Telecom 99, White Album,Next Generation Money>
10/23/99 - Telecom 99: White Album -- Next- Generation Money
Oct. 22, 1999 (LTH - CMP via COMTEX) -- The International Telecommunication Union (ITU) held its quadrennial World Telecom
exhibition and conference Oct. 10 to 17 in Geneva. On the occasion of this seminal event, tele.com invited leading technology think
tanks to discuss some of the fundamental shifts in today"s global communications networks and services. Our series of white papers,
also available at www.teledotcom.com, concludes with this issue:
Oct. 25: Next-Generation Money-Pyramid Research shows how emerging nations are finding new sources of finance from next-gen
telephone companies and content providers.
Oct. 4: The New Cybergeography-TeleGeography Inc. tracks the tectonic shifts in global Internet traffic.
Sept. 20: The End of Time-The Boston Consulting Group Inc. tells how the Internet business model is overtaking the global telecom
industry.
---
Emerging nations are finding new sources of finance for new kinds of networks and services. New money and old money are
commingling in emerging nations across the globe, creating a burgeoning variety of viable communications and Internet services
companies.
To be sure, the developing world is still getting funds from traditional sources. Among them: the World Bank, U.S. and Western
European telephone companies, and equipment suppliers. At the same time, though, new sources of funding are springing up among
next-generation service providers and content companies from industrialized nations. So, too, are there new channels for financing the
developing world"s new generation of competitive network operators and service providers.
This surging investment comes against a backdrop of rapid political and technological change. These are defining years in the
communications industry. Between 1995 and 2000, the competitive landscape for the global communications industry will change
irrevocably. In 1995, fewer than 10 countries worldwide had liberalized basic communications services; by the end of 2000, more than
35 countries will have done so. Many more have already opened other market sectors-wireless services and Internet services, for
example-to competition. Liberalization initiatives from Singapore to Argentina are providing new opportunities for operators seeking to
enter the communications industry.
Add to this equation the frenetic pace of development in information technology (IT), software applications and the Internet, and you
have a recipe for a wholesale transformation. And as regional liberalization efforts in emerging markets meet with global technology
advances, the traditional communications industry is converging rapidly with formerly discrete computer and media industries. This
convergence, like the Internet upon which it is founded, is having a multiplier effect in terms of new opportunities, from the network level
all the way through to content and applications. The result is that the number of players is increasing at a high clip.
Investment is accelerating, particularly in Asia and Latin America. At the network level, vendors that initially used vendor financing to
support the capital needs of new entrants in these regions have now moved to a new level of commitment: They are sometimes buying
stakes in service providers to spur demand for infrastructure. Newer vendor-investors such as Intel and Microsoft are also following this
course to ensure a foothold into these growing markets.
Meanwhile, U.S. and Western European telcos continue to invest in service providers in these regions-but with a new twist. Their
investments are no longer necessarily going to buy a stake in the incumbent operators. Instead, telcos such as AT&T are now buying
stakes in broadband access providers, cable television companies, Internet service providers (ISPs) and portals.
On top of these funding sources comes a new level of interest from venture capital (VC) companies, which are beginning to turn their
interests to the vast potential of emerging markets, and from investment banks like Goldman Sachs and Lehman Brothers, which are
both establishing high-tech investment companies targeted at Latin America and Asia.
The new investment trends augur well for these markets but will only prosper if regional governments regulate accordingly. Latin
America seems poised to continue increasing capital venues and flows into its communications services industry despite lingering
economic troubles. Asia, however, is susceptible to continued distortions as the government follows its proclivity to remain an active
player in the sector through ownership and, more recently, VC funding.
Latin America and Asia both offer enticing opportunities even for the more risk-adverse investors. As wireless networks and the Internet
continue to alter the communications landscape, demand far exceeds supply in most countries in these regions. In Asia and Latin
America, the total number of dial-up Internet users at the end of 1998 reached only 8 million and 2.6 million, respectively (see "Cultural
Differences"). Those numbers are expected to increase to over 70 million and nearly 20 million, respectively, in 2004. For businesses,
the needs are even stronger: Asian leased-line penetration is expected to grow from a little over 1 million in 1999 to more than 6 million
in 2004 (see "Lining Up").
In both Asia and Latin America, the growth opportunities with the greatest potential reward-and the greatest risk-are among new service
providers such as competitive local network operators, ISPs, Internet content providers and new mobile entrants, particularly providers
of personal communications services (PCS). Traditional financing channels such as privatizations, commercial loans, corporate bond
placements and initial public offerings (IPOs) are still pumping billions of dollars of investment into these markets. However, as the
number of new players continues to multiply, the nontraditional channels of financing, such as venture capital and equipment providers
buying into new startups, are increasing in importance.
What follows is a closer look at the different categories of investors:
- Old Money Chases New Ventures
Global operators still play an active role in bringing capital to the local market. Still, the era of privatizations-where global operators
bought into formerly state-owned telephone companies-is largely past.
Increasingly, international operators are strategically investing in new market entrants, often taking on brand-new roles for their
international expansion strategies ("See Internet a la Latina").
For instance, AT&T recently made a $300 million acquisition of Netstream, a fiber-based broadband access operator in Brazil. As
AT&T"s first significant effort to enter the Brazilian market, the Netstream purchase gives the company a growing list of corporate
customers and the capacity to offer advanced voice and data services in the nation"s key business districts.
Even Spain"s Telefonica, which invested aggressively in incumbent operators as a wave of privatizations swept through Latin America,
is now opting to enter some markets through new entrants. The Spanish operator chose this tack in El Salvador and Guatemala
through fixed/mobile PCS concessions combined with competitive long-distance service. More recently, Telefonica bowed out of
Colombia"s attempt to privatize Empresa de Telecomunicaciones de Santafe de Bogota (ETB), the incumbent local service provider in
the capital city of Bogota. Soon after the failed privatization attempt, Telefonica Data, the Spanish operator"s data communications
arm, acquired a 51 percent stake in local data communications operator Rey Moreno and will likely participate in the upcoming PCS
auctions.
As Asia emerges from its economic crisis, operators are beginning to focus on the region again, although not at a blistering pace.
Asia"s economic downturn caught many markets on the road to liberalization. Once in the throngs of the crisis, most governments
backpedaled or stagnated on that path. Consequently, many of the "fire sale" assets in the region are not the bargains they may
appear to be, since the environment is far from truly competitive and the regulatory frameworks surrounding the industry are riddled with
risk and uncertainty.
However, many of these governments are focusing attention on technology and trying to stimulate Internet and e-commerce growth.
These efforts are particularly evident in Malaysia, Singapore, Japan and Hong Kong. Not surprisingly, investment activity is picking up
in these countries. BT has gone on a buying spree lately, spending $2 billion to $3 billion between 1998 and 1999 (see "New Asian
Influence"). These investments have all been in new entrants set up to compete with entrenched telcos-for example, Singapore"s
StarHub. BT plans to link all of its Asian assets to the new $10 billion entity that will emerge from its joint global services venture with
AT&T.
- Net Assets
ISPs and Internet content providers from the United States, Europe and Latin America represent an increasingly important source of
capital for Latin America"s communications industry.
While most are entering the region by acquisition, AOL is building a network and brand name from scratch, in partnership with the
Cisneros Group, a large Venezuelan conglomerate. Internet content providers are particularly keen to direct more eyeballs to their sites
and thus increase advertising fees. To that end, StarMedia has acquired a series of popular local Web sites with feature-rich local
content. It has also partnered with AT&T in its first attempt to enter the Internet access business. Argentina-based El Sitio, meanwhile,
recently acquired the Internet access subscribers of Chile"s ImpSat in three of the region"s largest markets. The company aims to be a
region-wide force in the Internet content business. Generally speaking, the ability to cover such a large addressable market of Spanish-
and Portuguese-speaking customers represents an attractive opportunity for pan-regional portals, which in turn is attracting significant
capital toward business ventures attempting to establish these portals.
- Very VC
Both pure venture capital firms and traditional investment banks are actively seeking private equity stakes in the increasingly crowded
and complex competitive landscape of Internet content providers, Internet access providers, next-generation service providers and fiber
backbone providers. Examples abound in Latin America: Interprise Technology Partners took a $10 million stake in Yupi.com in April.
Other recently formed VC firms such as San Francisco-based Explorador.net is focusing exclusively on Latin American Internet
startups, as are a growing number of Miami-based VC firms.
Traditional investment banks are increasingly turning to private equity to take high-risk/high-reward investments in startup companies.
Grupo Pegaso, an ambitious fixed/mobile PCS venture in Mexico, received private equity funding from Citicorp Equity Capital Latin
America, AIG-GE Capital Latin America Infrastructure Fund and Nissho Iwai in mid-1998. More recently, GE Capital took a significant
private equity stake in FirstCom, a metropolitan fiber-based provider of next-generation broadband services in Santiago, Lima and
Bogota. Additionally, the private equity arm of the Goldman Sachs Group teamed with VC firms Alta Communications, Norwest Venture
Partners, OneLiberty Ventures and the private equity arm of the Rothschild family to produce the $70 million second-round financing of
Diginet Americas, a provider of broadband wireless access services in Argentina, Brazil, Colombia and Peru.
In Asia, VC interest is increasing at a slightly slower pace than in Latin America. Certainly the potential of the Asian markets is
alluring. The strong performance of China.com"s IPO earlier this year has bolstered this interest. Many of the investment banks such
as Goldman Sachs are setting up special high-tech Internet investment groups that will focus on promising startups. Additionally,
U.S.-based VC companies are setting up Asia high-tech funds. One example is W.I. Harper Group, a U.S.-based VC company that
has joined up with Beijing Enterprises and Hong Kong property giant Sun Hung Kai to create a $50 million fund concentrating on
e-commerce and wireless communications.
Still, several governments are not comfortable leaving all the investing strictly to the private sector. Governments have set up VC-like
funds of about $1 billion in Singapore and about $120 million in China.
- Vendor Spenders
With the entrance of so many new startup operators, which are often rich in vision but lacking in investment capital and technical
expertise, multinational equipment suppliers are increasingly playing roles in financing startups. In both Latin America and Asia,
hardware vendors such as Cisco and Qualcomm and software companies such as Microsoft have all begun investing in service
providers as a way of stimulating demand for their products.
Mexico"s Grupo Pegaso provides an example. Qualcomm initiated a venture with Pegaso in late 1997 before the venture capitalists
joined the group. Together, the two companies secured nationwide PCS spectrum, assuring Qualcomm a significant market presence
for its wireless code-division multiple access (CDMA) infrastructure. More recently, Qualcomm spun off its Operations division into Leap
Wireless, a wireless network operator that has also made investments in Chile"s PCS auctions and two wireless concessions in Brazil.
In the case of Diginet Americas, Ericsson secured a $100 million global supply agreement with the startup that involved a significant
amount of financing. In the epic battle for control of the Internet, Microsoft recently expanded its service provider investment strategy
into Latin America by purchasing an 11 percent equity stake in O Globo, Brazil"s largest cable television operator. Among other media
plans, O Globo is launching a cable modem service.
In Asia, Intel recently announced plans to invest $50 million in Hong Kong-based Pacific Century Cyberworks (PCC). PCC provides
high-speed broadband Internet services in Hong Kong. Intel has announced that it will be increasing its VC investments, especially in
countries outside of the United States. Cisco has also recognized the Internet"s tremendous potential in Asia and recently announced
plans to invest $20 million in a development center in India. This development center will augment existing development agreements
that the company has with local players in the Indian market for Internet telephony applications and asynchronous transfer mode (ATM)
products.
- Keeping the Capital Coming
To truly maximize capital flows and take advantage of the multiplier effect of the Internet, governments in all countries should focus their
efforts on creating truly competitive and open markets with transparent, autonomous regulatory institutions supporting the competitive
model. Governments should be keen to eliminate distortions that might deter or impede the proliferation of capital venues and the
volume of investment. In Latin America, most governments are moving inexorably (albeit some more expeditiously and effectively than
others) toward full and open competition, recognizing this as the fastest way to increase capital flows and develop the communications
industry. This focus on competition, combined with the market demand in Latin America, has resulted in an increasingly strong flow of
capital to the region despite the lingering economic uncertainties.
While the flow of capital is increasing in Asia, it is certainly not occurring at the same clip. Although there are many factors to explain
this difference, the Asian governments' proclivity to remain fully ensconced in the industry as operators, regulators and now financiers
will continue to have a negative impact. From Singapore to Indonesia to China, the governments remain the controlling owner of the
incumbent operator, the regulator and increasingly the financier of technology development.
Their VC-type funds represent another example of this tendency. Though these funds are positive in theory, as the governments have
rightly recognized the importance of technology for the overall economy, they may in reality cause distortions that stymie capital flows
from the private sector. Given the inherent conflicts of interest in the existing competitive landscape in many Asian countries including
Singapore, these governments should consider the implications going forward. These funds raise a substantial risk of impeding the flow
of private investment in the long run.
Catherine Forster Connolly (cfconnolly@pyr.com) is director of research and Christopher Neal (cneal@pyr.com) is research manager of
Latin America for the Economist Intelligence Unit of Pyramid Research (Cambridge, Mass.).
-0-
By: Catherine Forster Connolly and Christopher Neal
Copyright 1999 CMP Media Inc.
|
