Global Insight Perspective | |
Significance | There is light at the end of the tunnel for Telefónica's local unit with the renewal of its mobile contract following months of hard negotiations with Ecuador's government. |
Implications | The operator will be required to pay an undisclosed amount, which may surpass the February 2008 suggested US$700-million down-payment proposed by the government, as well as abide with a list of contractual obligations, whose implementation has been a top priority for leftist President Rafael Correa. |
Outlook | The new contract allows the deployment of third-generation services, thus saving the firm the bidding cost of an eventual spectrum auction, similar to the one that took place in Brazil in December 2007 and cost operators 5.3 billion Brazilian reais. |
Telefónica operates in Ecuador under the Movistar brand and its contract was due to expire in November 2008. "It is an important advance in the negotiations, although there are still some minor aspects in the contract terms that we have to polish before ending the process," the head of Ecuador's telecommunications secretary (Senatel), Jaime Guerrero, said in a statement. The deal is expected to close next week with approval of the contract by the National Telecommunications Council (Conatel). The concession involves use of 35 MHz of spectrum—25 MHz in the 850 MHz frequency band and 10 MHz in the 1900 MHz band—and will include new services, such as video and data-transmission based on 3G technology.
In February 2008, Guerrero revealed that the government was looking to charge the operator some US$700 million for a 15-year extension of its contract, which is 12 times the original price of US$58 million that the firm paid in the 1990s. He added that the US$700-million price tag refers to upfront payment in full and that the government could charge more should companies choose an instalment plan. Although Guerrero did not disclose the concession amount in his announcement last week, he said that the company will make an initial payment at the end of this year and progressive payments for 15 years, according to the company's annual revenues.
Outlook and Implications
Movistar is Ecuador's second-largest mobile player with 2.62 million customers and 20.45% share of the market in February 2008. Rival operator Porta, a local unit of pan-American firm América Móvil, claims the lion's share with 9.71 million lines, while state-owned Alegro PCS only counts 482,090 users.
The agreement marks a victory for leftist President Rafael Correa, who is seeking to increase state participation in key industries of the economy, such as telecoms, oil, and mining. Although there has been no indication of plans to proceed with the nationalisation of the telecoms sector, as regional ally Venezuelan President Hugo Chavez did last year, Correa's plans may deflect potential investors to other Latin American markets that have limited state control over their industries.
Movistar's rival operator, Porta, is still in negotiations over its concession agreement, which is also due to expire later in the year. Senatel is looking to conclude negotiations this month, but in the unfortunate event of not reaching an agreement, the government will begin a process to revert the concession to the state and launch an international bidding contest. Last year, the government came close to terminating the two operators' contracts as a result of operational failures that gravely affected the quality of service for a large number of customers, and created a hostile environment by demanding payment of allegedly unpaid taxes, and accusing Movistar of obstructing tax payments to the local tax authorities (see Ecuador: 4 March 2008: Ecuadorian Tax Authorities Ask América Móvil to Pay US$150 mil. in Unpaid Taxes and 2 April 2008: Ecuadorian Tax Authorities Accuse Telefónica of Delays in Tax Payment). According to previous announcements,Correa's aim was to improve quality of service (QoS), which includes various aspects, such as the number of successful calls, average delivery time of SMS, areas of network coverage problems, service interruptions, and QoS on special events, by integrating a list of prerequisites in the two operators' freshly negotiated contracts, as well as creating a fund, fed by the two players, that would provide telecoms services to the poor. On the other hand, Movistar is now allowed to deploy its own 3G offerings; the previous 1993 contract only provided for basic voice services. Both Telefónica and América Móvil have already launched similar services in other Latin American markets, hoping to increase ARPU levels, mobile phone usage, and migration towards post-paid monthly offerings.