Introduction

Brazil has vast barriers to accessing the Internet. These barriers include literacy, education, economic purchasing power, and infrastructure (telephone lines, etc.). Through privatization, legislation, and market liberalization initiatives Brazil is making significant progress toward decreasing these barriers.

Telecommunication Structure

In recent years, the Brazilian Government has pursued a comprehensive privatization and economic liberalization agenda, which is completely changing the face of the market and its players. In light of the recent privatizations and market liberalization, Brazil's telecommunications sector is poised for dramatic growth.

Anatel, the Brazilian version of the FCC, reports that Brazil had 27.8 million main telephone lines and a line penetration of about 17 lines per 100 inhabitants at the end of 1999. ANATEL projects that figure to rise to 28 per 100 inhabitants by the end of 2003 and to 33 by the end of 2005. ANATEL reported 713,000 public telephones at the end of 1999, to rise to 981,000 by the end of 2001.[i]

The data communications sector, while still small, has grown essentially unregulated for a few years, attracting many new providers to the sector. Entry is relatively easy, requiring an application to ANATEL and a modest licensing fee. While still young, the market is also increasingly lucrative, with analysts predicting growth rates of about 50 - 60 percent. [ii]

Despite strong growth in the data communications market, it is still overshadowed by the phenomenal growth in demand for access to the Internet. This sector is attracting attention from not only the traditional telecom operators, but increasingly from pay television operators, who were recently authorized by ANATEL to provide high-speed Internet access via cable modems. The Yankee Group estimates that there were 8.8 million Internet users in Brazil by the end of 1999, for a penetration rate of about five percent. Currently, only 7 percent of Brazilian households are online. However, Brazil has already demonstrated a greater ability to absorb new technologies than other Latin countries, and that number could increase to 17 percent if PC leasing and flat phone rates are introduced. The Yankee Group predicts that there will be 35 million Internet users in Brazil by the end of 2003, for a penetration rate of about 20 percent. [iii]

Major international companies such as Telefónica, America Online (AOL), Yahoo, StarMedia and others are entering the Internet services market. Consolidation has affected Internet Service Providers (ISPs), and there are currently about 400 left in the market, whereas there were over 1,000 until relatively recently. The top ISPs in Brazil are Universo Online (UOL) with a half million subscribers; Zaz (owned by Telefonica's Terra Networks) with approximately a quarter million subscribers; Mandic.com with about 92,000 subscribers; Matrix Internet; AOL Brasil; Onda; Originet; ICONet; UniNet; and DGL Net. Dial-up Internet access costs as little as $11 month, and free access offers are becoming increasingly numerous. [iv]

In a joint venture with the Cisneros Group of Venezuela, AOL launched its Brazil operations in November. For AOL, Brazil is the obvious starting point for its plans to invest approximately USD $200 million in Latin America over the next few years. AOL and IBM Brazil recently announced a strategic partnership that should allow AOL to capture market share while simultaneously increasing PC ownership (and IBM market share in Brazil). Targeting the middle class, IBM will finance computers, already loaded with the AOL software, with a down payment and a low monthly installment for 24 months, which includes unlimited Internet service. [v]

Government Policy

The telecommunications sector has undergone dramatic change in the late 1990s, beginning on August 15, 1995, when the legislature passed a constitutional amendment to remove the federally mandated monopoly in the telecommunications sector. This and the 1997 General Telecommunications Law ("Lei Geral de Telecomunicaçoes") laid the groundwork for privatization and liberalization, the establishment of an independent regulatory body (described below), and for greater competition in the cellular, data communications, value-added-services, and satellite transmissions sectors. [vi]

The Brazilian telecommunications sector underwent major restructuring in the 1990s. Previously, the Ministry of Communications (MOC) was responsible for planning, coordinating, supervising, and regulating telecommunications and postal services in Brazil. However, in October 1997, a new independent regulatory agency, the Agencia Nacional de Telecomunicaçoes (ANATEL) was established by presidential decree. ANATEL took over all regulatory responsibilities formerly placed with the MOC, including: representing Brazil in international telecommunications fora; regulating the procedures for licensing and providing services; granting and revoking licenses; enforcing regulations; management of spectrum and satellite orbital slots; and accepting and certifying equipment and products. Broadcasting is not regulated by ANATEL and will be covered by future legislation. The MOC is responsible for telecommunications policy. [vii]

Competition in data communications was introduced by a July 17, 1991 regulation (Portaria 525), which allowed private companies to offer certain limited communications services, including data communications, ending Embratel's monopoly in data communications. Under the July 1991 regulation, state operating companies may now provide intrastate, dedicated data communications services in partnership with private companies, including value-added and packet-switched services, using either leased lines from Embratel or the state operating companies. [viii]

As Internet services are relatively new in Brazil, discussions within the Government continue regarding Internet policy. There are currently no policies governing access to the Internet, which is viewed as a value-added service, and there is no special license required to be an ISP. There are no restrictions concerning the types of services that may be provided, except for telecommunications services (i.e. "voice over IP" or "voice over the Internet"). ISPs are not allowed to establish nor to operate their own switches, only telecommunication companies can operate switches or any other cable related to telecommunications services. The Association of Internet Service Providers reported that some ISPs have been shut down by ANATEL for providing Internet telephony services illegally. Limitations on the Internet business in Brazil are described in the general law of telecommunications ("Lei Geral de Telecomunicações"). [ix]

ANATEL recently approved the provision of Internet services over cable modems, so cable operators are now also entering the market. Globo Cabo recently launched high-speed Internet access over its cable infrastructure in Sao Paulo, and plans to expand the service offering during the first half of 2000. Globo's pay television rival, TVA, launched a one-way Internet access service in Sao Paulo in late 1999. [x]

Telecommunications Restructuring

In preparation for telecommunications privatization, the Brazilian Government created twelve fixed line, cellular and long distance companies out of state-owned monopoly telecommunications provider, Telecomunicaçoes Brasileiras S.A (Telebras), and on July 29, 1998 sold nineteen percent of the shares it held to private investors for $19 billion.

The transactions were as follows:

• MCI purchased the long distance carrier, Empresa Brasileira de Telecomunicaçoes (Embratel), for $2.29 billion.
• Telefonica de España, in partnership with Iberdrola, Bilbao Vizcaya Bank, RBS (one of the largest media/telecommunications companies in Brazil) and Portugal Telecom purchased TELESP (the fixed line company in São Paulo) for $5 billion. The company now uses the name Telefónica.
• Telecom Italia and Opportunity (a Brazilian investment bank) purchased TELE CENTRO SUL (the fixed line company for the states of Parana, Santa Catarina, Mato Grosso do Sul, Mato Grosso, Goias, Distrito Federal, Tocantins, Rondonia and Acre) for $1.8 billion.
• Andrade Gutierrez (one of the largest civil construction companies in Brazil), La Fonte Alianca do Brasil, Inepar (a business group from southern Brazil and the Brazilian partners of Motorola's Iridium project), Brasil Veiculos and Macal, purchased TELE NORTE LESTE (including Rio's telecommunication company and Telerj fixed line company, as well as the companies for Minas Gerais, Espirito Santo, Bahia, the Northeast region states, Amazonas, Para, Roraima and Amapa) for $3 billion.
• Portugal Telecom purchased TELESP CELULAR (the cellular company for the State of Sao Paulo) for $3.1 billion.
• Telefonica de España, Iberdrola, NTT Mobile and Itochu Corporation purchased TELE SUDESTE CELULAR (including the cellular companies of Rio de Janeiro and Espirito Santo) for $1.2 billion.
• Canada's Telesystem International and Brazilian investment bank Opportunity purchased TELEMIG CELULAR (the Minas Gerais' cellular company) for $655 million.
• The Globo Group (a Brazilian media group, owners of O Globo newspaper and TV Globo), Bradesco (the largest Brazilian commercial bank) and Telecom Italia purchased TELE CELULAR SUL (the cellular companies of Rio Grande do Sul, Parana and Santa Catarina) for $606 million.
• Canada's Telesystem International and the Brazilian investment bank Opportunity purchased TELE NORTE CELULAR (including the cellular companies of Amazonas, Para, Roraima, Amapa, and Maranhao) for $163 million.
• Splice do Brasil (one of the largest telecommunications equipment manufacturers in Brazil) purchased TELE CENTRO OESTE CELULAR (the cellular companies for Mato Grosso do Sul, Mato Grosso, Distrito Federal, Goias, Tocantins, Rondonia and Acre) for $384 million.
• Telefónica de Espana and Iberdrola purchased TELE LESTE CELULAR (Bahia and Sergipe cellular companies) for $370 million.
• The Globo Group, Bradesco and Telecom Italia purchased TELE NORDESTE CELULAR (cellular companies of six northeast states) for $577 million. [xi]