A Long Distance Free For All In Brazil

As telecom giants fight it out, how will they make money?

A visitor to Sao Paulo in the last month would have reason to think that South America's largest city had been taken over by the numbers 21 and 15. The long-distance phone codes for rivals MCI WorldCom Inc. and Spain's Telefonica are splashed onto billboards, television and magazine ads, streets signs, and taxis. The global heavyweights have taken their battle to Brazil as the country's domestic long-distance market opens for the first time on July 3.

The scramble will likely be even more heated than in the fast-paced U.S. market, where callers usually sign on with one company. Every time they call long distance within the country, Brazilians have the choice of dialing one of the two-digit codes. With customers able to change carriers on a whim, the phone companies are being forced to offer steep, profit-devouring discounts. "Price is fundamental, because there's no customer loyalty," says Carlos Constantini, telecommunications analyst at Banco BBA in Sao Paulo. "If one company goes on TV on Mother's Day offering calls for 10 cents a minute, the others might not get any business that day."

The intense marketing campaign is a reflection of Brazil's economic opening, which has accelerated since President Fernando Henrique Cardoso took office in 1995. No industry has advanced as quickly and dramatically as telecommunications. Just a year ago, the sector was dominated by plodding state-run monopoly Telebras.

But Cardoso's opening of the telecom market, culminating in the $19 billion privatization of Telebras in July, 1998, set the stage for competition, falling prices, and surging investment. In Sao Paulo, where a group led by BellSouth Corp. of the U.S. is facing off against Telesp Celular, the price of a new cell phone has fallen by more than half in the last year, to $225, and the number of cell-phone users has doubled to more than 9 million since 1997. Telecom should account for at least a third of the $16 billion in foreign direct investment Brazil expects this year.

With their high-profile campaigns, estimated to cost tens of millions of dollars each, the telecom giants are introducing marketing ploys similar to those used by airlines to attract frequent flyers. Telefonica, for example, offers points toward purchases of plane tickets and restaurant meals for each $5 spent on long-distance calls. Tele Norte Leste, the Brazilian-run regional carrier that covers Rio de Janeiro, will turn long-distance calls into airline miles. And MCI WorldCom, which runs long-distance carrier Embratel, has a discount program aimed at business users.

TOUGH TEST. Telefonica, which leads a consortium that paid $5 billion for Sao Paulo's local phone operator, could lose as much as half of the state's long-distance market, estimated at $700 million a year. It had been the only company handling long-distance calls within Sao Paulo state but now must fight off MCI WorldCom. However, Telefonica could recoup later. Regulators will allow it to enter Brazil's interstate and international markets as early as 2002.

MCI WorldCom, meanwhile, will face competition in regional calls from Telecom Italia in the south-central part of the country. Later this year, a consortium including Sprint of the U.S., France Telecom, and National Grid of Britain will take on MCI WorldCom in interstate and international calls. MCI WorldCom's toughest test could come from Rio de Janeiro, where Tele Norte Leste will challenge it on calls made within a 16-state region.

At first, customers might find the changes confusing, but they are clearly the biggest winners. Phone tariffs will fall about 10% per year through 2002, says telecom analyst Constantini. In Chile, which introduced a similar call-by-call competition in 1994, rates initially plunged by 80% before rebounding. But they remain among the lowest in Latin America. Not long ago, an antiquated infrastructure made even most local calls in Brazil an adventure. Now, the telecom companies are fighting each other to give gifts to would-be customers. That's something to phone home about.

Before it's here, it's on the Bloomberg Terminal.