service (LMDS), point to point

microwave and wireless local loops.

BellSouth currently has a hub in Santiago, Chile for its
Chilean and Argentinean traffic, and the other countries hub
off from Miami. In turn, each country may end up with a
different network makeup and set of equipment vendors.

Equipment manufacturers can be very instrumental in helping

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carriers enter the market. BellSouth International plans to
build in-country fiber routes and create a ring around Latin
America through its consortium of carriers networks. That
ring also will tap into undersea cables flanking the East
and West coasts of the continent. Although no specific
details are still not given, BellSouth is involved with a
consortium to run the link back to the US. BellSouth likely
will leverage its ownership stake in Qwest Communications to
provide more fiber power in Latin America. For some time
now, Qwest has been building a significant fiber optic
network in Mexico, which is open to competition, although
the two companies—have not announced plans to work together

in that country.

Most of US vendors have invested heavily in Latin American
operations and facilities in order to secure sales in the
region. Some such as Alcatel, Ericsson and Siemens have
been in the region far longer than the Latin American
privatization date. In general, many countries still
regulate what equipment can be used, where equipment is

produced and what taxes will be paid.

Every country has a different methodology regarding
licensing and permits, so it is hard for foreign carriers to
know the specific regulatory constrains of each country.
This is where the vendors step in their quest to enter the

market. In addition, vendors can also help with import

79

rules, taxes and duties. For example, Alcatel helps service
providers by contributing to the market assessment process,
strategy, planning and network design. Tying wireless and
future wireline networks together is another area where
vendors can be of help to BellSouth International.
Technologies such as dense wave division multiplexing will
tie networks together while wireless local loops bring the

last mile.

In 1991, Chile awarded a license to the consortium, Cidcom
to provide cellular service. Bell South is part of this
consortium. BellSouth took advantage of the deregulation
opportunities as early as 1988, acquiring a share of
cellular carrier Movicom and launching Argentina’s first
cellular network. The carrier now owns 65 percent of
Movicom and serves more than 884,000 subscribers, operating

in Buenos Aires, Argentina.

Chile was another early BellSouth investment. The carrier
acquired 100 percent of an existing cellular operation that
now operates under the BellSouth name. In Chile, it is a
co-branded situation. BellSouth’s most recent acquisition
was two regions in Brazil, including Sao Paulo, the world's
third largest city for a combined total of more than $3
billion. It is estimated the Latin American investment
totaled more than $5 billion for licenses and acquisition

costs alone, not including network upgrades and other

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expenditures. BellSouth signed up more than a million
Brazilian customers in less than seven months of operation.
The core of its international strategy is partnering with
top local companies with insight and expertise in local
political, regulatory and marketing environments. BellSouth
is the majority partner and or/controlling party in most of

its ventures.

GTE

GTE has several Latin American holdings and has seen
considerable growth gains, but it success is not as
impressive as BellSouth International. CTI Movil is the
GTE-led consortium in Argentina, providing services in the
country’s north and south interior regions. GTE holds a 58
percent ownership along with operational control. It ended
in 1998 with 590,000 wireless customers and forecasts an

additional 330,000 this year.

GTE surpassed international growth estimates for the last
several years and continues to invest in its wireless
properties. Despite that GTE doubled net income from
international investments during the last three years; its
wireless strategy doesn’t appear coherent. The company has
some wireless licenses, but in none of these markets share a
common strategy. In some cases they are the PTT and

BellSouth is their main competitor (Dziatkiewicz, 2000).

M

For GTE the process of entering the market: Argentina with
its association wit Grupo Clarin began any spectrum license
awards. Despite the A-list partnership, GTE’s initial
wireless strategy came short. While it provides wireless
service in Argentina’s interior, the alliance missed out on
the lucrative Buenos Aires metropolitan area. For any
business relationship has meant gaining operational control
of the local company. When it comes to its international
operations, GTE’s objective is to become a full-service
provider where possible, gain management control and
continuously evaluate its business relationships. GTE
increased its CTI investment to 50 percent and with
management control has tripled the customer base, but the
operation remains very local. CTI was the first to market
but fell behind its competitors and may be behind in market
share. An with the deregulation that is happening now with

each carrier competing in all regions GTE’s.

Conclusion

Thus, BellSouth and GTE have pursued aggressive foreign
strategies in Argentina, Brazil and Chile. In order to
enter these markets they decided to invest in cellular/PCS
industry in the form of joint ventures with the local
wireless companies. The Ultimate goal of these companies is
to become a full service company and expand to other

services such as data transmission, or wireline services.

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BIBLIOGRAPHY

CTI Movil. [Online] Available:
http://www.cti.com.ar/institucionalcomunicado.asp?idcom
=10, October 10, 2000.

Dziatkiewicz, Mark. Courting Partners South of the Border.
[Online] Available:
http://www.wirelessweek.com/intl/dance1025.htm, October
3, 2000

Tomlinson, Richard. Dialing in on Latin America. [Online]
Available email: morale8v@pilot.msu.edu, from
tsupporthellhowell.infolearnin.com October 25, 1999.

Wirelessweek: International Carriers. [Online] Available:
http://wwww.wirelessweek/index.asp?layout=static&pagein
ternatinalhead, August 9, 2000.

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Chapter 6

CONCLUSIONS

The goal of this thesis was to understand how the internal
(in-country) and external (international) regulatory factors
that have shaped the current development of the cellular/PCS
market in Argentina, Brazil and Chile. The descriptive

analysis shows that some generalizations can be made.

The three countries have similar patterns in their
telecommunication regulatory framework through their
privatization of their state—owned telephone companies.
However, the liberalization processes, through their World
Trade Organization commitments and foreign corporate
strategy give the different industry outcomes for the three

countries.

The literature review outlined the work of different authors
in restructuring the telecommunications industry through
regulation. It concludes that privatization and
liberalization are the most common strategies employed for
the development of this industry. At the international
level the World Trade Organization shows the countries
commitment to liberalize the cellular/PCS industry through
the enactment of trade agreements in basic
telecommunications services. The study only focuses on

liberalization from a trade in service approach. It did not

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include for example the ITU efforts on technological
standardization and spectrum management. It only focuses on
the effects of multilateral trade agreements such as the

GATS .

The World Trade Organization’s “Basic Telecom Agreement” had
a dramatic impact in the telecommunications sector (WTO,
2000). The agreement opened to foreign competition basic
services of the 69 WTO members committing to it. However,
the WTO agreement still faces many challenges such as
scheduling, regulator’s independence, competitive
safeguards, and interconnection of telecommunications
suppliers. The resolution of these issues will allow market
access and foreign ownership in over 90 percent of major

markets.

The most important consequence of the WTO agreement is the
quantity and quality of commitments made by the countries
involved. In other words sixty—nine countries made
commitments to open their markets for some or all-basic
telecommunications services to foreign competition. In
almost all these countries, international services have been
provided by a monopoly that will face competition for the
first time. The General Agreement on Trade in Services
(GATS) consist on a set of multilateral rules covering
treatment of foreign services and service suppliers and

government regulation on trade in services. It combines

85

 

elements of both trade and investment agreements. Some of
the obligations of the GATS applyautomatically to all WTO
members, while others only apply depending on the type of
commitment taken by each member. Thus, the extent of a WTO
member’s obligations can only e established by reference to

the text of the GATS and the Member’s Schedule.

The GATS requires WTO to provide “Most Favored Nation”
treatment (MFN). The Most Favored Nation treatment or
obligation prohibits a WTO member from discriminating among
services or service suppliers of other Members. On other
words, a member that commits to open its market for a
certain service cannot close its market on a selective basis
to like services or service suppliers from any WTO member.
Market Access is a provision that requires WTO Members to
treat other members as is specified under the terms. In
addition, the provision restrain from imposing certain types
of quantitative restrictions, economic needs test, or local
incorporation requirements in those services sectors where
the WTO Member has undertaken specific market access
commitments. National treatment is a nondiscrimination rule
that requires treating other WTO members no less favorably
than it treats its own services and service providers. It
is important to notice that application of these obligations
is subject to negotiation on a sector by sector basis and is

contained in individual schedules of commitments. Thus, not

86

all WTO members have the same level of commitments with

respect to market access or national treatment.

Argentina adopted the Market access and national treatment
limitations for domestic data and telex, domestic and
international fax, paging, trunk radio and leased circuits
(with a preference given to existing supplier until November
8, 2000). The Mobile Telephone Services (MTS) are supplied
under a duopolistic regime. However in the case of PCS, the
government or administrative authority will decide on a
number of suppliers based on the light of present and future
needs. In addition for the modes of supply cellular/PCS
services through cross-border, consumption abroad, and
commercial presence, the country had no restrictions under

the market access and national treatment categories.

Brazil assigned market access and national treatment
conditions for enhanced services, paging and nonpublic
domestic and international services for closed user groups.
As in Argentina, the analog/digital cellular mobile service
will be provided in a duopoly basis in each designated
market. In addition the local wireline company may be
allowed to be one of the service suppliers directly or
through a subsidiary. Brazil allows 100 percent foreign
ownership of nonpublic service providers, 49 percent limit

on cellular and satellite service suppliers until July 1999.

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In Chile market access and national treatment restrictions
are applied for long distance and international wireline and
wireless (including satellites). The country did not make
any commitment on local service or one-way transmission by
satellite of direct-to—home, direct broadcast satellite and

digital audio services.

Implementing the WTO Basic Telecommunications Agreement will
be no less challenging than negotiating it. Effective
competition needs more than simple deregulation or market
opening contained in WTO Member Schedules of Commitments.

It will be some time before the real effect of the agreement
can be measured, but the successful conclusion of the

negotiations is evidence that liberalization is inevitable.

Another dimension of trade in telecommunications services
that would be interesting to conduct further research is the
role of regional trade agreements such as the Mercosur
(Connolly, 1999). In March 1991, Argentina, Brazil, Chile
and Paraguay agreed to form a custom union that created an
integrated regional market whose members were committed to
liberalizing trade among them, while impossing a common
tariff on goods imported from nonmembers. There is also a
role for public policy intervention through the
simplification and flexibilization of rules and institutions
in creating homogeneity in technological collaboration

regulation across the Mercosur countries (De Onis, 1998).

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The most relevant corporate strategies in Argentina, Brazil
and Chile were examined such as the ones employed by
BellSouth and GTE. The investments in types of service
provisions being implemented in host countries by these
telecommunication companies were evaluated. The companies
took similar paths in their Latin American investments. The
reason is that both decided to invest in the three countries
implementing joint ventures with powerful and influential
local partners, because the latter know the market, the
culture and its politics and how to move proposals through
regulatory and government agencies. The Ultimate goal of
these companies is to become a full service company and
expand to other services such as data transmission, or
wireline services. Further research implies how these
companies once they established themselves as wireless

provider would invest in wireline structure.

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BIBLIOGRAPHY

Connolly, M. (1999). Mercosur: Implications for growth in
member countries. Economics and Finance. 5. 7, 1—6.

De Onis, J. (1998). Why Mercosur matters. Institutional
Investor1132. 117—120

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