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UNCLAS BOGOTA 002936 
 
SIPDIS 
 
SIPDIS 
 
DEPT PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ETRD ECON ECPS CO
SUBJECT: COLOMBIAN TELECOM SECTOR OVERVIEW 
 
REF: A. 05 BOGOTA 8730 
     ¶B. 05 BOGOTA 11901 
 
¶1.  (Summary) The telecommunications sector is a major 
contributor to Colombia's recent economic expansion.  Telecom 
sector growth and investment have been substantial in recent 
years, driven by a sizeable increase in the mobile services 
market, but Colombia needs to do more to augment internet 
services penetration.  The Telecommunications Regulatory 
Commission (CRT) made an important regulatory ruling to 
normalize rates for fixed-line to mobile calls in 2005 but 
continues having difficulty enforcing regulatory requirements 
for interconnection between Avantel and other mobile 
operators.  The recently negotiated FTA between the U.S. and 
Colombia will guarantee an open and competitive 
telecommunications market between the two countries. 
 
--------------------------------------------- - 
General Outlook, Investment Trends, and Income 
--------------------------------------------- - 
 
¶2.  The telecommunications sector is a major contributor to 
Colombia's recent economic growth representing about 3 
percent of GDP.  The telecom sector grew 5.9 percent between 
the third quarter of 2004 and the third quarter of 2005. 
This growth rate made telecom one of the best performing 
sectors of the economy, only surpassed by construction (16.1 
percent growth), financial services (12.1 percent) and 
commerce (8.9 percent).  The sector is the second largest 
investor in infrastructure (22 percent of the total) after 
the energy sector (51 percent).  Telecom companies 
significantly increased investment in infrastructure during 
the period 2000-2004 as shown in the table below.  While 
fixed-line operators reduced their infrastructure investments 
after the liquidation of the publicly owned Telecom in 2002, 
investment levels are expected to increase during the 2005-06 
period. 
 
Telecom Infrastructure Investment - 2000-2004 
 
Type of Operator        Amount (in USD billion)   Growth 
Fixed telephony ops.    USD 3.2                    -1% 
Mobile operators        USD 1.5                   270% 
Value aggregate ops.    USD 0.289                 278% 
Cable operators         USD 0.064                 470% 
 
¶3.  Mobile telephony had significantly greater income growth 
compared to all other telecom services in 2004 and 2005. 
Fixed telephony also showed moderate growth driven by the 
need to replace fixed lines with other technological 
alternatives such as voice over internet protocol.  In the 
first half of 2005, total telecom sector income was USD 3.02 
billion, growing by 15.1 percent with respect to the first 
half of 2004.  Total projected 2005 income was about USD 6.45 
billion in 2005 versus USD 5.56 billion in 2004.  The 
following are projected income levels for 2005 (in USD 
million): 
 
Mobile telephony                   2,489 
Local telephony                      933 
Local extended telephony             323 
Rural mobile telephony                11 
Interconnection                      288 
Basic commuted Public Telephony 
(Other services)                     310 
Value aggregate                      339 
Carrier                               69 
National long distance               316 
International long distance          184 
Trunking                              76 
Radio and television                 578 
Other                                533 
--------------------------------------------- -------- 
 Total                             6,449 
 
Source: CRT, Ministry of Communications 
 
---------------- 
Mobile Telephony 
---------------- 
 
¶4.  The three main players in the mobile telephony market are 
Movistar, owned by Telefonica Moviles from Spain; Comcel 
owned by Mexico,s America Movil; and Ola-Colombia Movil, a 
joint venture between Empresas Publicas de Medellin (EPM) and 
Empresa de Telecomunicaciones de Bogota (ETB).  Market 
distribution among mobile operators has remained constant 
throughout 2005: 
 
Company      Percent Share  # of Lines by  # of Lines by 
                            End of 2006    End of 2010 
 
Comcel        61.8          16.1 million   20 million 
Movistar      28.2           7.0 million    9 million 
Ola           10.0           2.3 million    600,000 
 
Source:  CRT and Pyramid Research 
 
¶5.  According to a market study performed by Pyramid 
Research, a US-based telecommunications consulting company, 
Comcel will maintain market share by adding 3 million new 
lines in 2006, and add an additional one million lines 
annually until 2010.  Movistar plans to add one million lines 
in 2006 and an additional 500,000 lines annually until 2010. 
OLA will add about 300,000 lines in 2006, 200,000 lines both 
in 2007 and 2008, 100,000 lines in 2009 and 2010. 
 
¶6.  The Ministry of Communications reported that the number 
of mobile telephony users rose significantly in the last year 
from 10.4 million in December 2004 to 21.8 million by the end 
of 2005.  Mobile telephony penetration reached 50 percent of 
the population in 2005 (measured by the number of users), up 
from 14 percent in 2003 according to the CRT.  (Comment:  GOC 
and industry experts agree the pace of growth in the 
penetration rate will moderate over the next several years 
since the remaining population without mobile phones is less 
able to afford the service. End Comment) 
 
¶7.  Mobile operators face some earning difficulties. 
Although the mobile penetration level has increased, the 
average revenue per user has decreased.  Wireless operators 
are attempting to attract low-income consumers to maintain 
revenues.  In addition, Law 788 of December 2002 increased 
the value-added tax from 16 to 20 percent for wireless 
telephony.  On the other hand, the appreciation of the 
Colombian peso over the last two years and migration toward 
GSM technology permitted an increase in productivity and cost 
reductions. 
 
--------------- 
Fixed Telephony 
--------------- 
 
¶8.  According to the CRT, by mid-2005 there were 
approximately 7.8 million fixed lines active in Colombia. 
Mobile penetration is having a significant impact on 
fixed-line market share.  A study published by Colombian 
think-tank Fedesarrollo predicts a drop-off in the number of 
fixed telephone lines; today there are 16.3 fixed lines for 
every 100 inhabitants, and by 2009 that figure will slide to 
15.6 lines.  The land line infrastructure is well-developed 
in the main urban centers with Bogota, Medellin, and Cali 
accounting for about 50 percent of land lines in use.  Local 
basic telephone service is provided by 42 authorized 
enterprises although more than one-third of these are 
associated with Colombia Telecomunicaciones (previously 
Telecom-Colombia,s state-run telecommunications company). 
Other major operators include ETB, EPM, Emcali, and Orbitel. 
Colombia Telecom accounts for 35 percent of the market with 
over 3 million lines in 900 municipalities.  ETB based in 
Bogota has 28 percent market share while Medellin company EPM 
has 23 percent.  Emcali, Orbitel, and a number of smaller 
companies control the remaining amount. 
 
¶9.  Low income households continue to rely on local fixed 
telephony although access is limited, especially in rural 
areas.  While the mobile market continues to grow, the fixed 
line market is stagnant, registering less than a 2 percent 
increase in registered lines in 2005.  Wireless lines 
overtook fixed lines in service for the first time during 
2004 and the market penetration rate for fixed lines also 
declined slightly that year.  Pyramid Research forecasts that 
the number of installed telephone lines will remain nearly 
flat over the next five years.  Although the number of 
installed fixed lines will grow slightly over the forecast 
period, tariffs are expected to rise in line with inflation 
and peso depreciation.  In May 2004, ETB announced a 
reduction of installation costs for new telephone lines, 
especially for low-income households.  New regulations 
approved in February 2005 allow companies to offer cheaper 
calling plans to low-income households. 
 
¶10.  Long-distance service is provided by three long-distance 
licensed operators (EPM, ETB and Orbitel) and the three 
wireless operators.  Cellular providers Movistar and Comcel 
have been gearing up for increased competition in long 
distance by offering attractive subscription conditions and 
introducing advanced second-generation (2.5G) technologies, 
which facilitate data transmission.  Movistar-Telefonica aims 
to become the dominant cellular telephony provider and a 
leading fixed-line provider in the country.  The two main 
wireless providers will try to increase margins by expanding 
the opportunities offered to corporate clients and by the 
development of the still minuscule text-messaging (short 
messaging service, or SMS) business. 
 
--------------------------------------------- -------- 
Internet Services - Imperative to Enhance Penetration 
--------------------------------------------- -------- 
 
¶11.  Low internet and broadband penetration remains a 
significant issue in Colombia.  CRT figures show the number 
of internet subscribers in 2005 reached 900,000, or the 
equivalent of 4.5 million users based on a CRT estimate that 
one subscriber supports 5 users.  Colombian users represent 
4.9 percent of total internet users in Latin America.  The 
CRT reports internet penetration will grow in 2005-09, 
although Colombia will likely continue to lag behind 
benchmark countries such as Chile, Brazil, and Argentina. 
Most of Colombia,s internet subscribers rely on dial-up 
service but approximately 170,000 pay for broadband access 
divided evenly between cable and DSL technologies. 
 
¶12.  The private sector is encouraging more internet use. 
Internet providers plan to use aggressive marketing to 
capture more corporate clients and internet market share. 
Also, leading communications companies, together with the 
banking sector, continue to promote the use of the internet 
for transactions with their clients by increasing internet 
banking and business-to-business transactions.  However, 
popular distrust of online transactions and low credit-card 
penetration will remain major obstacles to the development of 
e-commerce, even as Colombia introduces new internet security 
measures in the medium term. 
 
------------------------- 
2005 Regulatory Decisions 
------------------------- 
 
¶13.  In 2005, the CRT capped the price of fixed-to-mobile 
telephone calls.  As reported reftel A, the CRT regulation 
requires mobile operators to gradually lower the per minute 
rate from a high of about 44 cents per minute to about 17 
cents per minute by November 1, 2006, a 57 percent decrease. 
The regulatory change will save consumers approximately USD 9 
million, according to the CRT.  Similar modifications to 
tariff regulations for local extended telephony, 
long-distance, and access charges are expected for 2006. 
 
¶15.  In November 2005, CRT announced that from January 1 
2006, all local calls in Colombia would be charged by the 
minute in compliance with Resolution 1250 of 2005.  In 
December 2005, CRT published the regulatory agenda for 2006. 
The schedule includes consideration of a revision in access 
rates, a definition of rate policy for local extended 
telephony, and an integral review of regulatory policy. 
 
--------------------------------------------- --- 
Colombia Telecomunicaciones--Looking for a Buyer 
--------------------------------------------- --- 
 
¶16.  Colombia Telecomunicaciones, created in mid-2003 to 
continue the operations of its liquidated predecessor Telecom 
Colombia, is searching for a strategic partner who will help 
it expand into mobile and internet services.  The company 
announced in early 2006 that the winning bidder (the auction 
is scheduled for April 7) will guarantee payment of the 
company's USD 3.57 billion pension debt and significantly 
invest in the company's communications infrastructure. 
Colombia Telecom President Alfonso Gomez expects the winning 
bidder to offer more than the USD 350 million Telmex offered 
in 2005 and Banif Securities investment bank reported the 
controlling stake may be worth between USD 450-500 million 
according to Morningstar.  The winning bidder will continue 
present operations and contract for new mobile services. 
Potential investors include Mexico,s Telmex, Spain,s 
Telefonica, Venezuela,s privatized telecom monopoly CANTV 
(of which U.S.-based Verizon owns a minority share), 
Colombia's Cablecentro, and Phone 1. 
 
¶17.  An August 2005 attempt to transfer management control of 
Colombia Telecom to Telmex ended in failure when the 
Colombian Comptroller,s Office opposed the agreement, 
arguing the process lacked a formal valuation by a qualified 
independent firm.  The Comptroller instructed the GOC to 
repeat the process and provide an opportunity for other 
bidders to participate. 
 
------------------------------------- 
Interconnectivity-The Case of Avantel 
------------------------------------- 
 
¶18.  As reported reftel B, Avantel, a U.S. affiliated telecom 
company, continues to assert that Colombia has not been in 
compliance with its telecom trade agreements.  Avantel 
maintains that noncompliance arises from the refusal of other 
mobile operators to offer interconnection with Avantel,s 
trunking network and CRT's inability to enforce existing 
decrees requiring interconnection.  From 2000-2004, the 
Ministry of Communications and CRT did not require other 
Colombian mobile operators to provide interconnection 
services to Avantel, although this was required by 
Colombia,s Law 555 of 2000 according to Avantel officials. 
Decree 4239 issued in December 2004 appeared to resolve the 
interconnection issue.  While Avantel has received a unique 
prefix for the telephone numbers it assigns customers, 
Avantel efforts to negotiate license fees since the new 
decree have been rejected by the other mobile operators who 
refuse to recognize interconnection obligations. 
 
¶19.  Avantel argues that mobile operators are delaying 
cooperation in the hope that Avantel market share will 
continue to decrease.  Since Avantel cannot connect directly 
with the mobile operators, Avantel pays for a fixed line 
service that then provides the connection to the mobile 
operators.  Avantel pays about 43 cents per minute for the 
service while the average fee for other operators is 8 cents 
per minute.  Avantel,s market share has decreased from 5 
percent in 2000 to about one percent now.  Moreover, Avantel 
maintains regulatory delays have caused it to miss out on a 
rapidly expanding customer base and has left it with a 
network that is 60 percent under-utilized. 
 
----------------------- 
FTA Will Improve Access 
----------------------- 
 
¶20.  The recently negotiated U.S.-Colombia Free Trade 
Agreement (FTA) will provide guaranties for an open and 
competitive telecommunications market between the two 
countries.  Colombia will provide cost-based licensing for 
operators, and ensure that U.S. companies will enjoy the same 
access as Colombian companies, including interconnection 
rights with Colombian suppliers and timely bid review 
procedures.  Regarding rural telephony, the agreement 
initially excludes operators in approximately 800 Colombian 
municipalities that have less than 4,500 installed lines 
(about 9 percent of the national total) to facilitate 
investment in areas with limited telephony access. 
 
------- 
Comment 
------- 
 
¶21.  CRT forecasts that the telecom sector will outperform 
the rest of the economy over the next five years.  CRT also 
predicts substantial growth potential as over 5 percent of 
the population remains without access to telephony services 
and broadband penetration is low compared with similar 
regional economies.  The signing of an FTA with Colombia will 
foster growth and broaden service access.  The sector's 
expansion, including greater access to telephony services in 
Colombia's rural areas, will assist GOC efforts to 
reestablish its presence in areas formerly controlled by 
illegal groups. 
WOOD