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Tele Norte Leste Participacoes S.A. 20-F 2010 Table of ContentsAs filed with the Securities and Exchange Commission on March 25, 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 20-F/A Amendment No. 1
OR
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 OR
OR
Commission file number: 001-14487
TELE NORTE LESTE PARTICIPAÇÕES S.A. (Exact Name of Registrant as Specified in its Charter)
Rua Humberto de Campos, 425/8° andar-Leblon 22430-190 Rio de Janeiro, RJ, Brazil (Address of Principal Executive Offices)
Roberto Terziani Investor Relations Director Rua Humberto de Campos, 425 7º andar Leblon, Rio de Janeiro, RJ, Brazil 22430-190 Tel: +55 21 3131-1208 RTerziani@oi.net.br (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Series B 8.0% Notes due 2013 The total number of issued shares of each class of stock of Tele Norte Leste Participações S.A. as of December 31, 2008 was: 130,611,732 common shares, without par value 261,223,463 preferred shares, without par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 x Item 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Table of ContentsEXPLANATORY NOTE This Amendment No. 1 to our annual report on Form 20-F for the fiscal year ended December 31, 2008, which was originally filed with the U.S. Securities and Exchange Commission on July 13, 2009 (our “Original 2008 20-F”), is being filed solely for the purposes of:
This Amendment No. 1 has not been updated except as required to reflect the revisions stated above. This Amendment No. 1 only amends and restates the Items described below as required to reflect the revisions described above and does not reflect events that have occurred after the July 13, 2009 filing date of our Original Form 20-F, or modify or update other disclosures presented therein. This Amendment No. 1 amends and restates the following Items:
While the above Items have been reproduced in full as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, no changes have been made to such Items, except to reflect the corrections stated above, or to any other Items. In addition, this Amendment No. 1 includes currently dated certifications by the Chief Executive Officer and the Chief Financial Officer pursuant to 17 CFR 240. 15D-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that are attached to this Amendment No. 1 as Exhibits 12.01 and 12.02 and 13.01.
Table of ContentsTABLE OF CONTENTS
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Table of ContentsPRESENTATION OF FINANCIAL AND OTHER INFORMATION All references herein to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars. On July 6, 2009, the exchange rate for reais into U.S. dollars was R$1.971 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. The selling rate was R$2.337 to US$1.00 at December 31, 2008, R$1.771 to US$1.00 at December 31, 2007 and R$2.138 to US$1.00 at December 31, 2006, in each case, as reported by the Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate at July 6, 2009 may not be indicative of future exchange rates. See “Item 3. Key Information—Exchange Rates” for information regarding exchange rates for the Brazilian currency since January 1, 2004. Solely for the convenience of the reader, we have translated some amounts included in “Item 3. Key Information—Selected Financial Information” and elsewhere in this annual report from reais into U.S. dollars using the selling rate as reported by the Central Bank at December 31, 2008 of R$2.337 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Information in this annual report is presented giving effect to our acquisition of control of Brasil Telecom in the Brasil Telecom Transaction on January 8, 2009. However, financial and other data included in this annual report regarding TNL and its consolidated subsidiaries as of December 31, 2008 and earlier dates and for periods ended on December 31, 2008 and earlier dates is historical in nature and does not give pro forma effect to the Brasil Telecom Transaction. Unless otherwise indicated or the context otherwise requires:
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Table of ContentsFinancial Statements We maintain our books and records in reais. Our consolidated financial statements at December 31, 2008 and 2007 and for the three years ended December 31, 2008, as adjusted and retrospectively revised for the changes in accounting practices described below, have been audited, as stated in the report appearing herein, and are included elsewhere in this annual report. We prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on:
Brazilian GAAP differs in certain important respects from accounting principles generally accepted in the United States, or U.S. GAAP. For a discussion of certain differences relating to our financial statements, see note 36 to our audited consolidated financial statements included elsewhere in this annual report. On December 28, 2007, the Brazilian government enacted Law No. 11,638/07, which became effective on January 1, 2008, amended the Brazilian Corporation Law and changed certain accounting policies under Brazilian GAAP. In December 2008, the CVM issued Deliberação 565/08, or Deliberation 565/08, implementing these changes in accounting policies. For a discussion of the principal changes introduced by Law No. 11,638/07 and Deliberation 565/08 as they relate to our financial statements, see “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Presentation of Financial Statements” and notes 2(c) and 2(d) to our audited consolidated financial statements included elsewhere in this annual report. In order to make our financial statements at December 31, 2007 and for the two years ended December 31, 2007 comparable to our financial statements at December 31, 2008 and for the year ended December 31, 2008, we have retrospectively revised our previously issued financial statements at December 31, 2007 and for the two years ended December 31, 2007 included in our consolidated financial statements at December 31, 2008 and for the year ended December 31, 2008 to conform to the changes in accounting policy introduced by Law No. 11,638/07 and Deliberation No. 565/08. Share Split On May 24, 2004, we authorized the reverse split of all of our issued common shares and preferred shares into one share for each 1,000 issued shares. This reverse share split became effective on August 30, 2004. In connection with this reverse share split, we authorized a change in the ratio of our American Depositary Shares, or ADSs. Upon the effectiveness of our reverse share split and the ratio change, the ratio of our preferred shares to ADSs changed from 1,000 preferred shares per ADS to one preferred share per ADS. All references to numbers of shares and dividend amounts in this annual report have been adjusted to give effect to the 1,000-for-one reverse share split. Market Share and Other Information We make statements in this annual report about our market share and other information relating to the telecommunications industry in Brazil. We have made these statements on the basis of information obtained from third-party sources and publicly available information that we believe are reliable, such as information and reports from the Brazilian federal telecommunications regulator (Agência Nacional de Telecomunicações), or ANATEL, among others. Notwithstanding any investigation that we may have conducted with respect to the market share, market size or similar data provided by third parties or derived from industry or general publications, we assume no responsibility for the accuracy or completeness of any such information.
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Table of ContentsRounding We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be arithmetic aggregations of the figures that precede them.
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Table of ContentsCAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended, which we refer to as the Securities Act, or the U.S. Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us. Our forward-looking statements may be influenced by factors, including the following:
Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
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Table of ContentsPART I
Not applicable.
Not applicable.
Selected Financial Information The following selected financial data have been derived from our consolidated financial statements. The selected financial data at December 31, 2008 and 2007 and for the three years ended December 31, 2008 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected financial data at December 31, 2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have been derived from our audited consolidated financial statements that are not included in this annual report. On December 28, 2007, the Brazilian government enacted Law No. 11,638/07, which became effective on January 1, 2008, amended the Brazilian Corporation Law, and changed certain accounting policies under Brazilian GAAP. In December 2008, the CVM issued Deliberation 565/08 implementing these changes in accounting policies. For a discussion of the principal changes introduced by Law No. 11,638/07 and Deliberation 565/08 as they relate to our financial statements, see “Item 5. Operating and Financial Review and Prospects—Financial Presentation and Accounting Policies—Presentation of Financial Statements” and notes 2(c) and 2(d) to our audited consolidated financial statements included elsewhere in this annual report. In order to make our financial statements at December 31, 2007 and for the two years ended December 31, 2007 comparable to our financial statements at December 31, 2008 and for the year ended December 31, 2008, we have retrospectively revised our previously issued financial statements at December 31, 2007 and for the two years ended December 31, 2007 included in our consolidated financial statements at December 31, 2008 and for the year ended December 31, 2008 to conform to the changes in accounting policy introduced by Law No. 11,638/07 and Deliberation No. 565/08. We have not retrospectively revised our financial statements at December 31, 2006, 2005 or 2004 and for the two years ended December 31, 2005 to conform these changes in accounting policy because we cannot provide this information without unreasonable effort and expense and, therefore, the selected financial data at and for these periods may not be comparable. Our consolidated financial statements are prepared in accordance with Brazilian GAAP, which differs in certain important respects from U.S. GAAP. For a discussion of certain differences relating to our financial statements, see note 36 to our audited consolidated financial statements included elsewhere in this annual report. We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares and preferred shares since January 1, 2004 in reais and in U.S. dollars translated from reais at the commercial market selling rate in effect as of the payment date under the caption “Item 8. Financial Information—Dividends and Dividend Policy—Payment of Dividends.” This selected financial data should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements included elsewhere in this annual report.
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Exchange Rates Prior to March 14, 2005, there were two principal foreign exchange markets in Brazil:
Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. The floating rate exchange market generally applied to transactions to which the commercial market rate did not apply. On March 4, 2005, the Brazilian National Monetary Council (Conselho Monetário Nacional), or National Monetary Council, enacted Resolution No. 3,265, as well as additional regulations, that consolidated the two foreign exchange markets into a single foreign exchange market, effective as of March 14, 2005, in order to make foreign exchange transactions more straight-forward and efficient. Consequently, all foreign exchange transactions in Brazil are now carried out in this single foreign exchange market through authorized financial institutions. We cannot predict the impact of the enactment of any new regulations on the foreign exchange market. Foreign exchange rates continue to be freely negotiated, but may be influenced from time to time by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual depreciation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real/U.S. dollar exchange rate to float freely. Since then, the real/U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably. From December 31, 2000 through December 31, 2002, the real depreciated by 80.6% against the U.S. dollar. From December 31, 2002 through December 31, 2007, the real appreciated by 49.9%
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Table of Contentsagainst the U.S. dollar, and in 2008, the real depreciated by 31.9% against the U.S. dollar. At July 6, 2009, the selling rate for U.S. dollars was R$1.971 per US$1.00. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political or economic instability or other factors. We also cannot predict whether the real will depreciate or appreciate in value in relation to the U.S. dollar in the future. The following table shows the commercial selling rate or selling rate, as applicable, for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the periods presented.
Source: Central Bank Risk Factors You should consider the following risks as well as the other information set forth in this annual report when evaluating an investment in our company. In general, investing in the securities of issuers in emerging market countries, such as Brazil, involves a higher degree of risk than investing in the securities of issuers in the United States. Additional risks and uncertainties not currently known to us, or those that we currently deem to be immaterial, may also materially and adversely affect our business, results of operations, financial condition and prospects. Any of the following risks could materially affect us. In such case, you may lose all or part of your original investment. Risks Relating to our Company and the Brazilian Telecommunications Industry Our fixed-line telecommunications services face increased competition from mobile services providers, other fixed-line service providers and cable television service providers, which may adversely affect our revenues and margins. Our fixed-line telecommunications services in Regions I and II face increasing competition from mobile services as the prices for mobile services decline and approach those of fixed-line services. According to ANATEL, from December 2005 to December 2008, the number of fixed lines in service in Brazil increased from 39.8 million to 41.1 million. We expect the number of fixed lines in service in Brazil to continue to stagnate or decline, as certain customers eliminate their fixed-line services in favor of mobile services, and the use of existing fixed lines to decrease as customers make additional calls on mobile phones as a result of promotional rates (such as free calls within a mobile provider’s network). The rate at which the number of fixed lines in service in Brazil declines
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Table of Contentsdepends on many factors beyond our control, such as economic, social, technological and other developments in Brazil. In addition, new fixed lines that we install are expected to be less profitable than existing ones because new fixed-line customers generally have lower incomes than our existing customers, subscribe to our lower cost service plans and generate fewer chargeable minutes of usage. Because we and Brasil Telecom derive a significant portion of our operating revenue from our traditional local fixed-line telecommunications services (for the year ended December 31, 2008, these services represented 41.1% and 38.5% of our gross operating revenue and the gross operating revenue of Invitel, respectively), a reduction in the number of our fixed-lines in service would negatively affect our operating revenue and margins. We also compete in the market for local fixed-line services with other fixed-line service providers, primarily with Empresa Brasileira de Telecomunicações – Embratel, or Embratel, in Region I, and primarily with Embratel and GVT S.A., or GVT, in Region II. In addition to direct competition for corporate customers in Region I, Embratel competes with us for residential customers in Regions I and II through services that it provides using the cable infrastructure of its affiliate, Net Serviços de Comunicação S.A., or Net, as described below. In addition, we compete in each of these regions with smaller companies that have been authorized by ANATEL to provide local fixed-line services. In March 2007, ANATEL adopted the General Regulation of Portability (Regulamento Geral de Portabilidade), which established the general rules regarding portability of fixed-line numbers, which allow customers to move to a new home or office or switch service providers while retaining the same fixed-line number. Implementation of number portability commenced in August 2008 and was completed in March 2009. We believe that number portability may negatively affect our local fixed-line business, particularly our services to corporate customers, because it allows our customers to overcome their general resistance to changing their fixed-line telephone numbers and thereby allows our competitors to attract these customers. In November 2005, Embratel, our main competitor in fixed-line services, announced a telecommunications services agreement with Net, a cable television company that is our main competitor in the broadband services market. Both companies are affiliates of Teléfonos de México S.A.B. de C.V., or Telmex, one of the leading telecommunications service providers in Latin America. This agreement supports the offering to the Brazilian residential market of integrated voice, broadband and pay television services through a single network infrastructure. This bundling strategy has increased competition in the local fixed-line services and broadband businesses, which may require us to increase our marketing and capital expenditures, or reduce our rates to maintain market share, in each case leading to a reduction in our profitability. Our loss of a significant number of fixed-line customers would adversely affect our gross operating revenue and may adversely affect our results of operations. In addition, because callers in Brazil placing long-distance calls from their fixed-line telephones generally tend to select the long-distance carrier affiliated with the provider of their fixed-line service, our loss of a significant number of fixed-line customers may adversely affect our revenues from long-distance services and our results of operations. For a detailed description of our competition in the local fixed-line services market, see “Item 4. Information on the Company—Competition—Local Fixed-Line Services.” Our mobile services face strong competition from other mobile services providers, which may adversely affect our revenues. The mobile services market in Brazil is extremely competitive. We have experienced increased competition in Region I from large competitors such as TIM Participações S.A., or TIM, Vivo Participações S.A., or Vivo, and Telecom Americas Group, which markets its services under the brand name “Claro.” As of December 31, 2008, according to information available from ANATEL, we were the market leader in Region I with a 30.4% share of the mobile services market based on the total number of subscribers as of that date, followed by Vivo with 24.4%, TIM with 24.1% and Claro with 20.7%. Similarly, Brasil Telecom, which had an estimated 14.4% share of the mobile services market in Region II as of December 31, 2008, based on the total number of subscribers as of that date, faces competition from Vivo, Claro and TIM, which had estimated market shares of 32.8%, 27.7% and 24.9% in Region II, respectively, as of that date. Vivo, TIM and Telecom Americas Group are each controlled by multinational companies that may have more significant financial and marketing resources and a greater ability to access capital on a timely basis and on more favorable terms than us.
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Table of ContentsOur ability to generate revenues from our mobile services business depends on our ability to increase and retain our customer base. Each additional customer subscribing to our service entails costs, including sales commissions and marketing costs. Recovering these costs depends on our ability to retain such customers. Therefore, high rates of customer churn could have a material adverse effect on the profitability of our mobile services business. During 2008, our average monthly churn rate in the mobile services segment (excluding churn rates of Amazônia Celular S.A., or Amazônia Celular, of which we acquired control in April 2008 and for which we do not calculate churn rates), representing the number of subscribers whose service is disconnected during each month, whether voluntarily or involuntarily, divided by the number of subscribers at the beginning of such month, was 2.4% per month. Brasil Telecom’s average customer churn in the mobile services segment during 2008 was 4.1% per month. We have experienced increased pressure to reduce our rates in response to pricing competition. This pricing competition often takes the form of special promotional packages, which may include, among other things, mobile handset subsidies, traffic usage promotions and incentives for calls made within a mobile services provider’s own network. Competing with the service plans and promotions offered by our competitors may cause an increase in our marketing expenses and customer-acquisition costs, which could adversely affect our results of operations. Our inability to compete effectively with these packages could result in our loss of market share and adversely affect our operating revenue and profitability. Our launch of mobile telecommunications services in Region III in October 2008 exposes us to a new competitive environment. We anticipate that our entry into the Region III market is likely to generate a market response by Vivo, Claro and TIM, each of which competes in the mobile services market in Region III. A response from a competitor that is more aggressive than that anticipated in our business plans may result in higher costs and lower revenues than we expected, which may adversely affect our results of operations. For a detailed description of our competition in the mobile services market, see “Item 4. Information on the Company—Competition— Mobile Services.” Our long-distance services face significant competition, which may adversely affect our revenues. In Brazil, unlike in the United States and elsewhere, a caller chooses its preferred long-distance carrier for each long-distance call, whether originated from a fixed-line telephone or a mobile handset, by dialing such carrier’s long-distance carrier selection code. The long-distance services market in Brazil is highly competitive. Our principal competitor for long-distance services originating on fixed-line telephones in Region I is Embratel, and our principal competitors for these services in Region II are Embratel (an affiliate of Telecom Americas Group) and GVT. We compete for long-distance services originating on mobile telephones in Region I with Embratel, Telecomunicações de São Paulo S.A., or Telesp (an affiliate of Vivo) and TIM, and in Region II with Embratel, Telesp and TIM. Generally, callers placing fixed-line long-distance calls in Brazil tend to select the long-distance carrier affiliated with the provider of their fixed-line service. Similarly, callers placing mobile long-distance calls in Brazil tend to select the long-distance carrier affiliated with the provider of their mobile or fixed-line service. Embratel, as the incumbent long-distance service provider, is the most aggressive of these competitors, offering discounts and other promotions from time to time in an effort to increase its market share in the long-distance market. Competition in the long-distance market may require us to increase our marketing expenses or provide services at lower rates than those we currently expect to charge for such services. If competition in the domestic long-distance market increases, it could have a material adverse effect on our revenues and margins. See “Item 4. Information on the Company—Competition—Long-Distance Services.” Data transmission services are not subject to significant regulatory restrictions and, as a result, we face an increasing amount of competition in this business. Competition in data transmission services is not subject to significant regulatory restrictions and, therefore, the market is open to a large number of competitors. Some competitors, such as cable operators, offer telephone and broadband services, which does not require them to use our network, thereby allowing them to reach our clients without paying interconnection and/or mobile network usage fees to our company. Additionally, we anticipate that ANATEL will auction radio frequency licenses, possibly in 2010, that may be used to establish Worldwide Interoperability for Microwave Access, or WiMax, networks. The implementation of WiMax networks may allow other ISPs to deploy wireless Internet Protocol, or IP, networks over a much greater area, for a much lower cost, than previously possible. This reduced deployment cost may give our competitors, or new entrants into the data transmission market, the ability to provide Voice over Internet Protocol, or VoIP, and other data services over WiMax networks at lower rates than we are able to offer.
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Table of ContentsIncreasing competition in data transmission services may lead to rate reductions in this segment, adversely affecting the operating revenue we generate from this business. Additionally, increased competition for data transmission customers may require us to increase our marketing expenses and our capital expenditures and may lead to the loss of broadband customers, in each case leading to a decrease in our profitability. For a detailed description of our competition in the data transmission services market, see “Item 4. Information on the Company—Competition—Data Transmission Services.” The telecommunications industry is subject to frequent changes in technology. Our ability to remain competitive depends on our ability to implement new technology, and it is difficult to predict how new technology will affect our business. Companies in the telecommunications industry must adapt to rapid and significant technological changes that are usually difficult to anticipate. The mobile telecommunications industry in particular has experienced rapid and significant technological development and frequent improvements in capacity, quality and data-transmission speed. Technological changes may render our equipment, services and technology obsolete or inefficient, which may adversely affect our competitiveness or require us to increase our capital expenditures in order to maintain our competitive position. For example, in 2008, we invested R$583 million in connection with the implementation of our Universal Mobile Telecommunications System, or UMTS, services, which we refer to as 3G services, in Regions I and III. In 2008, Brasil Telecom invested R$288 million in its network and R$487 million in licenses in connection with the implementation of 3G services in Region II. While we have been upgrading our fixed-line networks with technologically advanced fiber optic cable with a microwave overlay for use in our long-distance services, it is possible that alternative technologies may be developed that are more advanced than those we currently provide. If ANATEL auctions radio frequency spectrum for use in the development of WiMax networks, we expect that we may be required to participate in these auctions and deploy a WiMax network to remain competitive in the broadband services market. Even if we adopt new technologies in a timely manner as they are developed, the cost of such technology may exceed the benefit to us, and we cannot assure you that we will be able to maintain our level of competitiveness. Our industry is highly regulated. Changes in laws and regulations may adversely impact our business. Our industry is highly regulated by ANATEL. ANATEL regulates, among other things, rates, quality of service and universal service goals, as well as competition among telecommunications service providers. Changes in laws and regulations, grants of new concessions, authorizations or licenses or the imposition of additional universal service obligations, among other factors, may adversely affect our business, financial condition and results of operations. In October 2008, ANATEL published items that are on its regulatory agenda in the short-term (up to two years), medium-term (up to five years) and long-term (up to 10 years). In the short-term, ANATEL is expected to address the following items, among others: (1) review of and amendments to concession agreements to include additional obligations to expand existing networks; (2) assessment of the adequacy of fixed-line regulations in light of the convergence of telecommunications services; (3) regulation of service providers with significant market power; and (4) establishment of additional obligations to extend mobile networks, including broadband services, to rural areas. We cannot predict when regulations regarding these matters will be proposed, whether these regulations will be adopted as proposed or whether ANATEL, the Brazilian Ministry of Communications or the Brazilian government will adopt other telecommunications sector policies in the future or the consequences of such policies on our business and the business of our competitors. Proposed laws seeking the termination of monthly subscription fees for local fixed-line services may adversely affect our business and financial condition. Certain legislative bills seeking to terminate monthly subscription fees charged by local fixed-line service providers have been submitted to the Brazilian Congress and remain pending. In March 2008, a special committee was formed in the Brazilian House of Representatives to discuss the various proposed bills on this issue. As of the date of this annual report, no action had been taken by the committee.
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Table of ContentsIn 2008, monthly subscription fees represented 25.4% of our gross operating revenue and 21.6% of Invitel’s gross operating revenue. The enactment of legislation terminating the monthly subscription fees would have a material adverse effect on our results of operations. Our local fixed-line and domestic long-distance concession agreements are subject to periodic modifications by ANATEL and expire on December 31, 2025. Our bids for new concessions upon the expiration of our existing concessions may not be successful. We provide fixed-line telecommunications services in Regions I and II pursuant to concession agreements with the Brazilian government. Our concession agreements expire on December 31, 2025, and may be amended by the parties every five years prior to the expiration date. The first amendment to each of the concession agreements is expected to become effective on January 1, 2011. In connection with each of these amendments, we are currently discussing modifications to our concession agreements with ANATEL. On March 30, 2009, ANATEL published a public notice of the proposed modifications to these concession agreements. In this public notice, ANATEL proposed amendment to the General Plan on Universal Service (Plano Geral de Metas de Universalização) that would (1) require the expansion of our fixed-line network to all municipalities (municípios), which are analogous to counties in the U.S., with more than 30,000 inhabitants, (2) require us to provide service to a large number of additional areas, including indigenous villages, rural schools, health clinics, military bases, federal and state highway police stations, public aerodromes and environmental conservation organizations, and (3) require the fixed-line concessionaires to install an aggregate of up to approximately 110,000 additional public telephones, which number may be reduced as a result of ongoing changes in ANATEL regulations decreasing the number of public telephones required per inhabitant. The public consultation period in connection with the March 30, 2009 public notice ended on June 22, 2009, although the final amendments to our concession agreements have not yet been determined. Our obligations under the concession agreements may be subject to revision in connection with each amendment. We cannot assure you that any of these amendments will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate setting procedures applicable to us in a manner that will significantly reduce the gross operating revenue that we generate from our fixed-line businesses. If the amendments to our concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected. Our concession agreements will expire on December 31, 2025. We expect the Brazilian government to offer new concessions in competitive auctions prior to the expiration of our existing concession agreements. We may participate in such auctions, but our existing fixed-line and domestic long-distance concession agreements will not entitle us to preferential treatment in these auctions. If we do not secure concessions for our existing service areas in any future auctions, or if such concessions are on less favorable terms than our current concessions, our business, financial condition and results of operations would be materially adversely affected. Our local fixed-line and domestic long-distance concession agreements, as well as our authorizations to provide personal mobile services, contain certain obligations and our failure to comply with them may result in various fines and penalties imposed on us by ANATEL. Our local fixed-line and domestic long-distance concession agreements contain terms reflecting the General Plan on Universal Service and the General Plan on Quality Goals (Plano Geral de Metas de Qualidade) and other regulations adopted by ANATEL and implemented in 2006, the terms of which could affect our financial condition and results of operations. Our local fixed-line concession agreements also require us to meet certain network expansion, quality of service and modernization obligations in each of the states in Regions I and II. In the event of noncompliance with ANATEL targets in any one of these states, ANATEL can establish a deadline for achieving the targeted level of such service, impose penalties, and, in extreme situations, terminate our concession agreements for noncompliance with its quality and universal service obligations. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services.”
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Table of ContentsOn an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to comply satisfactorily with those inquiries or our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan on Universal Service, among others. We had recorded provisions in the amount of R$433 million as of December 31, 2008 in connection with fines sought to be imposed by ANATEL. Brasil Telecom has also received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to its inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan on Universal Service, among others. Invitel had recorded provisions in the amount of R$149 million as of December 31, 2008 in connection with fines sought to be imposed by ANATEL. Additional fines from ANATEL or fines in excess of the provisioned amount could adversely impact our financial condition and results of operations. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry” and “Item 8. Financial Information—Legal Proceedings—Civil Claims—Administrative Proceedings.” In addition, our authorizations to provide personal mobile services contain certain obligations requiring us to meet network scope and quality of service targets. If we fail to meet these obligations, we may be fined by ANATEL until we are in full compliance with our obligations and, in extreme circumstances, our authorization could be revoked by ANATEL. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.” We may be unable to implement our 2G network in Region III, our 3G network or our projects to upgrade and enhance our existing mobile networks in a timely manner or without unanticipated costs. Following our receipt in December 2007 of the authorizations and radio frequency licenses necessary to offer Global System for Mobile communications, or GSM, services, which we refer to as 2G services, in Region III and 3G services in Regions I and III, and Brasil Telecom’s receipt in December 2007 of the radio frequency licenses necessary to offer 3G services in Region II, we have undertaken significant capital expenditure programs to implement the networks necessary for us to provide these services. In addition, we have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of these networks. Our ability to achieve our strategic objectives relating to our mobile services depends on and will depend on, in large part, the successful, timely and cost-effective implementation of these networks and projects. Factors that could affect this implementation include:
Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual costs or time required to complete the implementation of these networks will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected. We depend on key suppliers and vendors to provide equipment that we need to operate our business. We depend upon various key suppliers and vendors, including Ericsson, Alcatel-Lucent, Nokia and Huawei, to provide us with network equipment, which we need in order to expand and to operate our business. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements. If these suppliers or vendors fail to provide equipment or service to us on a timely basis, we could experience disruptions, which could have an adverse effect on our revenues and results of operations, and we might be unable to satisfy the requirements contained in our concession and authorization agreements.
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Table of ContentsWe are permitted to negotiate rates for interconnection to our mobile networks with providers of fixed line-services. ANATEL arbitration of these rates as a result of our failure to reach agreement with providers of fixed line-services may result in reductions of the interconnection rates that we currently charge. In order to receive or send calls from or to customers of other Brazilian and international fixed-line and mobile networks, we must interconnect with the networks of our competitors. The Brazilian General Telecommunications Law (Lei Geral das Telecomunicações) requires all telecommunications service providers to interconnect their networks with those of other providers on a non-discriminatory basis. ANATEL sets the interconnection rates that fixed-line networks may charge. Interconnection rates that mobile networks charge have typically been higher than the rates set by ANATEL for fixed-line networks. As a result, mobile operators generally have received a large portion of revenues generated by fixed-to-mobile calls, while fixed-line networks generally have received a small portion of revenues generated by mobile-to-fixed calls. Since July 2004, the interconnection rates that mobile networks may charge have been freely negotiable. Brazilian laws and regulations provide that if interconnection rates for mobile networks are not agreed among telecommunications service providers, ANATEL is empowered to arbitrate, at its discretion, the interconnection rates that mobile telecommunications companies may charge. When we and 14 Brasil Telecom Celular S.A., which we refer to as Brasil Telecom Mobile, began offering mobile services, we were each unable to agree with fixed-line service providers on the interconnection rates that we would charge the fixed-line service providers. Similarly, none of the other mobile services providers were able to agree with fixed-line service providers on the interconnection rates that they would charge the fixed-line service providers at the time that their authorizations to provide mobile services were granted. Each of the mobile services providers and the fixed-line service providers with which they interconnected commenced arbitration proceedings before ANATEL to establish the applicable interconnection rates. ANATEL established provisional rates applicable to each mobile services provider, pending a final decision in the arbitration proceedings. An initial decision approving these provisional rates was rendered in September 2007, but an appeal remains pending before ANATEL’s Council of Directors (Conselho Diretor). We cannot predict whether the final interconnection rates established by ANATEL will be equivalent to those currently applied by us. If ANATEL sets interconnection rates that mobile operators may charge at a level that differs substantially from the current level, our results of operations may be materially adversely affected. Our controlling shareholder, TmarPart, has control over us and our controlled companies. We are controlled by TmarPart, which, as of July 6, 2009, held 53.7% of our outstanding voting shares. TmarPart’s shareholders are parties to two shareholders’ agreements governing their equity interests in TmarPart. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—TmarPart Shareholders’ Agreements.” Our controlling shareholder is entitled to appoint a majority of the members of our board of directors, and it has the power to determine the decisions to be taken at our shareholders’ meetings on matters of our management that require the prior authorization of our shareholders, including in respect of related party transactions, corporate restructurings and the date of payment of dividends and other capital distributions. The decisions of our controlling shareholder and its controlling shareholders on these matters may be contrary to the expectations or preferences of holders of our indebtedness, including holders of our preferred shares and ADSs. In order to expand our business, we may take advantage of the consolidation of the telecommunications industry through the acquisition of other telecommunications companies, which could adversely affect our business, results of operations and financial condition. We may acquire other companies in the telecommunications industry as part of our growth and convergence strategy. A growth strategy that involves acquisitions may present certain risks to our business, results of operations and financial condition, such as: (1) difficulties in capturing synergies in the integration process, causing the
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Table of Contentsanticipated benefits of the acquisition to be more limited than originally expected; (2) costs associated with any unforeseen antitrust restrictions; (3) failure to identify contingencies during the due diligence process; (4) uncertainty in relation to regulatory approval; and (5) distractions from our core business to pursue these acquisitions and implement the integration of acquired businesses. If acquisition transactions cause us to incur unforeseen costs due to the factors described above, we may have to dedicate more resources than we had originally planned and eventually face substantial losses that would adversely affect our business, results of operations and financial condition. Even if we identify suitable acquisition targets, we may be unable to complete acquisitions or obtain necessary financing to do so on satisfactory terms. Paying for acquisitions could require us to incur or assume debt and/or contingent liabilities, amortize certain identifiable intangible assets and incur acquisition-related expenses. In addition, we may be unable to realize all or any of the anticipated benefits from acquisitions or expansion in other related businesses because of operational factors or difficulties in integrating the acquisitions or such other related businesses with our existing businesses, including disparate information technology systems, database systems and business processes. For a discussion of risks specifically pertaining to the Brasil Telecom Transaction, see “— Risks Relating to the Brasil Telecom Transaction.” We have a substantial amount of existing debt, which could restrict our financing and operating flexibility and have other adverse consequences. As of December 31, 2008, we had total consolidated indebtedness of R$20,033 million (excluding swap adjustments of R$509 million) and a ratio of debt to equity of 2.09:1. As of December 31, 2008, Invitel’s consolidated indebtedness was R$5,842 million. We are subject to certain financial covenants that limit our ability to incur additional debt. Our existing level of indebtedness and the requirements and limitations imposed by our debt instruments could adversely affect our financial condition or results of operations. In particular, the terms of some of these debt instruments restrict our ability, and the ability of our subsidiaries, to:
Furthermore, some of our debt instruments include financial covenants that require us and/or our subsidiaries to maintain certain specified financial ratios. We expect that Brasil Telecom will not comply with certain covenants set forth in its debt instruments as of June 30, 2009. Brasil Telecom is currently seeking waivers from creditors in respect of the anticipated breach of these covenants. We cannot provide investors with any assurance that these waivers will be obtained. See “Item 5. Operating and Financial Review and Prospects—Indebtedness and Financing Strategy—Long-Term Indebtedness.” In general, the occurrence of an event of default under one of our debt instruments may trigger defaults under our other debt instruments. If we are unable to incur additional debt, we may be unable to invest in our business and make necessary or advisable capital expenditures, which could reduce future operating revenue and adversely affect our profitability. In addition, cash required to serve our existing indebtedness reduces the amount available to us to make capital expenditures. If our growth in net operating revenue slows or declines in a significant manner, for any reason, we may not be able to continue servicing our debt. If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to renegotiate or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all. For more information regarding our debt instruments and our indebtedness at December 31, 2008, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
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Table of ContentsWe are subject to numerous legal and administrative proceedings, which could adversely affect our business, results of operations and financial condition. We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or “remote.” We make provisions for probable claims but do not make provisions for possible and remote claims. At December 31, 2008, we had provisioned R$2,473 million for probable claims relating to various tax, labor and civil legal and administrative proceedings against us. At December 31, 2008, Invitel had provisioned R$933 million for probable claims relating to various tax, labor and civil legal and administrative proceedings against it. At December 31, 2008, we had claims against us of approximately R$10,271 million in tax proceedings, R$1,133 million in labor proceedings and R$3,096 million in civil proceedings with a risk of loss classified as “possible” or “remote,” and for which we had made no provisions. See note 26 to our audited consolidated financial statements included elsewhere in this annual report. At December 31, 2008, Invitel had claims against it of approximately R$1,797 million in tax proceedings, R$635 million in labor proceedings and R$1,221 million in civil proceedings with a risk of loss classified as “possible,” and for which it had made no provisions. If we are subject to unfavorable decisions in any legal or administrative proceedings and the losses in those proceedings significantly exceed the amount for which we have provisioned or involve proceedings for which we have made no provision, our results of operations and financial condition may be materially adversely affected. For a more detailed description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.” We are subject to potential liabilities relating to our third-party service providers, which could have a material adverse effect our business, financial condition and results of operations. We are subject to potential liabilities relating to our third-party service providers. Such potential liabilities may involve claims by employees of third-party service providers directly against us as if we were the direct employer of such employees, as well as claims against us for secondary liability for, among other things, occupational hazards, wage parity or overtime pay, in the event that such third-party service providers fail to meet their employer obligations. We have not recorded any provisions for such claims, and significant judgments against us could have a material adverse effect on our business, financial condition and results of operations. We are subject to delinquencies of our accounts receivables. Our business significantly depends on our customers’ ability to pay their bills and comply with their obligations to us. In 2007 and 2008, we recorded provisions for doubtful accounts in the amount of R$649 million and R$799 million, respectively, primarily due to subscribers’ delinquencies. As a percentage of our gross operating revenues, our provision for doubtful accounts was 2.6% at December 31, 2007 and 2.9% at December 31, 2008. In 2007 and 2008, Invitel recorded provisions for doubtful accounts in the amount of R$348 million and R$370 million, respectively, primarily due to subscribers’ delinquencies. As a percentage of its gross operating revenue, Invitel’s provision for doubtful accounts was 2.2% at December 31, 2007 and 2.2% at December 31, 2008. ANATEL regulations prevent us from implementing certain policies that could have the effect of reducing delinquency, such as service restrictions or limitations on the types of services provided based on a subscriber’s credit record. If we are unable to successfully implement policies to limit subscriber delinquencies or otherwise select our customers based on their credit records, persistent subscriber delinquencies and bad debt will continue to adversely affect our operating and financial results. In addition, if the Brazilian economy declines due to, among other factors, a reduction in the level of economic activity, depreciation of the real, an increase in inflation or an increase in domestic interest rates, a greater portion of our customers may not be able to pay their bills on a timely basis, which would increase our provision for doubtful accounts and adversely affect our financial condition and results of operations. See “— Risks relating to Brazil.”
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Table of ContentsIf key members of our senior management team were to resign, or if we are unable to attract and retain skilled management, our business could be materially adversely affected. Our ability to remain competitive in our markets and achieve our growth strategy depends on our senior management team. We may not be able to continue to successfully attract and retain skilled management. If key members of our senior management team were to resign, or if we are unable to continue to attract and retain skilled management, our business, financial condition and results of operations could be adversely affected. Our operations depend on our ability to maintain, upgrade and operate efficiently our accounting, billing, customer service, information technology and management information systems and rely on the systems of other carriers under co-billing agreements. Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, render monthly invoices for services, process customer orders, provide customer service and achieve operating efficiencies. We cannot assure you that we will be able to operate successfully and upgrade our accounting, information and processing systems or that these systems will continue to perform as expected. We have entered into co-billing agreements with each long-distance telecommunications service provider that is interconnected to our networks to include in our invoices the long-distance services rendered by these providers, and they have agreed to include charges owed to us in their invoices. Any failure in our accounting, information and processing systems, or any problems with the execution of invoicing and collection services by other carriers with whom we have co-billing agreements, could impair our ability to collect payments from customers and respond satisfactorily to customer needs, which could adversely affect our business, financial condition and results of operations. Improper use of our network can adversely affect our costs and results of operations. We incur costs associated with the unauthorized and fraudulent use of our networks, including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud also affects interconnection costs and payments to other carriers for non-billable fraudulent roaming. Improper use of our network can also increase our selling expenses if we need to increase our provision for doubtful accounts to reflect amounts we do not believe we can collect for improperly made calls. Any increase in the improper use of our network in the future could materially adversely affect our costs and results of operations. Our operations are dependent upon our networks. A system failure could cause delays or interruptions of service, which could cause us to suffer losses. Damage to our networks and backup mechanisms may result in service delays or interruptions and limit our ability to provide customers with reliable service over our networks. Some of the risks to our networks and infrastructure include: (1) physical damage to access lines; (2) power surges or outages; (3) software defects; (4) disruptions beyond our control; (5) breaches of security; and (6) natural disasters. The occurrence of any such event could cause interruptions in service or reduce capacity for customers, either of which could reduce our gross operating revenues or cause us to incur additional expenses. In addition, the occurrence of any such event may subject us to penalties and other sanctions imposed by ANATEL and may adversely affect our business and results of operations. The mobile telecommunications industry and participants in this industry, including us, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices. Media and other entities frequently suggest that the electromagnetic emissions from mobile handsets and base stations may cause health problems. If consumers harbor health-related concerns, they may be discouraged from using mobile handsets. These concerns could have an adverse effect on the mobile telecommunications industry and, possibly, expose mobile services providers to litigation. We cannot assure you that further medical research and studies will refute a link between the electromagnetic emissions of mobile handsets and base stations, including on frequency ranges we use to provide mobile services, and these health concerns. Government authorities could increase regulation on electromagnetic emissions of mobile handsets and base stations, which could have an adverse effect on our business, financial condition and results of operations. The expansion of our network may be affected
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Table of Contentsby these perceived risks if we experience problems in finding new sites, which in turn may delay the expansion and may affect the quality of our services. In July 2002, ANATEL enacted regulations that limit emission and exposure for fields with frequencies between 9 kHz and 300 GHz. Although these regulations did not have a material impact on our business, new laws or regulations regarding electromagnetic emissions and exposure may be adopted that could have an adverse effect on our business. Risks Relating to the Brasil Telecom Transaction We may not be able to integrate successfully, or may experience difficulties in integrating, Brasil Telecom into our operations and therefore may fail to achieve the anticipated benefits from the Brasil Telecom Transaction. On January 8, 2009, we completed the Brasil Telecom Transaction in which we acquired all of the outstanding shares of Invitel and 12,185,836 common shares of Brasil Telecom Holding owned by the shareholders of Invitel. As of December 31, 2008, Invitel owned 100% of the outstanding shares of Solpart Participações S.A., or Solpart, which owned 52.0% of the outstanding voting share capital, representing 19.0% of the outstanding share capital, of Brasil Telecom Holding, which, in turn, owned 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom. As a result of the completion of the Brasil Telecom Transaction, we control Brasil Telecom Holding and Brasil Telecom. We intend to integrate Brasil Telecom’s operations as soon as possible. For additional information about the Brasil Telecom Transaction, see “Item 4. Information on the Company—Our History and Development—Acquisition of Brasil Telecom.” Integration of Brasil Telecom’s operations into our operations will be a complex, costly and time-consuming process. We may be unable to integrate successfully the personnel and operations of Brasil Telecom into our business. In addition, we may be unable to achieve the operational synergies or other cost savings and benefits that we had anticipated in the expected timeframe, or at all. Moreover, we may incur significant costs in connection with the integration of Brasil Telecom. Risks and challenges that may impair our ability to achieve the anticipated benefits of the Brasil Telecom Transaction include the following:
If we are unable to respond successfully to these risks and challenges, we may experience substantially higher than expected operating costs or fail to achieve the anticipated benefits of the Brasil Telecom Transaction. We have and will incur additional indebtedness in connection with the Brasil Telecom Transaction, which could limit our operating flexibility. The total purchase price to our company of the shares of Invitel and Brasil Telecom Holding paid upon closing of the Brasil Telecom Transaction was approximately R$5,371 million. See “Item 4. Information on the Company—Our History and Development—Acquisition of Brasil Telecom.” In addition, we paid R$3,271 million for preferred shares of Brasil Telecom Holding and Brasil Telecom that we acquired in 2008 through open market purchases and through tender offers for a portion of the outstanding preferred shares of Brasil Telecom Holding and Brasil
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Table of ContentsTelecom. Finally, we paid R$2,656 million for common shares of Brasil Telecom Holding and Brasil Telecom that we acquired on June 23, 2009 through tender offers for any and all of the outstanding common shares of Brasil Telecom Holding and Brasil Telecom. We have incurred a substantial amount of indebtedness to finance our acquisition of the shares of Invitel, Brasil Telecom Holding and Brasil Telecom that we currently own. We have consolidated Invitel (including its outstanding indebtedness) in our consolidated financial statements as from January 8, 2009, the date of our acquisition of control of the company. As of December 31, 2008, Invitel’s consolidated indebtedness was R$5,842 million. The increase in our outstanding indebtedness could limit our operating flexibility, including among others, in the following respects:
ANATEL imposed significant obligations on our company as conditions to its approval of the Brasil Telecom Transaction, and compliance with these obligations could adversely affect our business and results of operations. On December 19, 2008, ANATEL granted its approval of our acquisition of control of Brasil Telecom, subject to a number of conditions contained in the order granting the approval. The most significant of these conditions requires us to:
Compliance with the conditions contained in ANATEL’s order could require us to undertake significant capital expenditures, which could materially and adversely affect our business, financial condition and results of operations. See “Item 4. Information on the Company—Our History and Development—Acquisition of Brasil Telecom—Regulatory Approvals.” The Brazilian antitrust authorities could impose costly or restrictive conditions on the approval of the Brasil Telecom Transaction, which could adversely affect our business and results of operations. The Brasil Telecom Transaction has been submitted to the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, the Brazilian antitrust regulator, in accordance with Brazilian law, and the transaction is subject to the final approval of CADE. However, Brazilian law permits us to consummate this transaction prior to receiving this final approval, unless CADE issues a writ of prevention blocking
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Table of Contentsa transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. The antitrust authorities will determine whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affects consumers in these markets. On December 10, 2008, we entered into an Agreement for Maintenance of the Reversibility of Operation (Acordo de Preservação de Reversibilidade da Operação) with CADE relating to our acquisition of control of Brasil Telecom. Under this agreement:
If the Brazilian antitrust authorities do not grant a final approval for the Brasil Telecom Transaction, we could be required to dispose of our direct and indirect interest in Brasil Telecom and to separate our operations to the extent that they have been integrated. In addition, if such authorities take any action to impose conditions or performance commitments on us as part of the approval process for the Brasil Telecom Transaction, it could materially and adversely affect our business and results of operations and prevent our company from achieving the anticipated benefits of the Brasil Telecom Transaction. Our acquisition of control of Brasil Telecom could make it difficult for you to evaluate our future prospects. Because our acquisition of control of Brasil Telecom was consummated in January 2009, the historical financial information included in this annual report with respect to our company does not include financial information regarding Brasil Telecom. Accordingly, the historical financial information included in this annual report may not reflect what our results of operations and financial condition would have been if this acquisition had occurred prior to December 31, 2008. The challenge inherent in integrating Brasil Telecom’s business into ours makes evaluating our future financial prospects difficult. You should consider our potential for future business success and operating profitability in light of the risks, uncertainties, expenses and difficulties typically encountered by recently combined companies. The acquisition of control of Brasil Telecom is subject to our ongoing due diligence review that may impact information included in or omitted from this annual report. Due to ANATEL regulations, we were prohibited from communicating with representatives of Brasil Telecom prior to the consummation of the Brasil Telecom Transaction, and therefore we did not have access to Brasil Telecom’s non-public information prior to that date. As a result, our ability to conduct due diligence with respect to Brasil Telecom prior to the consummation of the Brasil Telecom Transaction was extremely limited. As a result of our review to date, we have caused Brasil Telecom to change its criteria for estimating probable losses in connection with labor proceedings and the recognition of tax credits for the Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or ICMS (a state value-added tax on sales and services), in order to align their policies with ours. As a result, Brasil Telecom recorded additional provisions for labor proceedings and tax proceedings in 2009 in the amount of R$325 million and R$387 million, respectively. Additionally, as a result of certain judicial decisions in 2009, Brasil Telecom has reclassified the probability of loss in certain civil proceedings involving Companhia Riograndense de Telecomunicações, or CRT, the leading fixed-line telecommunications service company in the State of Rio Grande do Sul that Brasil Telecom acquired in 2000, from possible to probable. As a result, Brasil Telecom has recorded an additional provision in 2009 in the amount of R$1,153 million in connection with these proceedings. As a result of the increases in provision for contingencies in 2009 described above, Brasil Telecom expects that it will not comply with certain covenants set forth in its debt instruments as of June 30, 2009. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end of any fiscal quarter, Brasil Telecom is not in compliance with the covenants containing these ratios. Brasil Telecom is currently seeking waivers from these creditors in respect of the anticipated breach of these covenants. We cannot provide investors with any assurance that these waivers will be obtained. The instruments governing a substantial portion of our indebtedness contain cross-default or cross-acceleration clauses, such that the occurrence of an event of default under one of these instruments could trigger an event of default under other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness. We cannot assure you that our ongoing review will not reveal additional matters that would impact information included in this annual report or that, as a result, any information prepared following completion of our due diligence review would not differ materially from information included in this annual report. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could adversely impact our business, results of operations and financial condition. Substantially all of our operations and customers are located in Brazil, except for minor services provided outside of Brazil. Accordingly, our financial condition and results of operations are substantially dependent on Brazil’s economy. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement macroeconomic policies have often involved increases in interest rates, wage and price controls, currency devaluations, blocking access to bank accounts, imposing capital controls and limits on imports, among other things. We do not have any control over, and are unable to predict, which measures or policies the Brazilian government may adopt in the future. Our business, results of operations and financial condition may be adversely affected by changes in policies or regulations, or by other factors such as:
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Uncertainty over whether possible changes in policies or rules affecting these or other factors may contribute to economic uncertainties in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers. The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operating and financial results of businesses, such as our company. The term of Brazil’s current President, Luiz Inácio Lula da Silva, expires in January 2011, and under Brazilian law he is not permitted to run for another four-year term in the October 2010 elections. Uncertainty regarding the election of President Lula’s successor and speculation about the policies that may be implemented by the Brazilian federal or state governments could adversely affect our business, results of operations and financial condition. The global financial and credit crisis may adversely affect economic growth in Brazil, limit our access to the financial markets and, therefore, negatively impact our business and financial condition. The global financial and credit crisis and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. The ongoing crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with recent substantial losses in worldwide equity markets, including in Brazil, could lead to an extended worldwide economic recession or depression. A prolonged slowdown in economic activity in Brazil could reduce demand for some of our services, particularly broadband services if the rate of computer sales in Brazil declines, which would adversely affect our results of operations. We may also face significant liquidity challenges if conditions in the financial markets do not improve. Our ability to access the capital markets or the commercial bank lending markets may be severely restricted at a time when we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and business conditions. The financial and credit crisis could have an impact on the lenders under our existing credit facilities, on our customers, or on the ability of our suppliers to meet scheduled deliveries, causing them to fail to meet their obligations to us. If the global financial and credit crisis deepens further, it could have an adverse effect on the demand for our services and our ability to fund our planned growth.
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Table of ContentsDepreciation of the real may lead to substantial losses on our liabilities denominated in or indexed to foreign currencies. During the four decades prior to 1999, the Central Bank periodically devalued the Brazilian currency. Throughout this period, the Brazilian government implemented various economic plans and used various exchange rate policies, including sudden devaluations (such as daily and monthly adjustments), exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999, exchange rates have been set by the market. The exchange rate between the real and the U.S. dollar has varied significantly in recent years. For example, the real/U.S. dollar exchange rate increased from R$1.955 per U.S. dollar on December 31, 2000 to R$3.533 on December 31, 2002. The real appreciated against the U.S. dollar by 8.1% in 2004, 11.8% in 2005, 8.7% in 2006 and 17.1% in 2007. In 2008, primarily as a result of the international financial crisis, the real depreciated by 31.9% against the U.S. dollar and prompted foreign investors to remove billions of reais from the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. - Bolsa de Valores Mercadorias e Futuros), which we refer to as the BOVESPA. A significant amount of our financial assets and liabilities are denominated in or indexed to foreign currencies, primarily U.S. dollars and Japanese yen. As of December 31, 2008, R$3,975 million, or 19.8% of our financial indebtedness, was denominated in a foreign currency, excluding swap adjustments. As of December 31, 2008, R$882 million of Invitel’s consolidated financial indebtedness was denominated in a foreign currency, excluding swap adjustments. When the real depreciates against foreign currencies, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated long-term debt and foreign currency loans, and we incur gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated into reais. If significant depreciation of the real were to occur when the value of such liabilities significantly exceeds the value of such assets, including any financial instruments entered into for hedging purposes, we could incur significant losses, even if their value has not changed in their original currency. This could adversely affect our ability to meet certain of our payment obligations. A failure to meet certain of our payment obligations could trigger a default under certain financial covenants in our debt instruments, which could have a material adverse effect on our business and results of operations. Additionally, we currently have currency swaps in place for a portion of our foreign currency debt. If the cost of swap instruments increases substantially, we may be unable to maintain our hedge policy, resulting in an increased foreign currency exposure which could in turn lead to substantial foreign exchange losses. Depreciation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products and requiring recessionary government policies, including tighter monetary policy. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and balance of payments, as well as to a dampening of export-driven growth. In addition, a portion of our capital expenditures require us to acquire assets at prices denominated in or linked to foreign currencies, some of which are financed by liabilities denominated in foreign currencies, principally the U.S. dollar. We generally do not hedge against these risks. To the extent that the value of the real decreases relative to the U.S. dollar, it becomes more costly for us to purchase these assets, which could adversely affect our business and financial performance. If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be reduced. Government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market and our business and results of operations. Brazil has, in the past, experienced extremely high rates of inflation, with annual rates of inflation reaching as high as 2,708% in 1993 and 1,093% in 1994. Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy. Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. However, actions taken in an effort to control inflation, coupled with speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. More recently, Brazil’s rates of inflation, as measured by the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade Interna), or IGP-DI, published by Fundação
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Table of ContentsGetúlio Vargas, or FGV, were 12.1% in 2004, 1.2% in 2005, 3.8% in 2006, 7.9% in 2007 and 9.1% in 2008. According to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA, published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the Brazilian consumer price inflation rates were 7.5% in 2004, 5.7% in 2005, 3.1% in 2006, 4.5% in 2007 and 9.1% in 2008. If Brazil experiences substantial inflation in the future, our costs may increase and our operating and net margins may decrease. Although ANATEL regulations provide for annual price increases for most of our services, such increases are linked to inflation indexes, discounted by increases in our productivity. During periods of rapid increases in inflation, the price increases for our services may not be sufficient to cover our additional costs and we may be adversely affected by the lag in time between the incurrence of increased costs and the receipt of revenues resulting from the annual price increases. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy. Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance. Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. At December 31, 2008, we had, among other debt obligations, R$12,801 million of loans and financing and debentures that were subject to the Interbank Certificate of Deposit (Certificado Depositário Interbancário), or CDI, rate, an interbank rate, R$3,083 million of loans and financing and debentures that were subject to the long-term interest rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate, and R$3,136 million of loans and financing that were subject to the London Interbank Offered Rate, or LIBOR. At December 31, 2008, Invitel had, among other debt obligations, R$2,564 million of loans and financing that were subject to the TJLP rate, R$2,071 million of local commercial paper and debentures that were subject to the CDI rate and R$282 million of loans and financing that were subject to Japanese Yen LIBOR. The TJLP includes an inflation factor and is determined quarterly by the Central Bank. In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, in 2008, the CDI rate increased from 11.18% per annum at December 31, 2007 to 12.38% per annum at December 31, 2008. A significant increase in any of these interest rates, particularly the CDI rate, could adversely affect our financial expenses and negatively affect our overall financial performance. The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other emerging market countries, which may have a negative effect on the trading price of our preferred shares and the ADSs and may restrict our access to international capital markets. Economic and market conditions in other emerging market countries, especially those in Latin America, may influence the market for securities issued by Brazilian companies. Investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Adverse economic conditions in other emerging market countries have at times resulted in significant outflows of funds from Brazil. In 2008, certain Brazilian and Mexican companies announced significant losses in connection with currency derivatives as a result of the depreciation of the Mexican peso and the real against the U.S. dollar, respectively. As a result, a number of these companies have suffered financial distress and have sought or are contemplating seeking protection under various bankruptcy regimes. In addition, in October 2008, the Argentine government nationalized the Argentine private pension funds. Crises in other emerging countries or economic policies of other countries, in particular the United States, may adversely affect investors’ demand for securities issued by Brazilian companies, including our preferred shares and the ADSs. Any of these factors could adversely affect the market price of our preferred shares and the ADSs and impede our ability to access the international capital markets and finance our operations in the future on terms acceptable to us or at all.
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Table of ContentsRestrictions on the movement of capital out of Brazil may impair our ability to service certain debt obligations. Brazilian law provides that whenever there exists, or there is a serious risk of, a material imbalance in Brazil’s balance of payments, the Brazilian government may impose restrictions for a limited period of time on the remittance to foreign investors of the proceeds of their investments in Brazil as well as on the conversion of the real into foreign currencies. The Brazilian government imposed such a restriction on remittances for approximately six months in 1989 and early 1990. The Brazilian government may in the future restrict companies from paying amounts denominated in foreign currency or require that any such payment be made in reais. Many factors could affect the likelihood of the Brazilian government imposing such exchange control restrictions, including: the extent of Brazil’s foreign currency reserves; the availability of sufficient foreign exchange on the date a payment is due; the size of Brazil’s debt service burden relative to the economy as a whole; and political constraints to which Brazil may be subject. There can be no certainty that the Brazilian government will not take such measures in the future. A more restrictive policy could increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-denominated debt obligations and other liabilities. Our foreign-currency denominated debt represented 19.8% of our indebtedness on a consolidated basis at December 31, 2008. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our class A preferred shares and the ADSs. In addition, a more restrictive policy could hinder or prevent the Brazilian custodian of the preferred shares underlying the ADSs or holders who have exchanged the ADSs for the underlying preferred shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our preferred shares will hold the reais that it cannot convert for the account of holders of the ADSs who have not been paid. Neither the custodian nor the depositary will be required to invest the reais or be liable for any interest. Risks Relating to Our Preferred Shares and the ADSs Our preferred shares and the ADSs have limited voting rights. Under the Brazilian Corporation Law and our by-laws, holders of our preferred shares and, consequently, the ADSs are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of preferred shares, such as modifying basic terms of our preferred shares or creating a new class of preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council. Holders of our preferred shares and the ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies or the declaration of dividends. See “Item 10. Additional Information—Voting Rights.” Holders of the ADSs may find it difficult to exercise even their limited voting rights at our shareholders’ meetings. Under Brazilian law, only shareholders registered as such in our corporate books may attend our shareholders’ meetings. All preferred shares underlying the ADSs are registered in the name of The Bank of New York Mellon, as depositary of our ADS program. ADS holders may exercise the limited voting rights with respect to our preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of the ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs will receive notice of a shareholders’ meeting by mail from the depositary following our notice to the American Depositary Receipt, or ADR, depositary requesting the ADR depositary to inform ADS holders of the shareholders’ meeting. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of preferred shares. If it fails to receive timely voting instructions for all or part of the ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
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Table of ContentsIn the limited circumstances in which holders of the ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote our preferred shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and they will have no recourse if the preferred shares underlying their ADSs are not voted as requested. Holders of ADSs or preferred shares in the United States may not be entitled the same preemptive rights as Brazilian shareholders have, pursuant to Brazilian legislation, in the subscription of shares resulting from capital increases made by us. Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be permitted to allow holders of ADSs or preferred shares in the United States to exercise any preemptive rights in any future capital increase unless (1) we file a registration statement for an offering of shares resulting from the capital increase with the U.S. Securities and Exchange Commission, or the SEC, or (2) the offering of shares resulting from the capital increase qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of ADSs or preferred shares in the United States that we will file a registration statement with the SEC to allow them to participate in any of our capital increases. As a result, the equity interest of such holders in us may be diluted proportionately. If holders of our ADSs exchange them for preferred shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages. The Brazilian custodian for the preferred shares underlying the ADSs must obtain an electronic registration number with the Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the preferred shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of the ADSs decide to exchange them for the underlying preferred shares, they will only be entitled to rely on the custodian’s certificate of registration with the Central Bank for five business days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic certificate of foreign capital registration in connection with the preferred shares, which may result in expenses and may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.” Also, if holders of the ADSs that exchange the ADSs for our preferred shares do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the proceeds from any sale of, our preferred shares. See “Item 10. Additional information—Exchange Controls” and “Item 10. Additional information—Taxation—Brazilian Tax Considerations.” As a holding company, we may face limitations on our ability to receive distributions from our subsidiaries. We are a holding company with no revenue-producing operations other than those of our operating subsidiaries and, therefore, are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to meet our obligations. We will only be able to distribute dividends to our shareholders if we receive dividends or other cash distributions from our operating subsidiaries. The dividends that our operating subsidiaries may distribute to us depend on our operating subsidiaries generating sufficient profits in any given fiscal year. Dividends can be paid out from accumulated profits from previous years or from capital reserves. Such profits are calculated and paid in accordance with the Brazilian Corporation Law and the provisions of the by-laws of each of our operating subsidiaries.
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Table of ContentsHolders of the ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights. Holders of the ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporation Law. Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our preferred shares underlying the ADSs under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions. Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our preferred shares and the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries. Holders of the ADSs may face difficulties in serving process on or enforcing judgments against us and other persons. We are organized under the laws of Brazil, and all of the members of our board of directors and all of our executive officers and our independent public accountants reside or are based in Brazil. The vast majority of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of our assets and all of our directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our board of directors or executive officers than would shareholders of a U.S. corporation. In addition, there is doubt as to the applicability and enforceability of civil liabilities under the Securities Act or the Exchange Act through lawsuits filed before Brazilian courts. Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of the ADSs and preferred shares. According to Law No. 10,833, enacted on December 29, 2003, if a nonresident of Brazil disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another nonresident. Dispositions of ADSs between nonresidents, however, are currently not subject to taxation in Brazil. Nevertheless, in the event that the concept of “disposition of assets” is interpreted to include the disposition between nonresidents of assets located outside Brazil, this tax law could result in the imposition of withholding taxes in the event of a disposition of the ADSs made between nonresidents of Brazil. Due to the fact that Law No. 10,833/2003 has no judicial guidance as to its application to date, we are unable to predict whether an interpretation applying such tax laws to dispositions of the ADSs between nonresidents could ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
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Table of ContentsThe relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our preferred shares and the ADSs. The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The BOVESPA, which is the principal Brazilian stock exchange, had a market capitalization of R$1,375.3 billion (US$588.5 billion) at December 31, 2008 and an average daily trading volume of US$3.1 billion for 2008. In comparison, The New York Stock Exchange, or the NYSE, had a market capitalization of US$16.7 trillion at December 31, 2008 and an average daily trading volume of US$152.6 billion for 2008. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 52% of the aggregate market capitalization of the BOVESPA at December 31, 2008. The ten most widely traded stocks in terms of trading volume accounted for approximately 53% of all shares traded on the BOVESPA in 2008. These market characteristics may substantially limit the ability of holders of the ADSs to sell preferred shares underlying the ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of the ADSs themselves.
Overview We are the largest telecommunications service provider in Brazil. We are the largest telecommunications provider in Region I in Brazil, based on revenues and customers as of and for the year ended December 31, 2008, according to information available from ANATEL and other publicly available information. As a result of our acquisition of control of Brasil Telecom on January 8, 2009, we are also the largest telecommunications service provider in Region II in Brazil, based on revenues and customers as of and for the year ended December 31, 2008, according to information available from ANATEL and other publicly available information. We commenced offering mobile telecommunications services in Region III in October 2008. We offer a range of integrated telecommunications services that includes fixed-line and mobile telecommunications services, data transmission services (including broadband access services), ISP services and other services, for residential customers, small, medium and large companies, and governmental agencies. We operate under the brand name “Oi”, which we adopted in February 2007 as the sole brand for all of our services. We have begun using the “Oi” brand name for the marketing of some of Brasil Telecom’s services and expect to use the “Oi” brand name for the marketing of substantially all of Brasil Telecom’s services following the completion of the integration of its operation into ours. According to IBGE:
On January 8, 2009, we completed the Brasil Telecom Transaction in which we acquired all of the outstanding shares of Invitel and, as a result, we acquired control of Brasil Telecom. Brasil Telecom provides fixed-line telecommunications services, as well as broadband services, mobile telecommunications services and a variety of data transmission services, primarily in Region II. See “—Our History and Development—Acquisition of Brasil Telecom.” We intend to integrate the operations of Telemar and Brasil Telecom as soon as possible. See “Item 3.
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Table of ContentsKey Information—Risk Factors—Risks Relating to the Brasil Telecom Transaction.” Financial data of TNL presented in this annual report as of or for periods ending prior to January 8, 2009 do not include the financial results of Invitel and its consolidated subsidiaries, including Brasil Telecom. Fixed-Line Telecommunications Services Our traditional fixed-line telecommunications business in Regions I and II includes local and long-distance services, network usage services (interconnection) and public telephones, in accordance with the concessions and authorizations granted to us by ANATEL. We believe we were one of the largest fixed-line telecommunications companies in South America in terms of total number of lines in service as of December 31, 2008. Based on our 13.9 million fixed lines in service as of December 31, 2008, we were the principal fixed-line telecommunications service provider in Region I, with an estimated market share of 83.9% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. As a result of our acquisition of control of Brasil Telecom on January 8, 2009, we are now also the principal fixed-line telecommunications services provider in Region II. Brasil Telecom had 8.1 million fixed lines in service in Region II as of December 31, 2008 and an estimated market share of 85.0% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. For the year ended December 31, 2008, our highly mature fixed-line business segment generated R$17.3 billion in gross operating revenue, which represented a decrease of 3.1% compared to the year ended December 31, 2007. Mobile Telecommunications Services We offer mobile telecommunications services throughout Brazil. Based on our 24.4 million mobile subscribers in Region I as of December 31, 2008, we believe that we are one of the principal mobile telecommunications service providers in Region I, with an estimated market share of 30.4% of the total number of mobile subscribers in this region as of December 31, 2008, according to information available from ANATEL. Our position in the mobile telecommunications services market in Region I has been enhanced by our acquisition on April 3, 2008, of control of Amazônia Celular, which operated in five states in the northern section of Region I. As of March 31, 2008, Amazônia Celular had 1.5 million mobile subscribers. We commenced offering mobile telecommunications services in Region III in October 2008 and had 2.0 million mobile subscribers as of December 31, 2008 and an estimated market share of 5.3% of the total number of mobile subscribers in this region as of December 31, 2008, according to information available from ANATEL. As a result of our acquisition of control of Brasil Telecom on January 8, 2009, we believe that we are one of the principal mobile telecommunications services providers in Region II. Brasil Telecom had 5.6 million mobile subscribers as of December 31, 2008 and an estimated market share of 14.4% of the total number of mobile subscribers in this region as of December 31, 2008, according to information available from ANATEL. For the year ended December 31, 2008, our mobile services business generated R$6.4 billion in gross operating revenue, which represented an increase of 44.3% compared to the year ended December 31, 2007. Data Transmission Services We offer a variety of high-speed data transmission services. Our broadband services, primarily utilizing Asymmetric Digital Subscriber Line, or ADSL, technology, are marketed in Region I under the brand name “Oi Velox.” As of December 31, 2008, we had 2.0 million ADSL subscribers, representing 14.1% of our fixed lines in service at that date. As a result of our acquisition of control of Brasil Telecom on January 8, 2009, we now also offer broadband services, primarily utilizing ADSL technology, in Region II under the brand name “Turbo.” As of December 31, 2008, Brasil Telecom had 1.8 million ADSL subscribers, representing 22.2% of Brasil Telecom’s fixed lines in service at that date. Additionally, we provide voice and data services to corporate clients throughout Brazil. For the year ended December 31, 2008, our data transmission services business generated R$3.4 billion in gross operating revenue, which represented an increase of 18.0% compared to the year ended December 31, 2007. Other Services Following our acquisition of control of Brasil Telecom on January 8, 2009, we operate a fiber optic cable system that connects the United States, Bermuda, Brazil and Venezuela, and we operate an internet portal under the brand name “iG” that was the second largest internet portal in Brazil in terms of the number of unique visitors in 2008, according to Ibope/NetRatings.
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Table of ContentsThrough our subsidiary WAY TV Belo Horizonte S.A., or WAY TV, we provide subscription television services and broadband internet access to the residential, commercial and corporate market segments in the cities of Belo Horizonte, Poços de Caldas, Uberlândia and Barbacena in the State of Minas Gerais. WAY TV uses a hybrid network of fiber optic and bidirectional coaxial cable (HFC) that allows it to offer a broad range of interactive services, such as distance learning, telephony and telemedicine, among others. In September 2008, ANATEL authorized us to provide subscription television services throughout Brazil, using direct-to-home, or DTH, satellite technology. We currently plan to launch these services in the second half of 2009. Our principal executive office is located at Rua Humberto de Campos, 425/8° andar, Leblon 22430-190 Rio de Janeiro, RJ, Brazil, and our telephone number at this address is (55-21) 3131-1208. Our History and Development Prior to the formation in 1972 of Telecomunicações Brasileiras S.A., or Telebrás, the Brazilian state-owned telecommunications monopoly, there were more than 900 telecommunications companies operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating subsidiaries acquired almost all of the other telecommunications companies in Brazil and thus achieved a monopoly in providing public telecommunications services in almost all areas of the country. Beginning in 1995, the Brazilian government undertook a comprehensive reform of Brazil’s telecommunications regulations. In July 1997, Brazil’s Congress adopted the Brazilian General Telecommunications Law (Lei Geral de Telecomunicações), together with the regulations, decrees, orders and plans on telecommunications issued by Brazil’s executive branch, collectively the Telecommunications Regulatory Framework, which provided for the establishment of a comprehensive regulatory framework introducing competition into the Brazilian telecommunications industry and promoting the privatization of Telebrás and its subsidiaries. Privatization of Telebrás In January 1998, in preparation for the restructuring and privatization, Telebrás spun-off its previously integrated mobile telecommunications operations from its fixed-line operations into separate companies. In May 1998, Telebrás was restructured to form 12 new holding companies, or the New Holding Companies, by means of a procedure under Brazilian corporate law called cisão, or spin-off. Virtually all of the assets and liabilities of Telebrás were allocated to the New Holding Companies, including Telebrás’s interest in its operating subsidiaries. The New Holding Companies consisted of:
We are one of the New Holding Companies in the fixed-line telecommunications business. In the restructuring and privatization of Telebrás, we were allocated all of the share capital held by Telebrás in the operating subsidiaries that provided fixed-line telecommunications service in Region I.
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Table of ContentsIn August 1998, the Brazilian government privatized Telebrás by selling all of the voting shares that it held in the New Holding Companies, including us, to private-sector buyers. The Brazilian government’s shares in our corporate capital, which amounted to approximately 52% of our voting shares, were purchased by Consortium Telemar, a consortium comprised of Construtora Andrade Gutierrez S.A., Inepar S.A. Indústria e Construções, Macal Investimentos e Participações Ltda., Fiago Participações S.A., or Fiago, Brasil Veículos Companhia de Seguros and Companhia de Seguros Aliança do Brasil. Consortium Telemar paid R$3.4 billion for the Brazilian government’s shares in our corporate capital. Acquisition by TmarPart In July 1999, TmarPart, a closely held Brazilian company, acquired the equity interests in TNL owned by the members of Consortium Telemar in exchange for cash, shares of TmarPart and the assumption of certain debt obligations by TmarPart. The primary corporate purpose of TmarPart is to hold shares of TNL. For a discussion of the entities that own equity interests in TmarPart, see “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—TmarPart.” Corporate Reorganization of Telemar Following its formation, TNL provided fixed-line telecommunications services through 16 separate operating subsidiaries, each of which provided telecommunications services in one of the 16 states of Region I. In August 2001, TNL implemented a corporate reorganization, which resulted in all of the other fixed-line operating companies being merged into our subsidiary Telecomunicações do Rio de Janeiro S.A., or Telerj. In September 2001, Telerj changed its name to Telemar Norte Leste S.A. Entry into the Mobile Services Business In November 2000, we established our wholly-owned subsidiary TNL PCS S.A., or Oi, to provide personal mobile services (Serviço Móvel Pessoal) in Region I. In March 2001, Oi was granted an authorization by ANATEL to provide personal mobile services in Region I utilizing Band D following Oi’s successful bid of approximately R$1.1 billion in an auction held for the authorization and the related radio frequency license. Oi commenced operations in June 2002. Expansion of Data Transmission Network We acquired Pegasus Telecom S.A., or Pegasus, in December 2002. Prior to that time, we held preferred shares of Pegasus representing 24.4% of its share capital. In November 2005, Pegasus merged with and into Oi. Pegasus was a broadband data transmission services provider that primarily served corporate clients in major cities in Region II and Region III. Because Pegasus’s fiber-optic network was 100% compatible with the technology used by our existing data network, this acquisition allowed us to provide fully integrated data transmission services to our corporate clients on a nationwide basis. Investment in Infrastructure Joint Venture At the time of our acquisition of Pegasus in December 2002, Pegasus owned 18.1% of the share capital of Companhia AIX de Participações S.A., or AIX. In December 2003, we acquired additional shares of AIX for R$1.00, increasing our interest in the share capital of AIX to 50%. AIX provides infrastructure services to Telemar and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo. Under Brazilian GAAP, we proportionally consolidate the results of AIX in our consolidated financial statements. Entry into the ISP business In February 2005, Oi Internet, an ISP and a wholly-owned subsidiary of Telemar, commenced its ISP operations under the brand name “Oi Internet.”
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Table of ContentsEntry into the Subscription Television Business In July 2006, TNL PCS Sub, our wholly-owned subsidiary, acquired all of the share capital of WAY TV through an auction process on the BOVESPA for an aggregate purchase price of R$132 million. However, at that time the purchase price and the shares of WAY TV were deposited in escrow pending ANATEL’s approval of this acquisition. In November 2007, ANATEL authorized our acquisition of WAY TV and the amounts deposited in escrow and the shares of WAY TV were released. WAY TV provides subscription television services and broadband internet access to the residential, commercial and corporate market segments in the cities of Belo Horizonte, Poços de Caldas, Uberlândia and Barbacena in the State of Minas Gerais. WAY TV uses a hybrid network of fiber optic and bidirectional coaxial cable (HFC) that allows it to offer a broad range of interactive services, such as distance learning, telephony and telemedicine, among others. Our acquisition of WAY TV is part of our strategy to offer complete and converging solutions to our customers. Acquisition of Mobile Payment Business In December 2007, we purchased all of the outstanding shares of Paggo Empreendimentos S.A., or Paggo, for an aggregate purchase price of R$75 million, which we paid in February 2008. Paggo is a holding company that owns all of the share capital of Paggo Acquirer Gestão de Meios de Pagamentos Ltda. and Paggo Administradora de Crédito Ltda., which together operate the Paggo System of Credits and Payments, or the Paggo System. The Paggo System permits the use of mobile phones to pay for goods and services, providing a new range of services to complement regular mobile telecommunications services. The acquisition of this system is consistent with our strategy to extend the portfolio of services we offer to our customers. Acquisition of Amazônia Celular In April 2008, we purchased 1,292,679 common shares and 3,715 preferred shares of Tele Norte Celular Participações S.A., or TNCP, representing 51.9% of the common shares, 0.1% of the preferred shares and 19.3% of the total shares issued by TNCP, for an aggregate purchase price of R$129 million. At the time of this acquisition, TNCP was the controlling shareholder of Amazônia Celular, a mobile services provider in Area 8 of Region I, consisting of the Brazilian states of Amazonas, Roraima, Amapá, Pará and Maranhão. In addition, we purchased certain rights for the subscription of new shares to be issued by TNCP, as set forth in CVM Ruling No. 319/1999, for an aggregate purchase price of R$23 million. On June 4, 2009, this transaction was approved by ANATEL without restrictions and the transaction is currently being analyzed by CADE for final approval. Voluntary Tender Offers On July 18, 2008, we announced the commencement of a voluntary tender offer for any and all outstanding preferred shares of TNCP at a purchase price of R$33.00 per share. The auction with respect to this tender offer took place on the BOVESPA on August 19, 2008. In the auction, we acquired 3,951,923 preferred shares of TNCP, representing 93.9% of the outstanding preferred shares of TNCP and 59.0% of the outstanding share capital of TNCP, for an aggregate purchase price of R$130 million. Under the rules of the CVM, because we acquired more than two-thirds of the preferred shares of TNCP held by public shareholders, any holder of TNCP preferred shares was permitted to exercise a shareholder put right for the three-month period immediately following the date of the auction for the TNCP preferred shares. Holders of TNCP preferred shares that exercised the shareholder put right were entitled to receive the tender offer price of R$33.00, adjusted by the CDI rate from the settlement date of the auction to the date payment was made. As a result of the exercise of these shareholder put rights, we acquired an additional 191,666 preferred shares of TNCP for an aggregate purchase price of R$7 million. On September 22, 2008, we announced the commencement of a voluntary tender offer for any and all outstanding preferred shares of Amazônia Celular at a purchase price of R$38.00 per share. The auction with respect to this tender offer took place on the BOVESPA on October 23, 2008. In the auction, we acquired 921,014 preferred shares of Amazônia Celular, representing 25.5% of the outstanding preferred shares of Amazônia Celular and 15.6% of the outstanding share capital of Amazônia Celular, for an aggregate purchase price of R$35 million.
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Table of ContentsUnder the rules of the CVM, because we acquired more than two-thirds of the preferred shares of Amazônia Celular held by public shareholders, any holder of Amazônia Celular preferred shares was permitted to exercise a shareholder put right for the three-month period immediately following the date of the auction for the Amazônia Celular preferred shares. Holders of Amazônia Celular preferred shares that exercised the shareholder put right were entitled to receive the tender offer price of R$38.00, adjusted by the CDI rate from the settlement date of the auction to the date payment was made. As a result of the exercise of these shareholder put rights, we acquired an additional 50,777 preferred shares of Amazônia Celular for an aggregate purchase price of R$2 million. Mandatory Tender Offers Under Article 254-A of the Brazilian Corporation Law and CVM Instruction No. 361, of March 5, 2002, as amended, we were required to offer to purchase any and all common shares of TNCP held by public shareholders and any and all common shares of Amazônia Celular held by public shareholders as a result of our acquisition of control over TNCP and Amazônia Celular. On September 16, 2008, we announced the commencement of mandatory tender offers for (1) any and all outstanding common shares of TNCP at a purchase price of R$79.51 per share (adjusted by the fluctuation in average daily rate of the CDI, from April 3, 2008 until the date payment was made), and (2) any and all outstanding common shares of Amazônia Celular at a purchase price of R$121.61 per share (adjusted by the fluctuation in average daily rate of the CDI from April 3, 2008 until the date payment was made). The auctions with respect to these tender offers took place on the BOVESPA on January 16, 2009. In the auctions, we acquired (1) 1,175,018 common shares of TNCP, representing 47.1% of the outstanding common shares of TNCP and 17.5% of the outstanding share capital of TNCP, for an aggregate purchase price of R$103 million, and (2) 80,868 common shares of Amazônia Celular, representing 3.6% of the outstanding common shares of Amazônia Celular and 1.4% of the outstanding share capital of Amazônia Celular, for an aggregate purchase price of R$11 million. Following the acquisitions made through these tender offers, we owned an aggregate of 98.7% of the outstanding share capital of TNCP, including 99.0% of the outstanding common shares of TNCP. Through this ownership interest in TNCP, together with other shares of Amazônia Celular that we directly acquired in the voluntary tender offers and the mandatory tender offers, we owned an aggregate of 92.8% of the outstanding share capital of Amazônia Celular, including 93.3% of the outstanding common shares of Amazônia Celular. Corporate Reorganization of TNCP, Amazônia Celular and Oi On March 9, 2009:
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Table of ContentsAcquisition of Brasil Telecom On April 25, 2008, each of the shareholders of Invitel and Credit Suisse as agent on behalf of Telemar, acting as principal, entered into the Share Purchase Agreement, under which Credit Suisse agreed to purchase all of the outstanding shares of Invitel and certain shares of Brasil Telecom Holding owned by the shareholders of Invitel. As of December 31, 2008, Invitel owned 100% of the outstanding shares of Solpart, which owned 52.0% of the outstanding voting share capital, representing 19.0% of the outstanding share capital, of Brasil Telecom Holding, which, in turn, owned 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom. Open Market Purchases of Preferred Shares of Brasil Telecom Holding and Brasil Telecom Between April 25, 2008 and June 17, 2008, we acquired (1) 55,819,400 preferred shares of Brasil Telecom Holding, representing 24.3% of the outstanding preferred shares of Brasil Telecom Holding and 15.4% of the share capital of Brasil Telecom Holding, for an aggregate purchase price of R$1,425 million in transactions conducted over the BOVESPA, and (2) 45,590,200 preferred shares of Brasil Telecom, representing 15.3% of the outstanding preferred shares of Brasil Telecom and 8.3% of the share capital of Brasil Telecom, for an aggregate purchase price of R$898 million in transactions conducted over the BOVESPA. Tender Offers for Preferred Shares of Brasil Telecom Holding and Brasil Telecom On June 19, 2008, we announced the commencement of voluntary tender offers for (1) up to 20,826,442 preferred shares of Brasil Telecom Holding at a purchase price of R$30.47 per share, and (2) up to 13,366,365 preferred shares of Brasil Telecom at a purchase price of R$23.42 per share. The auctions with respect to these tender offers took place on the BOVESPA on July 22, 2008. In the auctions, we acquired (1) 20,826,442 preferred shares of Brasil Telecom Holding, representing 9.1% of the outstanding preferred shares of Brasil Telecom Holding and 5.7% of the outstanding share capital of Brasil Telecom Holding, for an aggregate purchase price of R$635 million, and (2) 13,366,365 preferred shares of Brasil Telecom, representing 4.5% of the outstanding preferred shares of Brasil Telecom and 2.4% of the outstanding share capital of Brasil Telecom, for an aggregate purchase price of R$313 million. Closing of the Share Purchase Agreement On November 21, 2008, pursuant to an Agency Agreement between us and Credit Suisse, Credit Suisse assigned all of its rights and obligations under the Share Purchase Agreement to us and we assumed these rights and obligations. On January 8, 2009, we acquired all of the outstanding shares of Invitel and 12,185,836 common shares of Brasil Telecom Holding owned by the shareholders of Invitel for an aggregate purchase price of R$5,371 million. Following this acquisition, we own an aggregate of 43.5% of the outstanding share capital of Brasil Telecom Holding, including 61.2% of the outstanding common shares of Brasil Telecom Holding. In addition to the 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom that Brasil Telecom Holding owns directly, we own 19.8% of the outstanding preferred shares, representing 10.7% of the outstanding share capital, of Brasil Telecom. Overview of Invitel, Solpart, Brasil Telecom Holding and Brasil Telecom Invitel is a holding company, substantially all of the assets of which consist of its shares in Solpart. Solpart is a holding company, substantially all of the assets of which consist of its shares in Brasil Telecom Holding. Brasil Telecom Holding is a holding company, substantially all of the assets of which consist of its shares in Brasil Telecom and direct ownership of equity interests in some of Brasil Telecom’s subsidiaries. Invitel’s net operating revenue was R$10,297 million in 2006, R$11,059 million in 2007 and R$11,297 million in 2008. Brasil Telecom is the largest telecommunications service provider in Region II in Brazil, based on revenues and customers as of and for the year ended December 31, 2008, according to information available from ANATEL and other publicly available information. Brasil Telecom offers a range of integrated telecommunications services that is substantially similar to the services that we offer.
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Table of ContentsBased on Brasil Telecom’s 8.1 million fixed lines in service as of December 31, 2008, Brasil Telecom was the principal fixed-line telecommunications service provider in Region II, with an estimated market share of 51.3% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. For the year ended December 31, 2008, Brasil Telecom’s highly mature fixed-line business generated R$10,775 million in gross operating revenue, which represented a decrease of 1.4% compared to the year ended December 31, 2007. Brasil Telecom offers mobile telecommunications services in Region II through its subsidiary Brasil Telecom Mobile. Brasil Telecom had 5.6 million mobile subscribers as of December 31, 2008 and an estimated market share of 14.4% of the total number of mobile subscribers in this region as of December 31, 2008, according to information available from ANATEL. For the year ended December 31, 2008, Brasil Telecom’s mobile services business generated R$2,561 million in gross operating revenue, which represented an increase of 4.7% compared to the year ended December 31, 2007. Brasil Telecom offers a variety of high-speed data transmission services, including services offered by its subsidiaries Brasil Telecom Serviços de Internet S.A. and Brasil Telecom Comunicação Multimídia Ltda. Brasil Telecom’s broadband services, primarily utilizing ADSL technology, are sold in Region II under the brand name “Turbo.” As of December 31, 2008, Brasil Telecom had 1.8 million ADSL subscribers. Brasil Telecom also provides voice and data services to corporate clients throughout Brazil through its network in Region II, through our network in Region I, and through cooperation agreements with other telecommunications network operators in Region III. For the year ended December 31, 2008, Brasil Telecom’s data transmission services business generated R$4,070 million in gross operating revenue, which represented an increase of 36.5% compared to the year ended December 31, 2007. Brasil Telecom operates a fiber optic cable system that connects the United States, Bermuda, Brazil and Venezuela through its subsidiaries Brasil Telecom Cabos Submarinos Ltda., Brasil Telecom Subsea Cable System (Bermuda) Ltd., Brasil Telecom of America Inc. and Brasil Telecom de Venezuela S.A., and an internet portal through its subsidiary Internet Group do Brasil S.A. under the brand name “iG” that was the second largest internet portal in Brazil in terms of the number of unique visitors in 2008 according to Ibope/NetRatings. Financial Impact of the Acquisition As a result of our acquisition of all of the share capital of Invitel on January 8, 2009, we will consolidate the results of Invitel, Solpart, Brasil Telecom Holding and Brasil Telecom into our financial statements as from January 8, 2009. As of December 31, 2008, Invitel had consolidated total assets of R$20,226 million and consolidated indebtedness of R$5,842 million. For the year ended December 31, 2008, Invitel had consolidated net operating revenues of R$11,297 million, consolidated operating income of R$1,214 million and a net loss of R$69 million. Regulatory Approvals CADE. Under Brazilian antitrust regulations, the Brasil Telecom Transaction is first analyzed by ANATEL to assess the effects on competition of our acquisition of control of Brasil Telecom, following which it will be submitted to CADE, the Brazilian antitrust authority, for final approval. As of the date of this annual report, ANATEL had not yet submitted its findings to CADE. Brazilian law permitted us to consummate this transaction prior to receiving the final approval from CADE. ANATEL and CADE will determine whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affects consumers in these markets.
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Table of ContentsOn December 10, 2008, we entered into an Agreement for Maintenance of the Reversibility of Operation (Acordo de Preservação de Reversibilidade da Operação) with CADE relating to our acquisition of control of Brasil Telecom. Under this agreement:
ANATEL. On December 19, 2008, ANATEL granted its approval for our acquisition of control of Brasil Telecom, subject to a number of conditions contained in the order granting the approval, some of which we have already fulfilled. The most significant of the remaining conditions require us to:
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Table of ContentsTender Offers for Common Shares of Brasil Telecom Holding and Brasil Telecom Under Article 254-A of the Brazilian Corporation Law and CVM Instruction No. 361, of March 5, 2002, as amended, we were required to offer to purchase any and all common shares of Brasil Telecom Holding and Brasil Telecom held by public shareholders as a result of our acquisition of control over Brasil Telecom Holding and Brasil Telecom. On May 22, 2009, we announced the commencement of mandatory tender offers for (1) any and all outstanding common shares of Brasil Telecom Holding, and (2) any and all outstanding common shares of Brasil Telecom. The auctions with respect to these tender offers took place on the BOVESPA on June 23, 2009. In the auctions, we acquired (1) 40,452,227 common shares of Brasil Telecom Holding, representing 30.5% of the outstanding common shares of Brasil Telecom Holding and 11.2% of the outstanding share capital of Brasil Telecom Holding, for an aggregate purchase price of R$2,618 million, and (2) 630,872 common shares of Brasil Telecom, representing 0.3% of the outstanding common shares of Brasil Telecom and 0.1% of the outstanding share capital of Brasil Telecom, for an aggregate purchase price of R$38 million. Following the acquisitions made through these tender offers, we own an aggregate of 54.7% of the outstanding share capital of Brasil Telecom Holding, including 91.7% of the outstanding common shares of Brasil Telecom Holding. In addition to the 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom that Brasil Telecom Holding owns directly, we own 10.9% of the outstanding share capital, including 0.3% of the outstanding voting share capital, of Brasil Telecom. The Corporate Reorganization Telemar has announced that it intends to conduct a corporate reorganization of its subsidiaries that control Brasil Telecom Holding and Brasil Telecom for the purpose of simplifying its corporate structure. As part of this reorganization, Telemar intends to cause (1) the merger (incorporação) of Brasil Telecom holding with and into Brasil Telecom, (2) a mandatory share exchange (incorporação de ações) to be completed between Brasil Telecom and Coari Participações S.A., and (3) the merger (incorporação) of Coari Participações S.A. with and into Telemar In connection with the proposed share exchange and mergers, Telemar plans to file or cause to be filed with the SEC (1) one or more registration statements on Form F-4, containing a prospectus which will be mailed to the shareholders of Brasil Telecom Holding and Brasil Telecom, and (ii) other documents regarding the proposed share exchange and mergers. We urge investors and security holders to carefully read the relevant prospectus and other relevant materials when they become available as they will contain important information about the proposed share exchange and mergers. Investors and security holders will be able to obtain the documents filed with the SEC regarding the proposed share exchange and mergers, when available, free of charge on the SEC’s website at www.sec.gov or from Telemar. We believe that shares of Telemar to be received by the shareholders of Brasil Telecom Holding and Brasil Telecom as a result of the share exchange and the mergers will be significantly more liquid on the BOVESPA and the NYSE than the shares currently held by the shareholders of Brasil Telecom Holding and Brasil Telecom. Corporate Structure The following chart presents our corporate structure and principal subsidiaries as of July 6, 2009. The percentages in bold italics represent the percentage of the voting capital owned directly and indirectly by the parent company of each entity, and the percentages not in bold italics represent the percentage of the total share capital owned directly and indirectly by the parent company of each entity.
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Our Service Areas Our concessions and authorizations from the Brazilian government, including those of Brasil Telecom, of which we acquired control on January 8, 2009, allow us to provide:
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In addition, we have authorizations to provided fixed-line local telecommunications services in Region III. Region I consists of 16 states of Brazil located in the northeastern and part of the northern and southeastern regions of Brazil. Region I covers an area of approximately 5.4 million square kilometers, which represents approximately 64% of the country’s total land area and accounted for 40.0% of Brazil’s GDP in 2006. The population of Region I was 100.8 million as of April 1, 2007, which represented 54.8% of the total population of Brazil as of that date. In 2006, per capita income in Region I was approximately R$8,285, varying from R$4,213 in the State of Piauí to R$17,695 in the State of Rio de Janeiro. Region II consists of the Federal District of Brazil and nine states of Brazil located in the western, central and southern regions of Brazil. Region II covers an area of approximately 2.9 million square kilometers, which represents approximately 33.5% of the country’s total land area and accounted for approximately 26.2% of Brazil’s GDP in 2006. The population of Region II was 43.5 million as of April 1, 2007, which represented 23.6% of the total population of Brazil as of that date. In 2006, per capita income in Region II was approximately R$13,626, varying from R$7,041 in the State of Acre to R$37,600 in the Federal District. Region III consists of the State of São Paulo. Region III covers an area of approximately 200,000 square kilometers, which represents approximately 2.9% of the country’s total land area and accounted for approximately 33.9% of Brazil’s GDP in 2006. The population of Region III was 39.8 million as of April 1, 2007, which represented 21.6% of the total population of Brazil as of that date. In 2006, per capita income in Region III was approximately R$19,548. The following table sets forth key economic data, compiled by IBGE, for the Federal District of Brazil and each of the Brazilian states.
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Source: IBGE.
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Table of ContentsSet forth below is a map of Brazil showing the areas in Region I, Region II and Region III.
Our business, financial condition, results of operations and prospects depend in part on the performance of the Brazilian economy. See “Item 3. Key Information—Risk Factors — Risks Relating to Brazil.” Our Services Our telecommunications services consist of:
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Local Fixed-Line Services As of December 31, 2008, we had approximately 13.9 million local fixed-line customers in Region I, and Brasil Telecom had 8.1 million local fixed-line customers in Region II. Although we continue to assess our strategic plans with regard to providing such services in Region III, we do not currently plan to offer local fixed-line services to residential customers in Region III due to the size of the investment that would be required. Local fixed-line services include installation, monthly subscription, metered services, collect calls and supplemental local services. Metered services include local calls that originate and terminate within a single local area. ANATEL has divided Region I into 2,920 local areas and Region II into 1,772 local areas. Under our concession agreements, we and Brasil Telecom are required to offer two local fixed-line plans to users: the Basic Plan per Minute (Plano Básico de Minutos) and the Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória), each of which includes installation charges, monthly subscription charges, and charges for local minutes. As of December 31, 2008, 54.0% of our fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan, and 48.7% of Brasil Telecom’s fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan. In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we offer a variety of alternative fixed-line plans that are designed to meet our customers’ usage profiles. As of December 31, 2008, 46.0% of our fixed-line customers and 51.3% of Brasil Telecom’s fixed-line customers subscribed to alternative plans. Telemar offers (1) bundled plans which permit subscribers to purchase unlimited local calls to other fixed-line customers, a fixed number of minutes per month that may be used for long-distance calls or local calls to mobile subscribers, and broadband services or minutes for use to establish dial-up internet connections, which we market under the brand name “Oi Conta Total”; (2) voice and internet plans which permit subscribers to purchase a fixed number of local minutes per month for calls to fixed-line telephones and for use to establish dial-up internet connections; (3) voice only plans which permit subscribers to purchase a fixed number of local minutes per month for calls to fixed-line telephones; and (4) budget plans which permit subscribers to purchase a fixed number of local minutes, either on a pre-paid basis or a monthly basis, but restrict local calls after the purchased minutes have been consumed and require the purchase of a pre-paid card to make long-distance calls or calls to mobile handsets, such as our “Oi Fixo Controle” and our “Oi Fixo Economia” plans.
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Table of ContentsBrasil Telecom permits subscribers to its alternative plans to design their own plans, selecting from a menu of options, including (1) the number of local minutes per month for calls to fixed-line telephones; (2) the number of local minutes per month for calls to mobile telephones; and (3) the number of long-distance minutes per month. Brasil Telecom also offers bundled plans that include these elements and broadband services or dial-up internet connection services for a fixed monthly rate which it offers under the brand name “Pluri”. Local fixed-line services also include in-dialing services (direct transmission of external calls to extensions) for corporate clients. For corporate clients in need of a large quantity of lines, we offer digital trunk services, which optimize and increase the speed of the customer’s telephone system. Long-Distance Services For each long-distance call, whether originated from a fixed-line telephone or a mobile handset, a caller chooses its preferred long-distance carrier by dialing such carrier’s long-distance carrier selection code. The caller pays the long-distance service provider for the call and the long-distance service provider pays interconnection fees to the service providers on whose fixed-line or mobile networks the call originated and terminated. Our domestic and international long-distance services have historically consisted primarily of calls originated in Region I. As a result of our acquisition of control of Brasil Telecom, our domestic and international long-distance services consisting of calls originated in Region II have substantially increased. Fixed Line-to-Fixed Line Calls from one local area to another local area are domestic long-distance calls, other than calls between separate local areas within specified metropolitan regions which, under ANATEL regulations, are charged as local calls. Calls between locations in Brazil and locations outside Brazil are international long-distance calls. We have historically provided domestic long-distance services for calls originating from Region I through interconnection agreements, mainly with Telesp in Region III and Brasil Telecom in Region II, that permit us to interconnect directly with their local fixed-line networks. We have historically provided international long-distance services originating from Region I through agreements to interconnect our network with those of the main telecommunications service providers worldwide. As a result of our acquisition of control of Brasil Telecom, we have expanded our domestic long-distance services for calls originating from Region II and our international long-distance services originating from Region II, utilizing Brasil Telecom’s interconnection agreements, mainly with us in Region I, Telesp in Region III and the main telecommunications service providers worldwide. Mobile Long-Distance Each mobile subscriber in Brazil is registered in a geographic area (identified by the corresponding area codes such as 11 (São Paulo) and 21 (Rio de Janeiro)), which we refer to as the subscriber’s home registration area, and Brazil is divided into sectors based on the first digit of the area code of a caller’s home registration area. A call originated by a mobile subscriber registered in one home registration area to a mobile subscriber registered in another home registration area sharing the same first digit (for example, Rio de Janeiro (area code 21) and Vitória (area code (27)), is referred to as an intrasectoral mobile call. A call originated by a mobile subscriber registered in one home registration area to a mobile subscriber registered in another home registration area that does not share the same first digit (for example, Rio de Janeiro (area code 21) and São Paulo (area code (11)), is referred to as an intersectoral mobile call. Different rates apply to intrasectoral and intersectoral mobile calls. We have historically provided mobile long-distance services originating from Region I through interconnection agreements, with Brasil Telecom in Region II, Telesp in Region III, and each of the principal mobile services providers operating in Brazil that permit us to interconnect directly with their local fixed-line and mobile networks. We have historically provided international long-distance services originating or terminating on our customer’s mobile handsets through agreements to interconnect our network with those of the main telecommunications service providers worldwide.
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Table of ContentsAs a result of our acquisition of control of Brasil Telecom, we have expanded our mobile long-distance services originating from Region II, utilizing Brasil Telecom’s interconnection agreements, mainly with us in Region I, Telesp in Region III and each of the principal mobile services providers operating in Brazil. We also use Brasil Telecom’s submarine fiber optic network to transport international mobile long-distance calls. Mobile Telecommunications Services As of December 31, 2008, we had approximately 24.4 million subscribers located in 1,214 municipalities in Region I, and Brasil Telecom had 5.6 million subscribers located in 1,015 municipalities in Region II. As of December 31, 2008, we had a 30.4% share of the mobile services market in Region I based on the total number of subscribers as of that date, and Brasil Telecom had a 14.4% share of the mobile services market in Region II based on the total number of subscribers as of that date. In addition, on October 24, 2008, we launched our mobile telecommunications services in Region III, and, as of December 31, 2008, we had 2.0 million mobile subscribers in that region and an estimated market share of 5.3% of the total number of mobile subscribers in this region as of December 31, 2008, according to information available from ANATEL. As of December 31, 2008, 84.4% of our customers subscribed to pre-paid plans and 15.6% subscribed to post-paid plans, and 82.5% of Brasil Telecom’s customers subscribed to pre-paid plans and 17.5% subscribed to post-paid plans. Pre-Paid Customers Pre-paid customers activate their Oi or Brasil Telecom Mobile cellular numbers through the purchase and installation of a SIM card in their mobile handsets. Our pre-paid customers are able to add credits to their accounts through the purchase of pre-paid cards at prices that vary based on the number of minutes available or through the purchase of additional credits over the phone which can be charged to the customer’s credit card or included on their bill for fixed-line services. These credits are valid for a fixed period of time following activation. Oi markets “Oi Ligadores” subscriptions to its pre-paid customers which allow these customers to receive bonus minutes with each purchase of additional credits. We charge a nominal subscription fee to enroll a customer in the “Oi Ligadores” program and provide bonus minutes to these customers that may be used for local calls to Telemar’s fixed-line subscribers or Oi’s mobile subscribers or long-distance calls to Telemar’s fixed-line subscribers. Oi sells pre-paid cards in Region I that contain a feature called “Oi Cartão Total.” “Oi Cartão Total” is a service that integrates mobile, fixed-line and public telephone services through a single card. Particularly focused on our pre-paid customers and on public telephone users, the “Oi Cartão Total” allows these customers to use their available credits to make any type of call from mobile, fixed-line or public telephones. We believe that “Oi Cartão Total” represents a significant step towards the convergence of our telecommunications services and satisfies the needs of a common profile of our pre-paid customers who use a mobile phone to receive calls and public telephones to make calls. We have made aggressive service offerings in order to promote and stimulate the use of the “Oi Cartão Total,” including bonus minutes for calls made by our pre-paid customers. Oi sells pre-paid cards in Region I in minimum denominations of R$1.00 and permits its pre-paid customers to add credits to their account in any amount, including centavos, in order to facilitate the continued activation of their mobile handsets, allowing them to continue to receive incoming calls. Oi regularly launches various packages designed to incentivize the purchase and use of credits by its pre-paid customers. In connection with our strategy of selling pre-paid service packages, Oi continues to develop new sales channels in order to increase market penetration and reduce sales costs, including selling SIM cards in small retail shops (newsstands, drugstores and supermarkets, among others). Since 2006, Oi has pursued a strategy under which we do not subsidize the purchase of mobile handsets in connection with our acquisition and retention of pre-paid customers in the retail consumer segment. Brasil Telecom Mobile adopted a similar strategy in 2009.
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Table of ContentsBrasil Telecom offers “Pula-Pula” subscriptions to its pre-paid customers which allow these customers to receive bonus minutes with each purchase of additional credits. In addition, Brasil Telecom launched “Crédito Especial,” a service which provides the customer with an emergency credit of R$3.00 for the price of R$0.60 payable when the customer adds credit to the customer’s account. In 2009, as part of our program to converge Brasil Telecom’s offers with ours, we began offering Oi Ligadores and Oi Cartão Total in Region II. Post-Paid Customers Post-paid customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous month. Post-paid plans include mailbox, caller ID, conference, call forwarding, calls on hold and special services, including Wireless Application Protocol (a protocol which simplifies standard internet codes for the more limited transmission features of a mobile handset), or WAP, General Packet Radio Service, or GPRS, which allows speeds in the range of 115 kilobytes per second (Kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 Kbps. The GPRS and EDGE services we include in our post-paid plans are available to customers with advanced mobile handset models. These services allow for mobile access to the internet through mobile telephones, laptops or personal digital assistants. They also enable customers simultaneously to use voice and data services, because the connection to the internet remains active even when the customer is speaking on the phone. This means that the customer can remain continuously online and, at the same time, place or receive calls. The WAP portal is another service and content channel available to our post-paid plan customers. Some of its features include sending and receiving e-mails, forming contact groups, accessing banks and buying tickets. The WAP portal can also be used on the internet, for instance, to schedule personal activities and join or initiate contact groups. Under our authorizations to provide personal mobile services, Oi and Brasil Telecom Mobile are required to offer basic post-paid mobile plans that include activation charges, monthly subscription rates and charges for local calls. As of December 31, 2008, less than 1.0% of our mobile customers subscribed to our basic post-paid plan and 1.7% of Brasil Telecom Mobile’s customers subscribed to its basic post-paid plan. In addition to the basic plan, we offer a variety of alternative post-paid plans that are that are designed to meet our customers’ usage profiles. Oi offers (1) plans which permit a subscriber to purchase a fixed number of minutes per month for local calls to other fixed-line or mobile subscribers; (2) family plans which permit a subscriber to purchase a fixed number of minutes per month for local calls that may be shared by up to four individuals; (3) budget plans which permit a subscriber to purchase a fixed number of local and long-distance minutes per month, but restrict outgoing calls after the purchased minutes have been consumed other than calls made using a pre-paid card, and (4) 3G plans providing data transmission at speeds from 300kbps to 1Mbps. Brasil Telecom Mobile offers similar post-paid mobile plans, other than the family plans. Under our authorization from ANATEL to complete the Brasil Telecom Transaction, we are required to offer the same plans to Brasil Telecom Mobile’s customers by December 31, 2009. Roaming Oi has roaming agreements with Brasil Telecom Mobile, Companhia de Telecomunicações do Brasil Central, or CTBC, and Sercomtel S.A. Telecomunicações, or Sercomtel, providing its customers with automatic access to roaming services when traveling outside of Regions I and III in areas of Brazil where mobile telecommunications services are available on the GSM standard. Brasil Telecom Mobile has roaming agreements with Oi, CBTC and Sercomtel, providing its customers with automatic access to roaming services when traveling outside of Region II in areas of Brazil where mobile telecommunications services are available on the GSM standard.
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Table of ContentsWe generate revenues from roaming when one of our mobile subscribers receives a call while at a location outside the sector that includes their home registration area. In addition, we generate revenues when a subscriber of another mobile services provider places a call from a location that is outside the coverage area of its mobile services provider and the call is originated on our mobile networks. Conversely, when one of our mobile subscribers places a call from outside of Brazil, we pay the applicable roaming rate to the mobile services provider on whose network the call originated. 3G Broadband Services In 2007, we and Brasil Telecom were granted authorizations and the related frequency licenses by ANATEL to offer 3G mobile services in our respective service areas. The deployment of our 3G networks allows us to offer data communication services to our personal mobile services customers at greater speeds than those made available by our previously existing 2G networks. As of December 31, 2008, Oi had launched 3G services in a total of 52 municipalities, including the 16 state capitals in Region I, and Brasil Telecom had launched 3G services in a total of 49 municipalities, including the Federal District and the nine state capitals in Region II. As of December 31, 2008, Oi and Brasil Telecom had approximately 31,300 and 100,900 3G mobile broadband customers, respectively. Data Transmission Services Broadband Services We provide high-speed internet access services using ADSL technology, which we refer to as broadband services, to residential customers and businesses in the primary cities in Region I under the brand name “Oi Velox” and Region II under the brand name “Turbo.” As of December 31, 2008, we offered broadband services in 451 municipalities in Region I, and Brasil Telecom offered broadband services in 1,546 municipalities in Region II. As of December 31, 2008, we had 2.0 million ADSL customers, and Brasil Telecom had 1.8 million ADSL customers. ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. An ADSL modem is installed using the customer’s conventional line, which, in turn, is connected to Digital Subscriber Line Access Multiplexer, or DSLAM, equipment at the switching station. As a result, customers can use the telephone line simultaneously with the internet. Customers pay a fixed monthly subscription fee, irrespective of their actual connection time to the internet. As of December 31, 2008, we had upgraded approximately 49% of our fixed-line network, and Brasil Telecom had upgraded approximately 38.8% of its fixed-line network, to enable these portions of our networks to support ADSL2+. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services though our Turbo 2.0 service and IP Television, which we refer to as IP TV, a television service that is based on broadband internet access. We charge monthly fees to our broadband users that choose Oi Internet, iBest or iG as their ISP. We do not charge fees to our fixed-line customers that choose Oi Internet, iBest or iG as their ISP for dial-up internet access. As of December 31, 2008, Oi Internet had 3.5 million registered dial-up users and iBest and iG had an aggregate of approximately 4.0 million registered dial-up users. In the beginning of 2007, Brasil Telecom launched a flat-fee dial-up service, called “Internet Toda Hora” (“Internet all the time”) under which Brasil Telecom’s fixed-line subscribers can access the internet through dial-up connections during evening and weekend hours for a flat fee without using the local minutes that they purchase under their fixed-line plans.
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Table of ContentsCommercial Data Transmission Services We provide a variety of customized, high-speed data transmission services through various technologies and means of access to other telecommunications services providers, ISPs and corporate customers. Our data transmission services include interconnection between local area networks at data transmission speeds of 34 Mbps, 155 Mbps and 1 Gbps, videoconferencing, video/image transmission and multimedia applications. Our principal commercial data transmission services are:
We provide these data transmission services using service network platforms in Regions I and II and our nationwide fiber optic cable network and microwave links. In order to provide complete solutions to our corporate clients, we have entered into service agreements for the joint supply of international data services with a number of important international data services providers. These commercial relationships with international data services providers are part of our strategy of offering telecommunications services packages to our customers. In addition, we provide services at our six cyber data center services located in Brasília, São Paulo, Curitiba, Porto Alegre and Fortaleza. We provide hosting collocation and IT outsourcing at these centers, permitting our customers to outsource their IT structures to us or to use these centers to provide backup for their IT systems. We acquired these centers as part of our acquisition of control of Brasil Telecom. As part of our acquisition of control of Brasil Telecom, we also acquired Brasil Telecom’s submarine fiber optic network, which connects Brazil with the United States, Bermuda and Venezuela. Through this network, we offer international data transportation services, primarily leased lines to other telecommunications services providers. Network Usage Services (Interconnection Service) All telecommunications services providers are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications services provider. Interconnection permits a call originated on the network of a requesting local fixed-line, mobile or long-distance service provider’s network to be terminated on the local fixed-line or mobile services network of the other provider. Use of Our Local Fixed-Line Networks We are authorized to charge for the use of our local fixed-line network on a per-minute basis for (1) all calls terminated on our local fixed-line networks in Regions I and II that originate on the networks of other local fixed-line, mobile and long-distance service providers, and (2) all long-distance calls originated on our local fixed-line networks in Regions I and II that are carried by other long-distance service providers. Conversely, other local fixed-line service providers charge us interconnection fees (1) to terminate calls on their local fixed-line networks that are originated on our local fixed-line, mobile or long-distance networks, or (2) for long-distance calls originated on their local fixed-line networks that are carried by our long-distance network.
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Table of ContentsIn addition, we charge network usage fees to long-distance service providers and operators of trunking services that connect switching stations to our local fixed-line networks. Use of Our Long-Distance Networks We are authorized to charge for the use of our long-distance network on a per-minute basis for all calls that travel through a portion of our long-distance networks for which the caller has not selected us as the long-distance provider. Conversely, other long-distance service providers charge us interconnection fees on a per-minute basis for all calls that travel through a portion their long-distance networks for which the caller has selected us as the long-distance provider. Use of Our Mobile Networks We are authorized to charge for the use of our mobile networks on a per-minute basis for all calls terminated on our mobile networks that originate on the networks of other local fixed-line, mobile and long-distance service providers. Conversely, other mobile services providers charge us interconnection fees to terminate calls on their mobile networks that are originated on our local fixed-line, mobile or long-distance networks. Traffic Transportation Services Long-distance and mobile services providers may avoid paying long-distance network usage charges to us by establishing an interconnection to our local fixed-line networks. In order to retain these customers of our long-distance services, we offer a long-distance usage service, called national transportation, under which we provide discounts to our long-distance network usage fees based on the volume of traffic and geographic distribution of calls generated by a long-distance or mobile services provider. We also offer international telecommunications service providers the option to terminate their Brazilian inbound traffic through our network, as an alternative to Embratel and Intelig. We charge international telecommunications service providers a per-minute rate, based on whether a call terminates on a fixed-line or mobile telephone and the location of the local area in which the call terminates. Public Telephone Services We own and operate public telephones throughout Region I and Region II. As of December 31, 2008, we had approximately 576,900 public telephones in service and Brasil Telecom had approximately 227,900 public telephones in service, all of which are operated by pre-paid cards. For a discussion of how we account for the sale of the pre-paid cards, see “Item 5. Operating and Financial Review and Prospects— Financial Presentation and Accounting Policies—Critical Accounting Policies and Estimates—Revenue Recognition and Accounts Receivable.” Value-Added Services Value-added services include voice, text and data applications, including voicemail, caller ID, and other services, such as personalization (video downloads, games, ring tones and wallpaper), SMS subscription services (horoscope, soccer teams and love match), chat, mobile television, location-based services and applications (mobile banking, mobile search, email and instant messaging). Advanced Voice Services We provide advanced voice services to our corporate customers, mainly 0800 (toll free) services, as well as voice portals where customers can participate in real-time chats and other interactive voice services.
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Table of ContentsiG Internet Portal Brasil Telecom operates an internet portal under the brand name “iG” that was the second largest internet portal in Brazil in terms of the number of unique visitors in 2008 according to Ibope/NetRatings. In 2008, iG was visited by 13.3 million unique visitors, and as of December 31, 2008, iG had approximately two million registered subscribers and hosted 7.5 million e-mail accounts. iG has launched several collaborative tools like blogs, chat, photo album, video player and an online dating service, and has developed new channels that promote the creation and distribution of content created by the user. Brasil Telecom has entered into an agreement with Google that allows iG to offer e-mail services using Gmail’s platform and use Google’s search engine throughout the portal. Brasil Telecom has entered into agreements under which it is licensed to distribute a variety of content through the iG portal, such as entertainment, news, sports and education, including an agreement to launch the “Second Life” game in Brazil. We generate revenue through the iG portal from (1) monthly subscription fees that we charge to registered users of this portal, (2) fees charged to place advertisements on this portal, and (3) fees that we receive from fixed-line service providers based on the number of minutes that their subscribers are connected to this portal. Subscription Television Services We provide subscription television services and broadband internet access to the residential, commercial and corporate market segments in the cities of Belo Horizonte, Poços de Caldas, Uberlândia and Barbacena in the State of Minas Gerais. We use a hybrid network of fiber optic and bidirectional coaxial cable (HFC) that allows us to offer a broad range of interactive services, such as distance learning, telephony and telemedicine, among others. Rates Our rates for local fixed-line services, domestic long-distance services, mobile services, interconnection, EILD and SLD services are subject to regulation by ANATEL, subject to certain exceptions relating to the rates we charge under alternative fixed-line and mobile plans that we are authorized to offer to our customers. For information on ANATEL regulation of our rates, see “— Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services—Rate Regulation,” “— Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Personal Mobile Services Rate Regulation,” “—Regulation of the Brazilian Telecommunications Industry— Interconnection Regulations,” and “—Regulation of the Brazilian Telecommunications Industry—Regulation of Data Transmission and Internet Services.” Local Fixed-Line Rates Local Rates Our revenues from local fixed-line services consist mainly of monthly subscription charges, charges for local calls and charges for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on the plan to which the customer subscribes and whether the customer is a residential, commercial or trunk line customer. Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the Mandatory Alternative Service Plan, each of which includes installation charges, monthly subscription charges, and charges for local minutes. As of December 31, 2008, 54.0% of our fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan, and 48.7% of Brasil Telecom’s fixed-line customers subscribed to the Basic Plan per Minute or the Mandatory Alternative Service Plan. The monthly subscription fees under the Basic Plan per Minute and the Mandatory Alternative Service Plan vary in accordance with the subscribers’ profiles, as defined in the applicable ANATEL regulations. The monthly subscription fee for the Basic Plan per Minute includes the use of 200 local minutes per month by residential customers and 150 local minutes per month by commercial customers and trunk line customers. The monthly subscription fee for the Mandatory Alternative Service Plan includes the use of 400 local minutes per month by residential customers and 360 local minutes per month by commercial customers and trunk line customers. We only deduct two local minutes from a Basic Plan per Minute customer’s monthly allotment and four minutes from a
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Table of ContentsMandatory Alternative Service Plan customer’s monthly allotment for each local call made, regardless of the duration of the call, during the following off-peak hours: Monday through Friday between midnight and 6 a.m.; Saturdays between midnight and 6 a.m. and between 2 p.m. and midnight; and any time on Sundays and Brazilian holidays. If the minute limits are exceeded, customers will incur additional metered-minute charges, the prices of which vary depending on whether the customer is a Basic Plan per Minute subscriber or a Mandatory Alternative Service Plan subscriber. If a customer does not use all of the minutes covered by the monthly subscription fee, the minutes cannot be carried over to the next month. In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we are permitted to offer non-discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans (e.g., monthly subscription rates and charges for local and long-distance calls) must be submitted for ANATEL approval prior to the offering of the plan to our customers. In general, ANATEL does not object to the terms of these plans. As of December 31, 2008, 46.2% of our fixed-line customers and 51.3% of Brasil Telecom’s fixed-line customers subscribed to alternative plans. Under our fixed-line rate plans, we charge for calls based on the period of use; the charge unit is a tenth of a minute (six seconds), and rounding is permitted to the next succeeding tenth of a minute. There is a minimum charge period of 30 seconds for every call. However, calls of three seconds or less are not charged, except in certain specific instances as provided for in ANATEL regulations. Prior to January 2006, calls were measured and charged in terms of pulses, consisting of a single charge per call and an additional charge for each four-minute interval of usage. In January 2006, our new concession agreements established a per-minute billing system for local fixed-line telecommunications services, which we implemented by July 2007. In localities where we have not implemented the minute-based rates due to technical or economic infeasibility, we do not charge fees for additional minutes on local calls made to another fixed-line telephone. In these localities, we charge only basic monthly subscription fees. On an annual basis, ANATEL increases or decreases the maximum rates we are authorized to charge for our basic service plans. ANATEL decreased the rates we may charge by an average of 0.51% as of July 13, 2006 and increased these rates by an average of 1.83% as of July 20, 2007 and 2.76% as of July 24, 2008. ANATEL decreased the rates Brasil Telecom may charge by an average of 0.43% as of July 13, 2006, and increased these rates by an average of 2.14% as of July 20, 2007 and 3.01% as of July 24, 2008. In addition, we are authorized to adjust the rates applicable to our alternative plans annually by no more than the rate of inflation, as measured by the IST. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. The following table sets forth selected information regarding service rates under our Basic Plan per Minute and Brasil Telecom’s Basic Plan per Minute during the periods indicated.
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Table of ContentsLocal Fixed Line-to-Mobile Rates When one of our fixed-line customers makes a call to a mobile subscriber of our company or another mobile services provider that terminates in the mobile registration area in which the call was originated, we charge our fixed-line customer per-minute charges for the duration of the call based on rates designated by ANATEL as VC1 rates. In turn, we pay the mobile services provider a per-minute charge based on rates designated by ANATEL as VU-M rates for the use of its mobile network in completing the call. VC1 rates vary depending on the time of the day and day of the week, and are applied per minute for the duration of the call. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. On an annual basis, ANATEL increases or decreases the maximum VC1 rates we are authorized to charge. In 2006 ANATEL did not change the maximum VC1 rate we or Brasil Telecom were authorized to charge. ANATEL authorized us to increase our VC1 rates by an average of 2.88% as of July 20, 2007 and 2.76% as of July 24, 2008. ANATEL authorized Brasil Telecom to increase its VC1 rates by an average of 3.34% as of July 20, 2007 and 3.03% as of July 24, 2008. Discounts from the VC1 rates approved by ANATEL may be granted to customers without ANATEL approval. The following table sets forth the average per-minute rates that we and Brasil Telecom charged for fixed-line to mobile calls during the periods indicated.
Domestic Long-Distance Rates Fixed Line-to-Fixed Line If a caller selects one of our carrier selection codes for a long-distance call that originates and terminates on fixed-line telephones, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and terminates. Rates for these long-distance calls are based on the physical distance separating callers (which are categorized by four distance ranges), time of the day and day of the week, and are applied per minute for the duration of the call. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. On an annual basis, ANATEL increases or decreases the maximum domestic fixed line-to-fixed line long-distance rates we are authorized to charge. ANATEL decreased these rates by an average of 2.86% as of July 13, 2006 and increased these rates by an average of 1.83% as of July 20, 2007 and 2.76% as of July 24, 2008. ANATEL decreased the rates Brasil Telecom may charge by an average of 2.77% as of July 13, 2006 and increased these rates by an average of 2.14% as of July 20, 2007 and 3.01% as of July 24, 2008. Discounts from the domestic fixed line-to-fixed line long-distance rates approved by ANATEL may be granted to customers without ANATEL approval. The following table sets forth selected information on domestic fixed line-to-fixed line long-distance rates charged per minute during peak hours (i.e., between the hours of 9 a.m. and noon and 2 p.m. and 6 p.m. on weekdays) by our company and Brasil Telecom during the periods indicated.
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Mobile Long-Distance Rates for long-distance calls that originate or terminate on mobile telephones are based on whether the call is an intrasectoral long-distance call, which is charged at rates designated by ANATEL as VC2 rates, or an intersectoral long-distance call, which is charged at rates designated by ANATEL as VC3 rates. If the caller selects one of our carrier selection codes for the call, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and terminates. The applicable VC2 and VC3 rates vary depending on the time of the day and day of the week, and are applied per minute for the duration of the call. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. On an annual basis, ANATEL increases or decreases the maximum VC2 and VC3 rates we are authorized to charge. ANATEL authorized us to increase our VC2 and VC3 rates by an average of 7.99% as of March 20, 2006, 2.88% as of July 20, 2007 and 2.76% as of July 24, 2008. ANATEL authorized Brasil Telecom to increase its VC2 and VC3 rates by an average of 7.99% as of July 27, 2006, 3.29% as of July 18, 2007 and 3.01% as of July 23, 2008. The following table sets forth the average rates that we and Brasil Telecom charged per minute for mobile long-distance calls during peak hours (i.e., between the hours of 9 a.m. and noon and 2 p.m. and 6 p.m. on weekdays) during the periods indicated.
Mobile Rates Mobile telecommunications service in Brazil, unlike in the United States, is offered on a “calling-party-pays” basis under which a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges.
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Table of ContentsOur revenues from mobile services consist mainly of charges for local and long-distance calls paid by our pre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. Under ANATEL regulations, Oi and Brasil Telecom Mobile were each required to submit a basic post-paid service plan and a basic pre-paid service plan to ANATEL for its approval. As of December 31, 2008, less than 1.0% of our mobile customers subscribed to our basic post-paid plan and less than 1.0% of our mobile customers subscribed to our basic pre-paid plan. As of that date, 1.7% of Brasil Telecom Mobile’s customers subscribed to its basic post-paid plan and less than 1.0% of Brasil Telecom Mobile’s customers subscribed to its basic pre-paid plan. Under the basic post-paid service plan, customers pay monthly subscription charges (which include a specified number of usage minutes) and pay fees based on usage of excess minutes that were not included in the monthly subscription charge. Under the basic pre-paid service plan, customers pay only a one-time activation charges well as charges for the minutes that they use. The rates for the applicable services under these plans (e.g., activation charges, monthly subscription charges, charges for local and long-distance calls and roaming charges) were approved by ANATEL at the time that the plans were authorized. We charge for all mobile calls made by our pre-paid customers, and for mobile calls made by our post-paid customers in excess of their allocated monthly number of minutes, based on the length of the call. As with local fixed-line services, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. In addition to the basic service plans, we are permitted to offer non-discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans (e.g., monthly subscription rates, charges for local and long-distance calls and roaming charges) must be submitted for ANATEL approval prior to the offering of the plan to our customers. In general, ANATEL does not object to the terms of these plans. As of December 31, 2008, substantially all of our and Brasil Telecom’s post-paid and pre-paid customers subscribed to these alternative plans. Although subscribers of a plan cannot be forced to migrate to new plans, existing plans may be discontinued as long as all subscribers of the discontinued plan receive a notice to that effect and are allowed to migrate to new plans within six months of such notice. Rates under our basic and alternative mobile plans may be adjusted annually by no more than the rate of inflation, as measured by the IST. These rate adjustments occur on the anniversary dates of the approval of the specific plans. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. The rate of inflation as measured by the IST was 3.20% in 2006, 3.17% in 2007 and 6.56% in 2008. Network Usage (Interconnection) Rates Fixed-Line Networks Our revenues from the use of our local fixed-line networks consist primarily of payments on a per-minute basis, which are charged at rates designated by ANATEL as TU-RL rates, from:
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Table of ContentsTU-RL rates vary depending on the time of the day and day of the week, and are applied per minute for the duration of the call. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. Charges for the use of our local fixed-line network to terminate local calls originating on the network of another local fixed-line service provider are only billed and due when usage of our network exceeds 55% of the total traffic registered between our network and the network of the other telecommunications service provider. On January 1, 2006, our TU-RL rate was reduced to 50% of the rate included in our Basic Plan per Minute for a local fixed-line call, which is adjusted on an annual basis by ANATEL. See “— Local Fixed-Line Rates — Local Rates.” On January 1, 2007, our TU-RL rate was reduced to 40% of the rate included in our Basic Plan per Minute for a local fixed-line call, which is adjusted on an annual basis by ANATEL. As of the date of this annual report, Telemar’s TU-RL rate during peak hours (i.e., between the hours of 9 a.m. and noon and 2 p.m. and 6 p.m. on weekdays) is R$0.028 per minute, and Brasil Telecom’s TU-RL rate during peak hours is R$0.031 per minute. ANATEL announced that beginning in 2008, the method used to determine the TU-RL rates would be based on a cost methodology, known as long-run incremental costs. However, in October 2007, ANATEL published an official letter delaying this change until 2010. Our revenues from the use of our long-distance networks consist primarily of payments on a per-minute basis, which are charged at rates designated by ANATEL as TU-RIU rates, from other long-distance carriers that use a portion of our long-distance networks to complete calls initiated by callers that have not selected us as the long-distance provider. TU-RIU rates vary depending on the time of the day and day of the week, and are applied per minute for the duration of the call. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. On January 1, 2006, our TU-RIU rate was reduced to 30% of our domestic fixed line-to-fixed line long-distance rates for calls of more than 300 km, which are adjusted on an annual basis by ANATEL. See “— Domestic long-distance rates — Fixed line-to-fixed-line.” As of the date of this annual report, Telemar’s TU-RIU rate during peak hours is R$0.12 per minute, and Brasil Telecom’s TU-RIU rate during peak hours is R$0.12 per minute. The following table sets forth the average per-minute rates we and Brasil Telecom charged for the use of our fixed-line networks during the periods indicated.
Mobile Networks Our revenues from the use of our mobile networks consist primarily of payments on a per-minute basis from (1) local fixed-line, long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service providers for the transfer to their networks of calls originating on our mobile networks. The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on our mobile networks, which are designated by ANATEL as VU-M rates, commercial conditions and
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Table of Contentstechnical issues, are freely negotiated between us and other mobile and fixed-line telecommunications service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things. We must offer the same VU-M rates to all requesting service providers on a nondiscriminatory basis. As with local fixed-line calls, the charge unit is a tenth of a minute (six seconds), rounding is permitted to the next succeeding tenth of a minute, and there is a minimum charge period of 30 seconds for every call. If we are not able to establish interconnection rates for use of our mobile networks with other mobile and fixed-line telecommunications service providers, ANATEL is empowered to arbitrate, at its discretion, the interconnection rates that we may charge. In 2005, mobile service providers and fixed-line service providers in Brazil were unsuccessful in negotiating an agreement for new VU-M rates. All mobile service providers and fixed-line service providers in Brazil commenced arbitration proceedings before ANATEL to establish the applicable VU-M rates. The mobile service providers and fixed-line service providers entered into a provisional agreement establishing provisional rates applicable to each mobile service provider, and after the providers entered into this agreement, ANATEL approved the adjusted VC1 rates that the fixed-line service providers were permitted to charge based on the provisional VU-M rates. An initial decision approving these provisional rates was rendered in September 2007, but an appeal remains pending before ANATEL’s council of directors. We cannot predict whether the final interconnection rates established by ANATEL will be equivalent to those currently applied by us. We and the other mobile services providers negotiate provisional agreements each year to establish rate increases for the VU-M charged by the mobile services providers, subject to a final decision of ANATEL in the arbitration regarding the initial provisional VU-M charges established by ANATEL. In March 2006, a provisional agreement among the incumbent fixed-line service providers (i.e., Telemar, Brasil Telecom and Telesp) and the mobile services providers, including Oi and Brasil Telecom Mobile, was submitted to ANATEL that increased the VU-M rate for calls terminated on a mobile services provider’s network by 4.5% over the previously existing VU-M rate. In July 2007, a provisional agreement among the incumbent fixed-line service providers, as well as CTBC Telecom and Sercomtel, and the mobile services providers, including Oi and Brasil Telecom Mobile, was submitted to ANATEL that provided for an annual increase of the VU-M rates of 1.97143% for calls terminated in Region I, and an annual increase of the VU-M rates of 2.25356% for calls terminated in Region II or Region III. In July 2008, a provisional agreement among the incumbent fixed-line service providers, as well as CTBC Telecom and Sercomtel, and the mobile services providers, including Oi and Brasil Telecom Mobile, was submitted to ANATEL that established an average increase in the VU-M rates of 2%, and provided that the VU-M rates would be increased by an amount equal to 68.5% multiplied by the percentage increase in VC1 approved by ANATEL in 2008. Until June 2006, charges for the use of our mobile network in connection with local calls originating from another fixed-line or mobile telecommunications service provider were only billed and due when usage of our network exceeded 55% of the total traffic registered between our network and the network of such other telecommunications service provider. In July 2006, the full billing system was adopted under which (1) we are permitted to charge for the use of our mobile networks based on the volume of traffic originated on the fixed-line or mobile network of other telecommunications service providers that terminates on our mobile networks, and (2) we are required to pay other mobile telecommunications service providers based on the volume of traffic originated on our fixed-line or mobile networks that terminates on their mobile networks. The following table sets forth the average per-minute VU-M rates that we and Brasil Telecom charged during the periods indicated.
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Data Transmission Rates Broadband services, IP services and frame relay services are deemed to be value-added services under ANATEL regulations and, therefore, the rates and prices for these services are not subject to regulation and are market-driven. We offer broadband services subscriptions at a variety of download speeds at prices that vary depending on the download speeds. A significant portion of our revenues from commercial data transmission services are primarily generated by monthly charges for EILD services and dedicated line services, which are based on contractual arrangements for the use of part of our network. Under ANATEL regulations, because Telemar and Brasil Telecom are deemed to have significant market power in the fixed-line services business, we are required to make publicly available the forms of agreements that we use for EILD and SLD services, including the applicable rates, and are only permitted to offer these services under these forms of agreement. We are allowed to increase these rates on an annual basis by no more than the rate of inflation, as measured by the IST. ANATEL also publishes reference rates for these services and if one of our customers objects to the rates that we charge for these services, that customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL. Our revenue from IP services is based on the number of data ports to which the customer is granted access. Our revenue from frame relay services consists mainly of charges for access to the data transmission network and metered service charges based on the amount of data transmitted. Such services are offered as pay-per-use or volume-based packages. Our revenue from cyber data center services is generally based on contractual arrangements that are tailored to the specific services provided. Marketing In 2008, we incurred R$491 million in marketing expenses, primarily to: (1) solidify our strategy of marketing all of our integrated services (fixed-line, mobile and broadband) under the “Oi” brand name; (2) launch new services, including “Oi Velox 3G” (mobile broadband) for high-speed access to the internet on our mobile network, “Oi Controle” for mobile customers seeking a fixed monthly rate for a fixed number of minutes in order to limit costs, and “Oi Fixo Controle” and “Oi Fixo Economia” for fixed-line services directed towards low-income customers; (3) introduce the “Oi” brand in the State of São Paulo; (4) promote our mobile telecommunications services through specific marketing campaigns targeting certain market segments, such as pre-paid retail customers and corporate customers; and (5) maintain a strong base of fixed-lines in service. Throughout 2008, we continued to offer integrated promotions by bundling our various services, such as mobile communications, ADSL services, fixed-line services and public telephone services. We also continued to reinforce our strategy of selling SIM cards individually, separate from mobile handsets, to acquire new pre-paid customers and retain existing ones. Beginning in February 2008, ANATEL regulations have required mobile services providers to unblock the mobile handsets of their customers, permitting mobile users to choose a different service provider than the handset supplier. The unblocking of mobile handsets has favored our strategy of selling SIM cards on a stand-alone basis. During 2008, sales of unblocked mobile phones by retail stores have been increasing, and in 2008, we maintained 160 permanent locations in Region I to unblock competitors’ mobile phones. Our most successful new services offered to the public in 2008 were the granting of bonus minutes for calls made within our network (between our customers) by our “Oi Ligadores” pre-paid customers and the launch of “Oi Fixo Controle,” a budget plan under which a subscriber purchases a fixed number of local minutes for calls to a fixed-line telephone or for a dial-up internet connection, which allowed us to further leverage our fixed-line and mobile services in Region I. Additionally, we successfully launched the “Oi” brand in the State of São Paulo by
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Table of Contentscoordinating the launch with our campaign to unblock mobile phones. To facilitate the launch, we set up 250 permanent and 35 temporary locations to unblock phones in the city of São Paulo and elsewhere throughout the State of São Paulo, which resulted in the activation of approximately two million mobile service accounts within 90 days after the launch. In 2008, Brasil Telecom incurred R$178 million in marketing expenses, primarily to promote the cost savings available through its bundled service plans and diversify its sales efforts. As a result and in line with our plans to integrate Brasil Telecom’s marketing efforts with ours, Brasil Telecom has recently adopted a strategy of selling SIM cards on a stand-alone basis to acquire new pre-paid customers and retain existing ones. We use a broad range of marketing channels, including television, radio, billboards, exterior signage, telemarketing, direct mail and internet advertising to market our fixed-line, mobile, long-distance and broadband services. We also sponsor sporting events and individual athletes, as well as cultural events, such as fashion shows, theatrical performances and popular music concerts. The goal of our marketing initiatives is to increase brand awareness in our targeted customer base and expand the use of our distribution channels. We target our marketing efforts on three separate segments of the telecommunications services market: (1) retail customers; (2) high-value residential customers and medium and small commercial customers; and (3) large commercial customers. Retail Customers We market our local fixed-line services, pre-paid and post-paid mobile services, long-distance services and dial-up internet access to retail customers. The retail marketing segment generated approximately 54% of our gross operating revenues in 2008. Our principal distribution channels in the retail segment in 2008 were:
Although Brasil Telecom has not historically segmented the telecommunications market in connection with its marketing and promotional activities in the same way as we have, Brasil Telecom has generally sold its services in the retail market segment through similar distribution channels. However, we have placed greater emphasis on drug stores, supermarkets, newsstands and similar outlets because we believe that these channels enable us to achieve broad distribution of our pre-paid services with relatively low distribution costs. We have begun to integrate Brasil Telecom’s marketing efforts with ours and expect to finalize this integration during 2009 and to expand Brasil Telecom’s use of these distribution channels as part of this integration effort. Brasil Telecom’s principal distribution channels in the retail segment in 2008 were:
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High-Value Residential Customers and Medium and Small Commercial Customers We market our local fixed-line services, broadband services, post-paid mobile services and long-distance services to high-value residential customers and medium and small commercial customers. This marketing segment generated approximately 28% of our gross operating revenues in 2008. Our principal distribution channels in this marketing segment in 2008 were:
Brasil Telecom has generally sold its services to high-value residential customers through the same distribution channels as we have, although Brasil Telecom has not historically engaged in direct sales campaigns at the facilities of large companies and organizations and has marketed to small- and medium-sized commercial customers as part of its marketing efforts focused on commercial customers generally. Brasil Telecom’s principal distribution channels in the high-value residential customer and small- and medium-sized commercial customer segment in 2008 were:
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Table of ContentsLarge Commercial Customers We market our local fixed-line services, broadband services, post-paid mobile services, long-distance services and commercial data transmission services to large commercial customers. This marketing segment generated approximately 9% of our gross operating revenues in 2008. Our principal distribution channels in this marketing segment in 2008 were our direct sales force. Brasil Telecom has generally sold its services to commercial customers of all sizes through a direct sales force. Billing and Collection Fixed-Line Telephone Services We send each of our fixed-line customers a monthly bill covering all the services provided during the prior monthly period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting, voicemail and call forwarding. We have agreements with several banks and other vendors, such as drugstores, lottery houses and government agencies, for the receipt and processing of payments from our customers. We are required to include in our monthly bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our networks that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for use of our networks. Payments are due within an average of 13 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. At December 31, 2008, 9.4% of all accounts receivable due from our fixed-line customers were outstanding for more than 30 days and 4.6% were outstanding for more than 90 days, as compared to 10.3% and 6.4%, respectively, at December 31, 2007. At December 31, 2008, 37.5% of all accounts receivable due from Brasil Telecom’s fixed-line customers were outstanding for more than 30 days and 17.7% were outstanding for more than 90 days, as compared to 36.7% and 27.2%, respectively, at December 31, 2007. ANATEL regulations permit us to restrict outgoing calls made by a fixed-line customer when the customer’s account is more than 31 days past due, restrict incoming calls received by a fixed-line customer when the customer’s account is more than 61 days past due, and disconnect a fixed-line customer when the customer’s account is more than 91 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the fixed-line customer may be ultimately disconnected due to non-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. Mobile Telecommunications Services We bill our mobile post-paid customers on a monthly basis and itemize charges in the same manner as we bill our fixed-line customers. See “— Fixed-line telephone services.” In addition, the monthly bills also provide details regarding minutes used and roaming charges.
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Table of ContentsPayments are due within an average of 13 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding. At December 31, 2008, 8.2% of all accounts receivable due from our mobile customers were outstanding for more than 30 days and 6.5% were outstanding for more than 90 days, as compared to 7.4% and 7.6%, respectively, at December 31, 2007. At December 31, 2008, 48.8% of all accounts receivable due from Brasil Telecom’s mobile customers were outstanding for more than 30 days and 32.8% were outstanding for more than 90 days, as compared to 58.8% and 45.3%, respectively, at December 31, 2007. ANATEL regulations permit us to partially suspend services to a mobile customer when the customer’s account is more than 15 days past due, restrict all incoming calls received and outgoing calls made by a mobile customer when the customer’s account is more than 45 days past due, and cancel services to a mobile customer when the customer’s account is more than 75 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the mobile customer may be ultimately cancelled due to non-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management which is designed to warn subscribers of high outstanding amounts due and unpaid. Network and Facilities Our network is comprised of a physical and logical infrastructure through which we provide fully integrated services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. Telemar and Oi monitor their networks remotely from our centralized national network operations center in Rio de Janeiro. Brasil Telecom monitors its networks remotely from its centralized national network operations center in Florianópolis. Network operating and configuration platforms, located at the network operations centers, perform failure monitoring, database and configuration management, security management and performance analysis for the each network. Fixed-Line Network Our fixed-line network includes a network of access lines connecting customers to digital exchanges, digital exchanges, trunk lines connecting digital exchanges and long-distance transmission equipment. As of December 31, 2008, our access network served approximately 13.9 million fixed-line subscribers and approximately 2.0 million ADSL subscribers, and the access network of Brasil Telecom served approximately 8.1 million fixed-line subscribers and approximately 1.8 million ADSL subscribers. As of December 31, 2008, we provided ADSL services in 451 municipalities and Brasil Telecom provided ADSL services in 1,546 municipalities. During 2008, the number of installed access lines in our fixed-line network declined by 1.2 million lines as a result of the disconnection of analog terminals in order to reduce network maintenance costs, and our total access lines in service declined by approximately 246,000 lines as a result of customer migration to mobile and broadband networks. During 2008, the number of installed access lines in Brasil Telecom’s fixed-line network declined by approximately 400,000 lines as a result of the disconnection of analog terminals in order to reduce network maintenance costs. In 2008, we provided fixed-line services at 1,970 new localities (localidades), which are governmental administrative units into which municipalities are divided, 1,562 of which were provided with group access (public telephone services) and 408 of which were provided with individual access (residential telephone service), and we visited more than 7,500 localities to confirm data on our record of localities. In 2008, Brasil Telecom provided fixed-line services at 100 new localities, 65 of which were provided with group access and 35 of which were provided with individual access, and Brasil Telecom visited more than 478 localities to confirm data on its record of localities. As of December 31, 2008, we offered fixed-line services in approximately 24,000 localities, either with individual or group access, and Brasil Telecom offered fixed-line services in approximately 8,909 localities, either with individual or group access.
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Table of ContentsThe following table sets forth selected information about our fixed-line network as of the dates and for the periods indicated.
Our fixed-line network is fully digitalized. Our transmission infrastructure connects these digital switches to two international gateway switches. Additionally, our network supports advanced services, including pre-paid and toll-free services. Our long-distance network consists of fiber-optic cable networks and microwave links that we use to provide long-distance services within Regions I and II. We have extended long-distance fiber optic networks that connect the state capitals in Region I, other than Manaus, Boa Vista, and Macapá (located in the States of Amazonas, Roraima and Amapá, respectively), the state capitals of Region II and the Federal District. Most of the large urban areas of Regions I and II are also connected by our fiber optic cable networks. Manaus, Boa Vista, and Macapá are served by our satellite network. Our long-distance network is modern, has an infrastructure prepared to support a capacity of 400 Gbps and is equipped with an automatic control system that provides for a high level of availability and flexibility for configuration and provisioning. Our transmission infrastructure has the capacity to accommodate our customers’ demand for long-distance, internet and data transmission services and other telecommunications service providers’ demand for transmission facilities. Satellite Network We have deployed an expanded range of satellite-based services to comply with our public service obligations to the rural and remote areas of northern Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. As of December 31, 2008, our satellite network covered approximately 3,000 localities in ten states and provided voice and data services to approximately 4.5 million persons and approximately 650,000 terminals. In 2000, we began the implementation of the land-based segment of a satellite network in order to extend transmission to remote areas in the states of Pará, Amazonas, Amapá and Roraima, as well as to other areas with limited access to telecommunications services due to geographical conditions. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Manaus, Boa Vista, Macapá, Belém, Salvador and Rio de Janeiro (located in the States of Amazonas, Roraima, Amapá, Pará, Bahia and Rio de Janeiro, respectively). This satellite network uses digital technology and began operating in August 2000. The fiber optic and satellite backbones are interconnected in Belém, Fortaleza, Salvador and Rio de Janeiro (located in the States of Pará, Ceará, Bahia and Rio de Janeiro, respectively). The integration of the land-based segment of our satellite network allows us to service our subscribers in any location in Region I.
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Table of ContentsWe and Hispamar Ltda., a Spanish-Brazilian consortium created in November 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), or Hispamar, invested nearly R$1.0 billion in the construction of the Amazonas I satellite, which was manufactured by Astrium (EADS Space Company). In December 2002, we entered into an agreement with Hispamar that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 W, C band, and we acquired a minority equity stake in Hispamar. The Amazonas I satellite was launched into geostationary orbit over the Americas and started to operate in November 2004. The Amazonas I satellite provides both C and Ku bands and on-board switching. The launch of the Amazonas I satellite has put Hispamar into direct competition for satellite services with StarOne S.A., a subsidiary of Embratel. We lease transponders from:
In 2005, we started to operate a satellite platform operating in the Ku band that is comprised of a satellite transport solution with Digital Video Broadcast — Return Channel Satellite technology and a control solution through Next Generation Networking. Mobile Network Our mobile networks are GPRS based networks. We offer GPRS/EDGE technology for data and 1,800/900 MHz for voice. We have GPRS coverage in 100% of the localities covered and EDGE in all capitals of the states in our service areas, other than Aracajú, Maceió, João Pessoa and Natal (located in the States of Sergipe, Alagoas, Paraíba and Rio Grande do Norte, respectively). Our mobile networks have unique data cores that are fully integrated with our fixed-line data networks. As of December 31, 2008, our mobile network, consisting of 5,025 active radio base stations, covered 1,119 municipalities, or more than 81.9% of the urban population in Region I, and covered 152 municipalities in Region III, or 78.9% of the urban population in that region. As of December 31, 2008, Brasil Telecom’s mobile network, consisting of 2,874 active radio base stations, covered 1,015 municipalities, or 90.0% of the urban population in Region II. With the acquisition of new radio frequencies and the authorization to provide 3G services in Region I, we started the implementation process for our new 3G network, which was present in 14 states in Region I as of December 31, 2008. As of December 31, 2008, we had 31,000 3G customers in Region I. This project is designed to provide the necessary capacity for up to 341,000 customers and includes the installation of 1,504 active radio base stations, Node-Bs and systems provided by Huawei and Nokia. This project also involves the connection of 15 3G control units and the expansion of our data and network transmission. With the acquisition of new radio frequencies and the authorization to provide 3G services in Region II, Brasil Telecom started the implementation process for its new 3G network. This project is designed to provide the necessary capacity for up to 120,000 customers and includes the installation of 1,418 active radio base stations, Node-Bs and systems provided by Ericsson and Nokia. This project also involves the connection of 19 3G control units and the expansion of its data and network transmission.
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Table of ContentsWe commenced offering 2G services in Region III in October 2008 and commenced offering 3G services in Region III in April 2009. We currently offer 2G services in 54 municipalities within the metropolitan area of São Paulo and in 155 municipalities in the interior of the State of São Paulo. We currently offer 3G services in 17 municipalities within the metropolitan area of São Paulo and in 35 municipalities in the interior of the State of São Paulo. Upon completion of the implementation of our 3G network, we expect to offer 3G services in 38 municipalities of São Paulo’s metropolitan area and in 61 municipalities in the interior of the State of São Paulo. Our 2G network in Region III currently has the capacity to serve up to 5.8 million mobile customers, and our 3G network in Region III currently has the capacity to serve up to 180,000 mobile customers. Our mobile networks are directly interconnected to the national and international long-distance networks of all long-distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III. Data Transmission Network Broadband Services Our broadband network uses ADSL as a broadband access technology using our existing fixed-line networks with speeds of up to 8 Mbps (download) and 512 Kbps (upload). We are implementing DSLAMs/Ethernet technology on a significant portion of our networks to support ADSL2+ technologies that allow us to offer higher speed services. Brasil Telecom has implemented an address control and name resolution system for its IP networks with the objective of optimizing resources and improving the availability of internet access services. We believe that we were one of the first telecommunications service providers in Latin America to implement Metro Ethernet technology for high-speed internet access. Metro Ethernet is a network that covers a metropolitan area to connect our subscribers to the internet. With the implementation of this technology, we are now able to provide IP TV, a television service that is based on broadband internet access. Brasil Telecom is also deploying a Metro Ethernet network, as well as fiber optic networks based on GPON technology together with VDSL2 for fiber to the building. Our dial-up IP platform supports dial-up access from the fixed-line networks. We operate an internet backbone network and a fully IP-routed network, which provides a backbone for all internet dedicated and dial-up services and VPN offerings. Our internet backbone connects to the public internet via international links that we maintain abroad. With these international links, we do not need to rely on other companies to connect our outbound internet traffic with the internet backbones of international ISPs. Commercial Data Transmission Services Our Asynchronous Transfer Mode, or ATM, network, with its fully integrated management system, provides:
These features allow our integrated ATM network to service each of the different types of data applications used by our customers. ATM is a technology that converts existing twisted-pair telephone lines into access paths for high-speed communications.
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Table of ContentsCall Center In 2007, Brasil Telecom consolidated its call center structure by merging its 30 pre-existing sites into five sites (Goiânia, Campo Grande, Florianópolis, Brasília and Curitiba). Brasil Telecom improved its customer relationship management system which integrates its systems and provides a database of information for each customer in order to provide better service and identify sales opportunities during each contact it has with its customers. Competition Our industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers. See “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting Our Financial Condition and Results of Operations.” Local Fixed-Line Services In the local fixed-line telecommunications services market, competition is focused on corporate customers. In addition, competition from other telecommunications services has been increasing, particularly from mobile telecommunications services, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services for fixed-line services, encouraged by offers of aggressively priced packages from some mobile telecommunications service providers. Finally, the decrease in interconnection rates has discouraged the construction of new fixed-line networks and has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers to offer lower prices to their customers. We are the leading provider of local fixed-line services in Region I with 13.9 million fixed lines in service as of December 31, 2008 and an estimated market share of 83.9% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. Our principal competitor in Region I for fixed-line services is Embratel, which has an estimated market share of 13.8% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. Brasil Telecom is the leading provider of local fixed-line services in Region II with 8.1 million fixed lines in service as of December 31, 2008 and an estimated market share of 85.0% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. Our principal competitors in Region II for fixed-line services are (1) GVT, which has an estimated market share of 10.2% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates, and (2) Embratel, which has an estimated market share of 4.9% of the total fixed lines in service in this region as of December 31, 2008, according to our internal estimates. Embratel provides local fixed-line services to residential customers through the cable network owned by its affiliate Net in the portions of Regions I and II where Net provides cable television service. As a result, Net is able to offer cable television, broadband and telephone services as a bundle at a very competitive price. Net has engaged in efforts to promote Embratel’s fixed-line service by offering free local fixed line service to its customers for a period of one year. Because this promotion is ongoing, we are unable to evaluate the number of our fixed-line customers that are served by Embratel through Net that will cancel their subscriptions with us when the promotional period ends. We expect competition from Embratel to increase as the cable network of Net expands through internal growth and as a result of acquisitions, such as its recently completed acquisition of Big TV. We also expect competition from Embratel and GVT to increase in certain cities, such as Rio de Janeiro, Belo Horizonte and Salvador, where they continue to expand their respective local fixed-line network. TIM has entered the local fixed-line services market by offering fixed-line wireless services which, unlike traditional mobile services, only permit a subscriber to place and receive calls when in proximity to a single specified radio base station. These services allow TIM to offer fixed-line service without installing a network of fixed lines directly to the homes or businesses of their fixed-line customers.
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Table of ContentsWe expect to continue to face competition from mobile services providers, which represent the main source of competition in the local fixed-line service market. As of December 31, 2008, there were 74 million mobile subscribers (including our mobile customers) in Region I, a 24.1% increase over December 31, 2007, and there were 39 million mobile subscribers (including Brasil Telecom’s mobile customers) in Region II, a 20.7% increase over December 31, 2007. The increase in the number of mobile users, in addition to reduced mobile services rates, is expected to continue to adversely affect the number of fixed-line subscribers and the volume of local fixed-line traffic. In addition, because mobile providers offer promotions and service plans that permit subscribers to make calls within the mobile provider’s network at rates that are less than those charged for calls from a fixed-line telephone to a mobile telephone, we believe that we may be vulnerable to traffic migration as customers with both fixed-line and mobile telephones use their mobile devices to make calls to other mobile subscribers. We believe that number portability, which was implemented in Brazil between August 2008 and March 2009, may negatively affect our local fixed-line business, because it may allow our customers to overcome their general resistance to changing their fixed-line telephone numbers and thereby allow our competitors to attract these customers. We believe that major technological innovations, such as instant messaging services and VoIP, may impact local fixed-line traffic in the future. In Brazil, those services have been increasing in popularity, which could put further pressure on the local fixed-line telecommunications market. Long-Distance Services The long-distance services market is highly competitive. For the year ended December 31, 2008, based on internal data and publicly available information, we were the leader in long-distance services provided to customers in Region I and Brasil Telecom was the leader in long-distance services provided to customers in Region II in terms of the volume of traffic from calls originated in these regions. Our principal competitor for long-distance services originating on fixed-line telephones in Region I is Embratel, and our principal competitors for long-distance services originating on fixed-line telephones in Region II are Embratel and GVT. We compete for long-distance services originating on mobile telephones in Region I with Embratel, Telesp, a subsidiary of Telefónica S.A., and TIM, and in Region II with Embratel, Telesp, TIM and GVT. Generally, callers placing fixed-line long-distance calls in Brazil tend to select the long-distance carrier affiliated with the provider of their fixed-line service. Similarly, callers placing mobile long-distance calls in Brazil tend to select the long-distance carrier affiliated with the provider of their mobile or fixed-line service. However, increased competition from long-distance service providers has resulted in pressure on our long-distance tariffs and adversely affected our revenue from these services. In addition, the offering of plans by other mobile services providers that include free minutes for calls to other subscribers of those mobile services providers may adversely impact our revenues from mobile long-distance calls if our mobile customers migrate to our competitors to remain within the network of the people to whom they plan to place long-distance calls. New technologies that serve as an alternative to traditional fixed-line long-distance telephone calls, such as VoIP, may start to capture part of long-distance traffic. However, in contrast to what has occurred in other countries such as the United States, we do not expect to compete with VoIP providers in the near term due to (1) the low level of broadband penetration in Brazil due to the population’s relatively low per capita income, and (2) the expected adverse effect of the success of this technology on the long-distance call margins of Embratel, which is an affiliate of Net, the main service provider with the ability to offer alternatives through VoIP. Mobile Services The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. According to IBGE, approximately 77% of the Brazilian population lived in areas with at least three mobile services providers in 2007. We expect the auction carried out by
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Table of ContentsANATEL in September 2007 for additional radio frequency spectrum for use by mobile services providers to lead to even greater competition. As a result of the grant of these new radio frequency licenses, each region in Brazil will have at least four mobile services competitors. We compete primarily with the following mobile services providers:
Of these competitors, Telecom Americas Group has been the most aggressive. Its strategy for gaining market share has included heavily subsidizing traffic and sales of mobile handsets. Vivo and TIM have been more conservative with respect to handset subsidies. As of December 31, 2008, we had a market share of 30.4% of the total number of subscribers in Region I, followed by Vivo with 24.4%, TIM with 24.1% and Claro with 20.7%. According to information available from ANATEL, we captured 34.8% of all new mobile subscribers in Region I during 2008. As of December 31, 2008, Brasil Telecom had a market share of 14.4% of the total number of subscribers in Region II, ranking behind Vivo with 32.8%, Claro with 27.7% and TIM with 24.9%. According to information available from ANATEL, Brasil Telecom captured 20.1% of all new mobile subscribers in Region II during 2008. In October 2008, we launched our mobile services in Region III, which represents a new competitive environment for our company. In addition to enabling us to offer roaming services in São Paulo to our current subscribers in Region I, our entry into the Region III market offers us the opportunity to gain market share in one of the largest and most profitable mobile services markets in Brazil. We believe that as the third entrant in the mobile services market in Region I, the fourth entrant in the mobile services market in Region II, and the fourth entrant in the mobile services market in Region III, our mobile business will benefit from number portability, which was implemented in Brazil between August 2008 and March 2009, because it may allow us to overcome the general resistance of long-time users (usually high-value customers) to changing their mobile telephone numbers and thereby allow us to attract these customers from our competitors. Data Transmission Services Cable television providers that offer broadband services, particularly Net, represent our principal competition in the broadband market. We face competition from these providers that offer integrated packages, consisting of subscription television, broadband and voice telephone services to cable television subscribers who, in general, have more purchasing power than other consumers. Our principal competitors in the commercial data transmission services market are Embratel, GVT and Intelig. Because the commercial data transmission services market is significantly less regulated than the fixed-line, long-distance and mobile services markets and, therefore, presents fewer barriers to entry, this market is subject to competition from a large number of competitors, including fixed-line telecommunications service providers and specialized services companies competing in this high-growth market and focused on large- and medium-sized business customers. Along with growth in traffic volume and increasing demand for broadband capacity, we expect significant price reductions in data transmission services as competitors expand their networks. We also anticipate a shift in competition towards value-added services provided over IP platforms.
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Table of ContentsConcessions, Authorizations and Licenses Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime or an authorization under the private regime. For additional details regarding the rights and obligations of service providers operating under the public regime and the private regime, see “— Regulation of the Brazilian Telecommunications Industry — Concessions and Authorizations.” We operate under:
These concessions and authorizations allow us to provide specific services in designated geographic areas and set forth certain obligations with which we must comply. Fixed-Line Services Concession Agreements We have entered into concession agreements with ANATEL that govern our concessions to provide fixed-line services in the Federal District and each of the states of Regions I and II. Each of our concession agreements:
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For more information regarding the adjustment of our rates for fixed-line services, the General Plan on Universal Service and the General Plan on Quality Goals, see “—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services.” These concession agreements required Telemar and Brasil Telecom to render services in public telecommunications offices that serve as business centers for low-income populations. In April 2008, these concession agreements were amended to remove the obligation to construct new public telecommunications offices and replace it with obligations to provide (1) transmission lines connecting the fiber-optic internet backbones of Telemar and Brasil Telecom to municipalities in their concession areas in which they did not provide internet service, which we refer to as backhaul, and (2) internet services in urban schools. Under these amendments, Telemar is obligated to set up backhaul in 2,800 municipalities and provide internet services to 31,700 urban schools in Region I, and Brasil Telecom is obligated to set up backhaul in 452 municipalities and provide internet services to 15,099 urban schools in Region II. Telemar and Brasil Telecom were each required to provide backhaul to 40% of these municipalities and internet services to 40% of these schools by December 12, 2008. However, our obligations to provide backhaul have been enjoined pending the outcome of a lawsuit seeking to classify the facilities that we construct to meet this obligation as property that is part of our concession and will therefore revert to the Brazilian government. Under the amendments, Telemar and Brasil Telecom are required to provide backhaul to 80% of these municipalities and internet services to 80% of these schools by December 31, 2009 and all of these municipalities and schools by December 31, 2010. These concession agreements provide that ANATEL may modify their terms in 2010, 2015 and 2020 and may revoke them prior to expiration under the circumstances described under “— Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications. Telemar and Brasil Telecom are discussing modifications to these concession agreements with ANATEL. On March 30, 2009, ANATEL published a public notice of the proposed modifications to these concession agreements. In this public notice, ANATEL proposed amendment to the General Plan on Universal Service that would (1) require the expansion of our fixed-line network to all municipalities with more than 30,000 inhabitants, (2) require us to provide service to a large number of additional areas, including indigenous villages, rural schools, health clinics, military bases, federal and state highway police stations, public aerodromes and environmental conservation organizations, and (3) require the fixed-line concessionaires to install an aggregate of up to approximately 110,000 additional public telephones, which number may be reduced as a result of ongoing changes in ANATEL regulations decreasing the number of public telephones required per inhabitant. The public consultation period in connection with the March 30, 2009 public notice ended on June 22, 2009, although the final amendments to our concession agreements have not yet been determined. The final modifications will become effective on January 1, 2011. Domestic Long-Distance Services Concession Agreements We have entered into concession agreements with ANATEL that govern our concessions to provide domestic long-distance services originating from the Federal District and each of the states of Regions I and II. Each of our concession agreements:
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For more information regarding the adjustment of our rates for fixed-line services, the General Plan on Universal Service and the General Plan on Quality Goals, see “—Regulation of the Brazilian Telecommunications Industry— Regulation of Fixed-Line Services.” These concession agreements provide that ANATEL may modify their terms in 2010, 2015 and 2020 and may revoke them prior to expiration under the circumstances described under “—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications. Telemar and Brasil Telecom are discussing modifications to these concession agreements with ANATEL. On March 30, 2009, ANATEL published a public notice proposing new conditions and quality and universal service targets related to these concession agreements. The public consultation period in connection with the March 30, 2009 public notice ended on June 22, 2009, although the final amendments to our concession agreements have not yet been determined. The final modifications will become effective on January 1, 2011. Personal Mobile Services Authorization Agreements and Radio Frequency Spectrum Licenses We have entered into authorization agreements with ANATEL that govern the authorizations of Oi to provide personal mobile services in Regions I and III, and of Brasil Telecom Mobile to provide personal mobile services in Region II. These authorizations permit us to provide personal mobile services for an indeterminate period of time, but do not provide us with the right to use specific radio frequency spectrum. We hold 11 licenses to use radio frequency spectrum in specific geographic regions, including licenses granted to Brasil Telecom Mobile. These licenses grant us permission to use the applicable radio spectrum for 15 years from the date of grant and are renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of the prior year’s net operating revenue from personal mobile services upon renewal of the license and on every second anniversary of the renewal. Our radio frequency spectrum licenses expire between 2017 and 2022. Our authorization agreements are subject to network scope and service performance obligations set forth in these authorization agreements. Under these obligations, as of the date of this annual report, we are required to:
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A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our personal mobile services authorizations by ANATEL. In August 2007, ANATEL adopted a revision of the personal mobile services regulations that became effective in February 2008. These revised regulations imposed additional obligations on personal mobile services providers, in particular in connection with customers’ rights. For a discussion of these additional obligations, see “—Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.” 3G Radio Frequency Licenses We have been granted radio frequency licenses by ANATEL that govern the use by Oi of the frequencies necessary to provide 3G services in Regions I and III, and by Brasil Telecom Mobile of the frequencies necessary to provide 3G services in Region II. Each of these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of the prior year’s net operating revenue from personal mobile services upon renewal of the license and on every second anniversary of the renewal. These licenses expire in 2023. These radio frequency licenses include network scope obligations. Under these obligations, we are required to provide the following services in Regions I, II and III:
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A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our personal mobile services authorizations by ANATEL. Fixed-Line Services Authorization Agreements We have entered into authorization agreements with ANATEL that govern Telemar’s authorizations to provide local fixed-line services in Regions II and III and the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I, and Brasil Telecom’s authorizations to provide local fixed-line services in Regions I and III and the areas in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II. These authorizations do not have termination dates and require us to comply with certain quality of service obligations set forth in the General Plan on Quality Goals. We have entered into authorization agreements with ANATEL that govern Telemar’s authorizations to provide domestic long-distance services originating from Regions II and III and the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I, and Brasil Telecom’s authorizations to provide domestic long-distance services originating from Regions I and III and the areas in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II. These authorizations do not have termination dates and require us to comply with certain quality of service obligations set forth in the General Plan on Quality Goals. We have entered into authorization agreements with ANATEL that govern the authorizations of Telemar and Brasil Telecom to provide international long-distance services originating from anywhere in Brazil. These authorizations do not have termination dates and require us to comply with quality of service obligations set forth in the General Plan on Quality Goals. Multimedia Communication Services Authorization Agreements In May 2003, ANATEL granted a Multimedia Communication Services authorization to Brasil Telecom together with the related spectrum license, permitting Brasil Telecom to provide high speed data service throughout Brazil.
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Table of ContentsIn February 2006, ANATEL granted a Multimedia Communication Services authorization to Oi, together with the related spectrum license, permitting Oi to provide high speed data service throughout Brazil. DTH Authorization Agreement In November 2008, we entered into an authorization agreement with ANATEL that governs the use by Oi of satellite technology to provide DTH satellite television services throughout Brazil. The authorization agreement permits us to provide DTH satellite television services for 15-years and is renewable for an additional 15 year term in exchange for a fee to be agreed upon between us and ANATEL. Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL regulations. Capital Expenditures and Investments Our capital expenditures on property, plant and equipment and intangible assets were R$5,061 million in 2008, R$2,597 million in 2007 and R$2,382 million in 2006. The following table sets forth our capital expenditures on plant expansion and modernization for the periods indicated, together with a reconciliation of capital expenditures to amounts shown in the company’s cash flow statement reflecting adjustments required under Law No. 11,638/07.
Our capital expenditures projects during 2006 through 2008 included the following:
Additionally, our investments in interests in other companies were R$3,282 million in 2008, R$17 million in 2007 and R$4 million in 2006. Acquisition of Paggo On December 17, 2007, we purchased all of the shares issued by Paggo for the total amount of R$75 million, which we paid in a single installment on February 26, 2008.
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Table of Contents2G Expansion in Region I In December 2007, we acquired additional radio frequency licenses in 12 states of Region I in an auction conducted by ANATEL, which allows us to expand our 2G services in this region. The total cost of these licenses was R$11 million. In connection with the acquisition of these licenses, we have undertaken an expansion of our mobile network in Region I. This project includes the installation of 125 radio base stations and the related switching equipment, traffic transportation infrastructure and control systems and is designed to permit us to provide mobile services to as many as four million additional mobile services subscribers. This project was completed in December 2008 at a total cost of R$573 million. Expansion of 2G Services into Region III In December 2007, we acquired an authorization to provide 2G mobile services in Region III, comprising the State of São Paulo, and the related radio frequency licenses in an auction conducted by ANATEL This authorization has allowed us to commence providing 2G services in this region. The total cost of this authorization and the related licenses was R$121 million. We have undertaken a project to develop our mobile services network in Region III which we expect will allow us to offer 2G service in 38 municipalities within the metropolitan area of São Paulo and in 444 municipalities in the interior of the State of São Paulo. This project includes the installation of 1,907 radio base stations and the related switching equipment, traffic transportation infrastructure and control systems and is designed to permit us to provide mobile services as many as 2.9 million mobile services subscribers in Region III. This project was completed in February 2009 at a total cost of R$646 million. Commencement of 3G Services in Regions I and III In December 2007, we acquired radio frequency licenses in an auction conducted by ANATEL to provide 3G mobile services in six of the nine regions into which Brazil has been divided by ANATEL for purposes of providing 3G services. These licenses have allowed us to commence providing 3G services throughout Regions I and III. The total cost of these licenses was R$867 million. We have undertaken a project to develop our 3G network in Regions I and III. This project is designed to provide the necessary capacity for up to 341,000 customers and includes the installation of 1,504 active radio base stations, Node-Bs and systems provided by Huawei and Nokia, the connection of 14 3G control units and the expansion of our data and network transmission. We expect that this project will allow us to offer 3G services in 38 municipalities of São Paulo’s metropolitan area, 61 municipalities in the interior of the State of São Paulo and 53 municipalities in Region I. By providing 3G services, we believe that we will strengthen our bundling strategy in Region I and ensure our ability to operate in the State of São Paulo with a range of services that will meet the requirements of all consumer segments of that state. This project was completed in Region I in September 2008 and was completed in Region III in April 2009 at a total estimated cost of R$296 million. Acquisition of Amazônia Celular In April 2008, we purchased 1,292,679 common shares and 3,715 preferred shares of TNCP, representing 51.9% of the common shares, 0.1% of the preferred shares and 19.3% of the total shares issued by TNCP, for an aggregate purchase price of R$129 million. TNCP is the controlling shareholder of Amazônia Celular, which is a mobile services provider in Area 8 of Region I, consisting of the Brazilian states of Amazonas, Roraima, Amapá, Pará and Maranhão. In addition, we purchased certain rights for the subscription of new shares to be issued by TNCP, as set forth in CVM Ruling No. 319/1999, for an aggregate purchase price of R$23 million. We purchased additional common and preferred shares of TNCP and Amazônia Celular through tender offers that concluded in August 2008, October 2008 and January 2009, and the exercise by the shareholders of TNCP and Amazônia Celular of related shareholder put rights. We paid an aggregate amount of R$279 million for these shares and, as a result of our acquisition of these shares, we owned an aggregate of 98.7% of the outstanding share capital of TNCP, including 99.0% of the outstanding common shares of TNCP. Through this ownership interest in TNCP, together with other shares of Amazônia Celular that we acquired in the voluntary tender offers and the mandatory tender offers, we owned an aggregate of 92.8% of the outstanding share capital of Amazônia Celular, including 93.3% of the outstanding common shares of Amazônia Celular.
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Table of ContentsAcquisition of Brasil Telecom On April 25, 2008, each of the shareholders of Invitel and Credit Suisse, as agent on behalf of Telemar, acting as principal, entered into the Share Purchase Agreement, under which Credit Suisse agreed to purchase all of the outstanding shares of Invitel and certain shares of Brasil Telecom Holding owned by the shareholders of Invitel. As of December 31, 2008, Invitel owned 100% of the outstanding shares of Solpart, which owned 52.0% of the outstanding voting share capital, representing 19.0% of the outstanding share capital, of Brasil Telecom Holding, which, in turn, owned 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom Between April 25, 2008 and June 17, 2008, we acquired (1) 55,819,400 preferred shares of Brasil Telecom Holding, representing 24.3% of the outstanding preferred shares of Brasil Telecom Holding and 15.4% of the share capital of Brasil Telecom Holding, in transactions conducted over the BOVESPA, and (2) 45,590,200 preferred shares of Brasil Telecom, representing 15.3% of the outstanding preferred shares of Brasil Telecom and 8.3% of the share capital of Brasil Telecom, in transactions conducted over the BOVESPA. We paid an aggregate amount of R$2,323 million for these shares. We purchased additional preferred shares of Brasil Telecom and Brasil Telecom Holding through tender offers that concluded in July 2008. In these tender offers, we acquired (1) 20,826,442 preferred shares of Brasil Telecom Holding, representing 9.1% of the outstanding preferred shares of Brasil Telecom Holding and 5.7% of the outstanding share capital of Brasil Telecom Holding, and (2) 13,366,365 preferred shares of Brasil Telecom, representing 4.5% of the outstanding preferred shares of Brasil Telecom and 2.4% of the outstanding share capital of Brasil Telecom. We paid an aggregate amount of R$948 million for these shares. On January 8, 2009, we acquired all of the outstanding shares of Invitel and 12,185,836 common shares of Brasil Telecom Holding owned by the shareholders of Invitel for an aggregate purchase price of R$5,371 million. Following this acquisition, we own an aggregate of 43.5% of the outstanding share capital of Brasil Telecom Holding, including 61.2% of the outstanding common shares of Brasil Telecom Holding. In addition to the 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom that Brasil Telecom Holding owns directly, we own 19.8% of the outstanding preferred shares, representing 10.7% of the outstanding share capital, of Brasil Telecom. On May 22, 2009, we announced the commencement of mandatory tender offers for (1) any and all outstanding common shares of Brasil Telecom Holding, and (2) any and all outstanding common shares of Brasil Telecom. The auctions with respect to these tender offers took place on the BOVESPA on June 23, 2009. In the auctions, we acquired (1) 40,452,227 common shares of Brasil Telecom Holding, representing 30.5% of the outstanding common shares of Brasil Telecom Holding and 11.2% of the outstanding share capital of Brasil Telecom Holding, for an aggregate purchase price of R$2,618 million, and (2) 630,872 common shares of Brasil Telecom, representing 0.3% of the outstanding common shares of Brasil Telecom and 0.1% of the outstanding share capital of Brasil Telecom, for an aggregate purchase price of R$38 million. Following the acquisitions made through these tender offers, we own an aggregate of 54.7% of the outstanding share capital of Brasil Telecom Holding, including 91.7% of the outstanding common shares of Brasil Telecom Holding. In addition to the 67.2% of the outstanding share capital, including 99.1% of the outstanding voting share capital, of Brasil Telecom that Brasil Telecom Holding owns directly, we own 10.9% of the outstanding share capital, including 0.3% of the outstanding voting share capital, of Brasil Telecom. Integration of Mobile Networks We have undertaken a project to upgrade the core mobile network of Brasil Telecom Mobile, with the primary goal of fully integrating Brasil Telecom Mobile’s network into the Oi mobile network. We have engaged Nokia to replace Brasil Telecom Mobile’s existing core mobile network, which relies on technology from Ericsson, with a new core mobile network that uses the same Nokia technology employed in Oi’s existing core mobile network to facilitate the integration of our networks.
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Table of ContentsEnhancement of Mobile Networks We are undertaking a project to upgrade a portion of our mobile networks to enable us to increase the capacity of these networks. We plan to replace 3,060 of Brasil Telecom Mobile’s radio base stations in Region II and 949 radio base stations in northern and northeastern Brazil that were operated by Amazônia Celular, all of which previously employed Alcatel technology, with Huawei base stations. We expect the replacement of the radio base stations in northern and northeastern Brazil to be completed by February 2010 and the replacement of the radio base stations in Region II to be completed by May 2010. The total cost of this project is expected to be approximately R$300 million. 2009 Capital Expenditure Budget Our 2009 capital expenditure budget, including our budget for expenditures in 2009 on the projects described above, totals approximately R$5.0 billion, of which R$2.6 billion will be applied in Region I, R$2.0 billion will be applied in Region II and the remaining will be applied in connection with our entrance into Region III and implementation of 3G. We plan to finance such expenditures through operating cash flows and long-term financings. From this total, we have budgeted 24% of our 2009 capital expenditure budget to the mobile telephone services business, and 63% to the fixed-line business, which includes the capital expenditures that will be necessary in order for us to meet our regulatory targets. Research and Development We conduct independent research and development in areas of telecommunications services but historically have not independently developed new telecommunications technology. We depend primarily on suppliers of telecommunications equipment for the development of new technology. As part of the privatization process of Telebrás, the newly formed telecommunications service providers, including our company and Brasil Telecom, contributed to the Foundation for Research and Development of Telecommunications (Fundação Centro de Pesquisa e Desenvolvimento em Telecomunicações), or Foundation CPqD, which is a research and development center formerly operated by Telebrás that develops telecommunications technology to be applied in Brazil. Our current agreement with Foundation CPqD provides for Foundation CPqD’s development of software and information technology services. We made disbursements to Foundation CPqD of approximately R$17 million in each of 2006, 2007 and 2008 for software development related to billing systems, anti-fraud systems for public phones and management of network maintenance workforce. Brasil Telecom’s current agreements with Foundation CPqD provide for access to telecommunications software developed by Foundation CPqD and technological services provided by Foundation CPqD, including equipment testing, consulting and training services. Brasil Telecom made disbursements to Foundation CPqD of R$18 million in 2006, R$12 million in 2007 and R$14 million in 2008. Since 2006, Brasil Telecom has performed research in cooperation with equipment and systems suppliers designed to develop new technologies and services. In 2007, Brasil Telecom modified its “Único” service, a service enabling subscribers to use their mobile device on our fixed-line network through a wireless local area network, or Wi-Fi, connection, to include Wi-Fi access and GSM seamless integration. As a result, we believe that Brasil Telecom is the first Brazilian carrier to launch services that use next generation network architecture. Brasil Telecom has developed a technology laboratory that includes space for equipment test and assembly. This laboratory performs a variety of functions, such as operation support systems, business support systems and information security. Brasil Telecom conducts trials of technologies from different vendors in this laboratory to evaluate these technologies for deployment. Brasil Telecom’s costs associated with this laboratory were R$5 million in 2008.
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Table of ContentsBrasil Telecom participates in telecommunications standards bodies, technical associations and committee forums such as the European Telecommunication Standards Institute (ETSI), the Telecommunication and Internet Services and Protocols for Advanced Networking (TISPAN), the Third Generation Partnership Project (3GPP), and the Fixed Mobile Convergence Alliance (FMCA) in order to contribute and gather expertise in globally applicable technical specifications, technical reports and telecommunications standards. Property, Plant and Equipment Our principal properties, owned and leased, are located in Regions I and II. As of December 31, 2008, we owned 4,890 properties and Brasil Telecom owned 3,155 properties. As of that date, we also leased 8,526 operational properties from third parties and Brasil Telecom leased 3,625 operational properties from third parties. At December 31, 2008, the net book value of our property, plant and equipment was R$12,670 million. As of that date, the net book value of Brasil Telecom’s property, plant and equipment was R$5,902 million. Our main equipment consists of transmission equipment, trunking and switching stations (including local, tandem and transit telephone exchanges), metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups. Buildings, land and leasehold improvements represented 10% of the net book value of our property, plant and equipment; underground ducts, post and towers, cables and lines represented 29%; plant and equipment related to trunking and switching stations represented 13%; transmission equipment represented 32%; construction in progress represented 7%; and other fixed assets represented 10%. Buildings represented 6.3% of the net book value of Brasil Telecom’s property, plant and equipment; underground ducts, post and towers represented 20.0% of the net book value; plant and equipment related to switching stations represented 4.7%; transmission equipment represented 44.2%; construction in progress represented 17.1%; and other fixed assets represented 7.8%. All property, plant and equipment that are essential in providing the services described in our concession agreements are considered “reversible assets,” which means that, should our concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 18 to our audited consolidated financial statements included elsewhere in this annual report. Intellectual Property We believe the trademarks that identify us and our businesses are important for us, and as a result, we have taken steps to protect them. In the first half of 2006, we engaged an international advisory company and, after conducting a comprehensive survey, decided to implement a project for the unification of our activities under the Oi brand. This project was aimed at reinforcing the concept of convergence of services, improving the practices shared among our controlled companies, as well as facilitating the perception of the group’s financial soundness by our customers. The project to unify our activities under the Oi brand has been fully implemented. We have 917 trademarks registered with the INPI along with 1,086 pending trademark applications. Our main trademarks, Oi and Brasil Telecom, are registered with the INPI in several classes, which allows us to use these trademarks in a variety of markets in which we operate, including our fixed-line, mobile and broadband services. Among the various trademarks we have registered with the INPI, 12 are being contested by third parties. Additionally, of the 1,086 pending trademark applications, 147 have been challenged by third parties. We have 1,130 domain names registered with the Center of Information and Coordination of Dot Br –NIC. Br, an agency responsible for registering domain names in Brazil. The information included on our websites or that might be accessed through our websites is not included in this annual report and is not incorporated into this annual report by reference.
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Table of ContentsWe have been granted eight patents by the INPI. We have also filed 19 patent applications, which are pending with the INPI. Requests for technical examination have been submitted to the INPI for all of these pending patent applications. Once examination is concluded, a decision accepting or rejecting the application will be issued. If granted, the patent will have a term of 20 years from the date of filing and no less than ten years from the date the application is granted. Insurance Pursuant to requirements in our concession agreements, we maintain the following insurance policies: (1) all risk property insurance covering all insurable assets pertaining to the concessions; (2) loss of profit insurance covering lost profits deriving from property damage and business interruption; and (3) performance bond insurance to assure compliance with our obligations related to quality of service and universal service targets set forth in our concession agreements. In addition to the above policies, we maintain civil liability insurance. Our assets that are of material value and/or exposed to high degrees of risks are also insured. All of our insurance coverage was purchased from established insurance companies in Brazil, such as Bradesco, Sulamérica and Itaú. We believe that our current insurance coverage is suitable to our operations. For more details on our insurance policies, see note 32 to our audited consolidated financial statements included elsewhere in this annual report. Regulation of the Brazilian Telecommunications Industry Overview Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation under the General Telecommunications Law and a comprehensive regulatory framework for the provision of telecommunications services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance and mobile telecommunications services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply. See “— Concessions, Authorizations and Licenses.” ANATEL is a regulatory agency that was established in July 1997 pursuant to the Regulamento da Agência Nacional de Telecomunicações, which we refer to as the ANATEL Decree. ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is administratively independent and is financially autonomous. ANATEL is required to report on its activities to the Brazilian Ministry of Communications (Ministério das Comunicações). ANATEL has authority to propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to grant concessions and licenses for all telecommunications services, other than broadcasting services. Any regulation or action proposed by ANATEL is subject to a period of public comment, which may include public hearings, and ANATEL’s decisions may be challenged administratively before the agency itself or through the Brazilian judicial system. Concessions and Authorizations Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime or an authorization under the private regime. A concession is granted for a fixed period of time following a public auction and is generally renewable only once. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers.
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Table of ContentsThe four principal providers of fixed-line telecommunications services in Brazil, Telemar, Brasil Telecom, Telesp and Embratel, provide these services under the public regime. In addition, CTBC Telecom and Sercomtel, which are secondary local fixed-line telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime. Providers of public regime services are subject to more obligations and restrictions than providers of private regime services. Under Brazilian law, providers of public regime services are subject to certain requirements with respect to services such as quality of service, continuity and universality of service, network expansion and network modernization. Additionally, the rates that public regime service providers may charge customers are subject to ANATEL supervision. Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations. Regulation of Fixed-Line Services General Policies for the Regulation of the Fixed-Line Telecommunications Sector In June 2003, Brazil’s president issued Decree No. 4,733, outlining a number of new rules and guidelines which were intended to consolidate several changes in the regulation of Brazil’s fixed-line telecommunications sector. This decree sets forth general declarations of policy regarding, among other things:
This decree also defined certain changes that are reflected in the concession agreements entered into by providers of public regime services that became effective on January 1, 2006. A number of bills affecting telecommunications policy have been submitted to the Brazilian Congress with an aim to make telecommunications services more accessible to Brazil’s low-income population. These bills have proposed to: (1) eliminate the monthly subscription fee (assinatura mensal) that compensates telecommunications companies for extending and maintaining fixed-line telecommunications services for their customers; and (2) impose inexpensive fixed-line telephone plans (telefone social) that telecommunications companies would be required to provide to certain eligible low-income residential customers. If approved, we expect that these types of proposals will adversely affect the overall margin of telecommunications providers, including us. For a discussion of the legal and regulatory risks associated with our business, see “Risk Factors — Risks Relating to our Company and the Brazilian Telecommunications Industry — Our industry is highly regulated. Changes in laws and regulations may adversely impact our business.” Private Regime Authorizations With the goal of introducing competition in fixed-line telephone services in Brazil, the federal government granted four private-regime authorizations in 1999 to permit fixed-line service providers to compete with the incumbent fixed-line concessionaires. Three of these authorizations were granted to providers of local and intraregional long-distance services in the three fixed-line service regions. Embratel currently holds two of these authorizations, which allows it to provide local fixed-line services in Regions I and III, and GVT holds the other authorization, which allows it to provide local fixed-line services in Region II. The fourth fixed-line authorization, to provide domestic and international long-distance services throughout Brazil, is currently held by Intelig. Since 2002, the number of authorizations to provide fixed-line services that the federal government may issue is unlimited.
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Table of ContentsPublic Regime Concessions Each of the public regime service providers operated under a concession agreement that expired at the end of 2005. Each of these providers entered into new concession agreements in December 2005 that extended their concessions for an additional 20-year period expiring in December 2025. Under these new concession agreements, each of the public regime service providers are required to comply with the provisions of (1) the General Plan on Universal Service that was adopted by ANATEL in June 2003, (2) the General Plan on Quality Goals that was adopted by ANATEL in June 2003, and (3) the General Plan on Competition Targets (Plano Geral de Metas de Competição), which has not yet been adopted by ANATEL. The concession agreements provide that ANATEL may modify their terms in 2010, 2015 and 2020 and may revoke them prior to expiration under the circumstances described below under “— Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications. Rate Regulation Public regime service providers must offer a basic service plan comprised of the following basic services: (1) installation; (2) monthly subscription; and (3) switched local minutes. Modifications of the rates charged for these basic services are determined by reference to a local rate basket that represents the weighted average of the rates for installation, monthly subscriptions and switched local minutes. Rates for long-distance services originated and terminated on fixed lines vary in accordance with three basic criteria: (1) physical distance separating callers; (2) time of the day; and (3) day of the week on which the call is placed. Modifications of the rates charged for these long-distance services are determined by reference to a long-distance rate basket that represents the weighted average of the rates for long-distance calls. The rates for the provision of services through payphones and installation rates are treated separately. The rates for international long-distance services provided by Embratel, the incumbent international long-distance concessionaire, are regulated by ANATEL. However, the rates for international long-distance services charged by other long-distance service providers, all of whom provide these services under authorizations rather than concessions, are not subject to ANATEL regulation. The concession agreements establish a price-cap mechanism for annual rate adjustments for basic service plans and domestic long-distance rates based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index. Under the concession agreements entered into in 2005, a new calculation method for Factor X was adopted. In 2006 and 2007, Factor X, which was discounted from the IST, was equal to 50% of the increase in a public regime provider’s productivity. Beginning in 2008, ANATEL has calculated the sector’s weighted average productivity rate. Currently, Factor X is equal to (1) 50% of the increase in the weighted average productivity rate of public regime providers, plus (2) a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow the annual adjustment to be increased by more than the IST. A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment. A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.
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Table of ContentsPrior to January 2006, calls were measured and charged in terms of pulses, consisting of a single charge per call and an additional charge for each four-minute interval of usage. The concession agreements entered into in 2005 established a per-minute billing system for local fixed-line telecommunications services to meet ANATEL’s objective to establish a more objective and transparent billing criteria for customers. For information on our rates and service plans, see “— Rates.” General Plan on Universal Service The General Plan on Universal Service was approved by ANATEL in June 2003 and became effective in January 2006. The General Plan on Universal Service sets forth the principal network expansion and modernization obligations of the public regime providers, such as providing public telephones in towns with a population in excess of 100, and installing residential fixed lines within seven days of a request in towns with a population in excess of 300. In addition, public regime providers must comply with the Special Individual Access Class (Acesso Individual Classe Especial) rules, which are designed to require service for economically disadvantaged people. Under the Special Individual Access Class rules, a qualifying customer may subscribe to a service plan, limited to one fixed-line per household, and pay a lower monthly fee for service than under the basic service plans. Public regime providers are also subject to network expansion requirements under the General Plan on Universal Service, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the General Plan on Universal Service or in our concession agreements may result in fines and penalties of up to R$50 million, as well as potential revocation of our concessions. Unbundling of Local Fixed-Line Networks On May 2004, ANATEL issued an order establishing rules for partial unbundling of the local fixed-line networks of the public regime service providers, which we refer to as “line sharing,” and requiring the eventual full unbundling of local fixed-line networks, which will entail these providers making their entire networks available to other telecommunications service providers. This order (1) establishes a time by which service providers must comply with the order to provide such access, (2) limits the rates service providers can charge for line sharing and full unbundling of services, and (3) addresses related matters such as co-location space requirements. Co-location means that a service provider requesting interconnection may place its switching equipment in or near the local exchange of the service provider whose network the requesting service provider wishes to use and may connect to the network at this local exchange. This regulation was designed to increase competition in the local fixed-line and broadband internet access markets by making it easier for new telecommunications service providers operating under either the public or private regime to enter these markets and for existing service providers to provide new services or enter new regions. ANATEL has not yet adopted final unbundling rules or rates for full unbundling, although we expect that the rates that we would receive from other telecommunications services providers accessing our fixed-line networks will be lower than the rates we currently charge our customers for providing fixed-line and broadband internet services. As of December 31, 2008, no unbundled lines had been used by competitors in our region. Service Restrictions Pursuant to regulations in effect as of the date of this annual report, public regime providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
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On November 20, 2008, Brazil’s president issued Decree No. 6,654, which modified the General Plan of Grants (Plano Geral de Outorgas) applicable to the fixed-line telecommunications industry. This decree eliminated a provision of ANATEL’s regulations that prohibited one public regime provider from holding more than 20% of the voting shares of any other public regime provider. As a result of the elimination of this provision, we were no longer prohibited from acquiring indirect control of Brasil Telecom. Termination of a Concession ANATEL may terminate the concession of any public regime telecommunications service provider upon the occurrence of any of the following:
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services. General Plan on Quality Goals The General Plan on Quality Goals was approved by ANATEL in June 2003 and became effective in January 2006. Each fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the General Plan on Quality Goals. All costs related to compliance with the quality goals established by the General Plan on Quality Goals must be borne exclusively by the service provider. The General Plan on Quality Goals establishes minimum quality standards with regard to:
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These quality standards are measured according to the definitions and quality indicators established by ANATEL. Every month, fixed-line service providers are required to report their compliance with quality goals to ANATEL. Additionally, they are obligated to provide ANATEL with an in-depth report and analysis on each quality goal that is not satisfied. ANATEL may also collect such data from fixed-line service providers at any time without prior notice. Fixed-line service providers that fail to meet quality goals established by ANATEL may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of their concessions and authorizations. ANATEL measures the performance of fixed-line service providers in each individual state in which they operate. As a result, the performance of fixed-line service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. Therefore, fixed-line service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular states. The failure by fixed-line service providers to meet the quality of service obligations established by the General Plan on Quality Goals or in our concession agreements may result in fines and penalties of up to R$40 million. Regulation of Mobile Services In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service (Serviço Móvel Pessoal) regime. The regulations permitted ANATEL to grant authorizations to provide mobile telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations, Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications services. Under the personal mobile service regulations:
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Auction of Personal Mobile Services Spectrum Prior to the establishment of the personal mobile services regime, ANATEL had granted licenses to mobile services providers to operate in each region of Brazil using Bands A and B. In 2001 and 2002, ANATEL successfully auctioned authorizations and licenses to operators in Band D and Band E in each region. Oi was granted its initial authorization to provide personal mobile services in Region I and a license to operate in Band D in March 2001. Brasil Telecom Mobile was granted its initial authorization to provide personal mobile services in Region II and a license to operate in Band E in December 2002. ANATEL conducted additional auctions of radio frequency licenses in 2004 and 2006. In April 2004, Brasil Telecom Mobile acquired an additional license to operate in Region II. In December 2007, ANATEL auctioned the remaining spectrum of Bands A, B, C, D and E to existing service providers as extension blocks and auctioned additional spectrum in Band M (1.8 GHz) and Band L (1.9 GHz). In these auctions, Oi acquired (1) an authorization to provide personal mobile services in the State of São Paulo and licenses to operate using Band M throughout the State of São Paulo and Band E outside of the city of São Paulo, and (2) licenses to use additional spectrum in 12 states in Region I. Auction of 3G Spectrum In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), ANATEL issued regulations that divide the Brazilian territory into nine regions for purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radio frequency licenses to operate on each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, Oi acquired the radio frequency licenses necessary to offer 3G services in six of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I and III under the personal mobile services regime, other than an area that consists of 23 municipalities in the interior of the State of São Paulo that includes the city of Franca and surrounding areas), and Brasil Telecom Mobile acquired the radio frequency licenses necessary to offer 3G services in two of the nine regions (corresponding to Region II under the personal mobile services regime). The use of these frequency bands will allow personal mobile services providers to offer 3G services to their customers. Personal Mobile Services Rate Regulation Rates for personal mobile services are regulated by ANATEL. Personal mobile services providers are required to offer a basic service plan that consists of a monthly subscription, local calls and roaming. Basic service plans were approved by ANATEL for each of the personal mobile services providers following the grant of personal mobile services authorizations to each of these providers. Following the effectiveness of the basic service plans, annual adjustments of the rates under these plans have been subject to a price cap mechanism. Through 2005, rates were adjusted annually by no more than the rate of inflation, as measured by the IGP-DI. In 2006, ANATEL replaced the IGP-DI with the IST to calculate annual rate adjustments.
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Table of ContentsPersonal mobile services providers are permitted to offer non-discriminatory alternative plans to the basic service plan. The rates charged under these plans (e.g., monthly subscription rates, charges for local calls and roaming charges) are subject to ANATEL approval prior to the time that these plans are first offered to mobile customers. Following the approval of these plans, the rates under these plans may be increased up to an annual adjustment that is approved by ANATEL and is no more than the rate of inflation, as measured by the IST. Although subscribers of a plan cannot be forced to migrate to new plans, existing plans may be discontinued as long as all subscribers receive a notice to that effect and are allowed to migrate to new plans within six months of such notice. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. Obligations of Personal Mobile Services Providers As a telecommunications service provider, we are subject to requirements concerning network expansion and quality of service, as established in applicable regulations and in our personal mobile services authorizations. If we fail to meet these obligations, we may be fined, subject to a maximum penalty of R$50 million, until we are in full compliance with our obligations. While it is possible for an authorization to be revoked for non-compliance with these obligations, there are no precedents for such a revocation. Network Expansion Obligations The personal mobile services authorizations set forth certain obligations and targets that must be met by a personal mobile services provider. For a description of the obligations and targets that must be met by our company, see “—Concessions, Authorizations and Licenses—Personal Mobile Services Authorization Agreements and Radio Frequency Spectrum Licenses” and “—Concessions, Authorizations and Licenses—3G Radio Frequency Licenses.” Quality of Service Obligations Our personal mobile services authorizations impose obligations on us to meet quality of service standards relating to our network’s ability to make and receive calls, call failure rates, capacity to handle peak periods, failed interconnection of calls and customer complaints. ANATEL defines these quality of service standards, and we must report information in connection with such standards to ANATEL. Additional Obligations In August 2007, ANATEL adopted revisions to the personal mobile services regulations that became effective in February 2008. These revised regulations imposed additional obligations on personal mobile services providers, particularly in connection with customers’ rights. These obligations require personal mobile services providers to:
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Interconnection Regulations Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications service provider. Interconnection permits a call originated on the network of a requesting fixed-line or personal mobile services provider’s network to be terminated on the fixed-line or personal mobile service network of the other provider. ANATEL initially adopted General Rules on Interconnection (Regulamento Geral de Interconexão) in 1998, which were amended and restated in July 2005. Interconnection Regulations Applicable to Fixed-Line Providers Interconnection fees are charged at a flat rate per minute of use of a fixed-line provider’s network. Interconnection rates charged by a fixed-line provider to terminate a call on its local network (the TU-RL rate) or intercity network (the TU-RIU rate) are subject to a price cap established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on the underlying cost characteristics of such service provider’s network. Fixed-line service providers must offer the same TU-RL and TU-RIU rates to all requesting providers on a nondiscriminatory basis. The price caps on interconnection rates are adjusted annually by ANATEL at the same time that rates for local and long-distance rates are adjusted. Fixed-line service providers are only required to pay interconnection fees to another fixed-line service provider for traffic in the same local area in the event that the ratio of the outbound traffic generated by that provider (measured in minutes) to the inbound traffic terminated by that provider (measured in minutes) exceeded 55% or was less than 45%. This system is designated the “bill and keep” system. In 2006, the TU-RL rates that fixed-line service providers could charge each other to terminate a call on their respective networks were reduced to 50% of the rate included in their Basic Plan per Minute for a local fixed-line call. In 2007, the TU-RL rates of the fixed-line service providers were reduced to 40% of the rate included in their Basic Plan per Minute for a local fixed-line call. ANATEL announced that beginning in 2008, the method used to determine the TU-RL rates would be based on a cost methodology, known as long-run incremental costs. However, in October 2007, ANATEL published an official letter delaying this change until 2010. In 2006, the TU-RIU rates that fixed-line service providers could charge each other to use a portion of their long-distance networks to complete long-distance calls were reduced to 30% of the applicable domestic fixed line-to-fixed line long-distance rates for calls of more than 300 km. Interconnection Regulations Applicable to Personal Mobile Services Providers Interconnection fees are charged at a flat rate per minute of use of a personal mobile services provider’s network. Prior to February 2005, interconnection rates charged by Band A and Band B providers were subject to a price cap stipulated by ANATEL. Since February 2005, the terms and conditions of interconnection agreements of all personal mobile services providers, including the rates charged by the operator of the network to terminate a call on its mobile network (the VU-M rate), commercial conditions and technical issues, are freely negotiated between mobile and fixed-line telecommunications service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things.
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Table of ContentsPersonal mobile services providers must offer the same VU-M rate to all requesting providers on a nondiscriminatory basis. Interconnection agreements must be approved by ANATEL before they become effective, and they may be rejected if they are contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and conditions of interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with fixed-line service providers could be reached regarding VU-M rates when Oi and Brasil Telecom Mobile began offering personal mobile services, ANATEL set the initial VU-M rates for each of them. Personal mobile services providers negotiate annual rate increases for their VU-M charges with the fixed-line telecommunications providers. If the providers cannot agree upon the terms and conditions of annual rate increases, ANATEL may determine the annual rate increases by arbitration. Transition from “Bill and Keep” System to “Full Billing” System Prior to July 2006, a personal mobile services provider was only required to pay interconnection fees to another personal mobile services provider for traffic in the same registration area in the event that the ratio of the outbound traffic generated by that provider (measured in minutes) to the inbound traffic terminated by that provider (measured in minutes) exceeded 55% or was less than 45%. In July 2006, ANATEL adopted new regulations under which personal mobile services providers recognize interconnection revenues (and costs) for traffic in the same registration area on a gross basis based on the total traffic between personal mobile services providers’ networks. This system is designated the “full billing” system. These regulations also:
Regulation of Interconnection Rates Charged by Providers with Significant Market Power In 2005, ANATEL issued regulations defining a series of cost-based methods, including the fully allocated cost methodology, for determining interconnection fees charged by telecommunications service providers belonging to economic groups with significant market power based on their fixed-line or personal mobile services interconnection networks. All incumbent fixed-line service providers and all personal mobile services providers are deemed by ANATEL to belong to economic groups with significant market power in their respective service areas until ANATEL finalizes its evaluation of each provider under published criteria to determine significant market power. In July 2006, ANATEL issued regulations regarding the fees that may be charged for the use of mobile networks by personal mobile services providers with significant market power in the mobile interconnection market. These regulations will become effective as of a future date to be established by ANATEL. Under these regulations, ANATEL will determine, based on a fully allocated cost model, a reference value for VU-M rates of providers that are deemed to hold significant market power. This reference value will be reassessed every three years. In order to determine whether a provider has significant market power, ANATEL will establish criteria that consider:
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In 2007, ANATEL developed a cost-based methodology that is expected to take effect in 2010 to determine reference values for the VU-M of mobile services providers having significant market power, which will be used in the case of arbitration by ANATEL of the value of VU-M. In 2008, mobile services providers began providing ANATEL with annual operating data, which is intended to support ANATEL’s cost-based methods for determining interconnection fees. Number Portability Regulations Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the same fixed-line or mobile telephone number. In March 2007, ANATEL adopted the General Regulation of Portability (Regulamento Geral de Portabilidade), establishing the deadlines and general rules regarding portability of fixed-line and mobile telephone numbers. These regulations permit fixed-line customers to retain their telephone numbers if they become customers of a different fixed-line service provider in the same municipality or if they move to a new home or office in the same municipality. Personal mobile services customers are permitted to retain their telephone numbers if they change their service plan or if they become customers of a different personal mobile services provider within the same registration area. Implementation of number portability commenced in August 2008 and was completed in March 2009. Each telecommunications provider has been required to contract a third-party management entity to manage all procedures relating to number portability. Service providers are permitted to charge a migrating customer that elects to retain its telephone number a one-time fee of no more than R$4.00. This amount is intended to compensate the customer’s current provider for the costs associated with managing the portability process. The new provider may elect to absorb this fee on behalf of the customer. Regulation of Data Transmission and Internet Services Under Brazilian regulation, ISPs are deemed to be suppliers of value-added services and not telecommunications service providers. Value-added services are considered an activity that adds features to a telecommunications service supported by such value-added services. Telecommunications service providers are permitted to render value-added services through their own networks. In addition, ANATEL regulations require all telecommunications service providers and cable television operators to grant network access to any party interested in providing value-added services, including internet access, on a non-discriminatory basis, unless not technically feasible. ANATEL has adopted regulations applicable to fixed-line service providers with significant market power. Under these regulations, these providers were required to make the forms of agreements that they use for EILD and SLD services publicly available, including the applicable rates, and are only permitted to offer these services under these forms of agreement. Following publication of these forms of agreement, the rates under these agreements may be increased on an annual basis by no more than the rate of inflation, as measured by the IST. ANATEL also publishes reference rates for these services, and if a customer of one of these providers objects to the rates which that provider charges for these services, the customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.
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Table of ContentsEnvironmental and Other Regulatory Matters As part of our day-to-day operations, we regularly install ducts for wires and cables and erect towers for transmission antennae. We may be subject to federal, state and/or municipal environmental licensing requirements due to the installation of cables along highways and railroads, over bridges, rivers and marshes and through farms, conservation units and environmental preservation areas, among other places. To date, we have been required to obtain environmental licenses for the installation of transmission towers and antennae in the municipality of Porto Alegre, the capital of the State of Rio Grande do Sul, with no material impact on our operations. However, there can be no assurances that other state and municipal environmental agencies will not require us to obtain environmental licenses for the installation of transmission towers and antennae in the future and that such a requirement would not have a material adverse effect on the installation costs of our network or on the speed with which we can expand and modernize our network. We must also comply with environmental legislation regarding the management of solid wastes. According to Resolution No. 237/97 of the National Environmental Council (Conselho Nacional do Meio Ambiente), companies responsible for the treatment and final disposal of solid industrial wastes, special wastes and solid urban wastes are subject to environmental licensing. Should the waste not be disposed of in accordance with standards established by environmental legislation, the company generating such waste may be held jointly and severally liable with the company responsible for waste treatment for any damage caused. Also, in all states where we operate, we have implemented management procedures promoting the recycling of batteries, transformers and fluorescent lamps. In addition, we are subject to ANATEL regulations that impose limits on the levels and frequency of the electromagnetic fields originating from our telecommunications transmissions stations. We believe that we are in compliance with ANATEL standards as well as with all applicable environmental legislation and regulations. We are currently not involved in any administrative or judicial proceeding involving material liability for environmental damage.
Not applicable.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements as of December 31, 2008 and 2007 and for the three years ended December 31, 2008, which are included in this annual report, as well as with the information presented under the sections entitled “Presentation of Financial and Other Information” and “Item 3. Key Information – Selected Financial Information.” The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.” The following discussion and analysis of our financial condition and results of operations presents the following:
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Overview We are the largest telecommunications service provider in Brazil. We are the largest telecommunications provider in Region I in Brazil, based on revenues and customers as of and for the year ended December 31, 2008, according to information available from ANATEL and other publicly available information. As a result of our acquisition of the control of Brasil Telecom on January 8, 2009, we are also the largest telecommunications service provider in Region II in Brazil, based on revenues and customers as of and for the year ended December 31, 2008, according to information available from ANATEL and other publicly available information. We commenced offering mobile telecommunications services in Region III in October 2008. We offer a range of integrated telecommunications services that includes fixed-line and mobile telecommunications services, data transmission services (including broadband access services), ISP services and other services, for residential customers, small, medium and large companies, and governmental agencies. We operate under the brand name “Oi”, which we adopted in February 2007 as the sole brand for all of our services. We expect to use the “Oi” brand name for the marketing of Brasil Telecom’s services as we integrate its operations. In 2008, we recorded net operating revenues of R$18,736 million and net income of R$1,154 million. Our results of operations and financial condition will be significantly influenced in future periods by (1) our acquisition on January 8, 2009 of Invitel, the controlling shareholder of Brasil Telecom, and the consolidation in our financial statements of its assets, liabilities and results of operations as from January 8, 2009, and (2) to a lesser extent, our acquisition on April 3, 2008 of TNCP, the controlling shareholder of Amazônia Celular, and the consolidation in our financial statements its assets, liabilities and results of operations as from April 3, 2008. For additional information regarding these acquisitions, see “Item 4. Information on the Company—Our History and Development—Acquisition of Brasil Telecom” and “Item 4. Information on the Company—Our History and Development—Acquisition of Amazônia Celular.” In addition, our results of operations for the years ended December 31, 2008, 2007 and 2006 have been influenced, and our future results of operations will continue to be influenced, by a variety of factors, including:
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Our financial condition and liquidity is influenced by a variety of factors, including:
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Table of ContentsFinancial Presentation and Accounting Policies Presentation of Financial Statements We have prepared our consolidated financial statements at December 31, 2008 and 2007 and for the three years ended December 31, 2008 in accordance with Brazilian GAAP, which include the changes introduced by Law No. 11,638/07 and Deliberation 565/08 and which differ in certain important respects from U.S. GAAP. For a discussion of certain differences relating to these financial statements, see note 36 to our audited consolidated financial statements included elsewhere in this annual report. On December 28, 2007, the Brazilian government enacted Law No. 11,638/07, which became effective on January 1, 2008, amended the Brazilian Corporation Law and changed certain accounting policies under Brazilian GAAP. In December 2008, the CVM issued Deliberation 565/08, implementing these changes in accounting policies. In December 2008, the Brazilian government issued Provisional Measure No. 449, which instituted the transitory tax-payer regime (“Regime Tributário de Transição—RTT”) for the determination of taxable net income of companies subject to the real profit tax regime as a result of the implementation of these changes in accounting policies and the Brazilian Corporation Law. In May 2009, Provisional Measure No. 449 was codified in Law No. 11,941/09. The principal changes introduced by Law No. 11,638/07, Deliberation 565/08, Provisional Measure No. 449 and Law No. 11,941/09 as they relate to our financial statements are, among others:
In order to make our financial statements as of December 31, 2007 and for the two years ended December 31, 2007 comparable to our financial statements as of December 31, 2008 and for the year ended December 31, 2008, we have retrospectively revised our previously issued financial statements as of December 31, 2007 and for the two years ended December 31, 2007 to conform to the changes in accounting policy introduced by Law No. 11,638/07, Deliberation 565/08, Provisional Measure No. 449 and Law No. 11,941/09. For additional information with respect to these changes and their effects on our financial statements, see note 2 to our consolidated financial statements included elsewhere in this annual report. Business Segments and Presentation of Segment Financial Data We have implemented an organizational structure that we believe reflects our business activities and corresponds to the principal services that we provide. We report our results in three segments to reflect this organizational structure:
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We evaluate and manage business segment performance based on information generated from our statutory accounting records, which are maintained in accordance with Brazilian GAAP, and, accordingly, the segment data included in this annual report is presented under Brazilian GAAP. We have included a reconciliation of the operating results of our segments to our consolidated results under “— Results of Operations” below. Critical Accounting Policies and Estimates Our significant accounting policies are described in note 3 to our audited consolidated financial statements included elsewhere in this annual report. In preparing our consolidated financial statements, we relied on estimates and assumptions derived from historical experience and various other factors that we deemed reasonable and relevant. Critical accounting policies are those that are important to the portrayal of our consolidated financial position and results of operations and require management’s subjective and complex judgments, estimates and assumptions. The application of these critical accounting policies often requires judgments made by management regarding the effects of matters that are inherently uncertain with respect to our results of operations and the carrying value of our assets and liabilities. Our results of operations and financial position may differ from those set forth in our consolidated financial statements if our actual experience differs from management’s assumptions and estimates. In order to provide an understanding of our critical accounting policies, including some of the variables and assumptions underlying the estimates, and the sensitivity of those assumptions and estimates to different parameters and conditions, we set forth below a discussion of our critical accounting policies relating to:
Revenue Recognition and Accounts Receivable Our revenue recognition policy is significant because our revenue is a key component of our results of operations. Management’s determination of price, collectability and the rights to receive certain revenues for the use of our network are based on judgments regarding the nature of the fee charged for services rendered, the price for certain services delivered and the collectability of those revenues. Should changes in conditions or discussions cause management to determine that these criteria are not met for certain transactions, the amount of accounts receivable could be adversely affected. In addition, we rely upon revenue recognition measurement guidelines in accordance with rules issued by ANATEL. Revenues from the usage of our network by other telecommunications service providers are recorded based on a formal document of declared traffic and services rendered, the Traffic Exchange Declaration (Documento de Declaração de Tráfego e Prestação de Serviço), or DETRAF, issued by an independent, outsourced clearinghouse.
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Table of ContentsAccounts receivable from telecommunications services are valued by applying the rates on the date the service is rendered. These receivables also include credits for services rendered but not yet billed, up to the balance sheet date. The value of services rendered but not yet billed is determined by the valuation of the metered services at year-end or by estimates that take into account the performance of the previous month. The related taxes are determined similarly and accounted for on an accrual basis. Late-payment interest is accounted for upon the issue of the first bill following the payment of the overdue bill. The revenues related to the sale of public telephone cards, handsets and accessories are accounted for upon the transfer of ownership. However, mobile pre-paid cards revenues are deferred and recognized as income, based on customer usage. Provision for Doubtful Accounts This provision is established in order to recognize probable losses on accounts receivable and takes into account limitations we impose on services to customers with past-due accounts and actions we take to collect delinquent accounts, beginning when the account is either 60 days past due for the fixed-line segment or 15 days past due for the mobile services segment, as follows:
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