Fixed vs. Mobile: The Telephone Market in Ecuador


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Fixed vs. Mobile: The Telephone Market in Ecuador

  1. 1. FIXED VERSUS MOBILE:THE TELEPHONE MARKET IN ECUADOR by Victor Molina A paper presented in partial fulfillment of the requirements for the course Forecasting and the Evolution of Technology ARIZONA STATE UNIVERSITY EAST February 2003
  2. 2. INTRODUCTION The present paper on ‘Fixed versus Mobile: the telephone market in Ecuador’ is apartial fulfillment of the requirements for the course Forecasting and the Evolution ofTechnology. It is the objectives of this paper are: • Research a technology-based company or industry that was threatened as a result of the emergence of a new technology or technologies that became disruptive. • Research events and issues that led to the difficulties or successful defense of the firm (or industry). • Identify who was affected by the facts. • Describe how those affected responded (strategies employed) to the threat. • Discuss the ultimate result. • Discuss the relevance of Christensen’s principles in the case and extend those principles where possible. The case study for the present research is the Ecuadorian publictelecommunications company (EMETEL), which was threatened as a result of theemergence of new telecommunication technologies, such as mobile telephone, in the localmarket. The relevance of this paper lies in the fact that studying EMETEL’s case will bepossible to test if Christiansen’s principles can be extended into the developing world.FIXED versus MOBILE 2
  3. 3. FIXED VERSUS MOBILE: THE TELEPHONE MARKET IN ECUADOR In February 1996, President Clinton signed into law the new U.S.Telecommunication Act, which was an updated version of the U. S. Communication Actof 1934. According to Wheeler (2000, pp.113), “the stated goals of this legislation were tointroduce competition in all parts of the communication industry, to allow for the morerapid introduction of new technologies and services, while at the same time preserving andenhancing the ability of all U.S. citizens to gain access to existing and new technologies.”President Clinton not only wanted to transform the telecommunications environment inthe U.S. but also extend the effects of the 1996 Telecommunications Act all over theworld. According to Castells (2000, pp. 140), President Clinton‘s strategy in developingcountries was simple: “political pressure either through direct government action orthrough imposition by the IMF/World Bank/World Trade Organization.” The Impact of the 1996 U.S. Telecommunication Act in the Ecuadorian Telephone Market In 1996, the International Finance Corporation (IFC), a World Bank Groupmember that promotes sustainable private sector investment in developing countries as away to reduce poverty and improve peoples lives, advised the government of Ecuador onthe privatization of EMETEL, the national telecommunications company. In fact,EMETEL was transformed into EMETEL S.A., a status that legally allows the company tosell part of its share to private investors (IFC, 2003).FIXED versus MOBILE 3
  4. 4. In 1997, in a fist attempt to sell 35% of EMETEL’s share, the Ecuadoriangovernment called international investors to a public auction. However, a week before theclosing three out of four foreign investors announced last minute no participation in theauction adducing that the base of the bid, approximately 600 million dollar for one third ofthe total share was too high. The Ecuadorian government was forced to cancel the auction. As a strategy to make the public company more attractive to private investors,EMETEL S.A. was split into two regional operating companies ANDINATEL (Andeanregion) and PACIFICTEL (Coastal region). In 1998, a new auction was called. The companies that initially demonstratedinterest in the bid were GTE (USA), Telefonica (Spain), STET (Italy), British Telecom(UK), and Bezeq (Israel). However, once again those companies desisted last minute fromthe auction for second time in less than one year (El Comercio, 2003). Reports in Ecuadorian press reveled that the major issues found by foreigninvestors behind ANDINATEL and PACIFICTEL were the obsolete telecommunicationinfrastructure, a large and inefficient bureaucracy protected under union rights, andextremely high country risk. The most affected from the process where local customers because despite the factthat public’s telephone service was deeply inefficient, customers had no choice butANDINATEL in the Andean region and PACIFICTEL in the Coastal region. BothANDINATEL and PACIFICTEL remained, under Ecuadorian constitution, as publicutility companies holding exclusive rights to profit from all kinds of telecommunicationservices such as voice, images, video, data and other services of aggregated value includingmultimedia. Also ANDINATEL and PACIFICTEL had right to profit from wired andFIXED versus MOBILE 4
  5. 5. wireless services such as local telephone calls, long distance, fax, radio, mobile, and radioand TV transmission and any other emergent telecommunication services “that could beinvented in the coming years” (SUPERTEL, 2003). Liberalization of the Ecuadorian telecommunication market and the introduction of emergent technologies After the failure of the privatization process of the Ecuadorian public telephonecompanies ANDINATEL and PACIFICTEL, the only way private capital couldparticipate from the Ecuadorian telecommunication market during the 1990s was throughconcessions on the wireless telecommunication systems, specially mobile telephonyservices because in those that segment of the market neither ANDINATEL norPACIFICTEL had any interest. The first two companies under concession of mobile telephony’s rights wereCONECEL S.A. (Porta Celular) and OTECEL S.A. (Celular Power). In 1994, the mobiletelephony service started in Ecuador with 18,920 users (Porta Celular with 13,260 usersand Celular Power with 5,300 users) while the public telephone companies had more thanhalf million fixed telephone lines already in place. At this point in time there was no threatto the public monopoly coming from the small mobile telephone companies (SUPERTEL,2003). By 1997, Celular Power is acquired by BELLSOUTH and a new era in theEcuadorian telecommunication sector began. BELLSOUTH looked at the potential of themobile telephone sector all over Latin America and the Caribbean. Particularly inFIXED versus MOBILE 5
  6. 6. Ecuador, BELLSOUTH began, for the benefit of the public, a lower cost/best service waragainst Porta Celular, and the local market responded with an explosive increase in thenumber of users. Statistical data from the Ecuadorian Telecommunication Secretary (SUPERTEL,2003) show that the most affected from the concession of mobile telephone rights were theconcessioners: ANDINATEL and PACIFICTEL. A highly significant difference betweenthe increase in the mobile telephone sector and the increase in the fixed telephone linessector is reveled by the following facts: while fixed telephone lines sector in Ecuadorincrease from 900,384 fixed lines in 1997 to 1,426,188 fixed lines in 2002, the mobiletelephones increase from 126,505 mobile phones in 1997 to 1,560,861 mobile phones in2002. In consequence, by the year 2002 there was in Ecuador more mobile phone thanfixed ones. ANDINATEL and PACIFICTEL strategy to regain position in the disruptive technology market The management strategy designed by the Ecuadorian telecommunicationcompanies ANDINATEL and PACIFICTEL to regain position in the disruptive mobiletelephone market is the creation of a joint venture among both ANDINATEL andPACIFICTEL plus a third strategic partner - selected internationally - in order to enter tothe Ecuadorian mobile telephone market. In effect, on March 13th, 2003, representativesof ANDINATEL and PACIFICTEL received proposals of mobile telecommunicationsystems from Alcatel, Huawei Technologies, Ericsson, Telefónica Móvil (Spain), Siemens,FIXED versus MOBILE 6
  7. 7. Foam One and Zte Corporation. One of the international companies will be the thirdpartner in this public/private venture (El Comercio, 2003). The ultimate result of this case is still in the days to come. However, it is interestingto note that ANDINATEL and PACIFICTEL are not only not abandoning the threatenedtechnology (fixed telephone lines), but also they are regaining position in the disruptivetechnology market (mobile telephones). Extension of Christiansen’s principles into the ANDINATEL and PACIFICTEL case studyRegarding Christensen’s principles, they could be extended in four particularities from thecase: Small market do not solve the near-term growth of large companies:In 1994 the size of the mobile market in Ecuador was too small (18,920 mobiletelephones) to be interesting to a large public utility company, which already had halfmillion customers. Giving small opportunities to small organizations: In order to test themobile telephone market concessions on telecommunications rights were given to twosmall private companies CONECEL S.A. and OTECEL S.A., which developed themobile telephone market significantly. Waiting until the market is large enough to be interesting: by 1997 itwas already know that the mobile telephone market had a high potential not only inEcuador but also in most of the developing world. BELLSOUTH decided to enter theFIXED versus MOBILE 7
  8. 8. market while both ANDINATEL and PACIFICTEL unaware of the market potential didnothing to enter the mobile telephone market in their own country. Don’t wait too much! In 1997, BELLSOUTH entered the Ecuadorian mobiletelephone market and now, five years later, ANDINATEL and PACIFICTEL want to jointhe game. The mobile telephone market might be still growing in the coming years;however, the initial stage of rapid growth could be experiencing a slow down.FIXED versus MOBILE 8
  9. 9. CONCLUSIONS • The EMETEL case had offered to the reader interesting facts to understand how a technology-based company or industry can be threatened as a result of the emergence of a new technology or technologies that became disruptive. • Additionally EMETEL’s case had permitted to extend Christensen’s principles, where possible, into the Ecuadorian context. • Finally, as it was stated in the introduction, understanding the recent evolution of emergent and disruptive technologies in Latin America is essential for further understanding and forecasting of information technologies in the region.FIXED versus MOBILE 9
  10. 10. REFERENCESCastells, M. (2000). The Rise of the Network Society. (2nd ed.) Oxford: Blackwell Publishers Ltd.Christensen, C. (1997). The Innovator’s Dilemma. Boston, Harvard Business Scholl PressEl Comercio. (2003). Andinatel y Pacifictel, los dueños de la tercera celular. El Comercio [Online]. Available: Finance Corporation. (2003). Privatization of the Telecommunication Company in Ecuador. International Finance Corporation [Online]. Available: Ecuatoriana de Telecomunicaciones. (2003). Estadisticas de Telecomunicaciones. Superintendencia de Telecomunicaciones [Online]. Available:United Nations-Economic Commission for Latin America and the Caribbean/UN- ECLAC. (2001). Latin America on its path into the digital age: where are we? Santiago, Chile: Hilbert, M.Wheeler, J., Aoyama, Y., & Warf, B., Ed. (2000). Cities in the Telecommunications Age: The Fracturing of Geographies. New York: Routledge.FIXED versus MOBILE 10