Brazil set for pay TV faceoff

Mega-rich telcos take on tube rivals to offer triple play

RIO DE JANEIRO — It is David vs. Goliath. In one corner, are the pay TV operators, led by Net Servicos and satcaster Sky Brasil, with combined annual revenues of about 5 billion reals ($2.3 billion). In the other corner are three mighty telcos with combined annual revenues of about $28 billion.

Both sides are set to slug it out for subscribers that want a triple-play package of telephone, TV and Internet services from one provider.

The telcos — Spain’s Telefonica, Telemar and Brasil Telecom — are becoming increasingly concerned about pay TV operators’ ability to offer Internet and, in some cases, phone connections.

Indeed, the pay TV operators’ total number of broadband subs reached 914,000 in June, a 102% increase over June 2005.

So, according to the Brazilian Pay TV Assn. (ABTA), telcos are doing what big corporations usually do with small, inconvenient competitors — buy them out.

ABTA is lobbying regulatory agency Anatel to bar three recent deals that would give Telemar and Telefonica pay TV access.

ABTA executive director Alexandre Annenberg says the telcos’ license agreements prevent them from offering pay TV in areas where they provide phone services because they inherited a comprehensive and unbeatable cable network from former state-owned telco monopoly Telebras.

Yet, the telcos seem to be ignoring this.

Telemar has a virtual fixed-line monopoly in Brazil’s southeastern and northeastern regions. In the summer it bought a controlling stake in Way, a cabler with 41,100 subs in Minas Gerais state that is within its licensed region.

In October Telefonica, the virtual fixed-line monopolist in Sao Paulo state, bought a stake in TVA, one of Brazil’s largest pay TV players, which has 320,000 subs, most of them in Sao Paulo.

A few months before, Telefonica also announced a deal with satellite operator Astral Sat.

The deals are subject to the approval of Anatel, which announced last week that it would review the cases “sometime next year.”

“We would more than welcome Telefonica and Telemar as pay TV operators outside their phone licensed areas,” says Annenberg. “But their agreements with Anatel prevent this.”

Lobbying group the Fixed-Line Carrier Assn. (Abrafix) says Brazil is simply undergoing a convergence and consolidation just as other countries are.

Representatives of Abrafix and TVA claim ABTA is controlled by Mexico-based Telmex, one of the world’s top telcos.

The group is a leading player in Brazil’s mobile and long-distance telephone sectors, but is not a fixed-line carrier.

About two years ago, Telmex bought control of Brazil’s No. 1 pay TV operator Net Servicos, though it remains a minority partner due to regulatory limits to foreigner ownership of cable operators.

Abrafix’s argument is that Telmex has already entered the pay TV market via Net Servicos and is now trying to bar the other telcos.

Even if Anatel rules against Telefonica and Telemar’s deals, most analysts believe telcos will break into the pay TV market soon.

Otavio Jardanovski, general director of research firm PTS, which analyses data for the pay TV market’s players, backs this opinion.

“The existing pay TV players, led by Telmex, are trying to postpone the entrance of other strong competitors. It is a natural move,” Jardanovski says.

“Telefonica is investing particularly heavily in the pay TV market. The word is it invested $465 million to buy the stake in TVA and is expected to launch a satellite package, even before Anatel rules on the deal.

“I believe it will eventually be one of the top three operators in the country, along with Net Servicos and Sky Brasil.”

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