Brasil Telecom Participaçoes S.A.

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Brasil Telecom Participaçoes S.A.

SIA Sul
ASP, Lote D, Bloco B
71215-000 Brasilia, D.F.
Brazil
Telephone: +55-61-415-1414
Fax: +55-61-415-1315
Web site: http://www.brasiltelecom.net.br

Public Company
Incorporated: 1998
Employees: 5,565
Sales: R 7.07 billion ($1.99 billion) (2002)
Stock Exchanges: Sao Paulo New York
Ticker Symbol: BRP
NAIC: 517212 Cellular and Other Wireless Telecommunications; 517110 Wired Telecommunications Carriers

Brasil Telecom Participaçoes S.A. is the holding company for Brasil Telecom S.A. Born from the breakup of Brazil’s state-owned Telebras telephone monopoly, Brasil Telecom, or BrT, is one of the rising stars on the Latin American telecommunications scene, providing fixed-line services to Brazil’s southern regions, including the states of Acre, Rondonia, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Santa Catarina, Paraná, and Rio Grande do Sul. The company also provides telecommunications services to Brazil’s Federal District. In all, BrT’s concession area encompasses more than 41 million people, or nearly 25 percent of the country’s total population. The company has been rapidly adding new connections—inheriting Telebras’s mostly dilapidated and highly inefficient network—and in 2003 already boasted more than 10.5 million subscriber lines. As this figure represented only 23 percent of its coverage area’s total population, BrT can look forward to years of fixed-line growth. On top of its local and interregional telephone services (Brazil’s national and international long-distance services are governed by Embratel), BrT has been pushing its Internet access and, especially, broadband services, and a launch into the mobile telecommunications market. Both of these activities are expected to enable BrT to expand its telecommunications services nationwide. As part of that effort, BrT began making acquisitions, including the purchase of Globenet, which owns a fiber optic cable linking Brazil with the United States, a 20 percent stake in Internet access provider MetroRed, and the long-distance carrier Intelig, formerly owned by Sprint, France Telecom, and the National Grid of the United Kingdom. Listed on both the Sao Paulo and New York stock exchanges, BrT is controlled by Telecom Italia and the Brazilian investment company Banco Opportunity. Carla Cico, an Italian native, is the company’s CEO.

Imperial Interest in the 19th Century

Brazil began installing its own electric telegraph network in 1851, and inaugurated its first public network in Rio de Janeiro the following year. The telegraph developed rapidly in the country, and by 1855 the network reached more than 20,000 kilometers. The first long-distance connection opened in 1856, connecting Rio de Janeiro with Porto Alegre, more than 1,000 kilometers to the south. In 1874, the country laid its first underwater cable, which connected cities along the country’s northern coast.

Yet the telegraph faced new competition that decade—the telephone. Brazil played an offhand, although important, role in the telephone’s development. Some years earlier, the country’s Emperor Pedro II had traveled to the United States and met with Alexander Graham Bell at the Boston School for the Deaf. Pedro II had returned to the United States for the Centennial Exhibition of 1876, which Bell had set up as a small and overlooked exhibit for his invention, the telephone. Pedro II had come along just in time, as Bell’s invention underwent scrutiny from the exhibition’s judges, who took notice when the Brazilian emperor tried the telephone and famously cried out: “Dios! It works!”

Emperor Pedro II had a telephone line installed in his palace that same year, marking the start of telephone history in Brazil. Early development of the telephone in the country went quickly, with much of the growing installed network centered on the then-capital of Rio de Janeiro. Over the following decades, states and local authorities claimed the right to grant licenses for building telephone networks, a situation that led to the development of a highly fragmented telephone system in the country. Indeed, by 1940, Brazil counted more than 800 separate companies servicing the country’s cities—while the poor rural areas remained unconnected.

By the 1960s, the number of companies operating in Brazil had swelled to more than 1,000. Among them was Telecomunicaçoes do Paraná, or Telepar, set up in 1963, which became the most direct predecessor of the later Brasil Telecom. Yet development of the country’s network had stagnated over the previous decades. This was due in large part to the widespread policy among competing telecommunications companies to maintain unrealis-tically low subscriber rates. With high line connection fees and low revenues from rates, the generally small-scale companies lacked the funds for technological and other investments.

In the mid-1960s, Brazil’s growing population remained vastly underserved by its telephone companies, with a density rate of just 1.6 per 100, nearly three times less than the world average. Nonetheless, the Brazilian market had moved in the direction toward more consolidated, large-scale companies, much of which had come under foreign control. Such was the case with Companhia Telefonica Brasileira, held by Canada-based Brazilian Traction Light and Power, which had gained control of nearly 70 percent of the country’s telephone lines. Yet there remained little coordination among the various telephone systems, which also used a variety of incompatible technologies, and completing a long-distance call at the time could require as much as two to three days of waiting.

The Brazilian government had recognized the strategic importance of the telephone system and began making moves to take control of the sector. In 1962, the government passed a new Telecommunications Code that gave the government the monopoly control over the operation and regulation of the country’s telephone system. The same legislation created a National Telecommunications Council, which had as its objective the drafting of a National Telecommunications Plan for consolidating and upgrading the country’s telephone network, including converting operations to a single technology.

Another feature of the legislation called for the creation of more realistic rates, as well as a surtax on telephone calls. The tax, which stood at 20 percent for local calls and 30 percent for international calls, went into a National Telecommunications Fund (FNT) to be used for upgrading technology and subsidizing new telephone lines. Finally, the new code created the Brazilian Telecommunications Enterprise, or Embratel, which ultimately became responsible for long-distance and international telephone transmissions.

The military coup of 1964 disrupted the timing of these plans, and the formation of Embratel, owned by the government in conjunction with a number of major corporate customers, was postponed until 1965. Financed by the FNT, Embratel took over domestic and international trunk operations, began working on connecting the underserved Amazon region in the country’s north, and also started work on integrating the various technologies in operation around the country.

In 1967, the government created a new regulatory body, the Ministry of Communications, also known as Minicom, which began the process of rationalizing the country’s telephone system. In 1968, Minicom took a big step toward streamlining the sector when it took over Companhia Telefonica Brasileira. A change in the country’s constitution, which stipulated that only state-owned authorities were permitted to offer telecommunications services, aided in consolidating the fragmented sector.

The next step in reforming Brazil’s telecommunications system came in 1972 with the creation of a new, state-controlled body, Telecomunicaçoes Brasileiras S.A., or Telebras. The new company, owned at 80 percent by the Brazilian government, took over Embratel and began acquiring most of the country’s telecommunications companies. For this Telebras set up a network of operating subsidiaries, initially 37, then later reduced to just 27—one for each Brazilian state—as well as Embratel. By 1980, the number of private telecommunications companies had dropped to just 150, which operated only some 250,000 telephones among them.

Although Telebras gained majority control of most of these new, larger companies, management of many, if not most, remained under the scrutiny of the states themselves. As before, the system lacked coordination on a national level and ultimately led to inefficiencies and slow technological investment and development. Nonetheless, into the mid-1970s, the new system appeared to be working, as the number of telephone connections jumped to five million by the end of the decade.

This growth was due in part to the adoption of a unique financing scheme, in which potential subscribers were required to pay up front for the new line—in 1992, this figure was worth about $4,000, at the turn of the century some $2,500—in exchange for stock in Telebras. This scheme ultimately reduced the government’s stake in Telebras to just 52 percent, yet reinforced the great disparity in telephone service, effectively blocking the country’s large poor population from access to the public telephone network.

In the meantime, the network’s growth had more or less come to a standstill after the first of a series of economic crises in the late 1970s. The addition of new subscriber lines slowed to a crawl through the 1980s and reached only ten million lines at the beginning of the decade. Meanwhile, the government began dipping into Telebras’ coffers in order to fill mounting state deficits, cutting short new technological and infrastructure developments.

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The situation only worsened in the late 1980s with the rise to power of the Sarney government, which replaced the last of Telebras’ professional management with political appointees. Corruption became a rule as Brazil’s telephone system deteriorated rapidly, and waiting lists for new lines stretched into years. In the meantime, Telebras’ rates once again sank to unreasonably low levels; adjusted for inflation, the nation’s phone rates dropped by some 80 percent during the decade.

The 1980s were not entirely without a bright spot for the country’s telecommunications sector. The successful launch of the country’s first telecommunications-capable satellite, BrasilSat-I in 1985, followed by BrasilSat-II the next year, enabled the extension of telecommunications services to the entire country.

Forming a Telecom Powerhouse in the New Century

The 1980s and 1990s marked the start of a wave of deregulation and privatization of many of the world’s state-owned or controlled telecommunications systems, including much of Latin America. In the early 1990s, the new Brazilian government began plans to privatize Telebras as well, a move that required a change in the country’s constitution. Yet political infighting doomed that effort; at the same time government intervention prevented the company from raising capital for a much needed modernization program.

Despite its difficulties, Telebras was able to introduce cellular telephone services to the country in the mid-1990s. By then, the company’s revenues neared $15 billion, with more than 21 million customers sharing some 13 million phone lines. Yet there were another 15 million on waiting lists to receive fixed-line phone services, and another five million waiting for cellular phone services. In addition, half of the country’s businesses had no phone service at all.

Reform of the country’s telecommunications sector finally got underway in 1995, leading to the adoption of new legislation, the General Communications Law, in 1997. The law created a new regulation body, Anatei, an autonomous body reporting to Minicom and the Brazilian government. The law also paved the way for the breakup of Telebras.

That momentous event began in January 1998, when Telebras’ mobile telephone operations were spun off into eight separate and independent companies. By May 1998, Telebras completed its breakup, creating 12 new holding companies—eight for the mobile telephone operations, one for Embratel, and three companies created as regional fixed-line operators providing local and interregional long-distance telephone services. Among this later group was Telepar, placed under the holding company Tele Centro Sul, which took over the eight fixed-line companies operating in the country’s western, central, and southern regions. Telepar itself was renamed Brasil Telecom.

A partnership between Banco Opportunity and Telecom Italia paid the Brazilian government $1.7 billion to acquire Tele Centro Sul in 1998. Like its counterparts, Tele Centro Sul was given strict targets and a tight deadline for the upgrade and expansion of its fixed-line operations in its region. Completion of the government’s requirement would then gain the company permission to expand its services beyond its core region. Tele Centro Sul began a massive investment program, boosting its number of fixed lines past 8,000 by the year 2000. At that time, the company changed its name to underscore its national ambitions, to Brasil Telecom S.A., while its holding company became known as Brasil Telecom Participaçoes. At the end of 2000, the company acquired CRT—previously held by Telefonica—which provided fixed-line services in Rio Grande do Sul.

Brasil Telecom announced a R 4.2 billion ($2 billion) investment effort in 2001, with the goal of meeting its targets and receiving permission to expand beyond its core regional base in 2002. Leading the charge was new CEO Carla Cico, an Italian native who had previously worked in the Chinese telecommunications market. Cico led a restructuring of the company, including slashing its payroll in half (although most of these employees were given new jobs in a call center subsidiary), and then cut a further 1,000 jobs the following year. The company also centralized its management at its Brasilia headquarters.

At the end of 2001, at which time the company was forced into a partial opening of its network to outside competitors, Brasil Telecom began targeting growth in the Internet sector, buying iBest Company and Lokau.com. In January 2002, the company began offering free e-mail accounts as well, and by the middle of the year had begun negotiations to acquire three more companies—MetroRed, Intelig, and Globenet. These purchases, completed by 2003 for the most part, gave the company operations beyond its core region, including in Sao Paulo, Rio de Janeiro, and Belo Horizonte.

Key Dates

1876:: The first telephone line is installed in the palace of Emperor Pedro II.
1963:: Telepar (predecessor to Brasil Telecom) is founded.
1965:: Empratel, which takes over control of Brazil’s national and international long-distance services, is created.
1967:: The Ministry of Communications (Minicom) is created.
1972:: Telebras is created and the takeover of regional telecom companies, including Telepar, occurs.
1995:: The Brazilian government announces plans to privatize the telecommunications industry.
1997:: The General Telecommunications Law is passed.
1998:: Telebras breaks up; Telepar is reformed as Tele Centro Sul and purchased by Telecom Italia and Banco Opportunity.
2000:: Tele Centro Sul changes its name to Brasil Telecom; CRT is acquired from Telefonica.
2001:: The company announces an R 4 billion ($2 billion) investment program.
2002:: Lokau.com, GlobeNet Communications, and iBest Company are acquired; the company purchases a mobile telephone license.
2003:: The company acquires Metro Red and Intel ig and begins national expansion.

Brasil Telecom met its government-imposed target in early 2003—ahead of its initial December 2003 predictions—with more than ten million installed lines. This enabled the company to begin planning its national expansion in earnest. As part of that drive, the company bid for and won a mobile telephone license for the country’s Personal Communication System, paying R $ 191 million. The company then began plans to roll out its own mobile telephone service. In August 2003, Cico announced the company’s intention to invest some $300 million in the initial launch; though awaiting Anatei approval, the anticipated roll-out meant more than one million new customers over the next year. Brazil’s telecommunications sector finally appeared to have come of age—and Brasil Telecom was poised to establish itself as a national industry powerhouse.

Principal Subsidiaries

Brasil Telecom S.A.; BrT Serviços de Internet S.A.; Brasil Telecom Celular S.A.

Principal Competitors

TeleComunicacoes de Minas; Embratel Participacoes S.A; Tele Norte Leste Participacoes S.A.; Nextel Telecomunicacoes Ltda; Vesper; Nokia Do Brasil Tecnologia Ltda.; Bse S.A.; Tele Centro Oeste Celular Participacoes S.A.; Quadrata Comunicacoes Empresariais Ltda.; Sercom S.A.; Telerj Celular S.A.; Picolli Service Com E Prest De Serviços Ltda.