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Viewing cable 06BUENOSAIRES705, TELECOMMUNICATIONS SECTOR UNDERGOES DRAMATIC

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Reference ID Created Released Classification Origin
06BUENOSAIRES705 2006-03-27 12:25 2011-08-25 00:00 UNCLASSIFIED Embassy Buenos Aires
VZCZCXRO2664
RR RUEHRG
DE RUEHBU #0705/01 0861225
ZNR UUUUU ZZH
R 271225Z MAR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3939
INFO RUEHAC/AMEMBASSY ASUNCION 5438
RUEHBR/AMEMBASSY BRASILIA 5236
RUEHCV/AMEMBASSY CARACAS 0875
RUEHLP/AMEMBASSY LA PAZ 4056
RUEHMN/AMEMBASSY MONTEVIDEO 5437
RUEHSG/AMEMBASSY SANTIAGO 5041
RUEHRG/AMCONSUL RECIFE 0123
RUEHRI/AMCONSUL RIO DE JANEIRO 1924
RUEHSO/AMCONSUL SAO PAULO 2826
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
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. 
 
------- 
Summary 
------- 
 
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and Telecom de Argentina have withdrawn their ICSID 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. 
 
--------------------------- 
Privatization and Expansion 
--------------------------- 
 
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. 
 
 
------------------------ 
Crisis and Consolidation 
------------------------ 
 
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 
 
BUENOS AIR 00000705  002 OF 004 
 
 
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. 
 
---------------------------------------- 
Resolution of ICSID Arbitration Claim 
---------------------------------------- 
 
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. 
 
------------- 
Nextel Survival 
-------------- 
 
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 
 
BUENOS AIR 00000705  003 OF 004 
 
 
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.) 
 
----------------------------------- 
COMARCOP'S DIFFICULT BIRTH 
----------------------------------- 
 
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. 
 
------- 
Comment 
------- 
 
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. 
 
BUENOS AIR 00000705  004 OF 004 
 
 
 
16. (U) To see more Buenos Aires reporting visit our 
classified website at: 
hhtp://ww.state.sgov.gov/p/wha/buenosaires 
 
GUTIERREZ