Love and war in Latin America

BellSouth International chisels into the thornyyet blossoming market of Latin America with a wireless co-branding strategy designed to give it a foothold for future wireline growth

Ironically, the tables have turned for BellSouth in Latin America. A company accustomed to reaping the benefits of incumbency is experiencing firsthand the tribulations of entering a market as a competitive carrier. Since BellSouth International's first efforts in Latin America 10 years ago, its business model has been that of a cellular provider. But now the RBOC plans to move forward as a competitive local exchange carrier, and it is feeling the pain of its competitive name tag as it waits for markets to open up and licenses to be granted.

Because it is at the mercy of government regulators, incumbents and other factors, BellSouth International has cobbled together a predominantly wireless infrastructure in Latin America. The region has been laden with outmoded and insufficient infrastructure - even where connectivity is available - and the bonus of wireless technology is that it has been the only feasible inroad to the region (Telephony, Sept. 6, page 42).

But as countries in Latin America gradually have become privatized and are opening up to competition, carriers such as BellSouth are poised to pounce on new markets. By combining a strategy of patience with one of strong name recognition and service quality, BellSouth International hopes to secure marketshare from the traditional telecommunications carriers.

To help secure that marketshare, BellSouth International is taking an incremental buildout approach and is investing in various telecommunications providers in the region rather than bearing the brunt of building all its networks from the ground up. But as it continues on that path, the investments remain centered on the airwaves in high-growth areas.

The incumbent no longer

BellSouth International is extremely guarded about any information it leaks regarding network plans or targeted markets and it is somewhat justified. Competitors venturing into Latin America are presented with a plethora of problems that typically vary in every market. Despite the increasing and warranted demand for service in the region, regulators and incumbents appear to be in little hurry to let competition run free. The economic stability of the markets also plays a significant role in the success of a venture or whether it even is targeted.

In many countries, the governments are not necessarily happy about giving up the reigns, and regulators still may side with local incumbents. But governmental concerns may be lessening slightly, says Juan Fernandez, a telecommunications analyst for Frost & Sullivan. "Privatization has hindered things such as governmental concessions even on the incumbent side. BellSouth is not positioned to go in and take anything by storm," he says.

"We sit here in the U.S. with the incumbency," says Buddy Miller, president of BellSouth International. "We understood the benefits and challenges of [Latin America], and we felt, dollar for dollar, we were better off expanding our presence and being a challenger there - and that's what we have done."

Rather than buy incumbent wireline telcos the way Telefonica has, BellSouth International is taking an incremental approach to its market expansion, Miller says. This gradual approach presents the advantage of not having to pay large amounts to buy into markets or become saturated with the outmoded equipment from which people in the region are trying to steer away. On the flip side, the incremental approach leaves BellSouth International with a primarily wireless portfolio.

"Some people have a natural tendency to go with the local phone company - it's a love/haterelationship. They have a nationalistic feeling, but on the other hand, there is the frustration with the service," Miller says. BellSouth International is betting on that frustration, hoping it will lead customers away from the incumbents. To catalyze that process, BellSouth International is emphasizing a local image.

Although the RBOC has interests in several other markets worldwide, the majority of its holdings are in Latin America. Throughout that region, BellSouth International is combining its own current networks within that of local telecommunications providers (Table 1). In Argentina and Uruguay, BellSouth International is co-branding with cellular provider Movicom. BellSouth International didn't get into that relationship for free; it currently owns 65% of Movicom and has made several similar investments throughout the region to lessen its buildout burdens.

In Venezuela, BellSouth International is co-branding with TelCel, and in Peru, it is co-branding with Tele2000, of which BellSouth International owns 74%. In Brazil, BellSouth International has a stake in cellular provider BCP. BellSouth currently doesn't have co-branding agreements in Ecuador and Nicaragua.

By investing in these Latin American carriers, BellSouth International is able to keep a strong influence within the companies, while benefiting from their local knowledge and abilities.

Attack by air

Because of the region's licensing constraints and the sheer inadequacy of its wireline infrastructure, BellSouth International has migrated from its U.S.-style wireline network - which was later supplemented with wireless - to a variety of wireless technologies in Latin America. Currently, the cost of reaching a customer via fiber or copper in Latin America is exorbitant and saturated with interexchange quagmires. Of BellSouth International's holdings in the region, roughly 98% is wireless, with a 2% wireline infrastructure.

"We don't expect to dig up a lot of streets and put in fiber," Miller says. "That's not what is appropriate from our position."

Until recently, BellSouth International and other competitors have not been allowed to dig up the streets in most countries. "The market had not been open to competition, and you could not have fixed line until about now," Miller says. As a result, a wireline infrastructure was not possible, which made wireless the ticket to Latin America.

The company currently has points of presence in Argentina, Brazil, Chile, Ecuador, Nicaragua, Panama, Peru, Uruguay and Venezuela. And BellSouth International plans to increase its footprint with additional cellular links.

With the wireless model, new competitors can reach a good portion of the untapped customers and attempt to win over incumbents' customers effectively and cheaply. The wealthiest 30% of Latin American households have 58% of the region's home telephones, while the poorest 40% of households have only 8% of the residential phones, according to research done by Audits & Surveys Worldwide. That same research stipulated that while cellular service is a necessity for business customers, it also is a necessity for households because of the difficulty getting wireline service. For one-third of the cellular users in Latin America, cellular service is the primary household telephone service, the study found.

Despite the abundant need in the residential market, BellSouth International plans to concentrate on business customers and enterprises. "They will be very selective as to who they offer services to, with corporations and businesses as the target market," says Marta Kindya, an analyst who focuses on Latin America for Dataquest. "BellSouth is not going after the not-so-lucrative residential market." Targeting the business sector also has brought confusion to BellSouth International's planned service offering, she adds. "They are debating on whether to come in with older types of services like X.25 instead of building 100% frame relay from the start."

The plan to reach those business customers varies from country to country and city to city. "The cellularnetwork itself has a backbone to interconnect the sites with the switches," Miller says. "In general, that's microwave, but in the densest parts to the cities, that network is already fiber." BellSouth's Latin American backbone can be converted from digital microwave, as it is currently, to a fiber backbone as more capacity is needed, Miller says (Figure 1). "It's just a matter of deciding what capacity we need."

Wireline in its sights

Once the needs for capacity are determined and the regulatory barriers are brought down, BellSouth International plans to supplement its wireless networks with some wireline infrastructure. Again, regulatory bodies have eager newcomers awaiting entry into the market. But BellSouth International doesn't seem to mind the wait.

The carrier's tactic is to strengthen and ingrain the BellSouth International brand through the cellular service it is allowed to provide now in most countries, which will then be parlayed into fixed services. "BellSouth will leverage its presence in the cellular market to enter the fixed business as markets open up. Their intent is to dominate in all aspects of communications - not just cellular," Kindya says.

"We plan to go after local telephony, long-distance telephony and data business, which is expected to explode," Miller says. BellSouth International generally will meet those needs through fiber when appropriate and through different types of wireless, such as microwave, local multipoint distribution service (LMDS), point-to-point microwave and wireless local loops.

"We may pick up a building as demand justifies itself and then we will underbuild with fiber to relieve the LMDS route," says Scott Pittman, executive director of regional initiatives for BellSouth International.

BellSouth International currently has a hub in Santiago, Chile, for its Chilean and Argentinean traffic, and the other countries hub off from Miami, Pittman says. Because of the variety of providers BellSouth International has invested in - and the differences in specifications, local content clauses and requirements - using a cookie-cutter approach in the region is impossible. "We can't have a single vendor," he says. In turn, each country may end up with a different network makeup and set of equipment vendors. Equipment manufacturers can be instrumental in helping carriers enter foreign markets (see sidebar on page 54).

To link all the pieces together even more tightly, BellSouth International plans to build in-country fiber routes and create a ring around Latin America through its consortium of carrier networks. "We will take a phased approach to connecting the properties on the ring," Pittman says. That ring also will tap into undersea cables flanking the East and West coasts of the continent. Although no specific details were given, Miller says BellSouth International is involved with a consortium to run the link back to the U.S.

BellSouth International likely will leverage its ownership stake in Qwest Communications to provide more fiber power in Latin America. For some time now, Qwest has been building a significant fiber optic network in Mexico, which is open for competition, although the two companies have not announced plans to work together in that country (see sidebar on page 60).

The challenge ahead

Although BellSouth International's local presence is helpful, some are quick to point out that taking a major share of a market is not an easy task. "Just like competition between the suppliers, [it] is fierce," says Victor Cervantes, vice president of account sales for Nortel Networks' Caribbean and Latin American markets. BellSouth International is coming into most of the markets as a second or third service provider.

Although potential customers freed by privatization may saturate the market, some caution that the market's challenges do not end with securing regulatory approvals or building out networks. Even more uncontrollable problems of economic stability affect the market.

"Companies love to say the Latin American market is booming," says Frost & Sullivan's Fernandez (Figure 2).

Although markets may be poised for growth, their economies may not be able to support the number of lines that they should. That may change in a few years as economies develop, says Nortel's Cervantes.

When looking at a new market, BellSouth International is cognizant of the economic unrest in many Latin American countries, says Angel Ruiz, vice president and general manager of the BellSouth account for Ericsson. "They go through a market assessment process and, depending on the number of players in the market and the economic and cultural situations, they decide whether or not to play," he says.

Without question BellSouth International has had tremendous success in Latin America. But Cervantes questions whether Latin America really is a hot market. "Let's be realistic. This is still a volatile market, and everyone experienced that in 1999," he says. "Even though it is expected to grow, don't assume it will follow a straight line or any kind of normal progression."

BellSouth International's Miller again stresses that by offering a higher quality service, BellSouth International will be able to secure increased marketshare. "We will continue as a cellular company and then broaden our lines of business to make us a general telecommunications provider, not just a cell carrier," Miller says. "There's a lot of gold in Latin America for us to go mine, and we don't have to get all of it to be very successful."

Trying to break into foreign markets is no trivial task, and companies such as BellSouth International turn to equipment vendors for help. Most of the major U.S. vendors have invested heavily in Latin American operations and facilities in order to secure sales in the region. Some, such as Alcatel, Ericsson and Siemens, have been in the region far longer than the Latin American privatization date.

In general, many countries still regulate what equipment can be used, where equipment is produced and what taxes will be paid. Every country has a different methodology regarding licensing and permits, so it is hard for foreign carriers to know the ins and outs of each country. This is where the vendors step in as both a tour guide and a regulatory hurdle-hopper to help carriers in their quest to enter the market.

"BellSouth and operators like them are always looking for someone who understands the politics and has knowledge of the local market," says Victor Cervantes, vice president of account sales for Nortel Networks' Caribbean and Latin American markets. "We can help them through the regulatory obstacle course because we know the local rules."

Beyond the regulatory problems, vendors also help with import rules, taxes and duties, Cervantes says. "It's what makes or breaks the implementation of a project," he says.

"The more doors we can open for them, the faster we can get them to market," says Edgar Valverde, country senior officer for Alcatel Latin America. "It is a tough battle for anyone."

Alcatel helps service providers by contributing to the market assessment process, strategy, planning and network design, says John Shelnutt, regional vice president of the BellSouth account for Alcatel.

Tying wireless and future wireline networks together is another area where vendors can be of help to BellSouth International. "Operators like BellSouth are looking at current technologies to tie the markets together," says Angel Ruiz, vice president and general manager of Ericsson's BellSouth account. Technologies such as dense wave division multiplexing will tie networks together while wireless local loops bring in the last mile, he says.

Ironically, as BellSouth International waits patiently to enter countries opening up to competition, it is turning away from one that already is open. BellSouth International originally had operations in Mexico in the early '90s, but it sold them in 1994 and has yet to return to the country.

"There is some question as to whether or not BellSouth will ever return to Mexico," says MartaKindya, an analyst for Dataquest. "In Mexico, everyone is losing money in long-distance."

Telmex has a 70% share of the market in Mexico, whereas AT&T's Alestra and MCI WorldCom's Embratel Mexico operations have a combined 29% share, according to Dataquest research. "Everyone else has 1% of what's left, so no one has been able to make inroads in the country," Kindya says.

Another analyst agrees. "In Mexico, it has been hard for new operators to compete with Telmex," says Hector Hernandez, a senior telecommunications analyst with IDC's Latin American practice. Although it is hard to compete with the incumbents, it is not impossible, Hernandez says, pointing to other countries, such as Brazil, that recently opened up to competition.