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Strong Points at a Telecom May Also Be a Weakness

The New York Times  December 28, 2004


MADRID - As an expanding European Union tries to find its way in a new world of competition and regulatory restructuring, its members might look to the example of Telefónica, one of the largest companies in Spain. The lesson learned, some economists and business analysts say, may be that while former government-owned companies make their lumbering dominance profitable in the short term, they can undermine an economy's competitiveness in the long term.

Since it was privatized in 1997, Telefónica has continued to dominate the Spanish telecommunications market and has made massive investments in Latin America. Despite losing billions in some of its overseas forays, the company continues to bring in high profits and is a favorite of stock market analysts a result of its firm control of its home market.

That is good news for Telefónica and its investors, but it could create long-term pitfalls for the Spanish economy as a whole, economic analysts say.

Telefónica's dominance in Spain has allowed it to fend off competition across a swath of telecommunications services, securing it a profit of 2.11 billion euros ($2.85 billion) in the first three quarters of 2004, on revenue of 21.9 billion euros ($29.7 billion). According the Spanish telecommunications regulator, in 2003 Telefónica reaped 81.3 percent of all fixed-line revenue in the country, 52.8 percent of total wireless revenue and 64.8 percent of all revenue from high-speed Internet service.

"Telefónica's market dominance is dangerous for the country over the long term because it detracts from innovation and keeps new competitors from entering the economy," said José Manuel Campa, a professor of finance at the IESE Business School at the University of Navarra in Madrid and Barcelona. The effect of Telefónica's strength can be seen in broadband, the fast Internet access, which was introduced in Spain only in 2001. Like other European incumbents, Telefónica owns most of the lines that its competitors use. Telefónica charges other companies a wholesale price of about 24 euros ($32) a month to use its broadband lines - among the most expensive in Europe - so many rivals are breaking even or losing money to compete, said Glen Spencer Chapman of Ibersecurities, a stock market analysis firm in Madrid.

The result is that in comparison to the rest of Europe, high-speed Internet access in Spain is slower and more expensive, and its market is among the least developed, according to Mr. Chapman and other telecom analysts. The Belgium telecom incumbent, for example, offers a speed of 3.3 megabits per second for 39 euros ($53) a month, and the European average in Europe is 1 megabit per second for 35 euros ($47), according to Luis Prota, a telecom analyst at Morgan Stanley in Madrid. Telefónica, by comparison, provides 512 kilobits per second for 39 euros, and that is only since late in 2004, when it doubled the speed on its lines.

Miguel Garzon, a spokesman for Telefónica, said that the company was aggressively promoting broadband, noting that its high-speed Internet clients had increased from 200,000 in 2001 to 2.35 million today.

Mr. Garzon disputed claims that Telefónica's prices were high, citing statistics that place it among the cheapest broadband providers in Europe. Telefónica has also sought to increase the reach of the Internet into Spanish homes by offering less expensive service with limited hours, he said, and because many Spaniards still do not have personal computers, it is offering a package that includes a PC "at very competitive prices and with financing," he said.

Telecom analysts and competitors contend that the Spanish telecommunications regulator has generally been ineffective at curbing Telefónica. But the regulator did recently fine Telefónica 58 million euros ($78.5 million) for anticompetitive behavior, its highest penalty to date.

Most countries have dominant incumbents, of course. Both Deutsche Telekom and Telecom Italia also dominate their markets, and like Telefónica, have relatively weak regulators, said Tim Johnson, principal analyst at Point Topic, a broadband industry analysis firm in London. British Telecom and France Télécom have had more robust regulation, and as a result, parts of their telecom markets are much more competitive than Spain's, he said.

The one area in Spain where Telefónica is facing significant competition, analysts say, is in wireless communications. The company did not inherit an existing cellphone network and has had to compete with Vodafone, Europe's largest wireless operator. It is in this sector where Spanish telecom prices are closest to European norms, according to Mr. Chapman of Ibersecurities.

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