Category Archives: Regulation

Tweet of the week for July 14 to 20 Brazil politicians try to rewrite the laws of physics

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Source: Yankee Group Latin America Mobile Carrier Monitor June 2012

Brazil gets ugly. #TIM #Oi & #Claro suspended from sales in various states for poor customer service. Operators blame antenna laws #ygmb

Could there be any doubt about this week’s choice?

  • A triumph of politics over logic, over the laws of physics
  • A bewildering move by a country that pretends to be in the top rank of nations but comes off looking like an ignorant backwater

Full Disclosure #1: I left Comcel as President in December of 2001 having spent 13 months working for America Movil. Since I left, I have on occasion provided advice to the group mostly in regulatory issues. I have advised principal competitor Telefonica through my association with Yankee Group.

Full Disclosure #2: I wrote a lot about this during the week and I have cribbed some of my other texts to create this one.

This event shows why CEO’s can’t take vacation.

From a public point of view, this wasn’t even on the radar screen two weeks ago. Last Thursday July 12, the Minister threatens TIM with this kind of sanction because of quality issues, but only mentions TIM. Tuesday July 17,  the city of Puerto Alegre’s consumer advocate stops sales of all operators pending better quality of service. The next day the national telecom regulator Anatel calls a hurried conference call to sanction all but Telefonica’s Vivo. TIM remains the target blocked from selling in 19 of 27 administered areas (26 states plus the federal district of Brazilia). Partially state-owned Oi comes a distant second with 5 states affected and America Movil’s Claro is blocked in three states.

Quick math shows that 19+5+3=27 showing that exactly one company was picked to be sanctioned in each of the administrative areas. Now either by sheer luck there was exactly one operator below standard in each area or – as one press report had it – the lowest operator in each area was selected regardless of whether or not they met the regulator’s quality standard. More likely the latter since some politician or politically-minded bureaucrat would 1) want every state to feel the federal government was looking out for them 2) it is a simple rule that would be easy to explain.

The problem is that it makes no sense and to my mind it should be illegal.

  • It should be illegal to punish an operator who was above standard but nevertheless selected. No doubt TIM’s lawyers are pursuing this course of action.
  • The rule makes no sense except as a one-time application. As an ongoing rule there will always be one operator with a stop sell because there will always be someone at the bottom of the list in each area. Does Antel plan to continually shut off the bottom operator for a period of time until some other poor soul drops behind?

It’s hard not to think of this as some sort of political one-upsmanship given the timing of the annoucements and especially the last-minute nature of Anatel’s action. It looks like  the Minister got wind of Porto Alegre’s decision and wanted to get out in front. Or he was floating a trial balloon and Porto Alegre jumped on it. They at least banned everyone until the industry got its act together. In either case, the minister was embarrassed by Porto Alegre’s action and ordered Anatel to get an even more draconian action in place and in front of the national press within 24 hours.

I’m unfortunately not sufficiently familiar with the Brazilian political situation to know what really motivated the minister. In the byzantine world of factions and parties within the government’s coalition anything is possible. Dilma has dismissed a number of ministers for corruption, incompetence or both. A crowd-pleasing stand in front of the press is a good way to ensure continued employment at least until the story dies down.

But real customers and especially shareholders are the collateral damage. Friday July 13, TIM’s stock dropped 7% just on the hint that something like this might be in the works. Its stock dropped again after Anatel’s announcement as did Oi’s. Even Vivo’s stock was affected. America Movil doesn’t trade in Brazil.

As to whether consumers will actually benefit, that is by no means clear. If anything TIM BR spent a higher percentage of its revenue on CAPEX than its peers. See the chart at the start of the article. It has also has the highest spending in absolute terms over the past four quarters to 1Q12. If despite this spending it is at the bottom of the quality list then either TIM’s problems come from many years prior or it wasn’t spending on items directly related to quality. Among other possibilities, no doubt TIM was overspending in high-economic-impact states like Sao Paulo and under-spending in low-impact– but politically sensitive – states like Amazonas and that’s where they got into trouble.

Government-controlled Oi is the most miserly operator and Claro the second. Both got the lightest slap on the wrist. Claro was uncharacteristically contrite and said they wouldn’t contest the result.

Only Vivo/Telefonica seems to show a relationship between CAPEX spending and this measure of quality: they were just behind TIM in spending and got off without penalty (except in Porto Alegre).

On the one hand 30 days is a dreadfully long time for a “stop sale”. On the other, it is impossible to fix network quality issues that quickly. If the government sticks to its guns, it will be months before operators can start selling again.

The operators say that the issue is tower permits with local governments reluctant to authorize more base stations. Puerto Alegre — which fired the first real shot — doesn’t permit towers to be within 500m of each other. If the solution is more towers then we will have irresistible force meeting immovable object.

This is yet another case of regulators trying to deny the laws of physics — and another full-employment act for lawyers.

As to what this means for Anatel, I doubt they come off looking well. This has all the ear-marks of a grandstanding move by the Brazilian telecom minister for some internal Brazilian or personal political reason. Anatel’s hurried press conference on Wednesday after Porto Alegre’s announcement of a similar move on Tuesday shows desperation not deliberation.

Worse, Brazil once again looks like a country which makes up the rules as it goes along to suit short-term political considerations with little or no consideration of the big picture. The operators who are already there are trapped. Soros must be rueing that he bid for a 4G license. Other operators will give the country a wide-berth despite its obvious potential.

I sure hope the minister gets what he wanted. No one else is likely to benefit.

Bottom Line: I believe this was a politically motivated mess that will do significant harm to Brazilian telecom. It is particularly damaging if the affected companies were above Anatel’s stated quality standards: that’s what they what they should use as a guide for investment. That being said, there was obviously a level of customer complaints about which the operators were not demonstrating sufficient public concern, giving the minister and Porto Alegre the pretext for their arbitrary actions. Finally, operators have to give a higher priority to tower sharing and even network sharing. Engineering-driven companies believe that tower placement is their value add because that’s all they understand. It is becoming their Achilles heel.

What to do about Dominant Carrier Regulation in Colombia?

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I recently had a chance to review America Movil/Comcel’s economic testimony used in their bid to avoid or mitigate Dominant Carrier Regulation in Colombia. As might be expected given the financial resources of the company, it was prepared by recognized economic experts who argued their points well. I have some technical quibbles with the statistical analysis by the Latin American group NERA but even then I’m not sure correcting these would have changed the conclusions.

Full Disclosure: I left Comcel as President in December of 2001 having spent 13 months working for America Movil. Since I left, I have on occasion provided advice to the group mostly in regulatory issues. I have advised principal competitor Telefonica through my association with Yankee Group.

I don’t think it worth discussing whether Comcel is in fact dominant or whether dominant carrier regulation is necessary. Regions as diverse in their economic policies as the United States and the European Union think it necessary to take action when one player has more than 60% market share in a multiplayer market. As well, the Colombia-US Free Trade Agreement requires both parties to have effective dominant carrier regulation. Comcel sticks out like a sore thumb with its above 65% Line Market Share.

The CRC has tried to address this by forcing a narrowing of on-Net/off-Net tariff differentials which are presumed to be the reason why Comcel has achieved and maintained its high market share.

My argument is that the CRC has been manifestly ineffective and their strategies might even make the presumed “problem” worse because they fail to attack the core reasons why Comcel has had the success that it has had.

The CRC has been ineffective:

  • Market Share measures (Lines, Revenues, Voice Minutes, EBITDA) remain essentially where they were before the CRC took action in 2009;
  • Theoretical arguments (as advanced by Comcel’s economic consultants) show that taking this kind of regulatory action can only result in HIGHER prices for consumers – not the lower prices that presumably is the objective of dominant carrier regulation;
  • I believe that in a multi-SIM environment such as we have in Colombia, lowering on-Net/off-Net differentials removes the customer incentive to have extra SIMS and thus could easily result in the disconnection of second and third-player extra SIMs reinforcing the “dominant” carrier’s position;
  • Voice revenue – while still representing over 50% of revenues in Colombia – is in decline so using voice tariffs to control the industry structure will be increasingly ineffective.

The core reasons why Comcel has been so successful in terms of Line Share have to do with handsets, distribution and a fundamental aspect of consumer behavior – what I call the “Winner Effect”:

  • Share of Sales = Share of Stores: aka “A bigger net catches more fish”— Comcel had always emphasized having a massive distribution network and America Movil – which had the same philosophy – accelerated investment in sales points. I wrote a long paper for Yankee Group proving the validity of this “theorem”. So long as Comcel has a broader network of sales points than its rivals, it will continue to lead in share of Gross Adds and so maintain its current Line Market Share.
  • Controlling the supply of “hot handsets”. The industry – and especially telecom regulators – see the market in terms of telecom services. But what drives Line Market Share is sales and what drives sales are handsets. (Voice and other tariffs impact prepaid behavior and to some extent postpaid churn but what brings consumers in the door is a hot handset.) Handset vendors want to sell the maximum number of phones. Winners have faith in their marketing capabilities to handle large volumes of sales. Thus operators who have already achieved the leading position are prepared to commit to large sales volumes in exchange for exclusivity or at least a “headstart” like a period of exclusivity for a number of months. And handset vendors, to achieve their sales targets more easily, have no problem extending this exclusivity even at the expense of their relationships with the number two or three operator in a market.
  • Once a winner, always a winner. A leading brand attracts criticism but also admiration. Consumers often hope some of the winning brand’s success rubs off on them. The leading brand also leads in “Top of Mind” surveys for the obvious reason that more consumers are their clients. Being the winner (for whatever reason) impacts important mobile market purchasing drivers like coverage and technological leadership. The winner is presumed to have both of these (whether they actually do or not). Massive distribution strategies reinforce coverage leadership since an operator is presumed to have coverage where they have distribution (whether they actually do or not). And vice versa: it is easier to attract distributors – and dictate commission terms – if you already have the leading market share.

(I have a long – very long – version of this note that develops these ideas in greater detail. Contact me if you want to see it.)

Thus the CRC’s chosen tools are ineffective and repeated application can only continue to be ineffective. Madness is repeating the same action and expecting a different outcome.

At best they may achieve a transfer of wealth from Comcel’s shareholders to those of its rivals but so far that hasn’t happened either. Furthermore, I don’t believe any telecom regulator has the right or the obligation to directly impact shareholder outcomes: their only legal scope for action has to be on consumer outcomes.

To exert effective control over Colombian market outcomes – and again assuming that something must be done if only to maintain the countries obligations to the US – then action has to be taken in the DISTRIBUTION (including handsets) market, not in the market for voice services.

This is probably impossible. My contention that the naturally-evolved structure of the mobile handset market creates distortions in the market for telecom services would create a field-day for Colombia’s lawyers.

Besides, America Movil is about to do the CRC’s work for them. Retiring Colombia’s most valuable brand – Comcel – to introduce an essentially unknown brand – Claro – and merging it with a so-so brand like Telmex will do the company untold damage.

It might even get them below 60%.

Bottom-Line: Colombia at least will continue to experiment ineffectively with voice tariff interventions trying to “correct” a situation nearly impossible to correct – Comcel’s “north of 60%” Line Market Share. That “horse left the barn” a long time ago (nearly 10 years ago in fact) and there is little that can be done now. Intervention in the mobile handset market might have an impact but that is no doubt politically and legally impossible.

New Chilean Antenna Law Brings Macondo To The Southern Cone

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For a long time, Chile has been the region’s most advanced telecommunications market

  • First with long distance competition
  • First with new mobile technologies — GSM, WCDMA, HSPA
  • First with new fixed technologies like MPLS

Those of us who work in countries thought to be “less well-organized” could only sigh in envy at the unspoken alliance between government, industry and society that propelled the Chile’s telecom environment towards so-called “First-World” status. But now “regression to the mean” is about to happen with the new antenna law.

Time after time scientific investigations have disproved that Electromagnetic Radiation from towers has any impact on human beings. Time after time panic by politicians and  uneducated voters has denied the validity of these studies.

Admittedly the evidence is less clear about heat and other emissions from the phones themselves but no one passes legislation banning phones, just banning or at least severely restricting towers. Everyone wants mobile phone service. It is an engine of progress as telecom ministers around the region like to say. No one wants the consequences of having mobile phone service like antennas.

Once again Chile moves to the vanguard but not in a good way: BNAmericas reports that Chile will be “among the five strictest member countries of the OECD” with respect to antenna placement. (Sorry, subscription required.)

Full Disclosure: This issue drives me crazy. It has since the time, as president of Comcel, I was dragged into the Bogota Planning Department Office and instructed that I had 18 months to migrate all towers in the city to a single shared structure modeled after the Berlin TV tower!

Towers have no friends. They block the skyline. They are often pug-ugly. They can have a depressing effect on property values in many cases. Like garbage dumps and social housing, no one wants them around however necessary they may be. NIMBY: Not in my back yard.

Given that there is much more evidence for the property value impact than the health effect, one suspects that health is the justification for an age-old economic impulse. The World Health Organization and those who wrap tin-foil around their heads to ward off the evil impacts of EMR are just the unwitting dupes of rich property owners who don’t want those “filthy things” in their neighborhood.These are no doubt the descendents of  aristocrats who didn’t want peasant markets around the walls of their castles. Thank heavens for Carrefour!

The problem is that while the inhabitants of Los Condes or Golf can dispatch garbage dumps to the countryside and social housing to the other side of the city, doing the same with towers has a direct impact on quality-of-service. No antenna. No service. Period. Laws of physics refuse to conform to national legislatures.

I’m not opposed at all to some of the consequences of laws like this one, especially in terms of motivating network sharing and encouraging the use of tower-disguising techniques. Personally, I am partial to the fake pine trees and fake palm tree variants.

I can accept that there were real costs born by neighbors for which operators are responsible but haven’t paid either in rent to the landlord of the tower site or in their ongoing operating costs.

The timing is even mildly fortuitous. If it had come earlier, there would have been few options, but now at least we have (or soon will have) small-cell architectures that can tuck the offending antennas out of site (or nearly so).

But it infuriates me that the same people blocking towers, demanding retroactively that they be torn down in some cases, will also be complaining to Subtel about quality of service. No where do I see that the law absolves operators of their service requirements even though they could be held up for years in environmental permitting for necessary expansion.

Bottom Line: Chile will now come late to the LTE party as operators find it difficult to impossible to put in new towers and in any event will be tied up with legal challenges over existing towers. (LTE is such a different radio technology from WCDMA and the available frequencies are so different that new towers are almost inevitable.) Chile will fall in the “league tables” for Network Readiness and other metrics of technological progress.

What a waste!

Tweet of the Week for June 2-8 2012

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#Nextel BR (#NII) denied right to sell to consumers. Judge says license forces only to sell to Co.s or professions. ow.ly/bo5zo #yg

Full Disclosure: I have advised Nextel International in the past through my association with Yankee Group.

Admittedly this looks like the case of a lower level judge ruling in favor of established players (the law suit in question was brought by Telecom Italia Brasil — TIM BR) who will get overturned as the suit rises up the judicial hierarchy.

I won’t ask how or why the judge decided to rule the way he did. That might lead me into speculations that could in turn lead into legal problems. I will say I find it strange that Nextel’s US lawyers – a breed usually known for being hyper-conservative bordering on paranoid – would let Nextel Brasil offer consumer services if it were obvious that the license wouldn’t permit this.

There is the possibility that Nextel BR’s leadership knew about the restriction but hid this from the Board thinking “No one will care” or “That was so long ago that it no longer matters” or “We’ll work this out when we get to it” (nudge-nudge, wink-wink, say-no-more to quote a famous Monty Python sketch). This is a particular vice of certain old-school Latin American managers (no matter how old they might be) but I have a higher opinion of NII BR’s managers than this.

Much more likely that the license itself isn’t explicit but the preamble to the license ruling was explicit that the authorization was for NII BR’s activities in the business market. This could be interpreted to mean that the company could only sell to personas juridicas i.e. companies rather than personas naturales i.e. human beings.

In a later twitter exchange on the absence of NII BR from the Brazil 4G auction, @miguelsmirnoff connected the two stories together, suggesting that – for now at least – cut off from the consumer market in Brazil, NII BR stayed out of the auction.

I agree that is a possibility although I also find it an excess of caution.

Spectrum auctions arise infrequently. This particular auction has been well over a year in gestation. They are opportunities that cannot be missed. Changing licenses to remove any doubt about provision of consumer services can come simultaneously or later.

Bottom Line: I suppose the Brazilian government can be cocky about this kind of “legal instability” since one relatively new player (Sky BR) and a brand new player (a George Soros vehicle) have come to the 4G party. But this has to put a chill on any serious player thinking about investing in Brazilian telecom, especially combined with Brazil’s “industrial policy” measures like the requirements for Brazilian-provided equipment. That… or some people – very senior people – in NII BR’s executive suite should get fired.