Telcomp: 'Telefónica is creating an entry barrier for smaller companies'

Market players in Brazil are up in arms about an infrastructure sharing deal between the local Telefónica subsidiary and newcomer Winity Telecom, a company backed by Pátria Investimentos.

Under the deal, which is being reviewed by antitrust regulator Cade, Telefônica is entitled to lease up to 3,500 of Winity’s cellular sites through 2030. Winity also leased to Telefônica, for up to 20 years, a 5MHz+5MHz portion of its 700MHz spectrum band, representing coverage of 1,100 localities.

Finally, Winity and Telefônica signed a roaming agreement, which may evolve into a radio access network sharing agreement, depending on the traffic processed.

In this interview, Luiz Henrique Barbosa, CEO of telecom association Telcomp, explains why carriers are so staunchly against the Winity-Telefônica deal. He also comments on Cade’s approval of Oi’s sale and market perspectives for fixed broadband providers, among other things.

Founded in January 2000, Telcomp represents more than 70 small and medium-sized Brazilian telecom companies, mostly non-nationwide carriers, as well as tower companies and equipment providers.

BNamericas: Telcomp has adopted a very decisive stance against approval of Winity’s sharing agreement with Telefônica, currently under analysis at Cade. What are the expectations for the outcome of this process?

Barbosa: Telcomp has 70 member companies, and each company has one vote, regardless of their size. All have the same weight. We’re not serving anyone’s interest in particular, contrary to what some say. We’re speaking for everyone. On that particular issue, every member is endorsing [the stance]. Winity is part of Telcomp, so in this case it’s obviously not part of the discussions.

We battled with [telecom regulator] Anatel to include regional frequencies in 3.5GHz in the 5G auction, which actually happened, so that operators could compete regionally. Same for other bands.

In the 700MHz band, in which national operators already held spectrum, Anatel vetoed their participation [in the first round]. The idea was that a wholesale operator would come in, something very welcome. [Winity won and paid 1.4bn reais, about US$270mn and an 806% premium, for a national block in the 700MHz band for 4G, becoming a new national mobile player].

This agreement with Winity, in our view, distorts that. It was made by Telefónica to block the market. Telefónica needs to prove that it needs 700MHz.

Winity won with a much higher premium, so much so that there was no counterbid. Why did it offer such a large amount? For us it is now clear that it’s because the company already had an agreement with Telefónica. At least with Telefônica. Because we already hear that there’s another big player mulling an agreement with Winity. 

It’s clearly a market and spectrum-blocking maneuver for those cities where it was contemplated.

BNamericas: Would Telcomp object to a Winity deal with a big telco under different terms?

Barbosa: Never. More networks is always good. We've been talking about sharing for years. What V.tal is today, positioning itself as a neutral network, we defended way back, in 2010. Transparent sharing agreements are always good. But it’s not the case in question.

Basically, it’s disguised as a sharing agreement, something that is actually Telefónica creating an entry barrier for smaller companies.

Sooner or later, regional operators will need 700MHz. They will want to make a deal. This spectrum will need to be available.

[Because] 700MHz is complementary to 3.5GHz in 5G. We are talking about five times fewer antennas than necessary if I used only 3.5GHz.

BNamericas: And what about Oi's case?

Barbosa: The sector has developed a lot in recent years. There is strong competition in fixed broadband. Around 60% of all accesses are in the hands of smaller, regional operators. In fiber broadband, even more so. 

In mobile, this is not the reality. Ninety-eight percent of the market is now [with the sale of Oi's mobile operation] in the hands of Claro, TIM and Vivo [Telefónica].

The sale of Oi Móvel was perhaps inevitable.

But what happened in Brazil happened nowhere else in the world: the first three players got together to buy the fourth and share frequency, customers and assets.

At the end of this process, each one had more or less a third of the market. Not really a third, because otherwise it would be very scandalous. But that's basically it.

What happens in other places is the first buying the fourth, the second merging with the third, etc. The resulting market shares are one company with 50%, the other with 20%.

Today, in Brazil, we have a situation of accommodation. If you think about the game theory, nobody is going to attack each other being more or less the same size.

And this [Oi’s sale] process is so debatable that when the operation was approved [by Cade], the vote was 3 to 3, with approval coming from the casting vote of Cade’s president.

It was a tense session, in which the rapporteur for the process said it would not be considered in any country's competition manual.

There was an understanding, at Cade, that it was necessary to approve it because there would be no other possibility for Oi. But there was a possibility that Oi could be sold to [DigitalBridge’s] Highline. The company was discouraged from following through with the offer.

BNamericas: But the sale was approved.

Barbosa: Telcomp’s fight at Cade is that you apply vaccines before you get sick. And that’s not what the regulators did. The deal was approved and then the antitrust remedies imposed. What happened? They’re not complying. 

We fought to have the reference offer of roaming prices, and on suitable terms, to foster competition, as required. We’re fighting for fair prices for the reference MVNO offers.

In other markets, MVNOs have 15%, 20% market share. In Brazil, they don’t get to 1%. The wholesale price must be inferior to the retail price. Otherwise, there’s no competition. 

Anatel was clear: no trinkets, details, which end up raising the price. But it seems like it went in one ear and out the other.

In the case of MVNOs, they [the buying telcos] created a fee of 0.75 reais per device per month. We’re talking about millions of IoT devices. 

This increases the cost [of the total reference MVNO offer] and makes the business unfeasible for MVNOs. We appealed to Anatel, arguing that this would go against the agency's decision. Anatel agreed, suspending this charge. What did the telcos do? Appealed to the courts. 

The roaming and MVNO price offers were supposed to be presented way back. After approval of the sale of Oi, the roaming one had to be presented within 90 days, and the MVNO one within 120 days, by June 22 and July 22. 

It’s January 18. And even today, operators are receiving orders from Anatel to adapt the offers. It is a deliberate act. Why? Because the remedy was applied ex-post. 

BNamericas: What are the other important issues for small providers and competitive telcos?

Barbosa: Telcomp is developing together with some members an agenda for private networks. With integrators, network orchestrators. This is an important agenda for us.

BNamericas: What does Telcomp want, exactly? More bands for private use?

Barbosa: We want to develop this ecosystem, get it to go beyond the big companies. How is it today? Large groups with large groups. Large mining companies, large agribusiness producers, served by Vivo, TIM and Claro.

But there is a whole middle market, there is a large group of rural producers, for example, smaller in size but who are important for the economy, that are not served by large companies.

They cannot be left behind in the digital transformation process. This is the market that Telcomp members expect to serve with 5G.

BNamericas: We’re seeing a market slowdown, with several internet providers and regional players hitting the brakes, grappling with high churn, struggling to keep up the pace of new FTTH clients. What is the expectation for this year for the sector?

Barbosa: In fixed broadband, the neutral network model still must prove itself. This is not just this year, this is years to come. The bill must add up for the ISP [to lease it]. And this is still challenging.

Competition is strong and the ISP consolidation movement will continue. Now, when the interest rate is low, as we have experienced in recent years, a lot of business, M&As, expansion is encouraged. Now rates are high and we see an accommodation of company valuations.

We saw fewer M&As last year. And also, a process of purging, with some companies getting stronger, others exiting the market. Those who managed to do their homework will be better prepared to sell their companies now. 

But we see this consolidation process going on. No country in the world has 20,000 internet service providers [like Brazil]. There will be consolidation, yes, and it’s natural.

We’re also going to see a sophistication of the business model in coming years. Today, building a fixed broadband network is very easy, almost plug-and-play. But this means selling a commodity. 

As demand becomes more sophisticated, you will have to provide other types of services. And this we’ll see advancing in the coming years.

We don’t have a single projection for all our members. But I think investments in general, with some exceptions, should remain more or less at the same levels as in previous years. When there’s competition, you have to keep investing. Otherwise you’re left behind.