What the new owners of Oi should do

Imagine the 5th telecom market in the world where telecoms accounts to 4% of the GDP. And the GDP is $2 trillion. In 2015, 44% of total operator revenue came from 1% of the country's area. The country's area is 8.5 million Km2. Which means operators are deriving 44% of their revenue from 85.000Km2 or about the area of Austria.

The 99% opportunity

The operators generate 56% of their revenue from a users’ base spread over 8.415.000Km2. During the old copper era its was uneconomical to provide services across the whole users' base. When the software becomes the network, that can now be achieved.

Owing to its heterogeneity and continental size, it unperceived what is going in areas out of the 1%. And those are Oi areas. Oi new owners will be operating in the areas that are growing. While the focus in a recession until 2016, according to a Boston Consulting Group study: retail spending in 2015 grew faster (by 1.8 percentage points) in interior cities than in major metropolitan areas; and in many cities (mostly in agricultural areas), spending growth remains strong. Despite overall decimation in the retail sector, pharmacy retail sales are growing at almost 9% per year, supermarkets at more than 3.5%, and bars and restaurants at more than 2%. 

And the hinterland is gaining, as a share of GDP, on the metropolitan areas. In the decade 2002-2012 Central-West region's share of Gross Domestic Product (GDP) grew from 8.8% to 9.8% the According to the Brazilian Institute of Geography and Statistics (IBGE)

Technology overtook ANATEL, the Brazilian regulator must act

Brazil has 5.570 municipalities over 8.5 million Km2. Oi is present in 3.200 of those municipalities. An outdated regulatory regime and high taxation killed Oi. Oi telecoms filed for bankruptcy protection in 2016 as its debt hit $19.2bn, the biggest bankruptcy in Brazil's history. Oi is presently under Judicial recovery.

Forced by outdated regulations Oi spread too thin on the ground. By the time the regulatory rules were drafted, fixed telephony accounted to 70% of the connections. Today is 15%. The rules were heavily based on enforcing connectivity based on fixed lines. Twenty years hence, the rules must be changed to enable unlocking the telecoms' market.

On average, 40% to 50% of the costs of telecommunications services in Brazil are related to taxes, rates that position the country in the top spots for the highest taxation for this sector in the world. 

High taxation punishes the ones who can least afford.

"...the lagging adopters are those people with less resources and education, and they therefore suffer the most from extra costs...a number of barriers to entry for these non-adopters, costs remain an important determinant of adoption." " Driving Demand for Broadband Networks and Services" Authors: Katz, Raul L., Berry, Taylor A.

According to the Information, Technology and Innovation Foundation (ITIF): In the 20 countries with the highest added costs from ICT taxes and tariffs, those costs may be holding economic growth back by a full 1 percentage point or more per year.

Brazilian operators’ return on capital employed (ROCE) has been falling steadily and is now 4.8% well below the cost of capital (approximately 15%).

If telecom and data users are punished. Operators are not profitable and economic growth is hampered, it begs the question: To whom does ANATEL's regulations benefit?

The telecoms sector was privatized in 1998. The Brazilian economy boomed during the 2000’s commodities boom; Oi mobile operations and its bigger markets -keep in mind the 1% of area generating the 44% of the revenue- were profitable enough to subsidize the loss making far-flung municipalities saddled with their outdated copper era regulations.

This situation is untenable

The mobile sector is directly coupled with GDP. GDP goes down. Mobile sector goes down. Brazil's economy boomed during the commodities super-cycle of the first decade of the 2000s. Once the commodities' boom ended, the GDP contracted. Oi could no longer subsided the loss-making operations with the profitable side of its operations.

Oi and Telefonica’s Vivo unit were the two companies with the largest underused fixed liabilities, with both forced to maintain rarely accessed public telephones and retain abandoned real estate.

Finally the rules changed and the market is in for a major boost. Rule changes in Brazil could allow converged operators to abandon underused assets to free-up cash to invest in improving 4G, Reuters reported.

Future, Oi says hello!

Once Anatel amends laws, operators can move OPEX supporting unproductive assets and unlock capital to expand and modernize their networks. That means bringing LTE to the country's hinterland. Oi's new owners will turn the old Oi presence in 3200 municipalities from a weakness into a strength. How?

Time is of essence

The new owners of Oi need to act swiftly to take the maximum advantage of the next cycle of economic growth that is approaching. Create a wholesale model whereby a city-operators will lease the spectrum and buys capacity. The companies operating in the local municipalities will operate telecoms as business as local business. That will attract local capital to the cities' network than can handle the business at the local level.

The new owners of Oi-Brazil telecom should buy Eletronet, and create an optical fiber company (Oi Cables) that will operate as separate company.

Oi will leverage Eletronet's assets to provide capacity to the municipalities and to other operators for redundancy. Build fiber to the most promising municipalities. Anatel should agree to Oi’s request to swap billions of Reais in regulatory fines for new investments. These 5-Billion Reais should be invested in the optical fiber connectivity to the 2.000 most promising municipalities.

Fiber Optic is key

Telefonica Brazil has special focus on Fiber optics in Brazil. announced an investment plan of 6.6 billion over the next three years. Therefore, Oi new owners must have a fiber strategy.

China Telecom that showed interest in buying Oi, has as partner, TPG Capital Management. Last December TPG won an auction for the Brazilian power transmission assets of Spain’s Abengoa SA. If a company owns transmission lines it owns optical fiber routes over these transmission lines. If they don't, it is very fast and cost effective to string OPGW fiber cables.

Anatel's Mr. Leonardo Euler de Morais believes that in less than four years there could already be a shutdown of 3G in Brazil. To make up for the lack of 3G and the consequent growth of LTE, infrastructure with high traffic capacity will be needed.

According to TIM Brasil CTO, Mr. Leonardo Capdeville, 2G traffic represents only 0.02 percent on the company's network - 85 percent is already over 4G and 15 percent on 3G.

But we still have to keep in mind the above applies to the 1% of Brazil's territory. All cities where today is mandated fixed telephony can be served with LTE by the city-operator while the new Oi-Brazil Telecom provides wholesale services. If Oi Cables deliver the fiber at the substation, the city operator will Built Operate and Transfer the last mile portion of the fiber.

The country Center - West is home of vast farmland. Agribusiness comprise 5.5% of Brazil's GDP. ANATEL should help there too.

America's agribusiness competitiveness owes to a much better transport infrastructure. Now the Unite States government is helping in the rural connectivity front too. President Trump signed a $1.3 trillion budget bill late last week that includes several provisions that will impact the telecom industry, including new funds for rural broadband deployment, plans that will smooth the way for future spectrum auctions, and opportunities for the FCC to allocate more spectrum for commercial use.

Brazilian farmers will compete with US farmers that have better infrastructure and superior rural connectivity. The spectrum regime must support remote areas' connectivity.

These are huge farms and city-operator could offer Enterprise LTE coverage in a cost-effective manner using the farm furniture: water tanks and pole lines owned by the farmers or farming cooperatives.

The new Oi owners must build modular software defined LTE networks that can growth as demand warrants and fits in these smaller municipalities as opposed to the prevalent monolithic core 'a highly efficient and effective software-based solution can unleash the full capability of LTE and UMTS networks.

On top of that, cache data at the municipality closer to where the users are. Provide them with a 5G-like experience on a LTE network.

As a deluge of video and hits mobile networks, operators seek more efficient ways of steering traffic at the network edge. Athonet’s fully softwarised S-GW local break-out function allows low-latency video, caching and content management at the network edge using standard 3GPP compliant interfaces and Open APIs. . The feature also allows local breakout for other edge computing services requiring low latency, security and optimisation of data flows.

The city-operator will be much more flexible to tailor its operations for that specific market. Decentralization allows to a more focused and efficient investment. For instance, if the city-operators has a business for FTTH owing to decommissioning of fixed line telephone switches. He will build FTTH using the copper poles and ducts. Cheaper and fast to market. Just hook up his Point of Presence to Oi Cables.

A Boston Consulting Group (BCG) calculations Designing Brazil’s new regulatory model for telecommunications indicate that, depending on the assumptions made in the study, the investments needed to universalize fixed broadband (up to 90% coverage) and to expand capacity in mobile broadband falls into a range from R$100 billion to R$ billion (Exhibit below)

The amplitude of the range illustrated shows the importance of the choices made regarding the telecommunications regulatory model.

Those choices can promote or greatly hinder the process of expansion of fixed access and mobile capacity.

At current volumes, it could take up to 14 years to cover this level of investment, assuming the vast majority of the funding went toward broadband which is not necessarily the case today

The effects of the improved connectivity are well known. So are the causes called The Digital Drag: Economic evidence is clear that government policies that raise the costs of ICT goods and services reduce adoption by consumers and businesses. Reduced adoption rates in turn reduce economic growth.

The world has moved on and Brazil technology sector is on a catch up phase. The Proposals of the Telebrasil Panel 2018 (in Portuguese) clearly outlines what should be done and asks authorities and the candidates (for this year's election) to deepen the proposals presented.

They future, the stakeholders stated, is now.