Telecommunications in Brazil will not follow the plan and become fully competitive in 2002. Financial difficulties and overcapacity, as with broadband, are reducing investment. Customers are spending and investing only when necessary for equipment and bundled solutions, mostly for security and operational optimization. Advances in technology will be limited; only the largest companies will upgrade significantly. Use of Web applications will increase, and next generation, 2.5 G, cellular will begin. Mergers, acquisitions and other consolidations will reshape the sector.
When the Ministry of Communications launched its ambitious plan , in 1994, to privatize and deregulate the Brazilian telecommunication sector, 2002 was to be the year full competition began in the local and long distance voice markets. This raised customer expectations of significant changes and drastic price reductions, but it will not happen this way. It will be some time before there is full competition, in all areas. At least for data carriers, though, competitions is now a reality and a second phase, bringing sectorial consolidation and new financing challenges is just beginning. Brazil is known as a country with great contrasts in its technological sector. This is a consequence of its unbalanced, asymmetrical, distribution of income . On one hand, its financial and banking area has one of the most modern and sophisticated telecommunications networks in the world, with very impressive web services, on the other hand, many of its cities with less than 50,000 inhabitants do not have a single Internet Service Provider. Even during the days of the monopoly, when telecommunications services were in the hands of the government, very little was invested to offer basic voice services to low-income populations in the country’s interior. Now that the Telebrás system has been privatized and a new model adopted for the sector, Anatel (Brazil’s telecommunications regulatory and policy making agency) has established goals for the newly privatized companies, and created a competitive model for local access, in order to increase the offer of basic voice services. The recession in US and the events that changed the world on September 11, 2001 contributed to the slowdown in Latin America Economy. Argentina’s economy deteriorated with surprisingly speed and had an adverse impact on the exchange rate in Brazil. These and the ensuing unemployment among the low income families that form the bulk of the new subscribers, has contributed to the difficulties faced by local telephone operating companies. These have had to to increase their reserves for bad receivables since many of these low income subscribers have not been able to pay their bills. Anatel’s efforts to reform the sector have suffered as a result forcing the agency to modify and adapt its plans to face up to the new reduced investment scenario. The lack of adequate infrastruture is still a big issue in Brazil. In the last three years, US$ 20 billion dollars a year has been invested on the sector to build an optical long distance infrastructure, local and metropolitan access, cellular radio base stations and expand the voice networks. Much more remains to be done and a steady influx of new investments is essential. The changeover to the next generation of cellular equipment and services, the building of competition in local voice markets and the expansion of broadband access are among the many challenges facing regulators and investors in 2002. Data Carrier market Let us focus on the Data Carrier market. Although more than 70% of the revenues of the incumbent telephone operating companies still comes from the voice services, it is the data market that is drawing much of the attention. The data transmission sector is now fully deregulated. More than 20 companies are offering these services. The incumbents dominates the market and earn 85% of the revenues, but mirror companies, or CLECs (competitive local exchange carriers) and the companies known as SLEs (Specialized Limited Service - dedicated exclusively to providing data transmission for corporations) offer serious competition. If one includes the utilities companies, which are deploying extensive fiber networks for long distance and metropolitan access along their-rights-of-way, and the companies offering international fiber capacity, there are now 30 companies currently in this market. Anatel has authorized 100 others to operate in this market as well. The investment plans of most companies in the sector have been affected dramatically and some companies are suffering great economic disruption. This is the outcome of a period of excess optimism, driven by the high growth rate of the Internet in Brazil -representing about 70% of the total traffic in the region, the global economic downturn, excess capacity, price erosion and effects of the exchange rate on the bottom line of multi-nationals. This was not completely unexpected and it is not, by any means restricted to Brazil. In the rest of the world many big telecom and dot.com companies have been hit hard. Many have closed and, in the US, an unprecedented number have filed for Chapter 11 protection. According to a recent study by Telcomp the Brazilian SLE (special limited service) association, connectivity services in Brazil during the last three years were reduced, on average, by 85%. In some cases, prices are one tenth of whatthey were just three years ago. Although this migh be welcomed by their customers it will have a dramatic effect on the bottom line of the service providers. It is not surprising to find a consensus among analysts that 2002 will see the beginning of a consolidation of telecom markets throughout the world – including Brazil. The survivors will begin a new cycle of investment. This time, though, investments will be based on more cautions assumptions of growth and investors will abide by old fashion economic common sense and give due importance to return on investment and future cash generation. Customer Trends Customers have also been affected by the recent economic turmoil. They tend strongly to avoid additional expenses and are mindful of the need to reduce costs and increase the efficiency of their operations. Among the more noteworthy, visible, short-term customers trends are: 1) Focus on cost reduction, not necessarily in telecom, but in the whole process chain; 2) One stop shopping - focus on solution providers not just circuit provisioning. 3) Increased demand for network management solution, including capacity planning, resource allocation, bandwidth optimization, application sensitive networks 4) Application bundling - connectivity, security, management and application hosting from a single vendor 5) Service Level Agreements - Although most of the customers still have difficulties defining it an, importantly, are unable to measure it afterwards, most are demanding SLA agreements on their service contracts. Service availability (a measure of the time the circuit or service is available with a certain quality to the customer) and latency are almost universal SLA requirements. A high degree of sophistication in specifying these guarantees can be expected in the near future. Since they are not able to differentiate providers based on technology, customers are turning to long contract negotiations to obtain service commitments and provide strong penalties for non-performance. 6) Increase investment for business continuity plans, including security measures (to avoid interruptions due to hackers and security disruption) and disaster recovery plans. This includes a broad gamut of precautions ranging from a simple file back-up policies to complete outsourcing in Secure Data Centers with mirroring and huge storage capacity. As for technology, the Brazilian corporate market is still asking for (very) basic connectivity services. Most of the circuits in use are still low speed (80% of all new orders are for 64 Kbps service). Frame Relay will be the technology of choice during the next 18 months. It seems that VPN - IP will be the next wave, but the market is not yet mature enough, and the clients not confident enough, for large scale deployment. We expect, though, that within two years most of the corporate market will be migrating to IP and VPN systems operating with Broad band access provided by MPLS IP networks. Technology trends In order to satisfy the customer expectations outlined above we think it likely that the following technologies will be introduced and/or see expanded use in 2002: · Frame Relay will still be the dominant technology in 2002. VPN IP and ATM will be slowly introduced at very large customers; · Streaming applications, based on new standards (like MPEG-4), readily available in Windows platforms, will be used more extensively in Web portals for distance learning, multimedia distribution, media events, caching, site replications and the like. Data Centers equipped with conversion equipment and storage capability will facilitate the introduction and usage of these new technologies · Security - The Bin Laden effect is forcing IT and TI managers to allocate more resources to protect their businesses from intrusion to detect and turn-back threats. They are developing comprehensive security policies and disaster recovery procedures · Voice over IP is not expected to account for a significant portion of the market in 2002. It will not be a boom year for this technology, but it will be an important year for testing and confidence building based on quality, availability, integration, interoperability and practical use. IP is clearly advantageous for carriers in terms of reduced investment requirements and cost optimization, but it is not at all clear if customers really benefit from their investment in new equipment - PABXs or softswitches and handsets. I t seems probable that investment in 2002 will be restricted to Call Centers, Customer Care applications and investments that would have to be made under any circumstances, such as those resulting from a move to new facilities. · Increased use of Web applications for selling services - Brazilians have shown their acceptance of the Web for by taking quickly to banking applications, by using it to file their annual income tax returns and by buying books, cars and a host of other products through the Internet. Users increasingly confide in the ease and security of the Internet. The introduction of digital signatures, to legally validitate web transactions, will make possible a new type of binding electronic relationship with the government for a Broad variety of services, with banks and with other people and entities. · Broadband access - After a slow introduction, with many start-up problems and much to learn about dealing with customer and unexpected technical problems, Broadband access will finally begin to grow. All types of broadband - cable modem, ADSL, wireless (LMDS, MMDS or Spread Spectrum) - will continue to expand and become an increasingly important part of the corporate and residential telecommunications infrastructure. Nevertheless, it will not be a simple process; wide-band access will be one of the biggest challenges for Brazil’s regulators. Initially, the challenges will be to fairly unbundle the transmission and access infrastructures and to regulate SCM – the Multimedia Communication Service, a proposed form of licensing, whose regulatory structure has been submitted to public comment by Anatel. With this new type of license, operators will be able to provide all types of multimedia services to all customers, residential or corporate. SCM is currently facing fierce opposition from cable operators and broadcasting unions. · Sales force automation - To increase the efficiency of their employees companies, to give them more and better information to perform their jobs, companies are increasingly giving laptops or palmtops to their sales force. These are linked by dial-up or wireless Internet to their back office systems. There is a growing tendency among companies to use outsourced services provided by Data Carriers, who handle the deployment and management of these systems, reducing the burden on the user’s IT group so they can concentrate on applying these telecommunications services to benefit their core businesses. Conclusion Brazilian regulators and corporate decision-makers will be greatly challenged during the year 2002. The new, nationwide, 2.5-G cellular system will be introduced. The Brazilian telecommunications sector is likely to consolidate in response to market demands. Companies will merge, others acquired and copperative arrangements will join cellular carriers to incumbent operating companies to data carriers (SLE) in every imaginable combination. New rules are expected for telephony licenses, multimedia licenses and LMDS licenses, among others, that, despite the doubts novelties bring, will animate the market. Anatel promise to assume an increasingly proactive role in the unbundling negotiations that will create conditions for the aggressive growth of competition among providers of voice and Broadband internet access. Finally, 2002 will be the year Brazil chooses its standard for high definition television, or HDTL – a decision fraught with important political, economical and technical implications. 2002 will certainly be a year to remember.