Key markets for investors are shaken by the global economy, but broadband expansion remains promising over the next five years.
PETER HOWARD WERTHEIM and DAYSE ABRANTESFour years after the privatization wave hit Latin America, investments in telecommunications continue but are now more cautious. Great expectations for Latin America's fiber-optic sector have diminished due to the recession that sweeps the region's economies, fueled in part by the cooling of the world economy. But despite the recession, international financial experts affirm that Brazil, Latin America' largest market, will continue to be one of the developing world's favorite venues for international investments. Latin America represents an alternative communications market with great growth potential at a time when the most important sources of profits-the United States and Europe-have weakened.
"Privatization in Latin America goes from one extreme in Mexico to another extreme in Chile," says Purificacion Carpinteyro, vice president for external affairs of MCI WorldCom, which controls Embratel, Brazil's largest international and long-distance carrier with a 982,000-km fiber-optic network.
"In Mexico, where the market is experiencing a second wave of long-distance and local fiber network construction, the telecom privatization took place after a six-year transition period beginning in August 1990 that allowed the company that previously held the monopoly, Telefonos de Mexico (Telmex), to adapt itself," explains Carpinteyro. "In Chile, privatization and market opening took place simultaneously. All companies rushed in at the same time and in such a huge wave that in some cases long-distance calls between Chile and the U.S. were so cheap and below costs that many companies went bankrupt."
The Brazilian system, on the other hand, is best described as hybrid, because during the transition period through 2002, there is no absolute monopoly. A duopoly was created; Embratel competes with Intelig for long-distance and international calls. Within Brazil, Embratel competes for long-distance calls with three companies: Telemar, Vesper, and Intelig. Although some constraints have been established, some competition is already going on, points out Carpinteyro.
Privatization was followed by an unprecedented wave of fiber-optic ring construction in the region's largest markets: Brazil and Argentina. Last year's expansion plans in Latin America's largest backbones convinced analysts to forecast an unequivocal march toward an optic world in the new millennium.
AT&T announced plans to invest $2.5 billion in Latin America up to 2002, with Brazil receiving almost half of the money and the remainder allocated to Argentina, Chile, Colombia, and Peru. Of the 96,000-km fiber-optic network AT&T has in Latin America, 37,500 km is in Brazil. AT&T Latin America and Global Crossing signed a $46-million agreement to link Buenos Aires (Argentina), Bogota (Colombia), Lima (Peru), Santiago (Chile), and Sao Paulo (Brazil) to the United States via fiber.
At least 15 companies or consortia are building rings in the southern cone (Argentina) to connect to submarine-cable links from both the Atlantic and Pacific oceans (see Lightwave, July 2001, "Fiber booms in Argentina," page 39). Telefónica International heads the SAM-1 fiber-optic cable, while Global Crossing works with Impsat to provide inter-urban links on land that will be connected to Global Crossing submarine cables.
Despite all this activity, Argentina's telecommunications companies are facing a critical financial situation. Some companies are reevaluating their investments. Others are considering leaving this market due to the acute regional financial crisis and recession.
After the deregulation of the sector, companies such as Nextel Com muni cations invested $300 million in the two years after arriving in the market, and Spain's Telefónica allocated $150 million for network expansion in northern Argentina. Thus, it took some by surprise how the crisis affected the country's telecom market-one of the most solid, which up to the beginning of the year seemed untouchable.
The recession, seen in part as a reaction to the cooling of the American and European economies, and the stagnation of Japan, is not only affecting service companies but also equipment and infrastructure providers. As a result of sliding investments, many of these companies had to restructure, reducing personnel and reevaluating growth expectations.
Ironically, that should be one of the most prosperous moments for the sector in Argentina. Large fiber suppliers such as Alcatel, Furukawa, Ficap, and Pirelli have plans to increase production levels, and Lucent Technologies began to produce locally in Brazil. With Argentina's market opening to competition, telecom companies promised the government $6.6 billion in investments in the country. According to Argentina's Communications Secretariat, the a mount invested reached $4.2 billion by the first half of the year.
Telefónica and Telecom, the two giants that controlled the telephone market in Argentina for almost 10 years, are undergoing radical downsizing, with Telecom reducing its work force by 3,000 workers.
Some analysts see Latin America entering a golden age of fiber optics because a large number of inter-metropolitan systems will soon be interconnected. Besides the regional networks and the fiber deployed by the old monopolies, several companies-some new to the telecom market such as Enron, Petro bras, Brazil's national oil company, and Eletronet-have started providing fiber to the new operators. These companies are projected to install some 170,000 km of fiber per year, just in Brazil.
In 2000, market researcher Yankee Group forecast that capacity demand in Latin America would increase by at least 1.4 Tbits by 2006, an impressive annual growth of 68%. With the new economic scenario, however, some analysts do not believe this surge in demand will take place; it's possible that there will be excess capacity for the region due to recession. Market analysts also complain that in Latin America, there is still a lack of viable commercial solutions that would promote crisscross linkage of the thousands of wavelengths generated by increasing DWDM utilization in the largest markets.
In Brazil, competition was not enough to lower prices after the banning of regulatory blocks. The country is burdened by sky-high interest rates. During the first half of the year, Brazil was hit by an energy crisis that led to electric power rationing that shaved the country's gross domestic product growth forecasts for 2001 from 4.5% to 1.5%.
Favorite markets for investors, such as Brazil, Mexico, and Argentina, all were shaken by the cooling down of the world economy but remain interesting for their capacity to expand broadband activities at least for five years to come. Chile, Venezuela, and Colombia are also seen as promising broadband markets, according to the Yankee Group.
Fiber-optic technology is needed in local areas to interconnect the sophisticated local networks with regional backbone infrastructure. Internet expansion is expected to claim capacity in all network systems, driving the need for fiber-optic technologies. Profits are expected as a result of increased bandwidth demand. Experts forecast good business for global companies with spare bandwidth to lease or sell to backbone providers.
Currently, more than 11 million Latin Americans are connected to the Internet, but studies from bank analysts indicate 50 million potential customers have purchasing power to generate profits online. Market researcher Inter national Data Corp. forecasts that by 2003, Latin America will have 29.4 million Internet subscribers compared with 8.4 million in 1999.
Many Latin American companies, especially the mid-sized ones, are becoming much more familiar with the idea of paying only for the bandwidth they use, thus creating a market for specialized IT services.
The arrival of Emergia, 360networks, and Americas cable connections to Brazil by the end of this year should add international capacity of 1.5 Tbits/sec. The new capacity will make high-speed connections with other countries easier, expanding access infrastructure and making this service cheaper. In the United States, a dedicated line between companies at 2 Mbits/sec costs $500 per month, while in Brazil, a connection with the same capacity and distance can cost up to $3,560 per month, according to Yankee Group research.
Up to now, there has been a great concentration of fiber between 10 cities in the Sao Paulo, Rio de Janeiro, and Belo Horizonte urban axis, but specialists observe a decentralization of operations from large metropolitan centers to the interior and other Brazilian states-driven by a growth in fiber-optic communications technology such as DWDM and 2.5-Gbit/sec cellular technology such as interexchange radio transmission technologies (IXRTT), multichannel multipoint distribution services (MMDS), and the Ku/KA bands. In Brazil's metropolitan regions, fiber-to-the-home technology is expected to enable the connection of fiber to households for around $300, a cost similar to that offered by the cable modem.
While in the United States the broadband market had a turnover of $5 billion in 2000, Brazilian operations in this sector are just beginning. By 2003, the broadband market should attract investments of $3 billion per year to complement national wideband networks. Within two years, more than 500 Brazilian cities will be served by fiber-optic infrastructures built through highways, railways, power transmission lines, and submarine cables, according to the Yankee Group. The Brazilian association of electric and electronic industry (Abinee) estimates that Brazil's telecommunications market will grow 35% this year, matching the growth rate in 2000, when industry revenues reached $5.34 billion.
Peter Howard Wertheim and Dayse Abrantes write on Latin American telecommunications issues. They are based in Rio de Janeiro, Brazil.