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Cablegate: Can Peru Improve Competition in Telecoms Industry?

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 LIMA 002025

SIPDIS

SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/CIP
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR KENNETH SCHAGRIN, JONATHAN MCHALE
FCC INTERNATIONAL BUREAU FOR ETALAGA

E.O. 12958: N/A
TAGS: ECPS ECON ETRD EINV PE
SUBJECT: CAN PERU IMPROVE COMPETITION IN TELECOMS INDUSTRY?
Ref: Lima 984

This report contains sensitive business information. Please
protect accordingly.

1. (SBU) Summary. Two recent developments in the
telecommunications industry have GOP officials pointing to
improved competition in the market. America Movil, a
Mexican company owned by Carlos Slim, acquired the fourth
mobile band on March 30 and should begin operations by early
2006. The Ministry of Transportation and Communications
(MTC) formally approved the merger of Telefonica del Peru
and BellSouth on April 8. MTC, in return, demanded that
Telefonica give up one of its two frequency bands (as part
of the MTC spectrum clean up) and commit to expand mobile
service to 2,000 communities. Despite GOP efforts to open
the market to new mobile participants, competition in the
telecommunications market is still limited, as Peru's
excessive mobile termination rates benefit Telefonica vis-a-
vis other providers. End Summary.

Limited Competition But Room For Growth
---------------------------------------

2. (U) Although Peru is experiencing unprecedented economic
growth, this is not mirrored in the mobile
telecommunications sector. In 2004, there were only four
million users, a significant increase from 2.9 million users
in 2003. Telefonica del Peru, with 67.5 percent of the
market, dominates Peru's mobile market. Italy's TIM Mobile
ranks second, with 26.9 percent, and Nextel is third with
4.5 percent. Of note for future competition: China's
Huawei recently successfully completed a pilot of low-cost
mobile phones in the 450-mgH band in Peru.

America Movil Wins Fourth Band
------------------------------

3. (SBU) America Movil, a Mexican company owned by
millionaire Carlos Slim, was awarded Peru's fourth band on
March 30. According to the MTC, America Movil only paid
$21.1 million for the spectrum, considerably more than the
$180 million TIM paid to enter the market in 2002. America
Movil, using GMS/GRPS technology (which is compatible with
the TIM system), will begin operations in Peru by late
2005/early 2006. According to Carlos Slim, Sercotel's (as
the Peruvian company will be known) entry into the market
will help drive down Peru's high mobile costs.

4. (SBU) America Movil was the sole bidder on Peru's fourth
band, even though Nextel was expected to submit an offer.
Alfonso de Orbegoso (protect), Vice President of Legal
Affairs at Nextel Peru, informed Commercial Counselor in mid-
March that a Sprint (Nextel's parent company) assessment of
the project determined that the high termination rates
(averaging $0.21) and the unwillingness of Osiptel to act
quickly were limiting factors in Nextel's ability to compete
in the market. As a result of these factors, Nextel's Peru
based finances were deteriorating, making it financially
unable to bid on the fourth band. Furthermore, unless
Osiptel regulates the high mobile rates soon, Nextel will
face serious financial difficulties in Peru, limiting the
company's ability to expand service throughout the country.

BellSouth Merger Approved
-------------------------

5. (U) After months of deliberation, the MTC formally
approved the merger of Telefonica del Peru and BellSouth on
April 8. MTC's approval, however, came with a multitude of
draconian stipulations. First, Telefonica must give up one
of its two frequency bands within the next two years, which
the MTC will open to bidders by the end of 2007. (Note:
This is part of the MTC's plan to clean up spectrum, which
will affect all mobile providers. End Note.) Additionally,
Telefonica must waive the fees for former BellSouth clients
who wish to cancel service. (Under Peruvian law, customers
must pay the entire cost of the service contract if the
contract is cancelled early.) Third, Telefonica must expand
or improve mobile access to a minimum of 2,000 communities
in the poorest areas of Peru by 2008. Failure to do so will
result in a fine of 16,500 soles ($5,077) per community,
paid to MTC. Fourth, Telefonica is prohibited from
including former BellSouth customers on its on-net plan
until 2007. Finally, the MTC noted that if OSIPTEL finds
Telefonica guilty of committing five infractions (cross
subsidy, predatory pricing) in a two-year period, Telefonica
would lose its concession. Furthermore, if Telefonica
commits two infractions in one year, it will also lose its
concession of BellSouth.

Comment: Increased Competition?
-------------------------------

6. (SBU) Peru's telecommunications industry, particularly
the mobile sector, is underdeveloped. There is a huge
potential for growth and the entrance of America Movil, as
well as the merger of Telefonica and BellSouth, should
marginally improve competition between mobile providers.
However, the GOP must grapple with Peru's high mobile
termination rates, which continue to undermine competition
in the market. Telefonica, which controls over two-thirds
of the market, allegedly continues to use predatory pricing
and cross subsidies to keep its on-net rates low. These
practices should cease when the new mobile rate takes affect
in June. If not, Nextel now has a means by which to bring
its complaints to MTC, which ultimately may cause Telefonica
to lose its concession of BellSouth.

STRUBLE

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