Telecommunications in Chile: Success and Post-Deregulatory Challenges in a Rapidly Emerging Economy.

• Author: Rosenblut, Jorge

CHILE'S DEVELOPMENT STRATEGY

The challenge of the Chilean post-deregulation period in telecommunications is to provide a framework that will allow the market to generate improvements that will be measured not only in number of lines per inhabitant, but also by the successful creation of a ubiquitous broadband network, a user-transparent platform that will assist our global community in facing the challenges of the Information Age. Globally, the communications industry has emerged from a simple measure of progress to an essential backbone of development. The prevailing belief is that by joining the developed nations in making this an area of priority and growth, countries like Chile will become full participants in the global economy Communications will also provide the vehicle for leapfrogging towards accelerated change in education, access to information and training for the next decade. This article examines some of the lessons learned from the Chilean experience thus far and takes a stab at the regulatory challenges needed to meet the new goal.

More than by strategy, Chile's development is marked by various timely influences that set the stage for success. Deregulation began to gain the support of policymakers worldwide while the military government was still in power. The concept of deregulation originated in the United States under the Reagan administration and gained favor in Chile when a new generation of economists returned from studying in the United States with the conviction and skills to implement economic deregulation theories associated with the Chicago School of Economics. Under pressure from the international community and because of the need to attract foreign investment, the military government began to phase in democracy in the early 1980s, thus setting the stage for deregulation. Political and theoretical philosophies coincided, allowing the ruling authority to implement the changes with little or no resistance from civil society. As a result of this political change, Chile took a shortcut to deregulation. This shortcut has, however, proven to be a double-edged sword, as Chile comes to grips with the reality that unfettered deregulation has a price.

During this period, government spending on education, health and welfare was cut to the bare bones. In addition, while the rest of the world was increasing their national debts, Chile was paying hers. A healthy economic atmosphere combined with a return to democracy made Chile a logical place for foreign investment. The theories of a deregulated system were very attractive to the military government. Not only did they merge well with the government's spending habits, but they would also prove an attraction for investors. The resulting economic boom in Chile over the past decade has proven this to be the case. Strong economic growth, combined with democratization of the political process, has allowed the democratically elected administrations of former President Patricio Aylwin and current President Eduardo Frei the freedom and necessary resources to tackle problems in education, health and the national infrastructure.

One key to continuing this success, and the focus of this article, is the need to come to terms with the barriers to competition that are paradoxically imbedded in too much deregulation and to introduce necessary adjustment within the new political reality

THE TELECOMMUNICATIONS Focus

Chile's newly trained economic experts recognized the importance of access to the worldwide flow of information as a stepping stone to diminishing the gap between the developing and the developed nations. The military government, with the aim of creating an atmosphere favorable for foreign investment, was thus able to push forward the new economic theories with ease. The combination of these forces created the conditions for Chile to become a global pioneer in the deregulation of telecommunications and to introduce a new framework based on the principles of market competition.

Rapid changes have taken place in the Chilean telecommunications industry that have affected the diversity and provision of services. These changes are the result of numerous factors, including continuous technological development, the characteristics of competition in Chile, overall economic growth and an accelerated growth of demand for these services. The new technologies have opened up the field for a wider range of services for the existing customer, as well as service provision for remote areas that were not economically feasible in the past and the merging of previously unrelated industries through digitalization.

The traditional providers of telephone service, with their limited expertise, financial base and trained personnel, did not have the capacity to make these new technologies a reality in the time frame envisioned by policymakers. The position was taken that deregulation would level the playing field and allow newcomers to fill the gaps. As a result, the traditional providers of telephone service are no longer alone in the national quest for modernization. They have been joined by a myriad of local and foreign companies with expertise in the provision of cable, long distance, radio networks, Internet and satellite transmission.

A MARKET BRIEF

The telecommunications industry generated 2.44 percent of the Chilean gross domestic product in 1995, representing a contribution of 0.4 percent to GDP growth. In 1996, contribution to growth amounted to 0.41 percent, while generating 2.31 percent of GDP. Chilean GDP grew 6.8 percent in 1996.

The largest telecommunications companies are CTC, ENTEL, VTR and Telex-Chile. All of them are diversified into various markets through holdings or other forms of administration. These companies earned U.S. $2.03 billion in total revenue in 1996.

CTC is the largest company, representing a quasi-monopoly basic telephone service with 91 percent of existing lines nationwide. The dominant position of CTC in all markets, demonstrated by its 65.2 percent revenue share and its aggressive competitive stance, allows it a great deal of control over the entire telecommunications industry in Chile. Plain Old Telephone Service (POTS) and CTC-Corp. generate most of CTC's revenue.

A general view of the industry is given by market share in basic telephony, cable television, long-distance and cellular businesses held by the different players. Additionally, there has been a growing tendency towards exiting the market, voluntarily or otherwise, particularly since 1996. In various telecommunications markets the players have been trying to compete harder for customers and revenues in an open, deregulated, but not yet perfect market.

In the mobile telephony markets, due to spectrum allocation limitations, there are only two national competitors. The introduction of personal communication systems (PCS) promises two more entrants. The low cost associated with this wireless technology will compete not only with cellular but also with wireline telephony The more advanced technology chosen by one of the licensees will also introduce wireless broadband to the end user. This market remains very dynamic. The annual rate of subscriber growth from 1994 to present has been 66 percent, representing a 30 percent annual growth in revenue for the sector. The penetration reached 319,103 subscribers at the end of 1996, representing 2.4 units per 100 inhabitants.(1)

In 1996, CTC-Cellular and VTR-Cellular merged, resulting in the creation of STARTEL, with a major market share in the cellular market. This was a preemptive step before the start of operations of PCS systems. Surprisingly and fortunately, negotiations between CTC and VTR for the total merging of the two companies have come to a halt. This slowed down the strong predisposition toward a market dominated by a quasi-monopoly for traditional telephony services, cable television and all broadband residential services. The CTC-VTR merger would have given CTC 100 percent of the existing cable infrastructure and subscriber drops.

The Chilean administration has actively encouraged participation in this...