Telefonica's Dream of Hegemony faces hurdles

SPANISH GIANT Telefonica is having a hard time lately down in South America with its local loop monopoly, Telefonica de Argentina.

Last month, a judge ruled against its IPTV plans. Now, the country's anti-trust agency is investigating Telefonica's indirect stake in Telecom Italia, which owns a stake in Argentina's other telephony incumbent.

The government wants to find out if Telefonica's latest European acquisition - a stake in Italy's Telecom - means giving Telefonica indirect control of the two incumbents in Argentina, a move which would be forbidden under local regulations.

Argentina's telecomms market in a nutshell
When the former PTT in Argentina was privatized, the worst possible system was selected: they turned a government-run monopoly into two non-competing private monopolies by assigning each their own exclusive geographical zone.

Hoping to provide the best possible business deal to private investors, they split the country into two regions, north and south, and sold each - including all of ENTel's assets - to foreign private investors.

In short: Italy's Telecom Italia and France Telecom took the northern region, and Spain's Telefonica took the southern region. The French recently sold off their stake in Telecom Argentina to a local group so now the two are owned by the Italians and the Spaniards, respectively.

This duopoly has been extending its control and its tentacles into other areas for the last 17 years, and now they collectively control the majority of the broadband and mobile markets.

Competition has been shrinking. In the mid-90s, Telefonica embarked on a buyout spree, snapping up a dozen small independent ISPs, and acquired mobile operator Movicom from Bellsouth in 2005, thus taking control of nearly 50% of the mobile market.

Whatever little competition there is in traditional fixed telephony comes from TelMex, the venture owned by Mexican billionaire Carlos Slim which also runs Argentina's third mobile operator CTI and recently ventured into POTS by using WLL equipment to reach the consumers.

Other than that, Telecom Italia has remained in the north, and Telefonica in the south.

The data market has some competition thanks to smaller firms, but when it comes to plain old fixed telephone service with a copper wire, customers don't have much choice.

Buenos Aires is split down the middle and depending on where you live, you either get a Telefonica or a Telecom phone line.

Both operators have historically opposed "local loop unbundling", i.e. giving smaller competitors - and each other - access to their customers' local loop wire. Aimed at fostering competition, this measure was originally supposed to come into force by 2001 or 2002 but it never happened because of the country's financial implosion.

Telefonica's IPTV dreams shut down
Both Telefonica de Argentina and Telecom Argentina had great plans to get into "triple play" and offer IPTV along with the traditional POTS and broadband, using their local loop monopoly.

But last month, a judge shot down Telefonica and Telecom's dreams of extending their dominant position into digital TV by means of IPTV. The ruling was based on a law prohibiting the incumbents telcos from getting into TV broadcasting.

Facing similar challenges elsewhere in Latin America, Telefonica decided to offer digital TV through DTH satellite rather than using the incumbents' phone wires - something of a half-baked "triple play" offering. Although providing TV over satellite gets around any legal issues involved in using the local loop, the cost is of course much higher.

Government investigates Telefonica's stake in Telecom Italia
And now, more grievance for the incumbents: the government said on Tuesday it was appointing "two observers" at local incumbent Telecom Argentina, to investigate if the Spanish company's recent purchase of an indirect stake in Telecom Italia brings the entire Argentinian market under the control of a single group.

Continuing its expansion at home in Europe, the Spanish behemoth purchased joined with two Italian banks to purchase an 18 per cent stake in Telecom Italia - Italy's former PTT and which owns half of Telecom Argentina.

Suddenly, a single company appears to have a stake - albeit indirectly - in both of Argentina's incumbent operators. This was explicitly prohibited at the time the PTT monopoly was auctioned off. Both operators were to be totally independent from one another.

The government has now appointed two observers - who ought to watch out for anvils falling from the sky or unrequested money appearing in their bank accounts - who will work at Telecom Argentina for 60 days then send a report to Argentina's competition watchdog and the Communications Commission.

Telefonica's has issued a statement saying the company is awaiting publication of the report and promising it "will respect the current laws".

The irony is that a single signature by a government official mandating local loop unbundling would bring much needed competition into this market. µ