GVT was valued at $3.8 billion after a contest between
Telefónica and the victorious French group Vivendi.
Picture: Wikimedia Commons
 

The expansion of Brazil’s GVT after its acquisition by French group Vivendi in 2009 should have great impact on the economic heart of the country and its largest broadband market, the state of São Paulo.
That is the territory of Telefónica’s fixed line operation in Brazil, which is the main provider of broadband in the state, using mostly ADSL over its copper network. São Paulo is so far not served by GVT, except for large companies.
Telefónica duelled with Vivendi for the control over GVT — originally Global Village Telecom — and lost, and as a result now faces its direct competition.
Vivendi made an “amicable offer” of $2 billion for GVT in early September 2009, but Spanish operator Telefónica — which is also big throughout South American — appeared at first to be set to outbid its French rival with an offer valued at $3.8 billion. Vivendi, which controls the SFR mobile operation in France, came back with a bid of $32.43 per share, valuing GVT at about $4.2 billion.
The São Paulo state population is about 22% of the country’s total with about 40 million, and its share of national GDP is about 33%. Cable company Net Serviços is so far the main competitor to Telefónica in broadband, offering service over its coaxial plant.
The broadband market in the state has been expanding rapidly in recent years, though there were repeated failures in Telefónica’s broadband service over the first part of 2009. This resulted in an order by regulator Anatel for Telefónica to suspend sale of the service to new customers until it implemented improvements. This suspension was in place for about two months.
Testimony to Brazil’s congress by the head of Telefónica in Brazil in July 2009 indicated that there had been a 100-fold growth of internet traffic in Telefónica’s territory over the previous six years, and this growth is accelerating.
An entry into São Paulo was already planned by GVT before the Vivendi takeover. However it has now the funding needed to speed it up substantially. The time for entering the state will above all depend on how quickly the carrier can get a fibre infrastructure in the cities it targets.
Access to capital

Multiple factors lead to a successful entry into the state and a gain of significant market share, starting with the capitalisation resulting from being acquired. The company has gained much greater access to capital as a result of its acquisition by Vivendi.
It has an already tested family of quality broadband products at a low price with speeds up to 100 megabits a second, which the company has had since August 2009.
GVT acquired Geodex for $60 million at the end of 2007, giving the group its own backbone, which simplifies expanding its coverage and enables provision of broadband at higher speeds and lower prices.
It has a modern IP network, without limitations of legacy technology as in the case of incumbent Telefónica.
Number portability is in force in the state today — something that will benefit GVT in joint sales of broadband with voice. That was not the case when GVT started its broadband services in the south of Brazil.
The government is considering legislation that will allow it to provide pay TV over its network. That will also accelerate market entry, since it could then offer triple play over its own network.
GVT can already offer triple play by reselling satellite pay TV service before the passage of that legislation: it already does that in its original territory with Brazil’s Sky, part-owned by US satellite group DirecTV.
Vivendi may contribute to GVT with broad access to content, as a leader in content, with much more experience in offering content than Telefónica.
Market impact

The entrance of GVT will likely lead to price cuts by Telefónica and Net Serviços to limit their customer losses, which should substantially expand the market, given the high price elasticity of demand for broadband among the population not served.
Thus the impact will not be limited to stealing broadband subscribers from Telefónica and Net Serviços, but will also bring many new users to the market, assuming that in fact the incumbents will react with price cuts to the entry of GVT.
This reaction however may not be immediate, but only after the presence of GVT becomes substantial, making the customer losses too large for the incumbents. Prices charged by the incumbents may be reduced only in areas served by GVT, continuing the discrepancy in prices between different areas.
France appears to be an interesting parallel regarding the market impact of a new entrant offering lower prices. Free, now the second largest provider of broadband and triple play, began activities several years ago offering a triple play package of voice over IP, broadband and pay TV for €30, and forced France Telecom to offer same price.
Since then, the prices of the triple play from Free and France Telecom have remained constant, while increasing the speed, the number of TV channels and number of countries with free calls included in the package. Vivendi itself participates in the French market as the third largest ISP.
Technological Impact

The incumbents must also respond with offers of faster technologies for broadband, expanding what they were already doing on a test basis, with Telefónica providing fibre access to high-income residential neighbourhoods, and Net Serviços offering Docsis 3.0 technology, which is the way that cable operators carry fast internet data on their networks.
These offerings, besides being expanded, would have to be significantly reduced in price in order to have an effect in areas served by GVT.
However, Telefónica is partly limited by its legacy technology circuit-switched network, compared to the all-IP network of GVT. Net Serviços also has limitations because it is service is largely based on a coaxial cable network.
Time to entry
The time required for GVT to enter the São Paulo market will depend mainly on how quickly it can install or lease fibre optic infrastructure to serve the traffic generated by its customers. In most cases, this fibre is used to connect the traffic hubs of GVT, which will be connected to users by ADSL, ADSL2 and VDSL technology, as part of a fibre-to-the-node architecture.
In principle the entrance of GVT into the São Paulo market will occur much faster than in its original territory in the south of the country — though a large-scale entry may not occur before 2011.
Choice of cities to serve

The choice of the first cities to serve will probably depend on availability of existing fibre infrastructure or one that can be installed quickly. This choice will also depend on the entry strategy of GVT, and whether it will aim for a frontal attack on incumbent firms in markets where they operate or instead give priority to areas where the incumbents do not act.
This choice would in practice depend on which alternative would have the best prospect for return on investment, with incumbent providers tending to be in markets with greater market potential, which could in principle provide better returns. On the other hand, in markets without service by incumbents the lower market potential could be offset by the absence of competition.
A decision by GVT on which cities it will serve first should take into account how the incumbents Telefónica and Net serve the 30-50 largest cities in the state — as well as which could be connected faster to the GVT fibre infrastructure, as well as ease of access to its own backbone, acquired from Geodex.
Possible acquisitions

There are possible acquisitions that could influence the market entry into São Paulo as they may accelerate the process.
The main candidates would be companies already having a substantial fibre optic infrastructure. Another possibility would be companies that already have broadband customers who might switch to the GVT infrastructure — but this is speculation at the moment.
However, the specialist broadband provider Neovia could be considered. It already has a substantial base of business customers served by wireless and wired technologies. Neovia has been seeking new capital injections for expansion, something which would be available in a merger with GVT. GVT initially used only wireless technology, as Neovia does today, before moving to wired solutions.
Another possibility would be wholesale capacity carrier AES Telecom, with its fibre infrastructure in metropolitan areas, although it might make more sense to lease their infrastructure at least in an early stage.
Impact on internet traffic

The impact of the arrival of GVT in the state of São Paulo should also produce a sharp increase in domestic and international internet traffic within and from the state, testing the limits of the backbones used by Telefónica as well as Net Serviços and GVT.
GVT uses the submarine cables of Telefónica and Global Crossing for 70% and 30% respectively of its international traffic. The internet traffic generated in the state, both by GVT and by Telefónica and Net Serviços, could be doubled or tripled as a result of the expected expansion of the broadband market, and may require increased of its current international capacity.
The entrance of GVT into São Paulo state will have a major impact, not just in a gain of customers in competition with Telefónica and Net Serviços, but in a substantial increase in the number of broadband users in the state, as well as in the average speed of broadband access, within a relatively short period of two to three years.
The benefits will be felt not only by home users, but also by businesses of all sizes. The new situation should also give a major boost to applications that rely on a high speed broadband infrastructure, such as use of video for online meetings and distance learning, movies rented by download rather than by physical delivery, use of the internet to watch TV, and many more to be introduced. GTB
Octavio Sampaio (osampaio@telintnet.com) is a telecommunications industry consultant advising on competitive, market, and regulatory factors with an impact on the take-off and profitability of new services. He has an advanced degree from Stanford University in the US and past experience with the Brazilian telecoms industry