Brazilian ISPs negotiate with US, Chinese funds to take part in 5G auction

A consortium formed by regional operators and internet service providers (ISPs) in Brazil to bid in the upcoming 5G auction is negotiating financial backing with US and Chinese investment funds.

The talks are taking place with three investment funds, two of which are from China and one from the US, consortium president Suelismar Caetano told BNamericas.

According to Caetano, despite the firm interest expressed by these funds, the selection of investors will only take place after the definition of the auction rules. Regulator Anatel has scheduled an extraordinary meeting to vote on the tender notice for this Friday.

Of the three funds, at least one is expected to be an anchor fund.

The talks with the US fund have taken place through contacts with the US diplomatic body in capital Brasília, said Caetano. The US fund, however, will only be involved if the Chinese funds are excluded, for commercial and geopolitical reasons. It will be one or the other.

To participate in the auction and bid for the frequencies, the consortium of ISPs, called Iniciativa 5G Brasil, created a legal entity, ISPs S.A, linked to a fund to finance the purchase of spectrum and the rollout of networks.

Participation in this fund is divided, with 49% involving quotas freely acquired by the ISPs and the remaining 51% to be acquired by investors, Caetano explained. 

According to the executive, at least 15bn reais (US$2.8bn) is needed to start up the 5G business. The ISPs claim to have around 7.5bn reais in equity. "So, we need a contribution of around 7.5bn reais," he said.

Each quota for ISPs costs around 10,000 reais (US$1,890). By joining the consortium, the ISP becomes a partner and will assign the use of its network, while it also has the chance to be an investor in the fund, he said.

“If not a billion-dollar group, nobody can possibly stand alone to deploy 5G in all of Brazil. A single 5G ERB [antenna] costs around US$135,000 – the cheapest one,” said Caetano.

The ultimate goal is to share the infrastructure and allocate the frequencies acquired in the auction according to each ISP's needs, under a model similar to the neutral, wholesale fiber vehicles being launched by Telefônica Brasil, Oi and TIM.

CONSORTIUM

The creation of the consortium began almost three months ago and it currently has 400 ISPs on board. Brazil has 15,000 ISPs registered officially. 

Although the majority of the consortium members are small and medium-sized operators (up to 200,000 customers), Caetano said that at least two of the largest ISPs in Brazil are also in the group.

Together, the ISPs claim to have 6mn customers and more than 2mn kilometers of fiber, including backhaul, backbone and last-mile, spread throughout Brazilian territory. Fiber will be essential for the deployment of 5G, especially for connecting antennas.

“The market itself and investment funds understand that the regional providers that are united in this consortium are the best option to be a new [telecom] entrant. No new entrant has the customer base we do,” said Caetano.

He added that it is possible to offer two SIM cards (mobile lines) in a combo for the ISPs' residential fiber customers, reaching a customer base of 12mn mobile users. 

“As a result, we would become the fourth largest operator in Brazil. We already have the customer base and fiber ready to connect the antennas,” he said.

The consortium has hired legal and business experts to study and assess the terms of the 5G auction and help structure the business model, as most ISPs have no prior experience in offering mobile services.

National telecommunications institute Inatel, law firm Pietro Lorenzoni, which is focused on compliance and corporate law, consultancy Futurion, which specializes in tenders, and IoT specialist Radtonics have been contracted. 

AUCTION

The consortium also functions as a lobby group to promote the demands of providers in the auction rules or in rules indirectly associated with the process.

Around 3.7GHz of spectrum in four frequency bands will be offered in the auction: 700MHz, 2.3GHz, 3.5GHz and 26GHz.

The auction proposal includes 16 lots, some national and some regional. The latter, however, comprise only the 3.5GHz bands.

The consortium has three main demands: the implementation of permanent national roaming by Anatel, the possibility of starting the activation of 5G in the interior of the country, and the combination of the 700Mhz (4G) frequency with 3.5GHz in the same lots.

As it currently stands, the tender requires the rollout of 5G to start in large population centers (state capitals) and only then be deployed in the interior of the country.

As ISPs' network and fiber structures are mainly located in small and medium-sized cities, “without this possibility for us, the business is practically unfeasible,” said Caetano.

The government argues that there is no time to change the auction rules and that regional operators are already considered in the auction terms.  

Although the ISPs are not seeking confrontation and want to prioritize healthy relationships with regulators, Caetano does not rule out legal action by the group regarding the auction if the rules are approved as they stand.

“We don't want to use [legal action], but we have our cavalry ready and lined up,” he said.