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International Telecommunication

Management
TERM PAPER REPORT

“Liberalization Trends in Telecom Sector in


Chile”
Under the guidance of

Professor Vinayshil Gautam

Submitted By

Kushagra Singhania (2010SMT6775)


(kushagra.singhania@dmsiitd.org)

Department of Management Studies


Vishwakarma Bhawan, Shaheed Jeet Singh Marg

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Index

Abstract .................................................................................................... Error! Bookmark not defined.


Chile Overview ......................................................................................... Error! Bookmark not defined.
Overview of Telecom sector..................................................................... Error! Bookmark not defined.
Development of Telecom sector .............................................................. Error! Bookmark not defined.
Steps towards Liberalization .................................................................... Error! Bookmark not defined.
Mobile Communications .........................................................................................................................9
Local carrier and universal service ........................................................... Error! Bookmark not defined.
Investment in telecommunication sector ............................................ Error! Bookmark not defined.
Current Scenario..................................................................................... Error! Bookmark not defined.3
Recent Market Developments ............................................................... Error! Bookmark not defined.3
Conclusion ................................................................................................ Error! Bookmark not defined.
References .......................................................................................................................................... 155

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ABSTRACT:

The General Law of Telecommunications opened Chile’s telecommunications


industry to competition in 1982. This law generally did not restrict the number of
licenses that would be granted to deliver telecommunications services in Chile.
Importantly, the licenses were for nonexclusive provision of wireline and wireless
services, both local and long distance. The primary obligation imposed on all
telecommunications operators in Chile was to connect their networks in compliance
with specified technical requirements. Other terms and conditions of interconnection
typically were left to negotiation among the operators.

In 1982, local telecommunications services were supplied almost exclusively by


Campania de Telephonos Chile (CTC), while long distance telecommunications
services were supplied almost exclusively by Entel. Not surprisingly, these two state-
owned enterprises were not anxious to connect their networks with the networks of
emerging rivals. Few interconnection agreements were signed and competition was
limited until Chile implemented a dispute resolution process that ensured the timely
execution of interconnection agreements. Long distance competition also was limited
until an equal access requirement was imposed in 1994. The requirement stipulated
that every time a customer placed a long distance call, she had to explicitly designate
(via dialling a special code) a long distance company to carry the call. The special
code for each long distance carrier incumbent and entrant alike had the same number
of digits. Most importantly, a call was not automatically carried by Entel if the caller
did not specify an alternative carrier.

Once new suppliers were afforded substantial opportunity to provide


telecommunications services on terms comparable to those faced by incumbent
suppliers, competition began to flourish in Chile. The number of fixed lines more than
tripled (from roughly one million to more than three million) between 1992 and 2000,
and the extensive waiting list for (fixed) wireline telephone service that had
inconvenienced Chile’s citizens for so many years quickly disappeared. The number
of mobile telephone subscribers in Chile increased nearly tenfold (from roughly
36,000 to more than 3.4 million) during the 1991–2000 period and nearly doubled
again (to more than 6.7 million) between 2000 and 2003. Prices for most

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telecommunications services in Chile also have declined substantially since 1990. By
2003, nearly one-fourth of the fixed telecommunications lines in Chile were supplied
by CTC’s competitors rather than by the incumbent supplier. Competitors secured
especially large market shares in Chile’s urban regions. This pattern of entry likely
reflects in part the lower unit costs of serving urban areas given their relatively high
population densities. This entry pattern also may reflect regulated prices of basic
telephone service that are further above costs in urban regions than in rural regions.

The regulated prices of local telephone services in rural regions often do not reflect
fully the relatively high unit costs of serving these regions. Instead, prices in rural
regions tend to be set closer to (and sometimes below) cost while prices in urban
regions often are set substantially in excess of cost. Such pricing patterns are designed
to ensure that basic telephone service is affordable to all citizens. These patterns may
be less pronounced in Chile than in some countries because a separate fund has been
established to subsidize the purchase of basic telephone service in rural regions and
low income urban regions. Nevertheless, in jurisdictions where CTC is deemed to be
a dominant supplier of local telephone services, it is required to set the same price for
basic services across substantial geographic regions. Some suggest that this restriction
on CTC’s ability to target price reductions to those regions in which competition is
most intense may be one cause of the substantial market share that competitive
suppliers of local telecommunications services have been able to secure in Chile.

CHILE OVERVIEW:

Due to some geographical particularities Chile happens to be a rather isolated country


situated between the Pacific in the east and the Cordillera in the west. With a total
length of about 4500 km, the country covers almost all climate zones including the
desert of Atacama in the third region and an Antarctic zone in the south. Out of a total
of 13 million inhabitants, more than 5 million live in the metropolitan area of
Santiago. The rest of the population is spread over several medium-sized cities and

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remote villages, while most parts of the south and the desert of Atacama are sparsely
populated. After a period of economic turmoil in 1982 due to a severe exchange rate
crisis, the country experienced rapid economic growth, driven by a policy of wide-
ranging privatization. A 17-year period of military dictatorship ended in 1989, and the
succeeding democratic government consolidated economic development by opening
the country to foreign investors and reducing the public deficit. The annual inflation
rate decreased from 27% in 1989 to 8-9% in 1994. In spite of the deflationary policy,
during the decade 1985-94 Chile's average growth of above 6% of GDP was the
fourth highest growth rate in the world. During this period the unemployment rate fell
to about 5% and the poverty rate decreased from 45% to about 30%. Further
progress in reducing poverty, especially in rural areas, has become the government's
first priority.

OVERVIEW OF TELECOM SECTOR:

In recent years technological progress has transformed telecommunications from the


switching of voice services to information processing. Several new transmission
systems have emerged which can substitute the capital-intensive fixed terrestrial
network. The telecommunications sector has become important not only because of its
own growth potential but also as an input for other service sectors.

The competitiveness of many industrial sectors depends on the availability of a


modern and widely spread infrastructure. Starting with the USA, Japan and the UK,
more and more industrialized countries have liberalized telecommunications markets,
assuming that competition and the inflow of private capital would facilitate the
growth of the sector. As regards industrialized countries, the negative impact of
network liberalization on universal service is expected to be limited given that in most
of these countries a high household access rate has already come about and that the
price elasticity of demand for network access is very low. In contrast, the starting
point for developing countries is very different. As has been pointed out in the
Maitland Commission report of the International Telecommunication Union (ITU),

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Even where in urban areas rudimentary local networks exist, they provide only poor
and unreliable service. Developing countries therefore face the double task of
installing a countrywide network and upgrading the existing infrastructure to enhance
the quality and variety of services provided over their networks. Given the different
state of development of their infrastructure, one could argue that developing countries
should not follow the liberalization trend. The absence of universal service could be
used as a justification in favour of continuous monopoly provision of the
telecommunications infrastructure. In this case cross-subsidization of access with
revenues stemming from the national long-distance and international service might be
justified.

In addition the main telecommunications operators (Telecom Operators) need


sufficient capital to carry out investments to upgrade their facilities. By withdrawing
traffic and revenue from the Telecom Operators, liberalization would make it less
likely that Telecom Operators could raise the capital needed from their
telecommunications business. According to this viewpoint, developing countries
should emulate the approach historically pursued by the industrialized countries,
which over a period of 80 years kept tight state control over the sector. Liberalization
would then take place only after the basic communications needs of a large proportion
of the population had been satisfied.

DEVELOPMENT OF TELECOM SECTOR:

The US company Edison started constructing local telephone networks in Chile in


1880. The resulting rudimentary infrastructure was taken over first by ITT and then
by the Companiade Telefonos de Chile (CTC) in 1930. Even thereafter, since it held
80% of CTC's shares, ITT remained in control of the Chilean telecommunications
sector. In 1964 the government decided to set up the Empresa Nacional de
Telecomunicaciones (Entel), which was authorized to run the national long-distance
and international networks. Thus the Chilean telecommunications sector was
dominated by state-regulated enterprises which enjoyed legal monopolies in their
respective territories. Beside the two main carriers, the Compania Nacional de

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Telefonos (CNT) operated in the Tenth and the Compania de Telefonos de Coyhaique
(COY) in the Eleventh region.

Nationalization further increased state control in the early 1970s. Tariff setting,
however, had already become a political issue, and the prevailing tariff schemes did
not allow a reasonable rate of return. As a result, over decades investment into the
infrastructure was far too low to meet rising demand. The regulatory regime was the
product of historic and political factors and did not reflect economic principles.

Tight government control over the industry was common in industrialized and
developing countries alike; in Chile, however, there was a peculiarity in the network
structure. Whereas in the past state-owned operators in Europe, as well
as NTT and AT&T, controlled the entire national network in their respective
countries, the Chilean national telecommunications network was divided between
several companies. Since all public networks were controlled by the state, this
separation did not lead to network competition; on the other hand, due to network
fragmentation economies of scale and scope could not be reaped either. The existence
of economies of scale and scope between different networks, however, is one of the
major natural monopoly arguments for the terrestrial fixed network. They are likely
to play an especially important role in a small market like the Chilean one. One may
therefore conclude that the traditional regime combined the disadvantages both of
network fragmentation and of public monopoly.

Although it brought disadvantages in the past, Chile's fragmented network structure


offered a unique opportunity for reform. Especially in a small country like Chile, a
fully integrated operator is likely to keep its dominant position even after full
liberalization has taken place. The existence of several operators saved considerable
transaction costs that would have been incurred in breaking up a fully integrated
carrier. Moreover, competition could be introduced between established carriers
which had already gained considerable skills in network management and service
provision. This may be one reason why the Chilean market has become more
competitive than other markets where network competition was introduced much
earlier.

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STEPS TOWARDS LIBERALIZATION:

By the late 1970s it had become increasingly clear that the prevailing regulatory
regime was out of date and that it had become an obstacle to the development of the
Chilean telecommunications sector and the economy in general. The
telecommunications network was only rudimentary; even in 1983 just 3.73% of
inhabitants had a telephone. This was a low level even compared to other South
American countries. Poorer households and sparsely populated areas did not have any
access to the telephone network. Moreover, only 40% of demand could be satisfied,
and the waiting time for a telephone was about nine years. In spite of cross-
subsidization of the local network with revenues stemming from the long-distance
services- Entel passed over about 61% of its total revenues to CTC the poor state of
the infrastructure could not be sufficiently improved.

Given the low degree of network development and the small customer base, neither
Entel's nor CTC's revenues were enough to raise the capital to finance a rapid
expansion of the telecommunications network. Increasing the capital base by drawing
upon government funds was equally excluded, given the government's budget
constraints due to high foreign debts. As a result, private capital had to be attracted by
a policy of market opening and privatization.

Starting with the creation in 1977 of the Subsecretaria de Telecomunicaciones


(Subtel), a division of the Ministry of transport and Telecommunications, the
government adopted a policy of market opening and privatization. As the regulator,
Subtel is responsible for studying the sector's development, making policy
recommendations and preparing the licensing of operators. The terminal market was
the first to be liberalized in Chile.

In 1978 a new 'Politica Nacional de Telecomunicaciones' was adopted which


established the principle of subsidiarity in the telecommunications sector. The state
was only to intervene in cases where the market would not deliver satisfactory results.
This new policy led to a complete change in the legal and regulatory environment,
and by 1982 a “Ley General de Telecomunicaciones” was adopted. It replaced a
former law, in force since 1959, according to which the state was responsible for both
the regulation and the provision of telecommunications services and infrastructure.
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According to the 1982 law, more than one enterprise can provide a
telecommunications service in the same geographic area.

The first licences were granted to CMET and Telefonica Manquehue and others
which never succeeded in establishing their own networks. For
several years a fierce discussion took place about the correct interconnection charges
these carriers would have to pay to CTC in order to feed their long-distance calls into
the latter's local network. As in many other countries, liberalization and privatization
of the main carriers took place simultaneously. From the government's point of view
these policies may conflict in that full liberalization may depress the share value of
the main operator. As a result, if priority is given to raising government revenue, the
incumbent may be sheltered from 'too much' competition. As we will see below, this
did not happen in Chile.

Privatization started with the sale of Entel. In a first step, 12.5% of the company's
shares were sold to its employees in 1987. Full privatization, however, took place
only in 1989. Telefonica de Espafia purchased 20% of Entel and 43% of CTC shares.
Given the shortage of domestic capital, Chile depended on foreign investment to
modernize its telecommunications infrastructure. However, foreign investment only
increased rapidly after the end of the Pinochet dictatorship and the establishment of a
democratic government in 1989. During the period 1983-88 in Chile the share of
investment of total telecommunications revenue remained below the regional South
American average. Thereafter the country faced a dramatic increase in domestic and
foreign investment into the sector. Since privatization, turnover in the Chilean
telecommunications sector has been growing at an annual rate of 14%, about twice as
fast as the overall economy.

MOBILE TELECOMMUNICATIONS:

In the mobile telephony market Chile is divided into two areas. In each area a duopoly
of two analog operators has been set up, presently serving about 110000 subscribers.
CTC and Cidcom operate in the metropolitan area and in the Fifth region while VTR

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and Telecom operate in all other regions. Prices are not regulated. The licensing of
digital operators is envisaged for the near future. In the digital market the Chilean
government is following a new and more liberal approach than other countries.

In the mobile network market it is common practice for regulators to define certain
standards which become compulsory for all operators in the market. Only those
transmission systems are approved which apply the previously defined standard. For
instance, in digital technology in the USA the TDMA and CDMA standards have
been adopted. Japan has developed its own digital standard based on TDMA, while
Europe favours the GSM standard. In Chile, however, the regulator only allocates
frequency bands and determines the number of players while leaving the choice of
standard and technology to the operators. Thus operators are free to choose, for
instance, a system based on GSM or CDMA.

To ensure interoperability between the different systems, operators are, however,


obliged to use switching facilities which make interconnection feasible. By not
harmonizing standards, the Chilean regulator imposes additional cost on the mobile
operators which have to use more sophisticated switching technology to ensure the
interoperability of networks. In the long run this may become an advantage since
operators are not locked into a particular technology which may be out of date within
a relatively short period of time. It is therefore hoped that the more flexible approach
will encourage innovation in the Chilean mobile communications market.

THE LOCAL NETWORK AND UNIVERSAL SERVICE:

By the late 1970s the telephone density in Chile was below the average of Latin
American countries. Outside the capital Santiago, which accounts for about 5 million
inhabitants, the rest of the population is spread over a 4500 km long territory,
including many islands. The universal service rate varies considerably between the
different regions. Universal service provision is made more difficult due to the
existence of many small and remote villages and a mountainous landscape. The
variation of telephone density between different communities greatly exceeds the
variation between regions. For example, the telephone density varies between 61.24%

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in the well-off metropolitan area of Providencia to zero in San Pedro (7000
inhabitants).

Chile today is still far from achieving the goal of universal service. However,
liberalization and the increase in private investment have brought about a
considerable improvement during the last decade. At the beginning of the 1980s the
average waiting time for network access was 8-9 years. CTC's initial development
plan for the period 1991-96 was to reduce the waiting time for a telephone to 30 days
and to increase the access rate from 8% to 12% of inhabitants. By 1994 the average
waiting time was already down to 25 days, and with a rate of 11.4% Chile had also
almost achieved the access level initially aimed for by 1996. Thus, with regard to
universal service, Chile has made considerable progress since taking the first steps
towards liberalization in 1982; moreover its progress in this regard has been better
than that of other (less liberal) South American countries.

In 1983 the Chilean access rate was lower than that of Argentina, Venezuela, Brazil
and Colombia, but by 1992 Chile had become second only to Argentina. Taking into
account that access demand is very income elastic, this can be regarded as even more
of a success, since in 1992 Chile's GDP per capita was lower than that of Argentina,
Brazil and Venezuela and close to Peru's. These improvements were achieved
despite the fact that since the late 1980s carriers had been preparing for the
'multicarrier' regime which has ended all cross- subsidization from long-distance
service revenues to telephone access. The government has resisted imposing any
universal service obligations on the operators; instead it has set up a universal service
fund amounting to about US$4.5 million annually, scheduled to rise to US$10 million
over the next five years. This fund is used to support operators which set up local
networks in underdeveloped regions.

While fostering universal service in the long run, the government's policy is devoted
to 'universal access' in the short run. Many remote villages still have no connection to
the public infrastructure. The universal access policy aims at installing at least one
connection point in these villages; thereby households gain access to the network over
payphones. According to the 'universal access' goal, by 1997 no community of more
than 50 inhabitants should remain without a payphone. With the support of the

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government's universal service fund it is hoped that private capital can be attracted
into this market. Any company or private person who wishes to do so can acquire and
run payphones. Revenues have to be shared with CTC, which provides the connection
to the local switch. When setting up such payphones, companies also obtain a licence
to provide a local network in the geographical area concerned.

INVESTMENT IN TELECOMMUNICATION SECTOR:

Anticipating the full liberalization of the telecommunications market by 1994,


Chilean operators significantly increased their investment in infrastructure. Until 1988
investment in telecommunications in Chile fluctuated greatly and never rose above
25% of revenue, falling short of the regional average. Thereafter it increased
dramatically and has averaged over 50% of revenue since privatization. We know that
in 1992 Chile came second in investment per capita when compared with other South
American countries. However, Figure 6 also shows that there is still a large gap
compared to the Asian 'tiger', South Korea. Today total investment amounts to about
US$400 million annually. 21 New network competitors have already announced large
investment plans for the future. Bell-South plans to spend up to US$40 million in
Chile, hoping to gain a 20% market share. Bell Atlantic and its Mexican partners have
put forward a similar scheme.

Besides improvements in universal service (see below), the accelerated investment led
to a modernization of the country's infrastructure. After New Zealand, Chile is the
second country in the world which has obtained 100% digitization of switches. In
addition, a large part of the copper cables has been replaced by fibre optics. Due to the
accelerated investment, taken together Chile's operators have become the most
efficient in South America (measured in main lines per employee). The digitization of
switches also allowed the implementation in 1994 of an equal access mechanism
according to which each long-distance operator received a three-digit code. On the
basis of these codes customers can select an operator each time a long-distance call is
made.

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CURRENT SCENARIO:

 No. of subscribers: 21.43 million with more than110% penetration rate, expected
to reach 25 million by 2013
 ARPU of $6.12 as of 2009 and expected to increase to $7.5
 Major telecom operators include:
◦ Movistar (40.7%)
◦ Entel PCS (32.6%)
◦ Claro (23.7)
MVNOs:
 Blue Two Chile
 Dotcom

RECENT MARKET DEVELOPMENTS:

Almost all regulatory market entry barriers have been removed as regards both
Chilean and foreign companies. Alongside five Chilean firms, two US regional
operators (BellSouth and Bell Atlantic) operate in the long-distance market. Since the
entire network has been digitized
it is possible for customers to choose their carrier for each individual call. As a result,
customer loyalty is low and operators must compete mainly on price.
Within a few months of full liberalization, competition in the long distance market
had become fierce. Nominal prices decreased below the levels prevailing in the late
2000s. For instance, a one-minute daytime call from Santiago to Valdivia cost 51
pesos in 2009; this price had come down to 28.24 pesos by 2003. Given double-digit
annual inflation rates, this implies a considerable reduction in the real price. Even
more dramatic price decreases materialized after the introduction of the multicarrier
system. It has been argued that during the promotional period tariffs for national and
international long-distance calls were even below marginal cost, and the operators'
total spending on advertising promotions amounted to US$30 million.
At the beginning of 2005 prices were raised again and stabilized at a higher level.
These new prices are used for a price comparison with the pre-multicarrier situation.

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Even after the price increases of January 2005, on average nominal prices were about
30% below the level before the introduction of the multicarrier system.

CONCLUSIONS:
The overall picture of telecommunications in Chile is one of high penetration levels
and relatively low prices. Telecommunications regulation and competition in Chile
has evolved substantially over the past two decades and is still evolving. There have
been several positive market outcomes that have delivered benefits to consumers.
Nonetheless the incumbent provider remains dominant by market share across a range
of markets, which has served to test the access and enforcement regulatory regime. It
has also meant that there has been a tendency towards regulatory tightening contrary
to expectations when the current regime was put in place.
In terms of the take-up of traditional fixed line communications, mobile
communications, and internet and broadband networks, the country fares well on
international front. Prices have also been declining over the past decade. Investments
in the telecommunication area increased with liberalization and have continued to
maintain a solid level.

These positive developments are due in part to liberalization and increased


competition, on the one hand, and technological innovation and overall wealth on the
other.

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References
 www.subtel.cl

 Odgen, Telecommunications Policy, Vol. 19, No. 9, pp. 667-684, 1995 Network liberalization
and developing countries :The case of Chile

 Adam, C., Cavendish, W., & Mistry, P. S. (1992). Adjusting privatization: Case studies from
developing countries.

 Portsmouth, New Hampshire: Reed Publishing.

 Baltagi, B. H. (1995). In Econometric analysis of panel data (p. 80). New York: John Wiley.

 Cronin, F. J., Parker, E. B., Colleran, E. K., & Gold, M. A. (1993A). Telecommunications
infrastructure investment and

 Economic development. Telecommunications Policy, 17, 415}430.

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