Brazil becomes the battleground as Spain’s Telefónica and Mexico’s Telmex fight for Latin America.

Spain and Mexico have carried their fight to dominate the Latin American telecommunications sector to Brazil, where Spain’s Telefónica is squaring off against Mexican rival Telmex, controlled by billionaire Carlos Slim Helú.

The Brazilian market generated US$70 billion in business during 2006, according to Teleco, a telecommunications consultancy. The South American behemoth is home to 100 million cell phone users, more than a third of Latin America’s total. However, the battle has really heated up in the fight for pay-television services. While this segment is still small—it doesn’t exceed 7% of the $32 billion that fixed-telephone companies now take in—it has grabbed the attention of big telecoms, which want to use it to get into the triple-play market, which offers voice, data and video in one package.

“Technological development and the growth of the telecommunications sector during the last few years has created a new reality that requires companies to quickly adapt to the new demands from the market if they want to stay competitive,” said Fernando Xavier Ferreira, just before stepping down from his post as Telefónica’s head in Brazil, in January. Telefónica is Brazil’s largest operator of fixed-line, cellular and broadband services.

At the end of 2006, Ferreira led the fight against his Mexican rival and also against Anatel, Brazil’s telecom regulator, which had sought to block Telefónica from entering the pay-television market. Brazilian laws do not allow telecommunications companies to run cable-television companies in their areas of concession. Telmex, however, owner of Embratel, the country’s leading long-distance provider, took control of Net, Brazil’s largest pay-television company. Net had previously purchased rival Vivax with the aim of developing broadband while capturing control of 45% of the pay-television market. Net claims 1.7 million subscribers and its main shareholders include Brazil’s largest media company, Organizações Globo, and Telmex’s Embratel.

Telefónica wants to do in Brazil and in Argentina what it did in Peru with cable-television company Cable Mágico, with 450,000 subscribers as well as direct-to-home satellite services that cover Peru and Chile. “In the majority of countries where it operates, Telefónica already offers telephone, broadband and television services. That’s the global trend,” says Diego Landi, director of external communications at Telefónica’s affiliate in Argentina, where the company leads in the fixed-line and mobile sectors, controlling 53% and 39% of those markets, respectively.

In response to Net’s move to dominate high-speed Internet service by selling it cheaply, Telefónica for $460 million bought TVA, Brazil’s third-largest cable-television operator in Brazil, with partner Grupo Editorial Abril. The Spanish group took full control of TVA’s wireless cable assets, but due to legal constraints was left with just 19.9% of cable-television services in São Paulo and 49% in other areas. The law limits foreign companies from owning any more than 49% of Brazil’s cable-television companies.

Net considers Telefónica’s moves to be predatory. “Telefónica runs a fixed-line telephone monopoly in São Paulo state, and its network practically connects Net’s entire cable-television subscriber base,” says Net President Francisco Valim. Valim says that competition in fixed telephone through Net Fone, an Embratel unit, has cut into Telefónica’s alleged monopoly, cutting prices by as much as 40%. “But the presence of Telefónica in the pay-television market would stifle competition because Net is only present in 43 cities, while Telefónica is present in 622 cities” in São Paulo state, Valim says.

Brazil’s cable-television association, ABTA, to which Net and TVA belong, side with Net. Alexandre Annemberg, the ABTA’s executive director, says it needs to create conditions for pay-television companies to grow by opening up the market, as was the case in Chile and in the United States. “In Chile, telecoms were blocked from entering the pay-television market up until a year ago. In the United States, the market opened up two or three years ago,” Annemberg says.

Stuck in the crosshairs, Anatel decided to postpone to this year a decision regarding acquisitions in the pay-television sector for fixed-line concessionaires. (At press time, no decision had been made.) Anatel's resolutions are decided by five members picked by the Brazilian president and approved by the Senate. It has come under heavy criticism for its actions; many see political influence creeping into its decisions. “I have no doubts that Anatel has suffered from political influence. The appointments were not technical, like they should have been,” says Renato Guerreiro, Anatel’s former president and today a consultant at Guerreiro Teleconsult.

While Telefónica awaits approval among regulatory bodies in both Argentina and Brazil to sell pay-television services, its Mexican competitor, now operating in Brazil, continues to conquer new lands in the Americas. After failing last year to buy Telecom Colombia, that country’s largest fixed-line operator, which went eventually to Telefónica, Telmex bought Colombian television companies Cable Pacífico and TV Cable as part of its plan to expand its television business.

Telmex has insisted that it will not hold back on spending in its drive to become the largest communications company in Brazil. It has already invested $900 million in Embratel. In 2006, through its regional wireless arm, América Móvil, Telmex bought U.S. wireless giant Verizon’s assets in Puerto Rico, the Dominican Republic and Venezuela for $3.70 billion. The company has also bought control of directory publishers in Argentina through Páginas Telmex, which plans to invest in Colombia and Venezuela in 2007. The company is already present in the United States, Mexico and Peru, printing up 23 million directories a year.

Meanwhile, Telmex sought to flank Telefónica by buying a 3.4% stake of Portugal Telecom. Portugal Telecom and Telefónica together own Vivo, Brazil’s largest wireless telephone company at a virtually 30% market share and a competitor to Claro, Telmex’s mobile-phone operator. At press time, Telmex was offering to buy for $9 billion TIM, Brazil’s second-largest mobile operator, from Telecom Italia. Should the deal go through, Claro would control more than 48% of Brazil’s mobile-telephone market.

“This acquisition would give Slim a clear advantage in the region and Brazil would give América Móvil the same weight in the number of cell phones that [América Móvil unit] Telcel has in Mexico,” says Eduardo Tube, a consultant at Teleco. “The Brazilian mobile-telephone market is known for its reach and growth potential. While penetration in Chile and Argentina is already at 70%, in Brazil it’s at 50%.”

América Móvil, meanwhile, is ramping up for the wireless war it faces against a formidable Spanish challenger. The Mexican wireless telecom’s shareholders gave it approval to merge with its holding company, América Telecom, a move that will streamline control of the company. Soon after, it sold the peso-equivalent of $739 million in 30-year bonds. The money, the company said, would go toward the company's $3.24 billion investment program for 2007. The placement in local debt was a first for the company, but more than half of the bonds were nevertheless snapped up by U.S. and European pension and investment funds that see growth ahead for Slim’s wireless operations.

Telefónica won’t sit idly by. The company’s global president, César Alierta, said at the end of 2006 that the company will invest $12.50 billion in the region over the next three years. A big chunk of that will go to the wireless sector, where the Spanish giant hopes to double its market share by 2009. That year, the region’s overall penetration rate will have jumped to 70% from 40%.