Plan B: Colombia's Empresa de Telecomunicaciones de Bogota challenges its own business model--and heavyweights from abroad.

We were out of options. It was like choosing between amputating a leg or just bleeding to death," says Rafael Orduz, president of Empresa de Telecomunicaciones de Bogota (ETB), one of Colombia's largest telecommunications companies.

Orduz is talking about the decision to restructure the company. Technology like voice-over-Internet--the growth behind industry giants such as Spain's Telefonica Moviles and America Movil, controlled by Mexican billionaire Carlos Slim, and growth of the wireless industry itself--had put ETB between a rock and a hard place. "Our response was that we had to be innovative," Orduz says.

The company soon made business decisions that some analysts described as suicide: ETB, which traditionally operated in fixed-line telephony, a slow sector in terms of growth thanks to the Internet and demand for wireless service, began offering national and international long-distance service via the Web. The technology cuts the traditional price of long-distance calls to a fraction by using the Internet instead of standard switches.

It was a bold move for a state-owned company cornered by aggressive private-sector competitors. Despite being one of Colombia's largest companies, ETB was taking a beating. Yet the company showed that it was ready to bet on new technology. It signed an agreement with U.S. voiceover-Internet provider Net2Phone and started offering the new service to its clients. "The "alternative was to continue channeling all of our efforts in traditional networks that sooner or later were going to be replaced," Orduz says.

The company also became an Internet service provider. It was already operating a broadband Internet network in Bogota, which gave it an advantage over competitors. With that, ETB had all the pieces of the puzzle to offer integrated communication services to companies, all through one network.

The effort was part of a broader corporate strategy bent on widening revenue streams. Just a decade ago, the company operated on revenue made from Bogota phone calls alone. In 1998, ETB realized the risk of such dependency on one market and began to diversify. Today, 65% of its revenue stems from fixed-line telephony, 27% from long distance and 8% from Internet.

Fixed-line telephony is fast becoming a dangerous habit for telecoms. A study published by Fedesarrollo, a Colombian research institution, predicts a drop-off in the number of fixed telephone lines--today there are 16.3 fixed lines for every 100 inhabitants, but in 2009 that figure will begin to slide, to 15.6, says Fedesarrollo President Mauricio Cardenas. "Not only is ETB in trouble, but the sector's traditional companies have to make big investments," says Cardenas.

Cellular telephony is driving drastic change, and it's beginning to take bigger bites in a market once controlled by companies like ETB. According to U.S. consultancy Pyramid Research, over the next three years cellular telephone penetration in Colombia will jump to 30% from 14%. ETB already has a foothold in the mobile market through its 50% stake in Colombia Movil (the other half is controlled by Empresas Publicas de Medellin, known as EPM). Yet Colombia Movil is having a hard time catching up to Telefonica Moviles and to Comcel, which is controlled by America Movil. Darlo Arango, a manager at Telefonica Moviles, says the sector's current heavyweights will continue to dominate the sector in the future.

While companies such as Comcel and Telefonica Moviles enjoyed record earn ings in 2004, Colombia Movil lost more than US$80 million. Over the coming years, the mobile telephone sector nevertheless will grow at a dizzying pace, although Arango says companies like Comcel, Telefonica Moviles' main competitor, are already so far ahead it would be difficult for a third party to cut the distance.

Merger. But try they must. Clouds are forming on the fixed-line telephony's landscape in the form of domestic rivals. In Bogota, ETB, EPM and Telecom are fighting each other for market share. ETB reported sales of $655.1 million last year.

But those clouds could have silver linings. A merger of ETB, Telecom and EPM, the three state-owned companies, would--give them power to face the fierce competition in the sector, a possibility that seems more real with each passing day. "We are causing much damage to ourselves;' says Jose Gustavo Jimenez, finance chief at EPM.

DARCY A. CROWE, BOGOTA