the BNamericas Fact File Roadmap the path to profitability

1
Internet provisioning regulation in .
Brazil
The current system and prospects for reform
2
Key Points

• The Internet market today
• The current regulatory framework
• Anatels proposals
• Conflicts and possible outcomes

3
The Internet market today

• Market figures
• 10 million dial-up Internet users
• 1.4 million broadband access customer
• Brazil accounts for 40 of e-commerce in Latin
  America
• 2003 e-commerce sales to reach 1.2bn reais
• Market features
• Dial-up customers are charged by the pulse
• Dial-up can become more expensive than broadband
• Online consumers down for the first time ever in
  July
• High costs are slowing increase of Internet use

4
Internet provisioning models

• Paid ISPs charge a monthly flat rate of about 25
  reais. Customers cover the cost of the phone
  call.
• Paid ISPs control 53 of the dial-up market.
  UOL, Globo, Terra and AOL among the top paid
  ISPs.
• Free ISPs do not charge an access rate.
  Customers pay only the price of the phone call to
  the ISP.
• Free ISPs are backed by fixed line telcos. The
  top free ISPs are iG (Telemar), iBest (Brasil
  Telecom), Pop (Global Village Telecom) and
  iTelefonica (Telefonica).

5
The regulatory framework

• The telcos back free ISPs because because local
  regulations apply the same rules for charging
  interconnection fees related to voice and data
  traffic.
• But voice and data traffic patterns are very
  different. Unlike voice service providers which
  both send and receive calls, ISPs only receive
  calls.
• Local regulatory provisions for very high
  interconnection fees accentuate the problem in
  Brazil.

6
Impact of liberalization

• Incumbent operators are freed to expand outside
  their original territory after completing
  infrastructure buildout requirements from their
  privatization contracts.
• The new rights to expansion into other operators
  territories has a perverse impact on the Internet
  market.
• Operators can set up switches outside their
  territory as an easy way to collect
  interconnection fees.
• Operators form alliances with the free ISPs as a
  way to defend traffic from other operators.

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What it means for customers

• Metered Internet access charge discourages people
  from spending more time online.
• Daily Internet traffic in Brazil spikes after
  12am!
• Internet users are clearly trying to avoid
  metered charges. They would probably be inclined
  to purchase flat rate plans.
• But the telcos are in a trap. Offering a flat
  rate implies facing an income statement that
  balances fixed monthly revenues with variable
  interconnection costs.

8
Anatels proposals

• Anatel published a public consultation document
  to change the Internet access provisioning model.
  The regulation proposed three changes
• Introduce a nongeographical Internet access code
• Offer incentives for flat-rate packages
• Prohibit revenue sharing between telcos and ISPs
• The main objective is to remove market
  distortions that encourage telcos to design their
  Internet business strategy around interconnection
  fees.
• Anatels proposals are not without controversy.

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Implications of the reforms

• The free ISP business model would disappear as
  all ISPs gradually migrate to a flat rate model.
• Operators would shift their focus from simply
  terminating traffic (to capture interconnection
  fees) to actually getting more traffic volume.
• They would encourage ISPs to sign up users to
  flat rate plans.
• ISPs would place more priority on attracting
  customers through valued added content and
  services.
• Customers would spend more time online. Flat rate
  plans also encourage speedier migration to
  broadband.
• Example of FRIACO reforms in the UK and other EU
  markets

10
What happens next

• Anatel does not have a calendar but says it is
  analyzing the comments made by operators and ISPs
  during the public consultation process that took
  place this year.
• We may see the subject resurface in early 2004.
• The telcos and their free ISP partners have
  created a system that works quite well for them.
• The telcos may recognize the proposed reforms
  offer the potential to generate more traffic.
• But they still need to be convinced that the
  reforms will also mean more profits.

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Contact information
David Gates Editor - Communications
Technology dgates_at_BNamericas.com Business News
Americas, Ltda. Carmencita 106 Las Condes,
Santiago CHILE Tel [phone] www.BNamericas
.com