The CAFTA Report
The history of telecom
|A brief history of opening the telecom market in Costa Rica|
By Dennis Rogers
for The CAFTA Report
Posted April 23, 2010
The state telecommunications monopoly in Costa Rica began with the constitution of 1949, when the victors in the recent civil war nationalized telecoms, insurance, banks, and smaller parts of the economy. As of 2010 the Instituto Costarricence de Electricidad, known as ICE, remains the sole operator, with continued delays in the process of opening the market to competitors as dictated by the 2008 telecommunications reform law.
ICE, pronounced E-say, was just the electric company until given control of telephones in 1963. At that point there were 9,200 lines for 1.3 million people. By 2001 fixed lines numbered about a million serving a population of four million. Geographical coverage is good. The basic rate is very low, as little as $4 per month.
Cellular phone service came gradually. At the end of the 1980s the private company Millicom was in the country, but pulled out in 1993 when the supreme court affirmed ICE’s monopoly.
ICE entered the market in 1994 with a basic AMPS system, but with negligible market penetration.
The first moves towards mass consumption were in the form of a Lucent TDMA system that had about 250,000 lines in 2001. Heavy demand was never completely satisfied by ICE and long waiting lists accumulated.
ICE contracted with the French company Alcatel for a 400,000-line GSM system in 2001. Thus began a saga that still is not complete. Former president Miguel Ángel Rodríguez and various others are on trial for allegedly receiving bribes in exchange for approval of the contract. Another former president, José María Figueres, has admitted taking $900,000 in “consulting fees” from the company, and refused to return from Europe to answer a congressional panel’s questions. The affair cost him his job as head of the World Economic Forum.
The case has already resulted in one conviction. Mid-level Alcatel executive Christian Sapsizian pleaded guilty in a U.S. court under the Foreign Corrupt Practices Act. He admitted to conspiring with local Alcatel manager Edgar Villalobos to pay $1.5 million in bribes to Costa Rican government officials. Alcatel was listed on U.S. stock exchanges at the time, resulting in legal jurisdiction there.
Alcatel was supposed to provide a countrywide system, but never did. Coverage was poor in rural areas and inside concrete buildings. ICE finally terminated Alcatel’s maintenance contract in 2007 and effectively expelled it from the country.
More GSM lines were bought in 2003 from Ericsson, with somewhat better results. These gradually put 600,000 lines in to use. ICE struggled to administer the process, and long lines of people wanting their reserved line formed at ICE offices. ICE was still unable to keep up with surging demand. At one point in 2006 the waiting list for a cell phone line reached 200,000. That means about 5 percent of the country’s total population wanted, had paid a deposit for, and could not acquire a line.
The next block of GSM lines was 300,000 provided by Ericsson in 2007, with improved coverage and reliability. At that point, nearly all Costa Ricans who wanted and could afford a line had one.
Ericsson also installed a pre-pay system which went on-line in April after some delays. Court challenges from a Chinese company that bid half as much slowed the process. Demand for lines is reported to be slow. The smallest cards are 2,500 colons, an amount not much less than the basic post-pay service (3,500 colons), and with only a month to use the minutes. Miserly users who consume less than the post-pay plan’s free 60 minutes would see little benefit. This option is really only desirable for those with irregular incomes who could lose their service (and incoming calls) in bad times.
Meanwhile ICE had quietly made pre-payment available to a set of their worst customers who had been blacklisted for unpaid bills. Similarly, the payment plan is unattractive to those who can control their phone use.
A report by the World Bank concluded that the lack of a pre-paid system was a “catastrophic strategic error” as in similar countries 70 percent of cell phone users opt for that choice. ICE had promised a pre-pay method essentially since the arrival of GSM to its portfolio, but found post-pay customers’ tendency to unintentionally run up a bill more attractive.
It was not a strategic error on ICE’s part. As a monopoly ICE seeks maximum income per customer, and indeed average revenue per user was higher than any country in Latin America except Panama in 2005. At $26.50 per user, the rate was more than twice as much as in Uruguay, a country very similar to Costa Rica in other aspects.
Without waiting until the other systems were saturated, 950,000 lines for a 3G system were contracted from the Chinese company Huawei. This was operational in 2009.
3G arrived with the “Kölbi” brand, ICE’s first effort at marketing, with a cute green frog as its emblem. Mostly 3G is offered as various packages including phones on installment. The cheapest basic rate at about $6 is similar to the simplest GSM rate, but phones are much more expensive. Most of the other packages include substantial numbers of minutes and SMS and MMS messages.
Wireless internet is an add-on to the Kölbi packages. Anecdotal reports are mixed. ICE is still putting up towers for this service. As of April 2010, ICE has about 2 million cellular lines installed, not all of them in use.
Internet was also a part of the monopoly, at first under the Radiografía Costarricense S.A. subsidiary. Thecompany known as RACSA had a long history as the country’s telegraph operator. Dial-up internet service started in 1994. RACSA also distributes its signal via cable television companies Amnet and Cabletica. RACSA has also introduced a WiMax system locally in the Central Valley.
In 2004 ICE entered the market under its own name with an ADSL service referred to as Acelera. It announced in 2009 a plan to absorb RACSA and integrate into its systems the latter’s 80,000 customers, with no explanation of how it would obtain the needed infrastructure. As 50,000 of RACSA’s subscribers are via Amnet which now has its own outside connection, these may not change to non-existent systems, as even ASDL availability is spotty.
Political process towards opening
The opening of government monopolies particularly in telecoms and insurance was a key element of the Central American Free Trade Agreement with the United States. The legal base for breaking ICE’s hold on the market came independent of the treaty, which was ratified in a bitterly-fought plebiscite on 2007.
Unions from ICE and other public employers were at the heart of the resistance to CAFTA, along with various political parties and student groups who oppose free trade on ideological grounds. Their strategy of street protests and blockades had been successful in 2000 against what was then called the “combo” an attempt to separate ICE into its telecom and electricity segments. That legal change was aimed at opening electrical generation to private investment, but the government quickly backtracked in the face of public opprobrium.
The administration of President Oscar Arias Sánchez was more steadfast in the face of the unions’ pressure, as the general public remained divided and did not support radical tactics as before. As telecoms became the central issue of the free trade treaty debate (at least in the opinion of the unions), and opponents continued stalling tactics after the vote, in the national legislature continued with the laws needed.
Law number 8642 was passed June 4, 2008, officially removing the government monopoly on telephony.
A new telecommunications agency, the Superintendencia de Telecomunicaciones, known as SUTEL, was split off the main government regulator as part of the new law. It is charged with approving every Internet café and provider, as well as larger phone concerns.
Any operator will pay 1.5 percent of revenues to a national telecoms fund, which will be used to increase access with public phones and internet access into areas not profitable commercially. The funds will be administered by SUTEL.
Interconnect fees and access will be a regular feature of the regulator’s cartel as new entrants meet the entrenched incumbent. SUTEL already arbitrated a squabble between Dodona SRL (Amnet) and ICE over access to the Maya submarine cable. This allowed Amnet to be the first internet company to operate independently of ICE.
Infrastructure sharing is mandated by the law, mainly aimed at unnecessary duplication of towers and posts. This had been an issue even before the creation of SUTEL, as some rural electric cooperatives had been fined for refusing access to cable companies, looking towards providing their own television coverage. SUTEL will have to define “infrastructure” more closely, as RACSA has suggested that the cable TV companies that carried its signal before should continue to do so over their wires.
SUTEL has already tangled with ICE when the latter tried to unilaterally increase charges, saying it didn’t need government approval since the market is now open. Substantial increases included upping SMS texts from 1.5 olons (three tenths of a cent) to 5 colons (one cent). This attempt was batted down by the regulator.
ICE was also forced to return money to Kölbi customers it had charged before MMS and wireless internet charges had been officially approved. The regulator ordered them to separate out the cost of any phone included in the Kölbi package.
Responding to historical problems in Costa Rica and elsewhere, a customer’s bill of rights was spelled out by the regulators. The basic rights in the regulations include: number portability, guarantee of continuous service, free access to emergency services, exact billing (seconds), compensation for time out of service, quality standards, and no billing of unsolicited services.
Users now have three days after their bill is due to pay or be disconnected. The content of service contracts and minimum detail on billing statements is specified.
Progress to opening
The manner which ICE has handled the changeover from old to newer technologies has provided a test run for the regulating authorities to consider the consumer’s rights to service.
Many clients have held on to their TDMA numbers rather than go to a more modern system since they don’t care about other features and/or don’t have money for a new phone. The cheapest GSM handsets in the country are about $60, a substantial amount for a truck driver or janitor who might take home only $350 per month.
There are still areas where TDMA has better reception. Something like 250,000 TDMA lines are still in use, down from a maximum of about 550,000.
In March the government consumer protection agency, the Defensoría de los Habitantes, accused ICE of refusing to reconnect TDMA customers who had lost or had their phones stolen, or been disconnected for non-payment. The agency suggested that ICE has no legal grounds to unilaterally cancel a contract.
ICE’s lawyers may not have been thinking ahead to the time when customers would not be defenseless against them, as had always been the case with fixed lines. Even now, a contract specifies a “beneficiary” for the line to a dwelling, as if it were
|something that must be
transferred in the event of the owner’s death.
The TDMA system is only around so long after its obsolescence because of ICE’s monopoly. Even when GSM systems became available, there were never enough lines to meet demand so the older phones stayed in use. Those who were early adapters stayed with the old system, instead of remaining on the cutting edge, largely because ICE arranged it that way. It did this by refusing to pass older customers’ phone numbers to new accounts. Even now the company avoids transferring numbers to new GSM lines, trying to steer business to the more expensive Kölbi 3G service.
Now ICE has begun to persuade and force TDMA users to change over to one of the other systems. Reports suggest service is worsening with a major outage in some areas during March. The company said in a news release that “unanticipated malfunctions” due to equipment adjustments have caused problems. The need to free up spectrum for the much-delayed auction has created technical problems, says ICE.
For a number of years there have been no new TDMA phones available, with a small industry reconditioning decrepit handsets and adapting those from shut down systems elsewhere. The second-hand phones are most affected by the equipment problems on ICE’s end. These can’t be reconnected as they are “not apt for use on the ICE system, for the reasons indicated,” though they were working recently. For this, the company offers "apologies and ask for understanding as to the situation.”
Nonetheless ICE plans to keep the system functioning until the end of 2010. The Defensoría’s take on ICE’s freedom to close an individual’s account suggests it might also defend users against the shutdown of the system.
The new Superintendencia de Telecomunicaciones has produced a report on the status of mobile telephony in Costa Rica. The report was released in May 2009. With delays in the auction process, it is still accurate.
Themes of importance in the report are electromagnetic spectrum in the country with recommendations for its optimization. It also touches on the impact of competitors to ICE, (referred to throughout the report as “the incumbent operator”), as mandated by the telecommunications law’s requirement that ICE be “strengthened” for competition.
A preliminary study of spectrum use required concessionaries of private frequencies to report their usage. A total of 1,030 reports of 4,356 frequencies ranging from television stations to ham radio operators arrived. Most had licenses from the old national radio control department, but fully 80 percent had missing or expired documents. The lack of legal standing for the users makes it simpler to “reorganize” the spectrum. The study was completed in April 2009 notwithstanding an appeal by ICE alleging that the time allotted was inadequate.
SUTEL operatives visited sites around the country with a portable spectrum analyzer to measure usage at different frequencies. Sampling was highest in the central urban areas but rural zones were visited also. Generally usage outside the main frequencies of the ICE cell phone systems was very low, and even those have little penetration into rural areas with low population density.
In essence there are four main spectral bands with commercial applications as described by the report, the 850 MHz, 900 MHz, 1800 MHz, and 1.9-2.1 GHz. The 900 MHz band is in use by a number of small operators who will have to be bought out, so the report recommends that it be reserved for future applications.
Cleanup of the 850 MHz band is what caused the problems with ICE’s TDMA system. SUTEL plans to put other concessions there.
The 1800 MHz frequency is where the present ICE GSM systems are located, with 15 MHz taken up by the Ericsson system and 22 MHz by the Alcatel system. The report recommends that these be combined to free up the 22MHz used by relatively few lines. Nonetheless, the report identified two 15 MHz bands available for immediate allocation to new entrants.
The 1.9/2.1 GHz band is essentially free and is a frequency widely used for 3G systems elsewhere. The report recommends four 15 MHz bands for three new entrants and the incumbent operator.
Additionally the high frequencies used for communication between base stations are already under concession, with ICE controlling no less than 78 percent of the 7.11-19.7 GHz range. The report suggests a “redistribution.”
Statistics cited in the report showed Costa Rica’s 2007 rate of cell phone lines at 34 per 100 population, below every Latin American country except Cuba. Even vastly poorer countries like Bolivia and Nicaragua had slightly higher rates. Currently the rate in Costa Rica is about 40 per 100 persons, while in El Salvador it has reached full penetration with more than one line per person.
Over the period 2004-2007, growth in most of Latin America was in excess of 100 percent, while in Costa Rica the number of lines in use went from 912,000 to 1.44 million. As of mid-2009 ICE had about 1.75 million lines in use out of an installed capacity of 2 million.
The World Bank report states with competition the total market will expand enough that ICE maintains its customer base and even gains, while keeping a market share of about 70 percent. This would mean two new entrants would share the remaining 30 percent of the market, calculated at 3.3 million lines in the few years after entry.
Since the other countries of Central America have four competing companies, with the exception of Nicaragua which has two, it is assumed Costa Rica can support four operators.
The substance of a spectrum auction is determined, though the latest delay was to see if there was a conflict of interest with a legal firm that had advised on the auction and also done public relations for a potential bidder.
Three packets of spectrum will be available. Concession one and concession two are 15 MHz (15 uplink + 15 downlink) of 1800 MHz and 15 MHz in the 1.9/2.1 GHz band. Concession three is 5 MHz of 850 MHz band, 15 MHz of 1800 MHz, and 10 MHz of 1.9/2.1GHz.
No company can have more than one concession. These are for 15 years with the possibility of extensions.
Regulators have set certain baseline qualifications to participate in the spectrum auction. New entrants must have also done a cell phone system startup from scratch somewhere. They must have at least 1.5 million subscribers in one country, and at least 1.5 million more between another two, with five years of operations in at least three countries, and a total of $700 million in overall revenue in each of the last three years.
With presumably more than three interested qualifiers for the three spectrum packages, the government should receive maximum return at the auction. It also means there will be more appeals to Costa Rica’s byzantine court system and additional delays.
Here are some of the likely bidders:
Digicel has established the most visible presence in the country with sponsorship of the national football team. Placards were prominent in Saprissa stadium and thousands of inflatable plastic noisemakers were distributed for home games.
The company initiated operations in Jamaica in 2001, and since has spread through the Caribbean, Haiti, Surinam, Guyana, and the Netherlands Antilles. It entered Central America with El Salvador in 2006, and has added Honduras and Panama. Emphasis has been on small markets, with the extreme case Nauru, an impoverished island nation with less than 10,000 people. This is part of an expansion in various small countries of the western Pacific.
In the Caribbean and New Guinea, Digicel has butted heads with local incumbents, with consequences ranging from dropped calls up to attempts to nationalize infrastructure. This experience may prove useful in dealing with ICE.
Digicel is owned by the Irish entrepreneur Denis O’Brien. He has compared himself to MacArthur, saying “[you] run from island to island—and you conquer.”
Movistar is the brand used by Spain’s Telefónica for its Spanish and Latin American operations. It is present in virtually all South and Central American countries except Paraguay and Costa Rica.
Much of Telefónica Latin American network has been put together with acquisitions, primarily Bell South assets purchased in 2004. Smaller companies consolidated in Mexico were the basis for its foothold in that market. The Costa Rican requirement of having done a start-up was apparently fulfilled in Guatemala and Peru.
Overall, Telefónica had about 58 billion euros in revenue in 2008, and employed 251,000 people, including European operations under the O2 brand.
Cable & Wireless
Cable and Wireless is one of the few companies in the business not to have a catchy brand name, with its history as one of Britain’s oldest communication companies going back to the days of the telegraph. It was the incumbent operator in most of the British ex-colonies in the Caribbean, mostly by monopoly before Digicel came along. It is still the only fixed-line provider in most of those countries.
The company was also the monopoly provider in Panamá, having purchased 49 percent of the government company Intel in 1997. That agreement gave operational control to Cable and Wireless while the government still owns 49 percent and employees 2 percent. As a result it is the main fixed-line and internet provider for the country.
The experience starting the cellular network in Panamá will presumably cover that requirement, since the Panamá operation was bought before then.
Tigo is the cell phone brand of Luxembourg-based Millicom. This company already has a presence in Costa Rica as the owner of Amnet, a cable television and internet provider, which it purchased in 2008.
Millicom had a brief operation here when invited to set up a cell phone system in 1987 during the first Oscar Arias administration. In 1991 the constitutional court reaffirmed ICE’s monopoly and effectively threw Millicom out of the country.
Tigo cell phone subsidiaries compete in Honduras, El Salvador, Guatemala, Bolivia, Paraguay, Colombia, and seven African countries.
Claro is a brand used by América Móvil, which is owned by Mexican billionaire Carlos Slim. He has been ranked as the richest man in the world by some measures. In Mexico the company operates as Telcel.
The company is on the Fortune 500 list and has over 200 million customers by its own accounting. It recently purchased the other main Mexican telecommunications company Telmex, supposedly to compete more effectively with Telefónica there.
Total revenue in 2009 was about $30 billion with 41,000 employees worldwide. América Móvil is present in all Latin American countries except Venezuela, Cuba, and Costa Rica. Subsidiaries also operate in the United States with pre-paid service, an area neglected by big national companies there.