Crossing over: Telefonica's Chilean unit shakes, rattles and rolls as the wireless battle for Latin America begins.

Telecommunications provider Telefonica CTC Chile, 43.6% owned by Spain's Telefonica, began 2004 fearing that the government would impose debilitating tariffs on its traditional fixed-line business--which was already in decline--but hoping that its mobile phone business would continue to bolster its growth prospects.

By mid-year those fears and hopes had completely turned on their head, for the company received relatively good news from Chile's government and then, shocking many, kissed its mobile business goodbye.

The long shadow for CTC in 2004 has been regulation of its fixed-line rates. In March the Chilean government proposed to slash CTC's fixed-line rate by 19% for the years 2004 to 2009 and force a 36% cut in per-minute calling rates, far lower than rates proposed by the dominant telecom. CTC predicted then that the rate reduction would cause it to lose 13% in revenue in a sector in which it already lost US$36 million in 2003. CTC's market share in fixed-line service has dropped to 75%, down from 90% five years ago.

In May, however, the company pulled off a surprising win when the government effectively reversed course, allowing the telecom to increase fixed-line rates by 7% and deciding to cut per-minute calling rates by only 14.4%. In the same decision, the government told the company it could boost by nearly 40% charges it makes to competitors to access CTC's network, far above the 8.6% rise proposed by CTC. Telmex Chile and Chilesat have prepared legal challenges to the government decree.

The fireworks didn't stop there. When Telefonica decided to buy the wireless operations of U.S. baby bell BellSouth in a regional deal valued at $5.8 billion--a move to arm itself for a region-wide showdown with Mexican billionaire Carlos Slim--analysts expected that CTC's Telefonica Moviles would merge with BellSouth. That would have made it Chile's new cell phone leader, since CTC's mobile market share stood at 30%, while BellSouth's was 17%. SmartCom, now run by the wireless arm of another company, Spanish energy giant Endesa, holds 15.5% of the market, while Entel PCS controls 37.5%.

Instead, CTC decided in May to instead shed its cell phone business altogether, selling it for a $1.01 billion plus $243 million in debt to Telefonica Moviles, the cellular arm of Spain's Telefonica. This was in part because CTC fetched a premium on the sale and because wireless penetration already exceeds 50% in Chile. Despite rollouts of the latest technology and a flood of prepaid phones in the streets, analysts believe that the market cannot grow much, meaning phone companies must either introduce new technologies faster or rob each other of customers on price.

"There is already a pretty high penetration rate in the cell phone sector and the average per capita income in Chile isn't high," says Cristina Acle, senior analyst for the Chilean brokerage Larrain Vial.

Still, CTC had begun to stake more of its future on its mobile phone business--a sector where Slim's America Movil has taken over in much of the region--having raised its number of clients to 2.27 million in 2003, up 23% from 1.85 million in 2002.

New directions. Such major market moves and the departure of four top executives in May seems to signal that CTC is seeking new direction after a difficult 2003. Last year's sales fell 7% to $1.37 billion, a decline CTC management blames on the company's decision to sell information systems provider Sonda. Net income fell 14% to $194.5 million. CTC's principal fixed-line phone business also suffered from the migration of consumers to mobile phones and greater competition from providers such as cable TV company VTR. Citing its recent flurry, of announcements, CTC executives declined to comment for this article.

With its wireless business sold and its fixed line and long-distance businesses under attack from the likes of VTR and Chilesat, now another Slim operation, CTC is still able to point to concrete growth in its broadband technology: It led the domestic sector in 2003 with more than 125,000 connections. Analysts also note that CTC reduced its debt considerably in the past year. The government's relatively benign rates decision, too, has blown wind into CTC's sails. Whether that wind pushes CTC into calmer waters or a storm, however, depends on how fast competitors can paddle.