The ANATEL 5G public auction and its impacts on Brazil’s social inclusion and economic disruption

“Nothing is more powerful than an idea whose time has come”, Victor Hugo

After the breakdown of the Telebras monopoly and privatization of the telecom sector in 1998, Brazil went through a period of unprecedented improvement of its telecommunication backbone. From a mere number of ~17 million fixed (and very expensive) landline telephones and less than 4.6 million cell phones in the late nineties to a remarkable number of more than 240 million mobile accounts now, Brazilians saw their levels of domestic and global connectivity skyrocket.

Impossible to deny the role that global technological forces played (3G, 4G, iOs, Android, etc.), but the truth is that the reduced control over such an important industry played a key role in allowing more Brazilians to access affordable options of connectivity. In critical and regulated industries, governments can be a force of very positive change alongside innovators and entrepreneurs.

Fast forward 23 years, and we are close to witness another potentially disruptive and historical moment: tomorrow the ANATEL will hopefully successfully conclude the biggest public auction in the history of Brazil’s telecom industry, with what is commonly known as the “5G public auction”. Last week, 15 companies presented their proposals, and since then, everyone has been waiting excitedly and a bit nervously about what could come out of tomorrow’s auction.

The potential impact of this auction on technological disruption is significant: by bringing high speeds, better network stability, and primarily very low latency levels, the 5G technology may open up new frontiers in areas such as autonomous vehicles, remote surgeries, and IoT. However, it’s important to note that, before anything, this auction is also about social and economic inclusion, since a lot of remote areas will benefit from investments in technology that are not exclusive to 5G.

With this backdrop in mind, let us try our best to provide our views on what this auction is about, and what impacts we should expect to see on venture capital investments in the telecom space as well as in other sectors of the economy.

A) What is the “5G public auction” about?

Before diving deeper into the structure of the auction, allow us to start putting things into context: in the past few years, we’ve seen a lot of excitement around the high levels of connectivity in Brazilian society. Every discussion we are part of lays out the digital engagement as a major pillar in the technological disruption we are seeing and should expect to see going forward.

In fact, we have a lot to celebrate indeed: the levels of digital engagement and disruption brought up / accelerated by COVID-19 are already remarkable and contributed to a massive attraction of capital inflows in the technology space. However, there are some important (and less happy) truths to keep in mind around the uneven distribution of connectivity across Brazil:

• Fixed broadband: only 57.5% of existing fixed broadband is built on top of fiber, and a substantial portion of the population lives with legacy technologies such as metallic and coaxial cables.
• Mobile broadband: of all the mobile phones in Brazil, almost 25% relies on legacy 2G and 3G technologies, which will most likely be discontinued this decade, but still represents a very significant share of our telecom infrastructure.
• Pay TV: 50% of all pay tv subscriptions still rely on old satellite connections, which are a lot more susceptible to bad weather, which often interrupts transmission and affects image quality.

In parallel, the world is only accelerating the development and adoption of global and open new technologies, and 5G, which is way more than “just a new generation” after the 4G, will lay the foundations for massive disruptions in many industries. With this backdrop in mind, it’s now time to shed some light on the public auction that is happening tomorrow, and which tries to bring more connectivity to a broader share of Brazil’s population, while also pushing for more ambitious goals.

1. More long-term investments. Less upfront payments: one of the interesting aspects of this process is that its goal leans heavily towards long-term and structural investments rather than upfront collections. ANATEL expects “only” ~$500–600MM USD to be collected upfront from the winners of the multiple pieces of the auction, while another ~$10B+ USD spent on fixed investments in the next years;

2. Mix of social inclusion, government requirements, and disruptive technologies: as previously mentioned, the auction is also about leveling the playing field, and bringing more Brazilians to the world of faster and more stable connectivity. Within this context, the auction was built around four main bands of spectrum:

2.1. — 700 MHz: this slightly lower frequency band of the spectrum will be focused primarily on bringing the 4G technology to areas and federal roads (ie.: BR-242) that lack this infrastructure. This band will be auctioned off in one national block of 10 + 10 Mz within the 708–718 MHz sub-band, and two regional blocks of 5 + 5 MHz within the 763–773 MHz sub-band.

2.2–2.3 GHz: focused on covering 95% of the urban areas of localities without the 4G technology, expected to be the standard frequency for general connectivity. It will be auctioned off in two regional blocks, 50 MHz within the 2.30–2.35 GHz sub-band and 40 MHz in the 2.35–2.39 GHz sub-band.

2.3–26 GHz: considered the least attractive frequency band of the auction. Comes with the obligation to provide connectivity to public schools to carry out their I.T. and communications curriculum. Will be auctioned off in 10 national blocks and 6 regional blocks within the 24.3–27.5 GHz sub-band.

2.4–3.5 GHz: this will be the main band for the 5G technology, with 4 national blocks and 8 regional blocks, all of 80 MHz. The band comes with the heaviest investment commitments, some of which with negative NPV, but will tag along the high-potential ones with the goal of social and economic inclusion such as:

• 2.4.1 Investments in high speed infrastructure such as fiber (ie.: more than one thousand cities in Brazil do not have the optic fiber infrastructure and will receive the “fiber backbone”);
• 2.4.2 Implement the ERBs (Base Radio Stations) that will allow the 5G technology at the density of at least 1 station for each 10k inhabitants on the covered area;
• 2.4.3 Development of a private communication network for Brazil’s Public Federal Administration, and for the Amazon (PAIS — Programa Amazônia Integrada e Sustentável);
• 2.4.4 Reimbursement of potential problems caused with open cable (“antena parabólica”) via the potential overlap of spectrum. It is estimated that this potential frequency interference will impact 21 million Brazilians.

Each piece of the auction has its particularities, required investments, and timeframes, but we expect to see the first major deliveries (ie. 5G coverage in all 27 capitals in Brazil) already in H2-’22, and the bulk of the key investments concluded by ~2025. All of the bands will be auctioned for a 20 year authorization period.

In a nutshell, the auction will involve several investments that go well beyond 5G technology, and aim to improve the basic infrastructure of remote areas, federal roads, public schools, etc., in a movement that can move up the quality of communications for the long-tail of the country. With millions of Brazilians being connected to more high quality network, the potential impacts for technological disruption are plenty.

B) What are the short and medium-term impacts of the auction?

From a Venture Capital perspective, we believe that there are some significant impacts one could expect from the auction: the migration of more than 20 million Brazilians into at least the 4G technology will help equalize some of the disparities in terms of access to services and products.

On the retail side, for example, several e-commerce companies and marketplaces will be able to reach consumers in more remote areas of Brazil. Think of social commerce platforms who could be able to more easily and effectively serve consumers in remote areas.

Or, in the fintech space, think about the potential for value creation that could arise from having dozens of millions of Brazilians with more stable and reliable connection to the Internet. The potential for an increase in financial inclusion is remarkable. Same thing for other industries, such as healthcare, which could deliver high-quality tele health services more efficiently as well.

And, one sector that should expect to see some activity is telecommunications itself. The industry, primarily dominated by a few incumbents that have been around for decades, is not particularly known for being loved by consumers. And, with the new technologies, the auction could bring neutral networks, and thus foster some disruption. And, the changes will go well beyond the simplistic concept of MVNOs. For example: the technology infrastructure that permeates the sector’s supply chain is fairly old, we haven’t yet seen 4.0 MVNEs, and these areas could definitely expect to see some activity. Ps.: we have talked to some impressive Founders. More on that later.

In summary, we are certain a lot of things will happen through the first wave of bringing technology and innovation into more remote areas of our land.

C) What are the long-term impacts of the auction?

From a long-term point of view, we can also expect disruptions in a variety of industries, but before we get into the expected long term impact of 5G, let us lay out a few reasons why 5G is so disruptive compared to other technologies, such as 4G LTE.

• Improved speed, 100x faster than LTE.
• Lower latency with higher reliability, from 20ms to <1ms with 99.999% of reliability.
• Enablement of massive connection, 100x more devices supported per square kilometer.
• Higher energy efficiency, 90% less power consumption.

Combined, these elements will allow for the long-term development and broad deployment of truly disruptive technologies such as autonomous vehicles, remote surgeries, among others.

However, it is important to understand that the 5G that is deployable today, the non-standalone version, relies on existing LTE networks, which means that realistically, those full capabilities won’t be available to us until the standalone 5G is deployed (2022 or 2023). The main advantage of the non-standalone 5G is the improved network speed, while the standalone version will be the one to unlock the full potential and to disrupt our current connectivity standards. Another important aspect regarding 5G’s full capability is that it enables customized connectivity. In other words, it will allow telecom operators to work with multiple currencies as they will be able to customize its services to the users’ connectivity requirements.

With that in mind, it is reasonable to assume that the growth of 5G and its applications will occur in waves as we advance on the necessary technology, infrastructure and regulation. The first wave will be based on the use cases that can work on the non-standalone 5G and that already have compatible hardware in the market, which should encompass Enhanced Mobile Broadband (EMBB) and Fixed Wireless Access (FWA). For EMBB, it means to provide faster connection on wide coverage areas enabled by the already manufactured 5G chipsets. While for FWA, it means to provide an efficient and scalable alternative to wired internet connections.

According to 3GPP, we can expected 2 other waves of 5G applications, that relies on the standalone version of 5G and on the yet to be developed chipsets: Ultra-reliable, low-latency communication (URLLC), which increases the speed and quality of connections enabling remote control of robot and drones; and Massive machine-type communication (MMTC), involving the automatic generation, processing and transmission of data among various machines with low human intervention which enables tracking of products throughout a supply chain, for example.

What this means for telcos is that the usual approach for launching a new network, deploying technology first and designing the offer later on, will not work. Operators will have to be mindful of how to monetize use cases from the start and they will have to foster an open and agile environment fueled by an ecosystem of partners and service providers in order to succeed. Another expected consequence of 5G is that it should incentivize a decentralized network approach where the telcos find a collaboration model to rationalize deployment of networks, making it a lot more cost-efficient. Think of it as network “uberization”, where ownership of a network is decentralized and part of a shared economy.

In summary, what we aim here is to shed some light on this historical milestone for Brazil and what this could represent for the social and economic development of the country. And, if you are a Founder who sees opportunities arising from this auction, please let us know. We would love to exchange some ideas and help you on the journey!