Uncertainty prevails after CANTV takeover

Por Venezuela Real - 13 de Julio, 2007, 11:28, Categoría: Economía

ARCAYA & ASOCIADOS
THINK TANK
July 13, 2007

SUBJECT: The implications for the Venezuelan telecoms market of CANTV's nationalisation.

SIGNIFICANCE: With few examples of successful state-owned companies in Latin America, the nationalisation has raised concerns about the impact it will have on foreign investment and the technological development of the sector, and conflicts of interests between the watchdog and the state-owned operator. Meanwhile, announced cuts in calling rates will hurt CANTV's margins. The future will depend very much on the political environment.

ANALYSIS: On May 9, Venezuela's government announced it had taken a majority share in CANTV. It paid 1.33 billion dollars for 79.62% of the telecoms operator, including the 28.5% stake that it agreed to buy from USbased Verizon in February. The government previously owned a 6.6% stake, bringing the new total to 86.2%. It took control in effect after ratifying the new board on May 21. The purchase ended the intentions of Mexican telecoms magnate Carlos Slim to enter the last major Latin American market where he has no presence. Through his mobile holdings group America Movil and fixed line operator Telmex, Slim had agreed in 2006 to acquire Verizon's stake in CANTV.

The nationalisation, announced in January, was not unexpected. President Hugo Chavez had been building up to the nationalisation of both CANTV and electricity distributor Electricidad de Caracas for some time. The move reverses the privatisation trend seen in Latin America over the last two decades but is unlikely to be repeated elsewhere in the region, except in Bolivia, where the government is currently negotiating the purchase of Entel from Telecom Italia.

Post-nationalisation policies.

The government lost little time in declaring an 18-month plan, naming a new board and promising a strategy based on three areas that are in keeping with Chavez's vision of 'social profitability' rather than economic profitability:


• expansion of network coverage to 15,000 kilometres (km) from 7,000 km and linking up with electricity networks, as well as deployment of 1.6 million additional fixed lines and 2.0 million mobile lines.

• universal access to telephony services for low-income sectors, and providing computers and internet connections to 5,200 schools nationwide; and

• a drop in calling rates.

CANTV's new director, Socorro Hernandez, announced a 20% cut in mobile rates by August this year and a 28% cut in fixed-to-mobile calling rates in July. By January 2008, lower-income areas will benefit from a 10% cut in local telephony rates and a 15% cut in domestic long-distance rates, and the elimination of value-added tax.

Subsidised telephony.

Such a dramatic cut in calling rates appears to be tantamount to subsidising mobile telephony, something that will not be sustainable for CANTV over time. Financing these cuts is likely to come from cross subsidies between CANTV and its mobile operator Movilnet, or oil revenues. The effect on the company's margins will lead to inefficiencies.


CANTV has said it will reinvest 60% of profits -- if any -- into the company. However, the company is large and has been efficiently run since its privatisation in 1991, providing a margin of several years before serious problems may become evident.

At the beginning of the year, before privatisation, CANTV said it expected revenue growth of 24-30% in 2007, to 8.91 trillion bolivars (4.15 billion dollars). Net profits in the first quarter were 252 billion bolivars, up 36.9% year-on-year, boosted mainly by growth in mobile and broadband revenues.

Competition costs. CANTV's new rates system will have the biggest impact on the mobile segment, where the company disputes leadership with Movistar (owned by Spain's Telefonica), which had a 41.9% market share in the first quarter compared to 41.5% for Movilnet. Third-placed Digitel, owned by local private investor Osvaldo Cisneros, had 16.6%. In the fixedline segment, CANTV controls 78.0%, compared with 20.5% for Movistar and 1.05% for Digitel.

While competitors will have to find ways of cutting costs, Movistar and Digitel may try to protect their margins by focusing on offering value-added services to the high-end post-paid segment, which nonetheless still only represented just over 5% of the 19 million mobile subscribers in the first quarter.

Impact on technology. Besides having a high mobile penetration rate, Venezuela has also been considered one of the more advanced countries as regards adoption of advanced mobile technologies. Internet penetration is comparatively high for the region, at 16%, and the country has traditionally been intensive in data use, especially short messaging, which has caught on to a greater extent than in neighbouring countries. One concern is that the  fall in calling rates will remove the incentive to be competitive or to invest in new technologies such as 3G, WiMax and IPTV.

However, if anything, the government has gone out of its way to give the impression that this will not be the case. As CANTV has traditionally used a CDMA platform, whose EVDO 3G technology has advanced more quickly than its main rival UMTS, based on GSM, Venezuela already has a head start on many other Latin American countries. The company is also building a GSM overlay that it says will be ready this year, and recently announced plans to invest 160 million dollars in implementing IPTV over the next few years.

In addition, Telecommunications and Technology Minister Jesse Chacon announced in June that the government would auction mobile spectrum in the 1,800 MHz and 1,900 MHz bands in July, with operations due to start on November 13. The 1,900 MHz bands may be used for 3G telephony which, as they can handle more traffic, could lead to cost efficiency for operators. While the 120 million dollar price tag for the 15-year concession licences may seem steep in an uncertain political environment, the three main mobile operators all need more spectrum to compete.

Regulation.

A new regulatory environment has been created this year, raising concerns about potential conflicts of interest:


• Chacon is also director of telecoms regulator Conatel, while Conatel's operations manager Franco Silva was appointed to CANTV's board of directors.

• Concerns about distortions in the market are evident, as the government will clearly find itself in a position of influence in cases such as interconnection disputes between CANTV and new competitors or the awarding of concessions licences. Chinese investment. Whether major telecoms equipment suppliers such as Alcatel-Lucent, Sony Ericsson and Nokia-Siemens, all well established in Venezuela, will be more reluctant to invest in future is not yet clear, and no official announcements have been made. However, any decrease in investment could benefit Chinese companies Huawei and ZTE, both of which have taken advantage of agreements signed during Chavez's visit to China in August 2006. Huawei and ZTE are desperate to increase their global market share and are likely to be more willing to take risks than Nokia-Siemens, for example. ZTE has a deal with Venezuelan state telecoms operator CVG Telecom to build a 7,000-km fibre optics network scheduled for completion by late 2007. It expects to install a factory in Venezuela in 2007 to produce mobile telephones, while Huawei, in conjunction with CVG Telecom, plans to build a factory to produce GSM handsets locally.

CONCLUSION: The future of CANTV and the telecoms market generally will depend on the government policies adopted over the next few years. If the private sector can convince the government not to subsidise telephony rates, this could keep competition alive and CANTV afloat. Faced with lower margins, operators will have to work harder to maintain customer loyalty.





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