TELECOMMUNICATIONS SECTOR UNDERGOES DRAMATIC

UNCLAS SECTION 01 OF 04 BUENOS AIRES 000705

SIPDIS

SIPDIS

SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA
USDOC FOR 4322/MAC/OLAC/BASTIAN/PEACHER

E.O. 12958: N/A
TAGS: ECON AR
SUBJECT: TELECOMMUNICATIONS SECTOR UNDERGOES DRAMATIC
CONSOLIDATION



1. (U) Sensitive but unclassified, not for internet
distribution.

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Summary
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2. (U) Argentina's telecommunications industry has gone
through a great deal of change since its initial
liberalization in 1989. The consolidation following the
economic crisis in 2001-2002 has left the telecom industry
in the hands of three major multinational companies,
Telefonica, Telecom, and Telmex. Telefonica de Argentina
and Telecom de Argentina have withdrawn their ICSID
arbitration claims against the GOA. Nextel of the U.S. has
created a profitable mobile service niche for itself and is
the only US telecommunications company left in Argentina.
The GOA is trying to create a new telecom company, COMARCOP,
based on local cooperatives, but the company faces many
difficulties. End Summary.

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Privatization and Expansion
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3. (U) The Menem administration privatized the National
Telecommunications Company (ENTel) in 1989, leading to the
establishment of a duopoly between Telefonica and Telecom.
The privatization process divided the country into two
geographical areas. Telefonica of Spain controlled the
central to southern region of Argentina while Telecom of
France and Italy controlled the central to northern region.
The two companies invested an estimated USD 17 billion in
infrastructure and quality of service standards from 1991-

1999. BellSouth, a U.S. mobile service company, received
the licensing rights for Buenos Aires just prior to the
privatization of ENTel. Buenos Aires made up 80 percent of
the Argentine telecommunications market at the time and
mobile services were non-existent outside of Buenos Aires.


4. (U) The Menem administration opened the mobile services
market for the interior of the country in 1993 and further
deregulated the telecommunications industry in 1996, leading
to further foreign investment in the telecommunications
sector. Verizon, Nextel, AT&T, and Enron invested in both
fixed landline and mobile services. Verizon began to invest
in the interior of the country by setting up fixed land
lines. Nextel began a nationwide mobile service directed at
businesses and high-income individuals. AT&T invested in
infrastructure, laying down fiber-optic networks and fixed
land lines for business-to-business and international long
distance phone calls. Enron invested in Transporters of
Southern Gas (TGS) who owns the telecom company Telcosur.
Telecosur invested in laying down a fiber optic network
throughout Argentina. Fixed land line and mobile services
have and still represent 80 percent of the
telecommunications industry revenue, while infrastructure
such as fiber optic networks represents the remaining 20
percent.


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Crisis and Consolidation
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5. (U) The economic crisis of 2001-2002 bankrupted many
foreign telecom companies leading locally managed investment
funds to purchase international companies below market
value. US companies such as Verizon and Enron filed for
bankruptcy and sold their assets below market value due to
problems associated with a combination of peso revenues,
dollar debt and a weakened consumer market. Telefonica
bought BellSouth, Telecom purchased Verizon, and Telmex
bought AT&T. Telecom majority owner France Telecom sold the
majority of their holdings to the Werthein Group, an
Argentine investment group, in 2003. France Telecom now

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owns just 2 percent of Telecom.


6. (U) Three major companies have emerged from the
consolidation that followed the economic crisis of 2001-
2002: Telefonica, Telecom and Telmex of Mexico. Telefonica
is now the largest telecom company in Argentina with 4.3
million fixed land lines. Telefonica's mobile services
subsidiary is Movistar which was acquired when Telefonica
bought BellSouth. Telecom is the second largest telecom
company in Argentina. Telecom owns the Personal mobile
services company and the Arnet internet company. Telecom's
exit from Argentina is expected to occur within the next few
years as it has sold off all of its other Latin American
assets outside of Brazil and Argentina, according to a local
telecom executive. Telmex entered the Argentine market when
it acquired AT&T in 2004. Telmex sister company America
Moviles owns the CTI mobile services company. Telmex has
been attempting to purchase Telecom but Telecom's asking
price has been too high, according to the same local
executive.

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Resolution of ICSID Arbitration Claim
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7. (U) Telefonica withdrew its USD 2.834 billion World Bank
International Center for Settlement and Investment Disputes
(ICSID) arbitration claim against the GOA in February 2006.
In exchange for withdrawing its claim, Telefonica will now
be able to double the cost of phone calls made during the
hours from 8 p.m. to 9 p.m. Monday through Friday.
Telefonica will also be able to dollarize charges on all
incoming international phone calls, thereby tripling
Telefonica's revenue on those calls. Telefonica, for their
part, agreed to invest ARP one billion (USD 333 million) in

2006.


8. (U) Telecom Argentina likewise withdrew its USD 297.5
million ICSID arbitration claim against the GOA in February

2006. Telecom will also be able to dollarize incoming
international phone calls. Telecom has promised to reduce
rates for residential phone calls. Telecom will start
reducing long distance and international rates starting at
10 p.m. instead of 9 p.m., which is significant because a
large percentage of private residential international phone
calls occur during the hours of 9 p.m. to 10 p.m. Telecom
has promised the GOA that it will invest ARP three billion
pesos (USD 1 billion) in Argentina in the next three years.


9. (U) A lesser-known part of the GOA's agreement with
Telefonica and Telecom was to not allow cable companies to
provide triple play service, according to a local IT
executive. Triple play service is the grouping of
telephone, TV and data access into a single subscription on
a broadband connection. The provision of triple play
service on a broadband connection could undercut Telefonica
and Telecom revenue, as recently occurred when a local cable
company undercut Telefonica's telephone business in Chile.
Thus, Telefonica and Telecom are believed to have dropped
their ICSID arbitration claims in exchange for this type of
protection.

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Nextel Survival
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10. (U) Nextel is the only U.S.-based telecom company that
was able to survive the economic crisis of 2001-2002. Nextel
did so by taking out a USD 100 million dollar loan to pay
off its dollar debt, converting their US dollar receivables
into peso receivables, and being flexible with the forms of
payment from their hard-pressed customers (some customers
were even allowed to pay their bills in devalued provincial
quasi-currencies). Nextel also doubled the number of its
customer service centers while other companies closed their
centers. This combination of steps helped Nextel retain and

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acquire many new customers.


11. (U) Nextel went on to develop a profitable mobile
services niche within the larger mobile services sector.
Nextel captured Movicom customers when Telefonica purchased
Movicom's parent company, BellSouth. Eighty percent of
Nextel's client base is now small businesses and the
remaining 20 percent is affluent individual consumers. Its
strong costumer service helps it compete with mobile
services giants such as Movistar Personal and CTI. Nextel's
average monthly billing is USD 40 compared to USD 13 for
CTI. The difference in the size of Nextel's monthly billing
is due to the fact that it has a customer base of small
businesses and affluent individuals that are able to pay
monthly bills while CTI has a customer base of lower income
individuals that use prepaid phone service.


12. (U) Nextel's current business plan is defensive in the
face of an uncertain telecommunications environment. Nextel
is now only expanding its network servers in response to
growth within its customer base. (Comment: Nextel Argentina
is doing well but its parent company Sprint Nextel Inc. of
the U.S. reported a 55 percent drop in fourth-quarter net
income amid heavy merger-related expenses in 2005. End
Comment.)

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COMARCOP'S DIFFICULT BIRTH
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13. (U) Secretary of Communications Guillermo Moreno has
encouraged the establishment of a new Argentine wireless
company, COMARCOP, to promote national industry and increase
competition in the telecommunications sector. COMARCOP is
composed of small Argentine telephone cooperatives located
throughout the country. The GOA is planning to give
COMARCOP the portion of the radio spectrum that Telefonica
promised to return to the GOA after its acquisition of
BellSouth/Movicom. The initial start-up capital will come
from a telecommunications fiduciary fund, which was also
promoted by Secretary Moreno.


14. (SBU) COMARCOP faces a number of serious obstacles.
The company is composed of inefficient Argentine telephone
cooperatives which tend be poorly managed, are prone to
corruption and fight among themselves. The one exception to
this general statement is the telephone cooperative of
Pinamar, which has a respectable reputation in the
telecommunications sector. The Argentine telephone
cooperatives also do not seem to understand the global
telecommunications business well and the president of the
organization, Anthony Picorini, has a bad reputation, both
as a politician and a businessman, according to a local
telecom executive. COMARCOP has approached a variety of
international companies, including Nextel and Chinese
telecommunications company Hutchinson, to help manage
COMARCOP. Both companies turned down the offer, most likely
due to their unwillingness to enter into a business that
would be at least partially controlled by the Secretary of
Communications.

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Comment
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15. (U) The telecommunications sector is likely to see
less, rather than more, competition in the coming years.
Competition is expected to decrease with Telmex's likely
purchase of Telecom. The most promising potential source of
increased competition, the introduction of triple play
service, has been undercut by GOA's apparent agreement with
Telefonica and Telecom. Finally, the Secretary of
Communication's efforts to increase competition through the
creation of COMARCOP is not likely to succeed given
COMARCOP'S internal problems and Argentina's poor track
record with the management of state-controlled enterprises.

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classified website at:
hhtp://ww.state.sgov.gov/p/wha/buenosaires

GUTIERREZ