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Análisis - Brasil English

Concentration of Telecommunications in Brazil and the Resulting Threat of Deregulation of the Sector

The privatization of telecommunications was based on the argument that it would promote competition among companies, benefiting the final consumer. Instead, it led to a process of oligopolization.

Ana Claudia Mielke*/Brazil/December 2016
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As was the case in many other countries, Brazil experienced a process of privatization of the telecommunications sector during the 1990s. The state-run company Telecomunicações Brasileiras S/A – Telebrás– was privatized in 1997 with the creation of the General Telecommunications Law (Lei Geral de Telecomunicações –LGT, No. 9472/1997).

The law led to the commercial liberalization of the sector, promoting the granting of concessions to companies that acquired the operators created following the division of Telebrás into regions, thus authorizing the entry of new telecommunication service providers. The idea was that after a while, the authorized providers would compete on equal footing with the concession companies. This has not occurred with the speed and intensity that were anticipated. The legislation established two service provision systems. Concessionaires were to operate within the public regime while authorized providers would operate exclusively in the private regime. There was also a change in the role of the State, which moved from service provider to regulator and oversight agency, especially following the creation of the National Telecommunications Agency (Agência Nacional de Teleconunicações –Anatel–).

There was a significant increase in investment in the sector during this time as well, mainly in the expansion of infrastructure. This allowed for the growth of the offering of services to the public –especially landline service-, which had been fairly limited, in addition to the creation of the domain of foreign capital in Brazilian companies and a considerable jump in the concentration of the sector.


Part of the increase in concentration is due to the way in which the LGT differentiated between concessionaires and authorized providers. The former benefitted from the infrastructure that had been built by the state. In addition, there were public incentives for the construction of private infrastructure and government intervention in the purchase and sale of operators. This was the case of
Oi which, following Presidential Decree No. 6654 that altered the General Awarding Plan (Plan General de Otorgas, PGO), purchased Brasil Telecom, becoming the landline telephone service concessionaire in 26 of 27 of the units in the Brazilian federation (with the exception of São Paulo, where Telefônica/Vivo operates).

Although the privatization of the sector has been based on the argument that it would promote competition, thus benefitting the final client, what actually occurred was a process of oligopolization of telecommunications. This process has increased over the past decade through mergers and acquisitions among agents.

The regulatory liberalization promoted by the LGT combined with the process of technological convergence generated profound structural transformations in the sector. Today it is necessary to understand telecommunications infrastructure as part of a broader sector that includes information technologies and audiovisual content. The concentration of Brazil’s pay TV market illustrates the relationship of convergence that has been established among the sectors of infrastructure, programming and content distribution.

According to Anatel data, in March 2011, there were 10,418,829 pay TV subscribers, 87.05% of whom were subscribers of four operators: Net, Embratel, Sky and Telefônica. The first two alone covered 68.97 % of registered users.

tv-paga-2011

Pay TV (logins/subscribers) 2011
Source: Agencia Nacional de Telecomunicaciones de Brasil, developed by Intervozes.

In 2012, the total number of pay TV subscribers was 16,809,274, which represents a considerable increase of 6,390,445 logins compared to 2011.

It is important to underscore the regulatory changes in the sector promoted by Law No. 12485 of 2011, which addresses conditioned access service, which certainly influenced the increase. The new legislation removed obstacles that impeded the entry of foreign capital into the pay TV market and allowed for the offering of services based on any technological platform.1

tv-paga-2012

Pay TV (logins/subscribers) 2012
Source: Agencia Nacional de Telecomunicaciones de Brasil, developed by Intervozes.

The companies Net and Embratel merged in 2013 and together they captured 8,788,739 subscribers. In addition to the increase in subscribers (which was more evident over the last two years and reached 18 million in 2013), the top four operators represented 91.87% of logins in 2013. Just the top two represented 83.56% of logins that year. The merging of the two firms in 2013 showed how mergers and acquisitions have acted on the Brazilian market. The two companies and the operator Claro belong to América Móvil, a Mexican group that expanded control of the telecommunications market in Latin America.

tv-paga-2013

Pay TV (logins/subscribers) 2013
Source: Agencia Nacional de Telecomunicaciones de Brasil, developed by Intervozes.

As Martins (2015) notes, the composition of the market presented since 2013 illustrates the reconfiguration following the change in the regulatory framework. In March 2015, the number of logins reached 19,110,000. The data show the continuity of the logic of concentration. Together, the four main companies in the sector controlled 91.69% of logins. The first two together represented 80.71%.

tv-paga-2015
Pay TV (logins/subscribers) 2015

Source: Agencia Nacional de Telecomunicaciones de Brasil, developed by Intervozes.

As the figures show, over the course of the years analyzed, four operators were consolidated in the Brazilian pay TV market: Net/Claro/Embratel, Sky/DirecTV, Oi and Telefônica/Vivo, covering 91.69% of the market in 2015.

If we consider the CR4 Concentration Index, which indicates that markets can be considered highly concentrated if the four main companies represent over 50% of returns or total access of the industry or if the eight main companies represent over 75% of that total (Mastrini and Becerra, 2006), we can say that the Brazilian pay TV market is fairly concentrated given that Net/Claro/Embratel and Sky/DirectTV alone control 80.71% of the subscribers in that market.

Based on that scenario, it would be possible to state that there is an oligopoly in that sector in Brazil and that it is not limited to only one segment. On the other hand, given that only two operators hold what would be configured as a strongly concentrated market if it were occupied by four markets, we can state that the current configuration is a duopoly (Martin, 2015). In 2011, the operators Net and Sky formed a duopoly. The same was true of Net/Embratel and Sky/DirecTV in 2013 and Net/Embratel/Claro and Sky/DirecTV in 2015.

While switch telephone service in Brazil was the leader in statistics on concentration for decades, today it is practically impossible to analyze the telecommunications sector in isolation. While the diversity of companies that were operating in the landline and mobile telephony market was growing in the early 2000s, mainly through the entry of foreign businesses, at the end of the first decade of the 2000s a recurrent process of mergers and acquisitions between companies developed. This has resulted in high rates of concentration of the sector as a whole, even with the offering of diversified services.

In order to attempt to establish a comparison of data that allows one to demonstrate the concentration process, it is important to present data on multimedia communications services –broadband and fixed Internet- and personal mobile services –mobile voice and data-based on the participation of the operators in these two markets.

Participation in Multimedia Communications Services Market

2012

2013

2014

2015

OI

31.50 %

29.67 %

27.34 %

25.02 %

NET/CLARO/EMBRATEL

28.37 %

29.58 %

31.39 %

31.84 %

TELEFÔNICA/VIVO

20.34 %

19.35 %

17.11 %

28.63 %

GVT

10.80 %

11.38 %

12.29 %

CTBC/ALGAR

1.75 %

1.76 %

1.73 %

1.78 %

OTHER

7.24 %

8.26 %

10.14 %

12.73 %

Source: Anatel Annual Reports for 2013, 2014 and 2015.

Participation in Personal Mobile Services Market

2012

2013

2014

2015

TELEFÔNICA/VIVO

29.09 %

28.49 %

28.47 %

28.42 %

TIM

26.87 %

27.09 %

26.97 %

25.69 %

NET/CLARO/EMBRATEL

24.92 %

25.34 %

25.33 %

25.59 %

OI

18.81 %

18.52 %

18.14 %

18.65 %

Other

0.41 %

0.56 %

1.09 %

1.65 %

Source: Anatel Annual Reports for 2013, 2014 and 2015.

As the tables illustrate, the same operators that are currently controlling the pay TV market in Brazil in the segments of packaging and distribution also offer fixed Internet service and mobile Internet service.

It is important to note that Telefônica/Vivo, Net/Claro/Embratel and Oi, three operators located among the four leaders in the pay TV market,2 are also fighting for the lead spot in the fixed broadband market. Until 2014, Telefônica/Vivo controlled less than 20% of that market, but that changed after the acquisition of GVT.

Telefônica/Vivo’s participation increased from 17.1% to 28.6%, alternating between second and third place in the fixed broadband market. In practice, that indicates that only three companies dominate the fixed broadband market in Brazil. Meanwhile, Sky/DirecTV, which together with Net/Claro/Embratel forms the duopoly in the pay TV market, fought for control of the multimedia communications market, covering 1.15% of it in August 2016.3

In the personal mobile services market, Telefônica/Vivo, Net/Claro/Embratel and Oi are again in the lead. These three operators and Tim dominate the sector, with a market share of 98.3%. Among the large companies, the only exception to the rule of crossed concentration evidenced in this article is Tim, which emerges as the second largest operator in this market. However, it is known that part of Telecom Italia (18%), which owns Tim Brasil, is controlled by the consortium Telco, which includes Telefônica.

This oligopoly has important consequences because in a concentrated market, the few service providers and/or producers have sufficient power to set prices. Here it is important to note that only two groups control over 50% of the telephony, Internet and pay TV packaging/distribution market in the country. This concentration frequently takes the form of a monopoly in regions that generate less economic interest, which includes the peripheries of major cities, especially in fixed telephony and broadband, and only concession firms for landline phone service offer these services (Telefônica in the state of São Paulo and Oi in the rest of the country).

On average, the price of the mobile phone service minute in 2015 varied between 0.09 and 0.18 reales (between 0.02 and 0.05 U.S. dollars) among operators. Though it has decreased in the past few years, it is still among the most expensive in the world according to a 2014 report published by the International Telecommunications Union (ITU). The same is true for fixed broadband service, which is also precarious in the majority of municipalities.

The concentration creates economic asymmetries (Martins, 2015), contributing to the continuation of regional differences (the states in northern and northeastern Brazil have less access to telecommunications services) and differences in access among cities (peripheral regions are less benefited by the Internet infrastructure offer).

But there is something more that is of concern in regard to concentration: the fact that only a few agents determine what can be consumed –in terms of content or applications- by users, which negatively impacts freedom of expression, plurality and diversity. In Brazil, the mergers and acquisitions have consolidated the political power of a few media groups, which are now multimedia groups.

Through processes of convergence, operators have increasingly sought to offer combined services. While voice services (telephony), video (TV) and Internet (broadband) used to be offered, the trend now is to add mobile service to these services. This configures what is known as quad play.4 In Brazil, the model was first offered by Oi, then by América Móvil and other operators are aligning technologies for insertion into this market (Martins, 2015).

In other words, in a context of convergence, telephony operators move on to dispute markets with pay TV content loaders or distributors (and vice versa). Operators are increasingly making investments in order to allow them to control the pay TV and multimedia communications markets. The goal would be to situate themselves in an expanding market and prevent the advance of over-the-top content like Netflix, or OTT.

Deregulation of Telecommunications

Brazil is currently facing an extraordinary situation in terms of its institutional and political context. The impeachment of President Dilma Rousseff and ascension of an illegitimate government have left the country on constant alert. Some democratic institutions, including the Constitution itself, have been tested by political sectors that are taking advantage of a moment of institutional fragility to promote constitutional changes and approve guidelines that harm historic rights guaranteed by law. A process of complete deregulation is underway.

In 2016, a flurry of bills were produced that seek to alter important legislation such as the Civil Internet Framework (Law No. 12965 of 2014), which was passed in 2014 following broad participation of civil society, and General Telecommunications Law No. 9472 of 1997. Both pieces of legislation have been attacked over and over again by members of Parliament who act as spokespeople for telecommunications companies.

One of these attacks led to Bill No. 3453 of 2015 in which Anatel is authorized to transform public telephony concessions into private service authorizations.5 In Brazil, the public regime is adopted in services that are identified as essential to society, such as landline phone service, which is currently the only such service provided through the public regime. It is important to note that although Internet access is considered to be essential to the exercise of citizenship following the approval of the Civil Internet Framework (and that is reflected in the telecommunications service that serves as the basis for that access) and the LGT says that essential services cannot be provided through the private regime, the provision of broadband continues to private, which contradicts the law.

The requirements imposed on the operators that form part of the public regime are meant to ensure that the service is a necessary social good. As such, operators are required to guarantee universalization of access to all interested parties (regardless of their location), continuity of service (which may not be interrupted for unjustified reasons) and rate control with minimum prices that take into consideration individuals with less economic power. The purpose of the public regime is thus to ensure a sensible reduction of the obligations imposed on operators.

In practical terms, this means that the companies will be free to discontinue landline service in places that they consider to provide low economic returns. They also will no longer be required to maintain the minimum package for low income users, which can promote a shut-off in telephony for specific regions of the country if the bill becomes law.

Considering that the majority of the infrastructure used by these companies was inherited from the privatization process to be used during the concession period and later returned to the State for new concessions, this change also will have direct consequences on what are called reversible goods, currently calculated at 105 billion reales (around US$32.5 billion) by the National Accounting Court (Tribunal de Cuentas de la Unión, TCU), With the approval of the bill, the door will be opened for companies to transform that value into private investments, turning public patrimony into private capital.

There is another detail in this deregulation process for the telecommunications sector, which is the direct impact that it will have on Internet access and use. This is because the political perspective of universalization of Access to the internet was always linked to the possibility of using this existing infrastructure. This is something that civil society has demanded based on the concept of Internet access but that has been counteracted with the practice of offering broadband only through the private regime, going against the Civil Internet Framework and the LGT itself.

The review of the telecommunications regulatory model will define the model of Brazilian development in the coming years. As such, it requires caution and discussion. What is more, due to the role that Brazil plays in the economic context of Latin America, it is important to pay attention to the decisions that will be made here because they will certainly influence deregulation processes in neighboring countries.

As they are currently expected to take shape (the bill is about to go to a vote in the full session of the Lower Chamber), the changes to the LGT should expand the existing hole in the offer of infrastructure for Internet access in Brazil. Said access is already quite impacted by the prioritization of commercial interests of operators against the social interests of guaranteeing citizen participation online. For example, only 51% of Brazilian households currently have Internet access. Of this 51%, only 68% has a broadband connection. In addition, while the total percentage of those with access to Internet in urban areas is 56%, that number drops to 22% in rural areas.

The same can be said of the relationship among the regions of the country: while in the southeast 60 out of every 100 municipalities have access to broadband, in the north this is true for only 38 of every 100. These data suggest that allowing only commercial interests to decide where Internet will be available will not guarantee the universalization of Internet. On the contrary, it will create a profound abyss between the country and the city and between different regions of the nation.

The data are from the TIC Domicilios 2015 study which is conducted annually by the Regional Center for Studies for the Development of the Information Society (Cetic.br), an agency of the Punto BR Information and Coordination Nucleus (Nic.br) which in turn implements the decisions and projects of the Brazil Internet Management Committee (Cgi.br). The study shows that it is still necessary to make progress in order to attain the universalization of telecommunications services and Internet connections in Brazil.

* Journalist with a master’s degree in Communications Sciences from Universidad de São Paulo (USP). Coordinator-executive of Intervozes – Colectivo Brasil de Comunicación Social.

REFERENCES:

Martins, H. (2015) “O mercado de TV paga no Brasil contemporâneo: duopólio convergente”. En: IX Congreso Internacional Unión Latina de la Economía Política de la Información, la Comunicación y la Cultura (ULEPICC 2015. Cuba. 

Mastrini, G. y Becerra, M. (2006). Los dueños de la palabra. Acceso, estructura y concentración de los medios en la América Latina del siglo XXI. Buenos Aires: Editorial Prometeo.

1 There is a debate about the role of Law No. 12485/2011 in the generation of greater concentration of fixed broadband and pay TV that requires more research and a better assessment.

2 Although Telefônica/Vivo are Oi very far behind in the pay TV ratings.

3 Teleco. «Market Share das Operadoras de Banda Larga Fixa» in Teleco. N.p., n.d. Web. 10 Nov. 2016. <http://www.teleco.com.br/blarga.asp>.

4 Voice, video and broadband Internet Access and on-demand services.

5 PITA, Marina (2016) “Projeto de lei privatiza infraestrutura de acesso à rede; entenda.” Blog do Intervozes na Carta Capital. <http://www.cartacapital.com.br/blogs/intervozes/projeto-de-lei-privatiza-infraestrutura-de-acesso-a-rede-entenda>. Accessed on November 2, 2016.