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Liberalizing the Costa Rican Telecommunications Market
March 22, 2000
This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone. Names of people, corporations, businesses and governments are used only as examples in fictitious sample correspondence, statements, etc. in order to depict a realistic, albeit fictional, scenario. This does not represent any knowledge of these examples, nor does it in any way represent an endorsement by an individual, corporation, business or government.
For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.
Table of Contents
For the purposes of this project, I assume the fictitious role of a consultant hired by a fictitious multinational telecommunications service provider, GlobalCom.
GlobalCom is interested in entering the Costa Rican telecommunication services market, but Costa Rica does not yet allow foreign competition in this market. The company has tasked me with developing a strategy for pushing Costa Rica to allow foreign companies to enter its telecommunication services market. My report also includes analyses of the opportunities that would be presented by the company’s entry into the market.
GlobalCom stands to gain approximately five million dollars annually in a liberalized telecommunications market in Costa Rica. This Central American country stands out from its regional partners as an economic trendsetter, having already begun the internet boom that will soon hit its neighbors in Central and South America and the Caribbean. It is in the interest of GlobalCom to pursue the liberalization of the Costa Rican market, establish itself in that country, and use the country as a springboard to launch its growing information technology business throughout the region. GlobalCom already maintains a part-time representative in San José, which demonstrates the company’s commitment and interest in this market.
The introduction of foreign competitors into the Costa Rican telecommunications market requires a constitutional amendment to dissolve the current state-owned utility company’s monopoly position in the market. Such an amendment requires an overwhelming (2/3) majority of votes in the Legislative Assembly, which is comprised of fifty-seven deputies.
Telecommunications reform has become a notoriously difficult political issue for the current administration. President Rodriguez came into office intending to reform the telecommunications sector, and he introduced privatization legislation several years ago. That legislation was defeated despite the fact that the President and prominent leaders from the business community all supported the effort.
In a new attempt to pass reform legislation, Rodriguez recently began a process of national consensus building designed to minimize political gridlock. The process has already resulted in the creation of a law that would gradually open the telecommunications market to outside competitors. While the process has not succeed in dampening the spirit of opposition leaders, both major parties have agreed to introduce a compromise bill on the floor of the assembly. If passed, this bill will open the telecommunications market to foreign competitors yet maintain the national utilities company as a state-owned enterprise.
Now that both parties have committed to this debate, momentum seems to be building and the outlook for the passage of a compromise bill is positive. The likely result will be an opening of the Costa Rican market in which the state maintains some stake in the operation of the national utilities company. The exact nature of the relationship between the Costa Rican government and the new national utilities company is not yet clear, making it imperative that GlobalCom push for rules that will create a level playing field for foreign competitors.
GlobalCom should pursue a strategy aimed at assuring the passage of telecommunications reform, which not only opens the market to foreign competitors but allows them to compete freely and fairly with any quasi-governmental telecommunications provider as well.
Due to the relatively small size of the Costa Rican legislature and the leading role that it plays in policymaking, lobbying legislative deputies should be the focus of GlobalCom’s strategy. Using the company’s own representative for this is essential due to influence-peddling laws that prohibit the use of paid lobbyists. In conjunction with the local business community, GlobalCom should be able to conduct a media campaign that will raise public support and awareness of the issue of telecommunications reform. By bringing the issue to the public, GlobalCom can ensure that telecommunications reform makes its way into the ongoing election campaign. GlobalCom may even be able to prompt legislators to consider more ambitious reforms, such as signing the WTO Basic Telecommunications Agreement.
3. Commercial Analysis
GlobalCom stands to gain large profits from the liberalization of Costa Rica’s telecommunications market. Conservative estimates place the first year’s revenue at approximately five million dollars, and recent trends show that demand for telecommunications services in Costa Rica is growing rapidly. Furthermore, Costa Rica is on the forefront of Central America’s information technology development, and can serve as a starting point for GlobalCom’s own development as an information technology service provider in the region. Costa Rica is far ahead of its neighbors in transforming its economy from the production of just primary products toward a diverse set of manufacturing and services industries that depend on efficient information transfers.
GlobalCom’s market potential in Costa Rica depends on the range of services it will offer to Costa Rican individuals and businesses. This analysis assumes that GlobalCom will offer international long distance as well as complete telecommunications services to Internet service providers. It also assumes that GlobalCom will be able to secure one-quarter of the existing market in these products. While it is impossible to predict exactly who will enter the Costa Rican market and how many customers will stick with the newly privatized or corporatized ICETEL, one-quarter is a fairly conservative estimate considering the higher quality of services that GlobalCom will undoubtedly provide as well as the effects of any pre-liberalization marketing campaign.
Approximately 77 million minutes of international long distance telephone calls originate from Costa Rica each year (see Figures 1 and 2). One-quarter of this figure is approximately 19.25 million minutes. Available figures show that an average three-minute local call at peak hours costs approximately 6.5 colones (in 1995). Extrapolating a ballpark figure for an international long distance phone call of the same duration for the current year brings us to 18.59 colones. (6.5 colones multiplied by 1.43 to account for currency depreciation, then doubled to account for the more expensive cost of international long distance). 18.59 multiplied by 19.25 million totals 357,857,500 colones, or US$ 1,391,197.
The profit potential for providing telecommunications services to Internet service providers (ISPs) is extremely difficult to determine due to a fundamental lack of data on the prices that ICE’s subsidiary RACSA charges to ISPs. In order to arrive at a figure, it will be assumed, once again, that GlobalCom will secure one-quarter of the market. It is highly likely that GlobalCom can secure a much larger portion than this due to its new emphasis on providing extremely high quality telecommunications services on a global scale.
One-quarter of the current ISP market would equal approximately 815 ISPs. It is important to note, however, that while the number of ISPs has stabilized somewhat over the past two to three years, the number of Internet users has grown tremendously, providing a particularly optimistic forecast for this market (see Figures 3 and 4). If GlobalCom charges US$1,000 as a start-up fee for ISPs that switch to its service (this would include a complete overhaul of the ISP’s current system and connection to GlobalCom’s worldwide state-of-the-art network) and a $100 average monthly fee (this fee would vary, of course, depending on the number of Internet users hosted by each ISP), the total intake from one ISP per year would be $2,200. Multiplying this number by one-quarter of the market brings the total gross yearly income to $1,793,000.
Of course, this only represents the first year’s annual gross revenue. It is important to look at the rates at which each of these markets is growing in order to get a sense of just how much may be earned in the future.
Although the initial boom in new Internet users and ISPs has tapered off, both have continued to post impressive positive growth rates over the last several years (see Figure 5). The international long distance market shows a relatively more stable pattern of growth (see Figures 1 and 2), which is to be expected from an older and more established industry. As the market for Internet technology develops, growth rates can be expected to even out.
Overall, there is no question that the telecommunications market outlook in Costa Rica is extremely positive. In just two of the various types of service that GlobalCom may offer, conservative estimates place annual gross revenue at well over one million dollars each (and closer to two million in the case of ISPs). A strong marketing campaign and a decision to provide more services to Costa Rican businesses and individuals could easily push total gross revenues over five million dollars a year. It will be well worth GlobalCom’s effort to pursue liberalization of the Costa Rican telecommunications market.