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Massachusetts Institute of Technology Sloan School of Management 50 Memorial Drive Cambridge, MA 02139, USA Universidad Adolfo Ibáñez Escuela de Negocios de Valparaíso Balmaceda 1625 Viña del Mar, Chile Hypercompetition in the Chilean Telecommunications Industry () First Draft: February 15, 1998. This Draft: September 22, 1998 Do not quote nor distribute without the permission from the authors. Comments are welcome. At the beginning of the 1980s, the Chilean telecommunication market was characterized by low penetration rates of basic telephony, decade-long waiting lists for new customers, high levels of regulation, and State-owned operators. The deregulation of telecommunications initiated in 1981 with the aim of providing Chile with a modern telecommunications infrastructure, brought rapid expansion and introduction of new technologies. It also resulted in the privatization of the State-owned operators and high levels of competition in a segmented market with multiple competitors. The market changed from two monopolies--one for basic telephony and one for long distance-- to a set multi-segment and single-segment competitors operating in an environment of high competition and rapid technological change. There were several important questions in the mind of the managers competing in the industry: Would the structure of the market remain stable or would it consolidate? Would it move towards a dominant competitor and a set of followers or would there be an oligopoly and a group of fringe players? Who was best positioned among the competitors? Who had the best competitive advantage? Was it sustainable? What major options were open to each firm in order to gain or sustain advantage? These and other questions lured in the background as companies learned to compete aggresively in some segments of the market while cooperating in others. Alvaro Cuervo-Cazurra, Ph.D. Candidate at Sloan School of Management, MIT, prepared this case under the supervision of Professors Fernando Suárez of Universidad Adolfo Ibañez (Santiago, Chile) and Donald Lessard of Sloan School of Management, MIT (Cambridge, MA, USA) as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Previous versions of the paper were entitled “Compañía de Telecomunicaciones de Chile (CTC) (B): Managing Hypercompetition.” Copyright 1998 Sloan School of Management, MIT and Universidad Adolfo Ibañez. No part of this publication may be reproduced without the written permission of Sloan School of Management, MIT, or Universidad Adolfo Ibañez.

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Massachusetts Institute of Technology

Sloan School of Management 50 Memorial Drive

Cambridge, MA 02139, USA

Universidad Adolfo Ibáñez

Escuela de Negocios de Valparaíso Balmaceda 1625

Viña del Mar, Chile

Hypercompetition in the Chilean Telecommunications Industry (∗)

First Draft: February 15, 1998. This Draft: September 22, 1998 Do not quote nor distribute without the permission from the authors. Comments are welcome.

At the beginning of the 1980s, the Chilean telecommunication market was characterized by low penetration rates of basic telephony, decade-long waiting lists for new customers, high levels of regulation, and State-owned operators. The deregulation of telecommunications initiated in 1981 with the aim of providing Chile with a modern telecommunications infrastructure, brought rapid expansion and introduction of new technologies. It also resulted in the privatization of the State-owned operators and high levels of competition in a segmented market with multiple competitors. The market changed from two monopolies--one for basic telephony and one for long distance-- to a set multi-segment and single-segment competitors operating in an environment of high competition and rapid technological change.

There were several important questions in the mind of the managers competing in the industry: Would the structure of the market remain stable or would it consolidate? Would it move towards a dominant competitor and a set of followers or would there be an oligopoly and a group of fringe players? Who was best positioned among the competitors? Who had the best competitive advantage? Was it sustainable? What major options were open to each firm in order to gain or sustain advantage? These and other questions lured in the background as companies learned to compete aggresively in some segments of the market while cooperating in others.

∗ Alvaro Cuervo-Cazurra, Ph.D. Candidate at Sloan School of Management, MIT, prepared this case under the supervision of Professors Fernando Suárez of Universidad Adolfo Ibañez (Santiago, Chile) and Donald Lessard of Sloan School of Management, MIT (Cambridge, MA, USA) as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Previous versions of the paper were entitled “Compañía de Telecomunicaciones de Chile (CTC) (B): Managing Hypercompetition.” Copyright 1998 Sloan School of Management, MIT and Universidad Adolfo Ibañez. No part of this publication may be reproduced without the written permission of Sloan School of Management, MIT, or Universidad Adolfo Ibañez.

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Telecom in Chile 2

1.- CHILE Chile is a long narrow South American country over the Pacific side of the Andes that

stretches for 4,352 km., covering an area of 756,946 square km (EUI, 1996). The geographical characteristics, with disperse cities in a mountainous terrain subject to frequent earthquakes make communications problematic. Although 60% of the population lives in the center of the country, in the Metropolitan and V regions1, the production centers are scattered from the north (mining) to the south (fish). A modern and efficient telecommunication system is necessary for the development of the country.

2.- HISTORY OF CHILEAN TELECOMMUNICATIONS (1880-1980)

In 1880, four years after its invention, the telephone arrived in Chile. This year, an American engineer, Joseph D. Husbands, traveled to the US to bring the telephone to Chile. He was granted the right to use the patents on telephones and became a representative in Chile of Edison2. After watching a demonstration, the President of Chile allowed the telephone license to the Compañía de Teléfonos Edison on April 26, 1880. The telephone had been patented by Graham Bell only four years earlier, making Chile an early adopter of the new technology.

In 1884, the name of the company was changed to the West Coast Telephone Company after its association with US investors. In 1889, West Coast was acquired by Chile Telephone Company. The new company had at that time 2907 telephones (1804 in Santiago, 466 in Valparaiso and 637 in other locations) while Chile´s population at the time was 2.5Mn.

Over the next three decades, there was a surge of small privately owned operators offering local services. However, these operators were ultimately absorbed by Chile Telephone Company, which became the dominant provider of telephony in Chile. By 1927, the company had 26205 telephones, providing local service in most cities and interurban communication-- the latter highly unreliable except for connections between Santiago and Valparaiso (the largest Chilean cities). In this period, there was little governmental attention to telephony, except by granting the necessary operating licenses. This situation changed in 1925 with the passage of the General Electric Services Law, which provided the basis for government regulation, as well as for its direct participation in the telecommunications business. This law was the primary legal framework for the industry until 1982, when the first General Telecommunications law was passed.

In 1927, International Telephone and Telegraph Corporation (ITT), a US telecom equipment maker and service provider, bought the stock of Chile Telephone Company as part of its Latin American expansion strategy. Between 1927 and 1930, at a time of political turbulence in Chile, ITT sought how to achieve stability and profitability. On November 18 1930, the company became incorporated as Compañía de Teléfonos de Chile (CTC). In 1931, a special agreement with the government was achieved, which was formally enacted as law on 23 January 1931. The statutory contract granted a concession for 50 years, subject to renewal every 30 thereafter. It set tariffs to provide a 10% return on net investment.

1 Chile is organized into 13 administrative regions numbered I to XII from North to South, plus the Metropolitan region, which contains the capital Santiago, between the V and VI regions. 2 Although the telephone had been invented by Alexander Graham Bell and Husbands got the wrong patents, he was later allowed to use the right ones to develop telephony in Chile.

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Although there were other companies operating, CTC was by far the largest. In 1954, CTC had 97475 lines, whereas the second largest competitor, Compañía Nacional de Teléfonos de Valdivia had only 5246.

In 1959, a new law was passed that had an important effect on the telecommunications sector. Domestic telegraph became subject to state monopoly and the government increased its participation in the sector. However, CTC managed to continue operating under the law of 1931. In the 1960s, tensions started to arise between CTC and the government over the quality of service, which did not satisfy consumer demand. After the 1960 earthquake, it became evident that long distance telephony was highly unreliable. In 1964, the government intervened in the telecommunication industry with the creation of a new company, Entel, to provide long distance telephony, allowing the ITT-owned CTC to continue providing basic telephony.

In 1971, during Allende’s socialist goverment, CTC, which throughout its history had been a foreign-owned private company, was intervened by the government, though not nationalized. This was part of a broader strategy of control of key industries. At this time, other private telephone companies, such as Teléfonos de Valdivia and Teléfonos de Coyhaique, were acquired by the state-owned Corporación de Fomento de Producción (CORFO), a corporation whose objective was to promote industrial development in the country. In 1973, the transfer of CTC to governmental hands continued, as the 1930 statutes were revoked.

The 1973 military coup staged by General Pinochet was followed by the return to open-market policies regarding governmental intervention in the economy. However, this approach run into problems when applied to large businesses, especially public utilities. In 1974, to resolve the matter of ownership and control of CTC, the 89% of CTC owned by ITT was bought by the State and transferred to CORFO. The two telecommunications operators, CTC and Entel, became state-owned firms and monopolist in basic telephony and long distance, respectively. Although there were attempts to coordinate their behavior, the two companies were unable to reconcile their differences and operate as a single entity. Moreover, levels of investments were low and demand was always unsatisfied, resulting in decade-long waiting lists to obtain a telephone line.

3.- THE TRANSFORMATION OF THE CHILEAN TELECOMMUNICATIONS

INDUSTRY (1981-1994) State-ownership did not solve the deficiencies in telephony in Chile. Levels of

investments were low and demand was always unsatisfied, resulting in decade-long waiting lists to obtain a telephone line. Although the penetration of telephone had grown in the 1970s, Chile was still lagging other Latin American countries.

Starting in 1981, the industry was transformed in an effort to provide Chile with the modern telecommunications infrastructure necessary for its development. Consequently, the number of lines per 100 inhabitants increased from 3.27 in 1980 to 4.41 in 1985, 6.53 in 1990 and 13.20 in 1995 (ITU, 1986, 1993, 1996)3. By 1997, Chile had 16.6 lines per 100 inhabitants.

3 In 1980, Chile had 3.27 main lines per 100 inhabitants, which was low when compared to 6.74 in Argentina, 3.92 in Brazil, 3.98 in Colombia, 3.72 in Mexico, 19.32 in Spain or 39.88 in the US. However, by 1995, Chile had 13.2 main lines per 100 inhabitants, a large increased when compared with 15.99 in Argentina, 7.48 in Brazil, 9.98 in Colombia, 9.58 in Mexico, 38.11 in Spain or 62.57 in the US. (ITU, 1986, 1996).

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The transformation of the industry was based on three main pillars: (1) deregulation of the industry, (2) increase in competition levels, and (3) technological innovation.

The deregulation of the industry was performed along three main lines: (1) liberalization of entry and exit, (2) privatization of State-owned companies, and (3) deregulation of prices and charges. Table 1 presents a summary of major deregulation events in the industry. Table 1. Major deregulation events in the Chilean telecommunications industry. Date Event 1981 Beginning of entry deregulation, allowing CMET and Manqueue to enter basic telephony 1982 General Telecommunications Law. Deregulation of basic service.

Privatization of small regional basic telephony operators Telefónica del Sur and Teléfonos de Coyhaique 1984 Reglamento General de Telecomunicaciones (General Telecommunications Rules) 1987 Changes to the Telecommunications Law, including changes in tariff fixing to a five-year tariff period,

based on costs. Privatization of basic telephony operator CTC. 1988 Privatization of long distance operator Entel 1989 Implementation of five-year tariff system (1989-1993, 1994-1998, 1999-2003) 1994 Liberalization of long distance. Multiple-carrier system. 1996 PCS services. 1998 Deregulation of market shares ceilings in long distance

Liberalization of entry and exit commenced in 1981 when two new private telephone

companies – Compañía Teléfonica Manquehue and CMET- were allowed to operate local services in high-income sections of Santiago. In 1982, the General Telecommunications Law was passed, repealing monopolies and liberalizing entry under a lax system of concessions assigned by the Sub-Secretariat of Telecommunications. Other companies entered basic telephony in the 1990s, but CTC continued being the dominant player.

In August 1994, the long-distance market became open to entry under a multiple-carrier system which allowed clients to choose the long-distance carrier for each call by dialing a three digit access code prior to the number. The market was divided into international long distance and domestic long distance. Market share ceilings were imposed for 4 years in domestic long distance and 3 years in international long distance, starting in August 1994, to avoid the abuse of dominant positions and foster competition. Companies offering local telephony were allowed to vertically integrate using separate subsidiaries, in order to preserve the transparency of the relationships between related companies and avoid cross-subsidization. Although 11 licenses were issued, the initial participants were only seven (CTC-Mundo, Entel, VTR, BellSouth, Chilesat, CNT Carrier --Telefónica del Sur-- and Iusatel).

Privatization commenced in 1982 when the state-owned entity CORFO sold two regional companies it controlled - Compañía Nacional de Teléfonos (CNT, later renamed Teléfonica del Sur), and Compañía de Teléfonos de Coyhaique (CTCoy), which were acquired by the telex operator VTR. In 1987, 45% of the basic telephony operator CTC was auctioned and the rest sold later in the stock exchange. In 1988, the long distance operator Entel was sold in the stock market.

Deregulation of prices and charges started in 1987 when the General Telecommunications Law was altered, developing a detailed system for determining regulated services and their tariff levels. Tariffs were left free except for those cases when markets failed

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(local telephony, long distance, and connections). In these cases, tariffs were set by the Ministry of Transport and Telecommunications and the Ministry of Economy for five-year periods.

As expected, the deregulation of the industry was followed by the increase in the level of competition as new companies entered the market. When entry was liberalized, firms operating in one segment entered other. The resulting competitive structure was a set of multiple-segment competitors.

After fierce post-regulation competition, some of the weaker players were bought by or merged with larger companies. For example, at the end of 1996 CTC and VTR agreed to merge their mobile telephone operations, CTC-Celular S.A. and VTR-Celular S.A., and created Startel. Startel became the market leader with 200,000 clients. Despite these consolidation episodes, most of the different segments remained very competitive by 1997.

Finally, technological developments were altering the competitive landscape. New entrants could leapfrog barriers to entry such as large network investments using new technologies. For example, cable TV could in the future carry not only video but also telephony and data, competing directly with the networks already established by telephone companies. Personal Communication Services (PCS) could became a substitute for traditional cellular telephony, while at the same time mobile telephony was substituting basic services altogether rather than becoming a complement to it.

3.- MARKET SEGMENTS (1996-97) In general terms, one could distinguish two main business segments: telephony and

related telecommunication services. In the first, the market segments were basic, long distance and mobile communications. In the second, the market segments were cable TV, data transmission and corporate services, equipment, and other telecommunication services. The following paragraphs describe each of the segments in Chile from their inception to early 1998. Information on the competitors, both incumbents and new entrants, is included, as well as the main thrusts of the strategies followed by each firm.

3.1.- BASIC TELEPHONY

Basic telephony commenced in 1880 with the first telephone operator in Valparaiso. In a few years, private operators appeared in all major Chilean cities. After a period of consolidation in the 1920s, Chile Telephone Company, owned by ITT of the US, ended up dominating the industry. In 1930 it became incorporated as Compañía de Teléfonos de Chile (CTC). In 1931 it negotiated a contract with the government, which became law, by which it was granted an assured return on net investment of 10% in exchange for the provision to the public of an efficient and modern telephone system.

By 1954, CTC had 97457 main lines while the second largest competitor, Compañía de Teléfonos de Valdivia had only 5246 lines. Although the telecommunications legislative framework was reformed in 1959, CTC managed to continue to be regulated under the 1930 agreement. However, both public opinion and the government were becoming increasingly unsatisfied with the lack of a reliable telephone system, especially when such an strategic industry was under private foreign control. In the second half of the 1960s the government

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started to become an active economic actor, nationalizing copper mines and distributing land. The problems with long distance communications induced the government to create Entel in 1964, which became the long-distance carrier monopolist while CTC concentrated on basic telephony. In 1971, the socialist government of Salvador Allende intervened CTC and induced the owners of the other two basic telephony regional companies, Telefonos de Valdivia and Teléfonos de Coyhaique, to sell their participation rights to the state. In 1974, the government, now under the military dictatorship of General Pinochet, expropriated the 80% of CTC that was in the hands of ITT. The remaining telephone provider, Empresa Telefónica Municipal in Arica, was indirectly under government control and was later integrated into CTC.

The development of the basic telephony network did not improve as expected under state ownership. Investment was still low and years-long waiting lists did not disappear. To address this, in 1981, two new private telephone companies, Telefónica Manquehue and CMET, obtained licenses to offer basic telephony services in wealthy areas of the metropolitan region. CTC was barred from new investment in these areas to assure the survival of the newcomers. In 1982, the General Telecommunications Law established the repeal of legal monopolies and exclusive concessions, together with a system of licenses of operators, and the liberalization of tariffs except for instances where free market conditions did not ensure competition. This year, two small regional operators, Teléfonos de Coyhaique (Telcoy) and CNT-Telefónica del Sur were privatized and acquired by VTR, an international telex operator controlled by five foreign investors. These two companies were licensed to operate in the X and XI regions where CTC had no license.

In 1987, after two years of privatization of small packages, 30% of CTC, with the option to acquire an additional 15%, was put up for sale by the government. Bond Corporation of Australia won the auction and took control of the company in December 1987. Under the new direction the company commenced a large investment program designed to modernize and expand the network, while at the same time it entered into other segments of telecommunications such as cellular, long-distance, cable TV and telemarketing. Bond´s stake was transferred in 1990 to Telefónica de España, the Spanish telecommunications operator, which continued the expansion plans laid down.

In the first half of the 1990s, CTC had nationwide presence except for regions X and XI that were the realm of VTR’s Telefónica del Sur and Teléfonos de Coyhaique. In the metropolitan area CTC competed with CMET and Teléfonos Manquehue, which were focused on developing service in high-income areas of Santiago. This apparent equilibrium of a dominant nationwide competitor and small geographically focused niche operators was broken in 1995.

In 1995, CTC obtained the license to operate in the X and XI regions, thus becoming the only nationwide operator. In this same year, Entel, the now privatized long-distance carrier, entered the metropolitan basic telephone market with its subsidiary Entelphone. In 1996, Telesat, an affiliate of Telex-Chile, the now private telex operator, started operations in the metropolitan area as well, and in the north of the country using a combination of wireless and ground lines to quickly build its network.

In 1987, the General Telecommunications law was altered, developing a detailed system for determining regulated services and their tariff levels. Tariffs were left free except for those cases when markets failed (local telephony, long distance, and connections). Tariffs were set by the Ministry of Transport and Telecommunications and the Ministry of Economy for five-year

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periods following an economic model based upon assumptions on costs, efficiency and growth which took into account a rate of return equivalent to the cost of capital of the firm4. The tariffs set were maximum tariffs and there could not be discrimination among users for the same service in the same area. The five-year periods were 1989-1993, 1994-1998, and 1999-2003. Tariffs were set at the end of the period for the next five years. Their structure is a basic monthly rate and a charge for each call based on its duration and time of the day and week. Tariffs experimented a sharp increase in 1989 in an attempt to reduce the subsidy that local calls were receiving from long-distance calls. They were also rebalanced to avoid business customers subsidizing residential ones. However, the rates have decreased since then and by 1996 the average connection fee was US$250, the monthly fee was between US$11 and US$23 depending on the density of the location, and local call cost US$0.03 per minute during the day and US$0.005 at night5 (IIV, 1996 ; ITU, 1997; CTC, 1997).

In term of strategies, CTC was clearly the dominant competitor with nationwide presence. Other companies, which had preferred to focus on geographical niches, expanded their presence into other regions. Telefónica del Sur and Teléfonos de Coyhaique, part of VTR, which traditionally served the X and XI regions, were moving into adjacent regions. CMET, traditionally a Metropolitan operator was moving into the central regions of the country. A third set opted for the creaming of the market, serving the wealthiest segments of the population as well as corporate clients. For example, in the wealthy suburbs of Las Condes, Providencia and the financial district of Santiago, where Entelphone operates, 29% of the lines generate 41% of the local traffic, 40% of the long distance traffic and 65% of the international long distance traffic. Table 2 presents the competitors at the end of 1997 by their geographical presence.

Table 2. Local line operators by region. 1997. Region (from north to south) Operator

I CTC, Telesat II CTC, Telesat III CTC IV CTC V CTC, CMET, VTR Telefónica

Metropolitan CTC, CMET, VTR Telefónica, Entelphone, Telesat, Telefónica Manquehue VI CTC, CMET VII CTC VIII CTC, CMET, Telefónica del Sur, Telesat IX CTC, Telefónica del Sur X CTC, Telefónica del Sur XI CTC, Telefónica de Coyhaique XII CTC

4 The new tariff structure: 1) divided the country into four tariff areas based on network density, 2) substituted the fixed fee system for a measured service, 3) established different fixed fees for each area and eliminated the discrimination among categories of clients, 4) divided the country into 24 primary areas, 5) defined local traffic as traffic in a primary area, 6) contemplated differences into peak and reduced periods, 7) readjusted the access to inbound domestic long distance fees as 7.64% and reduced the outbound international long distance fee by 94.74%, 8) substituted the consumer price index by the producer price index as the adjustment index for tariffs, and 9) introduced under regulation public telephones, private lines and connection services. For the period 1994-1998 the return on capital established was 7.7%, though initially it was established at 11.22%. 5 In those areas where several companies operated, the interconnection fee was 63% of the local call and US$0.012 per minute. This was especially important in the greater Santiago area where CTC, Entelphone, CMET, Manquehue, and Telesat operated.

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Source: El Diario, January 21, 1998.

Basic telephony is characterized by large network economies and economies of scale. Competition in basic telephony developed into an investment race to provide the largest network possible, especially in a country like Chile where demand had traditionally outpaced supply6. For example, whereas from 1981 until 1987 CTC´s network had expanded by 41.8% from 386706 to 548359 lines, from 1988 to 1994 the network expanded by 161.1% from 591565 to 1545074 lines. In 1996 alone the company had expanded an additional 17% to reach 2056353 lines. In 1996, CTC invested US$336Mn to expand the network. Entel, for its part, invested US$200Mn in Entelphone to develop its network. Table 3 provides the estimated number of lines per competitor. At the end of 1996, CTC controlled 91.5% of the market, CNT 3.8%, CMET 2.3%, Manquehue 1.6% and others 0.8%. Table 3. Basic telephony lines by operator. 1975 1995 1996E 1997E 1998E 1999E 2000E CTC 434 1754 2084 2414 2744 3074 3404 CNT-Telefónica del Sur 15 62 71 85 100 120 130 CMET - 70 90 120 150 200 250 Telefónica de Maquehue - 30 40 50 60 66 73 Telesat - 3 12 50 90 130 170 Entelphone - - 20 50 75 100 150 VTR - - - 50 80 110 180 Total 449 1919 2317 2819 3299 3800 4357

Source: Santander Investments (El Diario, July 4, 1996). Data for 1975 comes from IIV (1996).

3.2.- LONG-DISTANCE TELEPHONY

Long distance communications in Chile had always been problematic because of the geography of the country being a long narrow strip where most of the population concentrates in the central regions. Except for the connection between the two largest cities, Santiago and Valparaiso, 120Km apart, long distance was always unreliable. In 1960, a large earthquake exposed the deficiencies in the network. In 1964 the government created Entel to tackle the limitations in the system and to build a long distance network, which was completed in 1971 using a microwave system. The company operated as the sole provider of long distance communications. In 1985, Corfo, the governmental arm for industry promotion, agreed to sell the company in the stock exchange. By 1989 the government had reduced its participation to a marginal 1.1%. In 1988 Telex-Chile, which had been privatized in 1986, was allowed to offer long-distance services. In 1992, CTC, the local telephony provider, was allowed to offer long distance services using its own equipment between Santiago and Valparaiso, the two largest Chilean cities. In this period, it was the local telephony operator, primarily CTC, and not the customer, the one who selected the long distance carrier. Tariffs were regulated in five-year periods along with basic telephony and interconnections.

6 Network density measured as CTC lines by 100 inhabitants increased from 3.64 in 1981 to 4.7 in 1987, 5.04 in 1988 and to 12.1 in 1994. In 1997 it had reached 16.6. However, this is still a fraction of the US, with more than 60 lines per 100 people.

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In August 1994 the long-distance market became open to entry under a multiple-carrier system7. The multiple-carrier system brought a new level of competition in the industry, among established competitors and new entrants.

Although long-distance tariffs were still officially under regulation, in practice they were set free. Competition in the first months of operation evolved into a battle to become the first code in the mind of the consumer. This was done through heavy advertisment campaigns, especially among the largest firms. The price war and continuous discounts that followed, trying to lure customers into using the code, coupled with high advertisements expenditures8 and large investments in network development, hurt profitability. Most companies experienced loses in the first year of operation; rates of return were low and in some cases negative (they have recovered since then). A market that was supposed to be US$600Mn netted only US$150Mn in 1994 (Palet, 1996).

By December 1994, domestic long distance prices had dropped to US$0.04 from US$0.19 per minute before the multiple-carrier system. By 1996, average tariffs had stabilized at around US$0.15 per minute, a reduction of 17% since the beginning of the system. In international long distance, the effect was even larger: the average price dropped from US$2.2 per minute before the multiple-carrier system to around US$0.25 per minute in December 1994. By 1996, the average price was around US$1.4 per minute, a reduction of 35% since the beginning of the system.

Lower prices induced growth in traffic. Domestic long distance increased from 84.7Mn minutes a month in the first semester of 1994 to 136Mn min./month by December 1994 and to 208Mn min./month at the end of 1996. International long distance went from 4.6Mn minutes a month in the first semester of 1994 to 12.3Mn min./month by December 1994 and to 17.7Mn min./month at the end of 1996. Although tariffs seem to have stabilized, volume has continued to grow and by August 1997, three years after deregulation, domestic long distance reached 225.1Mn min./month and international long distance reached 20.1Mn min./month.

Although eleven licenses were granted, by the end of 1994 there were only seven companies active in the market: CTC-Mundo (part of CTC), Entel, VTR, BellSouth, Chilesat (part of Telex-Chile), CNT Carrier (part of Telefónica del Sur, which belonged to VTR) and Iusatel. Transam entered in 1995 and ESTE (part of CMET) and Manquehue Larga Distancia (part of Manquehue) in 1997. Soon Entel, CTC-Mundo, Chilesat, VTR9 and BellSouth positioned themselves as the main carriers. However, “it is still likely that the number of players in the market will be whittled down, from 8 to 3, with the more likely to stay in the race the companies that own the fiber optic trunk cables, Entel-Chile, CTC and Telex-Chile.” (Atamericas, 1996). Table 9 presents the evolution of market shares by competitor. Entel, the former monopolist, has managed to sustain a market share of around 40%. CTC has increased its share gradually, while VTR and Chilesat have seen their market share dwindle. BellSouth

7 Other countries which permit competition in international long distance are UK with 35 facilities-based licenses, US with more than 35, Philippines and Sweden with 10, New Zealand with 7, Mexico and Finland with 4, Dominican Republic, Japan and Malaysia with 3, and Korea, Indonesia, and Australia with 2 (ITU, 1996). 8 In 1996, advertisement expenditure as a percentage of revenue was as follows: Entel 2.9%, CTC-Mundo 5.3%, Chilesat 10.5%, VTR 11.4%, and BellSouth 17.7%. 9 CNT carrier is part of the Telefónica del Sur group, which belongs to VTR (72.82%) and Chilean investors (Justin Inc Chile 9.12% and AFP the rest).

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achieved a noticeable 10% in international long distance, but did much poorer in domestic long distance. Other small companies had marginal shares.

Table 4. Main segments and competitors in long distance. Market share in percentage of physical units (million minutes). Domestic long-distance International long-distance Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Entel 37.68 38.28 37.16 40.87 41.98 41.23 36.30 41.20 38.19 38.78 33.26 32.98 CTC Mundo (CTC) 25.69 24.85 30.77 31.40 30.71 35.15 12.80 19.60 20.14 21.81 20.83 21.51 Chilesat (Telex-Chile) 25.30 22.64 21.72 16.37 16.95 13.74 24.80 17.91 20.10 16.18 16.32 18.04 VTR 7.60 11.07 5.63 5.13 4.30 3.71 24.20 11.46 8.00 7.39 12.20 10.48 BellSouth 1.81 1.12 1.70 1.99 1.67 1.38 1.50 7.61 10.70 9.16 10.03 10.37 Iusatel 0.02 0.24 0.37 0.33 0.23 0.27 0.10 1.63 1.81 2.84 3.63 2.03 Transam - 0.13 0.81 1.66 1.66 1.55 - 0.24 0.56 3.32 3.08 3.24 CNT carrier 1.90 1.67 1.84 2.25 2.50 2.47 0.30 0.35 0.50 0.52 0.65 0.74 Manquehue - - - - - 0.50 - - - - - 0.61 ESTE (CMET) - - - - - 0.00 - - - - - 0.00 Total 100 100 100 100 100 100 100 100 100 100 100 100 Mn. Minutes 136.0 145.5 177.8 173.2 208.7 223.8 12.3 10.9 13.5 12.4 17.7 19.0 Source: Subtel

Of the ten competitors in 1997, only three companies had developed nationwide networks –CTC-Mundo (CTC), Entel and Chilesat (Telex-Chile)-. The rest acted as resellers. CTC had a 100% digital network by 1993, making Chile one of the first countries to achieve such a network. In 1995 it had developed a nationwide optic fiber network linking regions I to X and beyond the country to Argentina and Peru. By 1996, both Chilesat and Entel were rapidly developing their own networks, with plans to complete them by 1998 when the Panamerican submarine cable--linking Chile to the Caribbean and then to the US an Europe--would be completed. In 1997, Chilesat and Entel agreed to provide reciprocal back-up facilities to each other's operating fiber optic networks.

Although there was not much hope for the small firms when the multiple-carrier system was established in 1994, they have stayed in business mainly by concentrating in niches. For example, CNT carrier was focused in a specific market, Region X, where it was second to Entel with a 24% market share, while nationwide it only had 2.5%. Transam was another operator that had survived by concentrating on the long distance market using a very light structure and centered in the small frequent caller.

The three-digit system that favored competition presented problems in terms of delinquency. A non-paying customer could switch between carriers easily and the local telephone company was not obliged to cut the telephony for non-payment of long distance phone calls to any specific carrier. It was estimated that in 1997 the delinquency rate was between 6 and 10% on long distance payments.

3.3.- MOBILE TELEPHONY

Mobile telephony is a recent market in telecommunications, with Chile as the pioneer in Latin America with a nationwide system. In 1981, Cidcom, a private company of domestic and US investors, was granted a license to operate mobile and cellular telephones in Chile. It

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established a mobile system using IMTS technology in Santiago, Valparaiso and Concepción, the three largest Chilean cities, later expanding it into the whole metropolitan and V regions. In 1989, CTC developed a cellular system between Santiago and Valparaiso through CTC-Celular. Cidcom was positioned in mobile telephony and high power cellular, whereas CTC preferred to focus on low power cellular. In 1990 Cidcom was acquired by BellSouth, the US telecommunications company, as its gateway into the Chilean market. By 1991, there were over 25,000 subscribers in both systems, which offered services in the metropolitan and V regions, where 60% of the population lives. In 1991, another two operators, VTR Celular (part of VTR) and Telecom Celular (a joint venture between Entel (33%) and Motorola (66%), the US equipment manufacturer) entered the market offering their services nationwide but in the metropolitan and V regions. Competitors were limited to two per geographical region due to the existence of only two bands in the 800 MHz frequency, the traditional frequency for cellular operations. Besides the geographical exclusivity imposed by bandwidth limitations, there were no regulations on tariffs or market share.

CTC-Celular10 established a roaming agreement with VTR-Celular, while BellSouth did the same with Telecom. At the end of 1994 there were some 120,000 cellular phones in Chile and four competitors. Table 5 presents the estimated number of clients by company.

Table 5. Clients in mobile telephony by company. 1994 1995 1996E 1997E 1998E CTC/VTR 60550 98325 190524 285787 385812 Telecom (Entel) 13200 29500 41656 62484 84353 BellSouth 48500 73023 109261 163892 221254 Total 121250 200848 341442 512162 691419 Subscriptions/ 100 inhabitants 0.9 1.4 2.4 3.5 4.7

Source: Santander Investments in El Diario, 1995.

Geographically, competition was split between CTC and BellSouth in the metropolitan

and V regions and VTR and Entel in the rest of the country. In June 1996, CTC-Celular merged its operations with VTR-Celular to create Startel, where CTC had 55% and VTR had 45%, becoming the only nationwide operator as CTC Celular operated in the metropolitan and V region and VTR Celular in the rest of the country11. The merger signaled the possibility of the creation of a duopoly, as BellSouth and Entel had a previous roaming agreement. At the end of 1997, Startel had a 54.5% market share and the association Entel-BellSouth 45.5%. In the central region (where 60% of the population lives), the market shares were Startel 56.5% and BellSouth 30.6%. Table 6 presents the evolution of estimated market shares. Table 6. Market shares nationwide. Company Year operation 1993 1994 1995 1996 1997 BellSouth 1990 (1981) 30 36 36 32 33 Telecom (Entel) 1991 11 13 15 11 13

10 In 1995 CTC introduced the Superteléfono, a combination of a cellular telephone and a fixed line which proved extremely successful. The Superteléfono was a cellular equipment that could be connected to the local lines upon arrival to the home. It was forced to stop the product by the Subsecretariat of Telecommunications over concerns of abuse of dominant position in local telephony via the bundling of products. 11 In 1997 CTC acquired VTR´s participation in Startel.

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CTC Cellular 1989 43 36 33 57 54 VTR Cellular 1990 16 14 16

Source: El Diario, various issues.

In 1996, the government put three Personal Communication Systems (PCS) licenses for auction. Although the existing cellular systems were analog and the logical step would have been the movement towards digital, the government wanted to bypass this stage and enter directly into PCS technology12. This placed Chile ahead not only of other Latin American countries, but also of developed nations as it would become the first country to have a nationwide PCS coverage.

PCS licenses were granted in 1996 based not on price but on investment plans that would rapidly create a running network with a large geographical coverage. However, companies had to place a US$50Mn deposit which was refunded after successful completition of the network. Moreover, the companies had to compensate previous users of the bands for their movement to another band. Some of the frequencies in the 1900MHz band were occupied by the armed forces, which refused to identify them on the grounds of national security.

Two of the licenses were awarded to Entel, which planned to use them to expand its mobile network, and the other to Chilesat, a subsidiary of Telex-Chile, which provided the firm with an entry in the competitive mobile market. Entel planned to use one of the licenses nationwide by the end of 1997, and build coverage for the other slowly from the metropolitan and V region into the rest of the country by mid 2002. Chilesat, on its part planned to cover the metropolitan and regions IV to X by mid 1998 and the rest of the country by the end of the year. If plans were followed, by the end of 1998 there would be three mobile nationwide players and four competitors in the metropolitan and V regions. The allocation of the PCS system forced the other two competitors in the market, Startel and BellSouth, to digitize their networks in an effort to offer similar services. This movement placed Chile ahead of many countries in mobile communications. The non-PCS operators also decreased their prices in order to reduce the drain of clients to PCS.

In January 1998 Subtel approved Entel´s PCS operations after reviewing its network investments. Chilesats´s operations were still pending of approval. At the same time, Entel sought to get out of the roaming contract it maintained with BellSouth, which forced Entel to change to BellSouth when it was out of range of Entel´s coverage. With the new PCS system in place and being capable of operating nationwide, including the metropolitan and V region, the roaming agreement did not seem strategically important for Entel. On its part, BellSouth was left with a large disadvantage as it only covered the metropolitan and V regions. It subsequently sued Entel for breach of contract.

In January 1998, Startel commenced implementing the system calling-party-pays-plus by which the cellular user pays only the outgoing calls and the fixed line user calling the cellular 12 The difference between the three systems can be summarized as follows : (1) Analog. It is the first generation technology, uses the 800 MHz band, and is limited and somewhat insecure. (2) Digital. It is replacing the analog system. It also uses the 800 MHz band, but it is more reliable and has the capability to perform more functions. (3) PCS. It is the latest generation in cellular telephony. It uses the 1900 MHz band and has the capability to offer additional services such as data transmission.

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client pays only the outgoing call, local or long distance, not including the cost of accessing the cellular network. The system benefits companies with fixed phone lines as cellular clients maintain their telephones on without the fear of paying for incoming calls. The system doubled the number of new subscribers to Startel compared to the similar periods. However, it was stopped by the Subtel and the anti-trust commission on grounds that CTC was not covering the costs of usage for the cellular network and that such a practice was predatory pricing aimed at forcing competitors to exit the market. The access tariffs were to be set by mid 1998 to address this issue and develop a true calling-party-pays system. This was a concept that had been under discussion since 1995 but never implemented. This action was likely to boost sales of cellular telephones and may increase the cellular density of 1.4 per 100 inhabitants in 1996 to somewhere near the US level of 12.

3.4.- OTHER TELECOMMUNICATION SEGMENTS

Cable TV. Competition in cable TV had always been deregulated and the market extremely fragmented. From more than 80 competitors, the segment became concentrated into five major players by 1995 as the result of the entry of telephone companies in the market13. In 1994, CTC acquired Intercom, the No.2 company, while the No.1 contender Metrópolis, was acquired by the Claro group and Atlanta-based TCI Bresnan. In 1995 VTR purchased Cablexpress for US$60mn to create the then-largest cable operator. VTR already controlled microwave-operator TV Max.2 (Atamericas, 1996) and had already merged the operations of 15 companies it had acquired in 1994. In 1995, Intercom and TV Cable Metropolis merged the two companies, creating the country’s biggest operator. The number of cable subscribers between 1994 and 1995 grew by three-quarters to 487,000 (Atamerica, 1996).All of the companies were laying down fiber-optic cable to expand their market share. VTR and UIH were also starting to install equipment and basic telephony in one package.

In 1996, the cable TV market narrowed down from five players to two rivals, VTR/Cablexpress with UIH, United International Holdings of the US and Metrópolis-Intercom, controlled by CTC and the Cordillera Comunicaciones. The VTR-UIH merger was a long-negotiated deal between VTR and UIH to merge their cable operations into the second biggest competitor behind Metropolis/Intercom with approximately 240,000 subscribers country-wide. By 1996, Metropolis-Intercom of CTC and Cordillera Comunicaciones, which operated in regions I to III and the center of the country, had 43% of the market, VTR-Hipercable of VTR and UIH of the US, which operated nationwide except in the southern part of the country, had 56% and the rest had 1%.

“In view of this situation, small cable companies have adopted a strategy of operating in regions where the large cable providers have minimal involvement or no involvement whatsoever. Telemas, for example, operates in the municipality of Colina and is also the only company operating in Chacabuco. Magic Cable operates on the coastal areas of Region V. In southern Chile, Music and Television by Cable is the only provider in Coihaique, and TV and the

13 There is no separation of telephone and cable TV companies in Chile, as opposed to the majority of countries. Cable TV can offer an alternative to telephony in voice, data and video transmission though its network, though currently it is only used for video. The potential threat that the use of the broader band cable TV network could mean for telephone induce telecommunication companies to enter the segment.

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Suarez company are the only cable companies in the Punta Arenas region.” (Chipnews, June 24, 1997).

Data transmission. “Chilean demand for data and text transmission, electronic and voice-based is also a function of robust economic growth. With centralization of decision-making in Santiago, and far-flung operations, data transmission is a growing necessity. Banks with widespread offices are in particular need of data-transmission facilities, and several have already developed their own networks (based on public and private telecom facilities). There is strong domestic competition for data services, CTC, Chilepac and VTR all offer data transmission services within Chile. Satel (a subsidiary of Entel), Iusatel and Chilesat (Telex-Chile) also provide dedicated satellite-based data transmission services to corporate clients.” DFAIT (1995) Equipment. Equipment is one of the most fragmented markets. It is a global industry where R&D is the key for competition. Most of the local players have alliances with equipment manufacturers for the access to technology and the distribution of equipment to the final clients.

4.- MAIN COMPETITORS AND THEIR STRATEGIES (1996-97)

The deregulation of entry in the different telecommunication market segments, which commenced in 1982, had created several competitive fields were different companies meet. The deregulation of the industry originated the increase in the level of competition as new companies entered the market. Although the market appeared to be fragmented into quasi-separate segments were different sets of competitors met, this segmentation of the market was rather artificial, and when entry was liberalized, firms operating in one segment entered other. The resulting competitive structure was a set of multiple-segment competitors. To avoid the cross-subsidization of businesses, firms had to establish independent subsidiaries in the new market segments. Table 7 presents and overview of the different competitors and their market presence.

Table 7. Main competitors by market segment, 1996.

Market segment Main competitors Basic telephony Long-distance CTC VTR Telex-Chile Entel BellSouth Manquehue CMET Iusatel Transam Mobile Cable TV Data transmission Telex-Chile Entel

The industry had become global as the result of the strategic alliances that local players

established with foreign MNEs. Table 8 presents a summary of the strategic partners of the main competitors. Competitors in one segment cooperated in other segments. A brief overview of the main players follows. Table 8. Main competitors and their strategic partners, 1996.

Company in Chile Domestic partner Foreign Strategic Partner CTC AFPs Telefónica (Spain)

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VTR Lucksic family South Western Bell (US) VTR Hipercable VTR United International Holdings (US) Startel CTC; VTR Metropolis Intercom CTC; Cordillera Comunicaciones Cordillera Comunicaciones TCI (US); Bresnan (US); Televisa (Mexico) BellSouth BellSouth (US) Entel Chilquinta; AFPs Samsung (Korea); Stet (Italy) Entel Telefonia Movil (PCS) Entel Qualcomm (US) Entel Telefonia Personal (Telecom) Entel Motorola (US) Chilesat Telefonia Personal (PCS) Telex Chile Qualcomm (US) Iusatel Inversiones Druma Iusacell (Mexico), part of Bell Atlantic (US) CMET Chilean investors Harris Corp. (US)

Source: Adapted from Beca (1996)

4.1.- COMPAÑÍA DE TELECOMUNICACIONES DE CHILE (CTC)

Compañía de Telecomunicaciones de Chile (CTC) was, in 1996, with $541296Mn in revenue, $150457Mn in net income and 8980 employees, the leading telecommunication operator in Chile, present in all market segments. In 1996, basic telephony and other regulated services accounted for 64.0% of revenue, long distance was 8.5%, mobile was 10.69%, sale of equipment was 6.57%, and other businesses accounted for 10.23% or revenue. In terms of net income, the percentages were 69.63% for basic telephony, 10.59% for equipment, 2.65 % for mobile communications, 6.3% for long distance and 10.71% for other businesses.

CTC had its origins in 1880 when the first telephone was brought to Chile. After a period of development and consolidation of the market, the company was incorporated as CTC in 1930, owned by ITT, the telephone equipment and service provider of the US. The company had become the largest provider of telephony in the country. In 1931, it established a contract with the government, later enacted as law, by which it was assured a rate of return on investments if it provided the country with a modern telephone system. In 1964 after it became apparent the lack of reliable long distance, the government created Entel, thus effectively separating basic telephony from long distance, which became the realm of CTC. CTC was intervened by the Allende´s socialist government in 1971 and nationalized after Pinochet´s coup d´état in 1974. Other smaller operators were also nationalized and integrated within CTC, which became the monopolist of basic telephony until 1981. The government commenced its privatization in 1985 and in 1987 it auctioned 30% of the firm with an option to acquire an additional 15%. Bond Corporation (Australia) acquired the initial 30% for sale, later acquiring up to 50% of the company. In 1988, under the new owner, CTC initiated its restructuration and expansion from basic telephony into related segments such as cellular, long-distance, and telemarketing. In 1990, financial problems at the parent company induced Bond to sell its stake to Telefónica de España, the Spanish telecommunications company, who became the leader shareholder. Under Telefónica, CTC continued its expansion into all the market segments, aiming to become the leading telecommunication operator in Chile.

By 1996, CTC was the leading provider of basic telephony with 2056353 lines, 91% market share, being the only company with nationwide presence.

In 1994, CTC entered long distance via its subsidiary CTC-Mundo (formerly CTC-Transmisiones Regionales which operated in for telecommunication equipment and network installation). By 1996, it had become the second largest long distance operator with 30.71%

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market share of domestic long distance and 20.83% of international long distance. It was the only operator with a fully digital network and a nationwide fiber optic network connected to Peru and Argentina.

In 1989, CTC-Celular started operations in the emergent cellular business, competing in the metropolitan and V regions. The company reached a roaming agreement with VTR to achieve nationwide coverage. In June 1996, CTC-Celular and VTR-Celular merged their operations into Startel, the only nationwide cellular operator, where CTC held 55% and VTR the rest. At the end of 1996 Startel had more than 175000 clients and a 54% market share. CTC acquired VTR's participation in Startel in 1997.

CTC entered the cable TV market in 1994 through the acquisition of 80% of Invercom, the owner of the cable TV operator Intercom which operated in the metropolitan region and had permission to operate in the V region. This acquisition allowed CTC to move into the multimedia network business that would offer telephony, cable TV, video on demand, tele-education, high definition TV, and data transmission. In 1995, CTC merged its operator CTC-Intercom (80% of CTC and 20% of El Mercurio) with the competitor Metrópolis (100% of Comunicaciones Cordillera, composed of Cristalerías de Chile, Telecommunications Inc. (TCI) of the US, and Bresnan International Partners of the US) to form Metropolis-Intercom (60% of Comunicaciones Cordillera, 10% of El Mercurio, and 30% of CTC) the largest cable TV operator in Chile with 47.2% nationwide market share and 57.8% in its area of operation. By 1996 Metrópolis-Intercom had a 43% market share nationwide.

Other CTC´s subsidiaries in 1996 were the following: CTC-Equipos y Servicios (December 1986) for marketing of equipment, CTC-Negocios (later CTC-Corp) (December 1988) for marketing equipment and services, especially to large clients, CTC-Isapre (June 1987) for social services to employees, Instacom (July 1974) for network installation, Multicable Television (August 1992) for installation of cable TV, CTC-Marketing e Información (December 1988) for telemarketing, and CTC-Internacional (December 1995) for foreign direct investment.

In 1994, CTC started its international expansion allied with Telefónica acquiring Cocelco, a Colombian cellular operator. In 1997, as part of a Telfónica-led consortia, it won the first Brazilian privatization, CRT of Rio Grande so Sul, the basic telephony operator of the southern state.

4.2.- ENTEL

In 1996, Entel was the second largest telecommunication operator in Chile and the leader in long-distance services, making $6084Mn in net profit out of $156011Mn in revenue, with 1378 employees. In 1996, it became an integral telecommunications operator with presence in basic, long distance, and cellular telephony, developing a five-year investment plan of US$1070Mn.

In August 31,1964, Empresa Nacional de Telecomunicaciones S.A. (Entel-Chile S.A.) was created by CORFO, a government arm for industry promotion. The firm had the aim to address the lack of adequate long-distance telephony services, which were not provided as desired by CTC. Using a microwave system, the company built a trunk network that covered the country by 1971. In 1965, Entel applied to become part of Intelsat, and in 1968 the first ground

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station for satellite communication from South America was created. With the creation of Entel the government showed that it was moving from regulation of the telecommunication industry into direct participation.

In November 1985, CORFO, which controlled 99.97%, agreed to sell 30% in five years. In 1986 it sold the 30% of Entel in the stock market, which was acquired by pension funds. CORFO continued selling stakes in the firm and by the end of 1989 it held only 1.11%. Telefónica de España, the Spanish telecommunications operator, acquired 20% of the firm in 1990, but was asked to sell it because of it also controlled CTC and there were fears of market dominance. It sold its stake in 1995 to Samsung, the Korean chaebol. In 1996, Stet, the Italian State-owned company, acquired 18% of Entel for US$300Mn. By the end of the 1996, the largest shareholders were Stet of Italy with 20%, Chilquinta with 20%, Samsung of Korea with 12.5%, and Chilean pension funds with 36%.

Since its inception, Entel had been a long distance telephony provider. It controlled the long distance market until 1992, when Chilesat and CTC were permitted to offer their services in a limited scale. In August 1994, entry into long distance, both domestic and international, was fully opened. At the end of 1994, Entel controlled 37.68% of domestic and 36.3% of international long distance. By 1996, its market shares were 41.98% and 33.26% respectively. In order to better compete in long distance, in 1996 Entel started laying down a fiber optic network between Arica (where the link to the submarine cable connecting Chile to the Caribbean is located) and Santiago and beyond to the South. By 1997, it had still not completed their nationwide network.

Entel stated operating in the cellular segment in 1991 with Telecom Chile where it controlled 33%. Motorola, the US equipment manufacturer, had the remaining 67%. The firm operated in all the country except region V and the metropolitan region, where it had a roaming agreement with BellSouth. In 1996, Entel raised its stake to 59.16%, acquiring control. At this time, Telecom had a market share of 11%. This same year, Entel was awarded two PCS bands out of the three for auction. This allowed the firm to expand operations into the metropolitan region and surrounding V Region. It also entered into an agreement with a satellite corporation, ICO Global Communications, to supplement its coverage with cellular, PCS and land systems. In January 1998 it obtained approval to operate the PCS networks after inspection from the Subtel. It also sought to end its roaming agreement with BellSouth, as now it was allowed to operate nationwide.

Entelphone, the basic telephony subsidiary, began operations in the late 1995. It is focused in network development in Santiago, mainly the wealthy suburbs, providing specialized services, and has the goal of having 250,000 main lines by the year 2000. It also served the remote Easter Island.

In 1996, other Entel subsidiaries were the following : Entel inversiones (99.9%) (August 1989) as a holding, Entelfonica (100%) (March 1989) in telecommunication equipment, Entel Internacional (100%) (September 1989) in international investment, Micarrier (99.9%) (December 1988) in telecommunication networks, and Satel Telecomunicaciones (99.9%) (March 1989) in satellite telephony and data transmission. Its related companies include Transaxion (47.1%) (June 1993) in electronic exchange information, AmericaTel Colombia (35%) (acquired in 1994) in data transmission in Colombia, and Buenaventura (50%) (October 1990) in equipment.

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In 1996, Entel started offering long-distance services in the US through its subsidiary Americatel Corporation, focused in the growing Latino Community in the US. It is participating in the Panamerican submarine cable and in the international global net CAESAR group, where Stet also participates. In 1996, other international subsidiaries were the following: Entel Mexico (March 1993) in data transmission, Entel International (British Virgin Islands) (100%) (February 1993) in international investments, Zetacom de Centroamérica (Panama) (70%) (November 1994) in private telecommunication services in Guatemalas, Honduras, El Salvador and Nicaragua, and Arnet (Argentina) (70%) (March 1993) in data transmission in Argentina.

4.3.- VTR

In 1996, VTR was the third largest operator in Chile with $75542Mn in revenue, and $1213Mn in net income. It operated in basic telephony, long distance, cellular cable TV and telex services.

VTR commenced operating as Trans Radio Chilena-Compañía de Radiotelegrafia Ltda, a joint venture of several foreign companies, including RCA and Siemens, incorporated in 1926 to provide telegraph services. In 1928 it started offering international telegraph service, adding telephone circuits in 1941. By 1960 domestic telegraph and telex services became centralized under government monopoly, allowing for competition in international telegraph traffic only. The company entered basic telephony when, in 1982, it acquired in public auction two regional basic telephony companies that were privatized -Compañía Nacional de Teléfonos (CNT, later renamed Telefónica del Sur), which operated in the X region, and Compañía de Teléfonos de Coyhaique (CTCoy), which operated in the XI region. In 1990, VTR Telecomunications was established to organize VTR´s interest in other companies: 91% of Telefónica del Sur, 88% of Compañía de Teléfonos de Coyhaique, and 50% of VTR Celular. Telefónica de Coyhaique became later integrated within Telefónica del Sur. In 1991 the company changed its name to VTR S.A as a consequence of the division of VTR Telecomunicaciones. This division was the result of the entry in the long-distance business of Italcable (nowadays Telecom Italia), an Italian telecommunications operator, and the separation of this business from the domestic telephony operations (Telefónica del Sur and Telefónica de Coyhaique), the cellular operations (VTR Celular) and the Cable TV operation (TV NET, later named VTR Cablexpress, and then VTR Hipercable). Telecom Italia sold its 35% in the company in 1996. In 1994, the company acquired total control over VTR Celular. This same year it followed and aggressive acquisition plan in the Cable TV segment, acquiring 15 cable operators and becoming the market leader.

In 1995, VTR established an strategic partnership with SouthWestern Bell Corporation (SBC) of the US, which acquired 40% of the company. In 1996 SBC increased its participation in capital by acquiring the participation of Siemens A.G. of Germany to reach 49.32% of the capital. The other leading shareholders were Quiñenco S.A. with 41.05% and Metalúrgica e Industrial with 9.63%, both companies controlled by the Chilean Lucksic family.

The company is structured in the following subsidiaries: CNT Telefónica del Sur (April 1893) in basic and long-distance telephony, VTR Celular (August 1989) in cellular telephony, VTR Hipercable (August 1996) in cable TV grouping previous participation in other companies in this segment, VTR Telecomunicaciones (later VTR Larga Distancia) (May 1927) in telex and telegraphy and long distance.

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In 1996, VTR, through its holdings in CNT and Telcoy, was the second largest basic telephony operator with almost 4% of the market. From its traditional stronghold in the X and XI regions it was expanding into adjacent regions and the metropolitan and V regions where 60% of the country population lives.

VTR entered the long distance market after its deregulation in 1994. By 1996 it had 4.3% of domestic long distance and 12.2% of international long distance. Its subsidiary CNT Carrier had 2.5% of domestic and 0.65% of international long distance.

VTR-Celular, the cellular subsidiary, started operating in 1990 in all the country but the metropolitan and V regions, with a roaming agreement with CTC-Celular for these regions. It achieved a market share of around 15% up until mid 1996, when it was merged with CTC-Celular to create Startel. VTR controlled 45% of the operation and CTC the remainder. The new company was the only nationwide operator with a 55% market share. VTR´s stake in Startel was sold to CTC in 1997.

VTR commenced it race to become the leading cable TV in 1994 when it acquired 15 smaller companies and integrated them into it already operating microwave-operator TV Max. In 1995 it became the largest operator after the acquisition of Cablexpress for US$60Mn. It then merged with the subsidiary of United International Holdings (UIH) of the US to form VTR-Hipercable, the leading operator with 56% market share.

4.4.- TELEX-CHILE

Télex-Chile is a diversified telecommunications holding company with subsidiaries in Chile, United States and other Latin American countries. In 1996 it was the fourth largest operator in Chile, with $57524Mn in sales, $3504Mn in net income, and 1598 employees. The company was focused mainly in the business segment of telephony, providing integrated solutions throughout Latin America. In 1996, long-distance operations represented 66.5% of total revenues, business services accounted for 19.2%, and foreign operations accounted for 14.2%. In 1995 these percentages were 64%, 15% and 5.8% respectively, while retail operations represented 15.2%.

Telex Chile was founded by the Chilean government in 1859 as a division of the post office providing telegraph and, subsequently, telex services. In 1980, it formed a separate division, Chilesat, to provide long-distance telecommunication services via satellite. Another division, Chilepac, provided data transmission services. Licenses to operate these services were granted in 1988, following Telex Chile's privatization in 1986 (Ingelbrecht, 1996). The company was acquired by the Chilean Ibañez and Radic families. From its telex origin it developed a retail operation in courier and communication services that reached 250 branches nationwide. In 1994, it acquired Texcom, an international telecommunications service for business customer in Latin America and the US.

On December 28, 1995, Telex Chile sold its 250-branch Chilexpress Retail Operations (courier activities in association with DHL, wire transfer activities in association with Western Union Intl., bill collection and telegraph) to Socimer-Chile S.A. (a financial institution specializing in mergers and acquisitions) for US$ 20 million to concentrate on its core businesses in telecommunications.

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Chilesat was the principal brand-name telephony operating subsidiary of Télex-Chile S.A.. It had been operating as an international long distance carrier since 1988 using satellite connections. In 1994, the year of the deregulation of long-distance, Chilesat controlled 25.3% of domestic and 24.8% of international long-distance traffic. By 1996, the figures were 16.95% and 16.32% respectively. Chilesat offered wide-band digital services for computer applications and was the market leader in the corporate services sector. The company was the largest Chilean equity holder in the Intelsat consortium, the world's largest provider of satellite telecommunications services, with 24 satellites currently in orbit. By 1996, Chilesat was extending its fiber optic coverage through a network project jointly being developed with Entel to provide linkage with the Panamerican submarine cable. Chilesat and Entel also agreed to provide reciprocal back-up facilities to each other's operating fiber optic networks.

Telesat (formerly Telefónica Andina) started operations in August 1996 in association with Comunicaciones Capítulo, owner of Teleductos, a principal last mile (direct connections to subscribers locations) provider in Chile to offer basic telephony services in the Santiago metropolitan area. By the end of 1996 it had 13500 lines and expected to have 200,000 in five years.

In November 1996, Chilesat Telefonía Personal (Chilesat PCS) was assigned one of the three PCS license for auction, thus allowing Telex-Chile a rapid entry into the competitive cellular market. The firm expected to begin offering PCS mobile telephony services at the end of 1998 in a 50-50 association with Qualcomm Incorporated of the US, the provider of CDMA technology. This project would reach 95% of the population nationwide and planed to have 285,000 subscribers in five years.

Other Telex-Chile's subsidiaries in 1996 were the following: Chilesat Servicios Empresariales S.A. (formerly Chilepac, which was transferred to Chilesat in 1995) in business services to corporate customers, and Telesys (created in October 1995 in a joint venture with Sonda S.A.) to provide information systems solution and services to telecommunication companies.

Texcom, the international arm of Telex-Chile was acquired in 1994. It offered both public and private telecommunications services, mainly to corporate customers, in the US and Latin America (Colombia, Venezuela, Peru, Bolivia, Mexico and, in 1997, Argentina, Brazil and Ecuador) through its affiliates using satellite links. Telex-Chile was looking for an international telephone operator to continue its expansion plans.

4.5.- BELLSOUTH

BellSouth in Chile was a 100% a subsidiary of BellSouth, the 7th largest company in the world in 1996 with US$19Bn in sales, US$2.8BMn in net income and 87571 employees14. In Chile in 1996 it was the fifth largest operators with presence in long distance and cellular telephony. 14 BellSouth of the US operated 21.13Mn main lines and 3.6Mn mobile subscribers in 1996 (ITU, 1996). The company had expanded internationally, controlling operators in Argentina (60% of CRM), Australia (24.5% of Optus), Chile (100% of BellSouth), Denmark (29% of Dansk MobilTelefon), Germany (22.5% of E-Plus), India (24.5% of Skycell), Israel (30.8% of Cellcom), New Zealand (65% of BellSouth New Zealand), Uruguay (35% of Abiatar) and Venezuela (53.3% of Telcel). In 1994, 42.5% of its revenue was derived from international telephone services operations (ITU, 1995).

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BellSouth entered the Chilean Market in 1991 when it acquired 100% of Cidcom Cellular, which offered cellular telephony in the Metropolitan and V Region15. Nowadays it operates under the BellSouth brand, offering cellular services to the region that include Santiago, Valparaiso and Viña del Mar, an area of seven million people. It had a roaming agreement with Entel to provide nationwide coverage. By 1996, BellSouth had almost doubled its 1991 market share of 17% to 32% nationwide and 43.5% in the regions it operated. After the allocation of the PCS licenses to Entel and Chilesat in 1996, BellSouth digitized its cellular network to be able to offer similar services and remain competitive. However, in January 1998 Entel sought to cancel their roaming agreement, an action that would jeopardize BellSouth's competitiveness as it only had permission to operate in the metropolitan and V regions.

BellSouth entered the long-distance market after its deregulation in 1994 through BellSouth Chile Larga Distancia. At the end of 1994 it had 1.5% of the international long-distance and 1.81% of the domestic long-distance market. By 1996 it was the fifth largest provider of long distance services with 1.67% of domestic long distance and 10.03% of international long distance.

4.6.- OTHER COMPETITORS

A number of other companies operated in the industry. These were small niche operators that competed on the base of price sustained by a light structure, but that were expanding into other segments. Among them one could find the following.

Compañía de Teléfonos de Manquehue (CTM). Manquehue started operations in 1981 as a basic telephony provider in wealthy

neighborhoods of Santiago, controlled by the Chilean Rabat family. In 1996 it reached US$7Mn in operational earnings, a 65 percent jump over1995 earnings. In 1996 it was open to investors to fund its expansion plans, investing US$250Mn to extend its basic telephony service from Santiago to the rest of the country and starting its long distance service, Manquehue Larga Distancia. It entered the long distance market in mid 1997, achieving market shares above 1.5% in both domestic and international long-distance in a few months. Its low rates, 50 percent less than other carriers, were due to budgetary restraint and its favorable contract with CTC Mundo which provided its network infrastructure.

CMET (Complejo Manufacturero de Equipos). Similarly to Manqueue, CMET commenced to operate as a basic telephony provider in

1981 in wealthy segments of Santiago, later expanding into the rest of the metropolitan, V, VI and VIII regions. By 1996, it had become the third largest operator of basic service after CTC and VTR. In 1995 Harris Corporation of the US, an equipment manufacturer with US$3.5Bn sales, for US$18Mn, acquired 25% of the firm. The association was designed to provide technological support and software to the Chilean firm, as well as the possibility to enter international markets where Harris Corp. is present. CMET entered the long distance market in 15 This company had been operating since 1981 as the sole provider of mobile system using IMTS technology in the central regions. It developed the cellular service in 1989 after CTC entered the market.

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1997 via Empresa de Transportes y Señales (ESTE), but by September 1997 it had almost no market share. Its strategic plan included doubling the number of lines in order to provide access to internet, e-mail and, eventually, cable television.

Transam. The origin of Transam dates back to 1974 when two Entel Engineers, Patricio Perelman

and Patricio Díaz, created the consulting firm Ingetel to establish a communication system to link America from North to South through the Pacific. Although the original project did not succeed, eventually it was developed by CTC and Entel. In the process, Transam obtained the license to operate in long distance, commencing operations in 1995. By 1996, it had a market share of 3.08% in international and 1.66% in domestic long distance. The company used the spare capacity generated in the over-investment of large firms (CTC, Entel, Telex-Chile). It focused on the small frequent caller competing with very little advertisement and a very light infrastructure where most of the costs were variable. It was owned by Chilean investors (Patricio Díaz Berr, 34.5%; Patricio Perelman, 34.51%; Adriana Lerrain, 25.97%; and Velikan S.A., 5.01%). In 1995 it gained $5Mn and in 1996 $ 460Mn. In 1996 it had 20 employees and sold US$7M, being profitable since the beginning.

Iusatel.

Iusatel operated in long-distance since 1994. By 1996, it had achieved a market share of 3.36% in domestic and 0.23% in international long-distance. It was owned by Iusacel (51%) of Mexico, part of BellAtlantic, and Inversiones Druma (49%) of Chile, controlled by the Chileans Sergio Muñoz and Ignacio Zúñiga. In 1995 it experienced a period of disagreements between the Chilean shareholders and Iusacell over internal corruption. In 1995 it lost $2580Mn and in 1996 $1505Mn. In 1997 it was acquired by InterAmericas Communications Corporation, a US telecommunications corporation for US$7.25Mn

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5.- REFERENCES

Beca, Raimundo (1997). Privatización de CTC: Las Lecciones de un Juego de Suma Positiva.

(CTC's Privatization: The Lessons of a Positive Sum Game). Mimeo. Santiago de Chile: CTC.

CTC. 1989-1997. Memorial Anual (Annual Report). Santiago (Chile): Compañía de Telecomunicaciones de Chile.

DFAIT (Department of Foreign Affairs and International Trade). Chilean Telecommunication Sector. Canada.

Diario, El. 1994-1998. Various Issues. Entel. 1986-1996. Memorial Anual (Annual Report.) Santiago (Chile): Entel EUI. 1996. Country Profile: Chile. London: The Economist Intelligence Unit.

Follete, Charles M. La, W. Carl Kester, and Enrique Ostale. 1992. Compañía de Teléfonos de Chile. Case study 9-293-015. Boston: Harvard Business School.

Ingelbrecht, Nick. 1996. A Pivotal Point in Telecom Industry. Ericsson Connection. http://www.ericsson.com.au/Connexion/connexion3-96/chile.html

ITU (International Telecommunication Union). 1995. World Telecommunication Development Report 1995. Geneva: ITU.

ITU (International Telecommunication Union). 1997. World Telecommunication Development Report 1996/1997. Geneva: ITU.

OECD. 1995. Communications Outlook 1995. Paris: OECD.

OECD. 1997. Communications Outlook 1997. Paris: OECD. Palet, Roberto. 1996. La Pequeña Gigante (The Small Giant). Apertura (November): 20-22.

Telex-Chile. 1994-1996. Memorial Anual (Annual Report). Santiago (Chile): Telex-Chile. VII (Virtual Institute of Information). 1996. Telecommunications in Chile.

http://www.crt.columbia.edu/vi/papers/chil2.htm VTR. 1994, 1996. Memorial Anual (Annual Report). Santiago (Chile): VTR.