The Strangest Telecom War Yet

Why the big boys are battling over a small market in Chile

Homegrown and multinational telecommunications companies, already locked in a bruising long-distance price war, are about to plunge into yet another fierce battle for shares in Chile's small market. This time, they will scramble to attract subscribers from a population of just 14 million for Latin America's first countrywide personal communications system (PCS).

For global heavyweights such as Southwestern Bell, Italy's STET, and Spain's Telefonica, however, competing for stakes in Chile is also a crucial part of a strategy aimed at a broader Latin America market. Multinational carriers "are not in this market because they'll make a lot of money, at least in the medium term," says Jane Winslow, an analyst at Bankers Trust New York Corp.'s Santiago investment bank. "They're in Chile because it is the first truly deregulated market in Latin America." Chile's harsh competitive environment will be a stern test run. "Everyone is revving up for Brazil," Winslow adds. "Once that is privatized, they'll go after it with a vengeance."

TOO EARLY? Carving out PCS footholds in Chile will be costly, however. Winners of three licenses, with bids to be submitted Mar. 1, will spend $100 million to $200 million apiece to set up countrywide PCS networks. Even some prospective bidders think the PCS market, which will compete with cellular phones, is being opened too soon. After six years of slow growth, cellular phones are only now catching on, with 140,000 subscribers currently. "PCS shouldn't have been planned for yet," says Sergio Cavagnaro, general manager of the cellular subsidiary of VTR Telecommunications, which is owned by Southwestern Bell, Siemens, and Chile's Luksic group (table). Chile's wireless-phone industry revenues, now about $200 million annually, should grow to $800 million by 2000, analysts say. But that pie will now be divided among three countrywide PCS carriers as well as the four present cellular operators, two in each of two geographic regions.

Despite the crowded field, "getting a license to operate PCS is an asset one must have to be involved in telecommunications in a big way in the future," Cavagnaro says. Competitors share the sentiment. "You get in now or you can't get in ever," says Alejandro Sazie, development manager for Chilsat, the PCS arm of Telex-Chile. For multinational companies, operations in Chile are crucial links in broader Latin American strategies. Italy's STET, for example, already runs a wired phone system in Argentina and recently acquired a controlling stake in Bolivia's privatized phone company. Last month, STET agreed to inject $278 million of fresh capital into Chilean long-distance operator Entel in return for an 18% stake. In turn, Entel, which has a cellular joint venture with Motorola Inc., may help STET run the Bolivian phone outfit.

Although prospective PCS operators expect a tough battle, they hope the market fracas won't be as vicious as the long-distance war. A year ago, competition among nine long-distance rivals drove international rates as low as 1.5 cents per minute on calls from Santiago to New York. In the cellular phone business, CTC, which is the dominant wired-phone operator, is luring its fixed-phone clients to use its cellular service as well by renting out handsets for almost nothing and waiving charges on the fixed phone for calls shunted to cellular.

ELBOWS OUT. Compared with analog cellular phones, the digital PCS offers advantages such as greater security and even a "virtual office" capability: Subscribers can remove the digital chip from the handset and insert it into a laptop computer. But BellSouth Corp.'s Chilean cellular operator, BellSouth Comunicaciones, has digitalized most of its network to offer many of the same advantages. So some in the industry speculate that BellSouth may opt out of the PCS fray.

Most prospective bidders see PCS, however, as a key ingredient in an integrated market strategy. Entel, eager to diversify after losing its long-distance monopoly, is moving into basic wired phone service in addition to its cellular partnership with Motorola. Now, with STET's buy-in, it has a fat war chest for a foray into PCS. CTC, which is traded on the New York Stock Exchange, just spent $100 million to buy out a Santiago cable company whose fiber-optic lines could have competed with its basic phone service. And it says it's willing to invest $200 million in PCS if only to keep one more rival out. With such deep-pocketed combatants, Chile's PCS war could be long and bitter.

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