US embassy cable - 05LIMA2025

UNCLAS SECTION 01 OF 02 LIMA 002025 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/CIP 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR KENNETH SCHAGRIN, JONATHAN MCHALE 
FCC INTERNATIONAL BUREAU FOR ETALAGA 
 
E.O. 12958: N/A 
TAGS: ECPS, ECON, ETRD, EINV, PE 
SUBJECT: CAN PERU IMPROVE COMPETITION IN TELECOMS INDUSTRY? 
Ref: Lima 984 
 
This report contains sensitive business information.  Please 
protect accordingly. 
 
1.  (SBU) Summary.  Two recent developments in the 
telecommunications industry have GOP officials pointing to 
improved competition in the market.  America Movil, a 
Mexican company owned by Carlos Slim, acquired the fourth 
mobile band on March 30 and should begin operations by early 
2006.  The Ministry of Transportation and Communications 
(MTC) formally approved the merger of Telefonica del Peru 
and BellSouth on April 8.  MTC, in return, demanded that 
Telefonica give up one of its two frequency bands (as part 
of the MTC spectrum clean up) and commit to expand mobile 
service to 2,000 communities.  Despite GOP efforts to open 
the market to new mobile participants, competition in the 
telecommunications market is still limited, as Peru's 
excessive mobile termination rates benefit Telefonica vis-a- 
vis other providers.  End Summary. 
 
Limited Competition But Room For Growth 
--------------------------------------- 
 
2.  (U) Although Peru is experiencing unprecedented economic 
growth, this is not mirrored in the mobile 
telecommunications sector.  In 2004, there were only four 
million users, a significant increase from 2.9 million users 
in 2003.  Telefonica del Peru, with 67.5 percent of the 
market, dominates Peru's mobile market.  Italy's TIM Mobile 
ranks second, with 26.9 percent, and Nextel is third with 
4.5 percent.  Of note for future competition:  China's 
Huawei recently successfully completed a pilot of low-cost 
mobile phones in the 450-mgH band in Peru. 
 
America Movil Wins Fourth Band 
------------------------------ 
 
3.  (SBU) America Movil, a Mexican company owned by 
millionaire Carlos Slim, was awarded Peru's fourth band on 
March 30.  According to the MTC, America Movil only paid 
$21.1 million for the spectrum, considerably more than the 
$180 million TIM paid to enter the market in 2002.  America 
Movil, using GMS/GRPS technology (which is compatible with 
the TIM system), will begin operations in Peru by late 
2005/early 2006.  According to Carlos Slim, Sercotel's (as 
the Peruvian company will be known) entry into the market 
will help drive down Peru's high mobile costs. 
 
4.  (SBU) America Movil was the sole bidder on Peru's fourth 
band, even though Nextel was expected to submit an offer. 
Alfonso de Orbegoso (protect), Vice President of Legal 
Affairs at Nextel Peru, informed Commercial Counselor in mid- 
March that a Sprint (Nextel's parent company) assessment of 
the project determined that the high termination rates 
(averaging $0.21) and the unwillingness of Osiptel to act 
quickly were limiting factors in Nextel's ability to compete 
in the market.  As a result of these factors, Nextel's Peru 
based finances were deteriorating, making it financially 
unable to bid on the fourth band.  Furthermore, unless 
Osiptel regulates the high mobile rates soon, Nextel will 
face serious financial difficulties in Peru, limiting the 
company's ability to expand service throughout the country. 
 
BellSouth Merger Approved 
------------------------- 
 
5. (U) After months of deliberation, the MTC formally 
approved the merger of Telefonica del Peru and BellSouth on 
April 8.  MTC's approval, however, came with a multitude of 
draconian stipulations.  First, Telefonica must give up one 
of its two frequency bands within the next two years, which 
the MTC will open to bidders by the end of 2007.  (Note: 
This is part of the MTC's plan to clean up spectrum, which 
will affect all mobile providers.  End Note.)  Additionally, 
Telefonica must waive the fees for former BellSouth clients 
who wish to cancel service.  (Under Peruvian law, customers 
must pay the entire cost of the service contract if the 
contract is cancelled early.)  Third, Telefonica must expand 
or improve mobile access to a minimum of 2,000 communities 
in the poorest areas of Peru by 2008.  Failure to do so will 
result in a fine of 16,500 soles ($5,077) per community, 
paid to MTC.  Fourth, Telefonica is prohibited from 
including former BellSouth customers on its on-net plan 
until 2007.  Finally, the MTC noted that if OSIPTEL finds 
Telefonica guilty of committing five infractions (cross 
subsidy, predatory pricing) in a two-year period, Telefonica 
would lose its concession.  Furthermore, if Telefonica 
commits two infractions in one year, it will also lose its 
concession of BellSouth. 
 
Comment: Increased Competition? 
------------------------------- 
 
6.  (SBU) Peru's telecommunications industry, particularly 
the mobile sector, is underdeveloped.  There is a huge 
potential for growth and the entrance of America Movil, as 
well as the merger of Telefonica and BellSouth, should 
marginally improve competition between mobile providers. 
However, the GOP must grapple with Peru's high mobile 
termination rates, which continue to undermine competition 
in the market.  Telefonica, which controls over two-thirds 
of the market, allegedly continues to use predatory pricing 
and cross subsidies to keep its on-net rates low.  These 
practices should cease when the new mobile rate takes affect 
in June.  If not, Nextel now has a means by which to bring 
its complaints to MTC, which ultimately may cause Telefonica 
to lose its concession of BellSouth. 
 
STRUBLE