At São Paulo’s annual telecommunications trade show Telexpo this year, the crowd was abuzz with talk of the “Multimedia Revolution.” And there was good reason. At last year’s show, the sale of state-owned monolith Telebras was still only a gleam in the eyes of the Brazilian government. Licenses for limited services such as fiber optic systems were only just being awarded. And the auction of licenses to businesses that would compete with Telebras fixed-line companies was still almost a year away.

But after Brazil pocketed $18.5 billion last July from the sale of Telebras, the doors of the country’s telecom sector were flung open to fast and furious competition. And as telecommunications providers struggle to meet the voice, data and video needs of their clients, a whole range of multimedia companies are lining up to reap the rewards of the market opening.

“With the end of the monopoly, the whole telecom landscape got much more complex,” said Jason Dyett, a Pyramid Research senior analyst, who gave a presentation on satellite technology at the trade show. “Now you have companies that will compete in some locations and partner in others. Companies will contract capacity in one location and not in another.

There is going to be a complete mixing of the market.”

The Players
When the Brazilian government passed the General Telecommunications Law in July 1997, its idea was to stimulate as much competition, as quickly as possible, in an effort to increase the quality and availability of services for the public and corporate sectors.

Starting last spring, the national telecommunications regulator Anatel began awarding limited service licenses to companies interested in conquering Brazil’s niche telecommunications and datacommunications markets. Since then three dozen licenses have been given out, including those for both satellite television and fiber optic services.

While these companies formulated their business plans and began to install communications lines, the three fixed-line Telebras spin-offs, plus long-distance carrier Embratel, were sold. In an effort to meet the country’s pent up demand for telecommunications, each company was given a set of service targets that they would be required to meet. So while the new Baby Bras owners scrambled to assess their assets and undertake their own network improvements, in January the Brazilian government awarded the first “mirror” license to an entity that would compete with them. The Bonari consortium, made up of Sprint, France Telecom and Great Britain’s National Grid, received the first license to go up against Embratel. A second mirror, for the competitor to the northern region’s Tele Norte Leste, was awarded to the Canbra group, which includes Bell Canada, Qualcomm and WLL International. At press time, a third license for the mirror that would compete with Telefonica in São Paulo was going to the auction block on April 23, with three interested groups. The final license, for Tele Centro Sul, has not yet been awarded for lack of investor interest.

The Stakes
As all of the telecommunications companies converge on the Brazilian market, industry experts say that value-added services such as bundled data, voice and video will be what captures and retains clients.

“Worldwide, data is going to dwarf voice transmission traffic so if these companies don’t become players in carrying data traffic, then they are going to be missing the boat,” said Ray Romero, managing director of Competitive Strategies Group. “My guess is that Embratel and its mirror will be big players, but the local carriers will undoubtedly need to get involved as well.”

The question for many of these companies is: What is the best way to offer these services, while still meeting Anatel’s expansion requirements?

One answer is clearly in the systems being installed by companies like Netstream, which recently launched fiber-optic cable services for businesses in São Paulo and Rio de Janeiro. When Netstream opened its doors last fall, it conservatively expected to complete its first 12 months with 30 customers in Brazil’s largest cities. The company now expects to serve 700 business clients by the end of the year.

“We have a huge capacity to offer high-technology services,” Nilson Soares, president of Netstream, told LatinFinance. “The wireline companies can obviously use our network to close their calls. To a certain extent, we compete with, and to a certain extent we complement these types of systems.”

Fidelity Investment’s venture Metrored, which opened its doors on the same day as Netstream, also hopes to provide fiber-optic solutions to the country’s telecoms.

“We feel that one of our strongest roles is to provide telecommunications for the companies that are already in the country like Embratel, Comsat, Impsat, and also for the new companies that are arriving like Bonari and Canbra,” said Newton Giordani, commercial director at Metrored.

Metrored is one of a handful of companies that will soon be offering long-distance fiber optic networks between Brazil’s major business cities of São Paulo, Rio and Belo Horizonte.

Local satellite providers Comsat and Impsat are also in the process of building out data networks, while a handful of other companies have begun to explore Internet telephony.

Industry experts predict that as the economy starts to improve, universal telecommunications companies will begin looking for alliances among the broadening horizon of limited access providers.

“These are strategies which have been utilized successfully in other parts of the world,” said Romero. “You have competitive access providers throughout the world that have spent billions of dollars in building their own infrastructure. And although they never made a profit, they were very attractive to long-distance companies that wanted to get in to the local market.”

Since the data market has been completely deregulated, more and more companies are expected to join the sector, although data carriers still come across holes in the existing voice regulations.

“The regulation is sufficient for me to understand that I have the right to interconnection and the tariffs that are involved,” said Soares of Netstream. “But since Embratel and Telefonica are fighting over payment issues, things are not very clear. Anatel is going to have to do something to make the rest a little more detailed.”

In the meantime, while the telecom companies are trying to break into the corporate market to offer data solutions to Brazil’s businesspeople, the consumer market continues to be top priority. According to Anatel rules, by the end of this year, mirror companies must serve at least half the cities in their service area that have more than 200,000 inhabitants. For former Telebras wireline holders, the build-out requirements are even more onerous.

The Argentine Example
In order to provide a range of services to consumers, while still meeting expansion goals, telecom companies will likely begin to cross-over into other media ventures.

Argentina, which is further along in its telecommunications market liberalization, is a telling example. Perhaps the biggest venture was Telefonica Argentina’s acquisition of a 66% stake in TCI/Cablevision more than a year ago. Telefonica has said that it plans to use the cable wire of the country’s second largest provider to quickly invade the northern region of the country that will be, until next November, under the monopoly control of Telecom.

“In visiting both Telefonica and Cablevision recently, we were very, very impressed by the degree to which these two companies have already started working together,” said Paribas telecom analyst William Beavington, at the LatinFinance’s Predictor 99 conference in New York in March. “And it is not just a long-term potential advantage in terms of bundled-service offerings and in terms of joint billing. There is an immediate advantage in terms of the speed of penetration which Telefonica can realize in Telecom’s region.

“If you want confirmation that this potential synergy has the ability to work, just look at AT&T and its bid for TCI (in the United States), which is clearly an endorsement by leading telecom players of the potential for these cable operators to team up, synergize, save some money, and do a better job at marketing,” said Beavington.

But Zain Manekia, telecom analyst at Warburg Dillon Read, is less sure of the benefits of the Telefonica/Cablevision union.

“Telefonica has talked in the market about using the cable infrastructure to provide voice, Internet and video,” said Manekia. “But normal cable systems are one directional. So either you go through a massive, expensive upgrade, or you limit yourself to data transmission. We need to look to the experience of US West in this country that tested cable telephony and found that it didn’t work.”

Manekia also raised concerns about the logistics of a cable/telephone venture. “How much does the telephone company pay to the cable company for the use of the infrastructure?” he asked. “Who should do the upgrade? Who is going to maintain the infrastructure?”

“Based on my numbers, Telefonica wouldn’t break even for 10 years,” he continued. “So, I sat down recently with the company and asked them to prove me wrong. So far, they haven’t been able to.”

In Argentina’s cable market, which leads the region with 50% of households wired, telecommunications operators must also fear that another company will snap up the potential access that these companies can provide.

In Brazil, which has a much smaller cable penetration rate of about 10%, cable systems are nonetheless also pushing hard to enter the telephony market. At Telexpo this year, Globopar’s cable venture Globocabo, the largest cable company in the country after it merged with Multicanal last year, was a vocal proponent of cable telephony and other multimedia services.

“I think you will see a move toward phone companies and cable companies joining together,” said Romero of the Competitive Strategies Group. “The question is: What would the regulatory environment in Brazil allow?

Let’s say either Embratel or the mirror license for Embratel (wants) to acquire a cable company in order to get in to local service instead of just long distance. What happens then? A lot of this is still going to be regulatory driven for a while.”

Not to be outdone, Telecom Argentina announced in early April that it was forming a $120 million joint venture with Sky Latin America to provide satellite television in Argentina.

The company said that it hopes to capitalize on the synergies of third party networks such as Internet and cellular phones.

And it’s not just media companies that are looking for a piece of the pie. Eletrobras recently announced that it was looking for a telecommunications company to bring on as a strategic partner in order to develop the electricity utility’s distribution network for telephony. Indeed, one of the new technologies unveiled during Telexpo this year was technology developed by US-based Intellon that would allow data to travel over electricity lines. But it’s not only the cable that is valuable. One of the highest costs for telecommunications companies is purchasing the right of way to lay lines and build an infrastructure.

The Sprint group, for example, which bought the Embratel mirror license earlier this year, is said to be in negotiations with the country’s recently-privatized railroad lines to get access to the communications systems and right of way.

“All of these state-owned or formerly state-owned companies are waking up to the fact that it is a different market,” said Dyett of Pyramid Research. “They’re saying to themselves, ‘We’ve got this certain asset that we weren’t taking advantage of. It may not be our core business, but let’s not overlook this.’ Anybody with pipeline, railroads, roads, electricity, or metro lines are all saying the same thing to themselves right now.”

The problem, of course, is that telecommunications companies have very little time to negotiate, since the clock is ticking on build out requirements and competitors are breathing down each other’s throats. In March, Telesp of São Paulo and Rio’s Telerj only had two months to install 18,000 and 20,500 more telephone lines before the government’s deadline was enforced.

“What is most important to me is time to market,” said Soares. “I can’t stay negotiating forever over the right of way, and let my plans fall behind. If something comes up, then I will use it.”

What will likely emerge from the cacophony now ringing in the Brazilian telecommunications market is universal telephone companies cobbling together a hodgepodge of fiber optic networks, Internet, satellites and cable systems to provide specialized solutions to individual consumers.

Just as the Brazilians wanted it.