The strong Brazilian economy was once more favorable to the telecommunications industry in 2011 despite the developments of the international financial crisis, which had a negative impact mainly in the second half of the year. Contributing factors in this situation were the low unemployment rate (4.7%), the 2.7% rise in the average real income earned by workers and consumption driven by the credit supply. The demand for services, mainly mobile phone and Internet access services, continued to rise among end-users, who want to be connected to the whole world, anywhere and at any time, due to the popularity of social networks.

Concerning cable TV, there are good prospects for HDTV resolution channels, a product that Algar Telecom introduced in December 2011 and has been accepted well by a portion of the clients. The corporate sector market also remained strong throughout the year. In addition to higher demand for connectivity among existing companies, the economic stability in Brazil is conducive to entrepreneurship. The more companies are created, the higher the demand for telecom products and services.

The regulatory environment in FY 2011 was marked by important discussions, mainly concerning the participation of telecom companies in the Brazilian Federal Government’s Digital Inclusion Program. In May 2011, Algar Telecom signed the National Broadband Program Agreement with the Ministry of Communications and Anatel (Brazilian National Telecommunications Agency); as a result, it started offering Internet access services at low prices in its operating area.

Also in 2011, the Fixed Switched Telephone Service (FSTS) Concession Contracts were revised, and the main alteration was the introduction of a new General Plan of Universalization Goals, which determines that telecom services be offered in rural areas through the 450 MHz band as of 2012. Additionally, the law that created the Conditioned Access Service, intended to establish new rules for pay television services in Brazil, including the obligation for TV service providers to distribute Brazilian content. Some provisions of this law still require specific regulation to be edited by Anatel and Ancine (Brazilian National Cinema Agency).

Other issues discussed by the industry in 2011 were the proposed General Plan of Competition Goals in the Brazilian telecom industry, in whose discussions Algar Telecom participated actively, and the approval of the Regulations on the Criteria for Tariffs for FSTS Calls to the Personal Mobile Service (PMS) and the Specialized Mode Service (SMS), which determines the gradual drop in the tariffs for users of these services. By means of resolutions, Anatel also established new quality goals for PMS and the Multimedia Communication Service (MCS), which will go into effect in 2012.

As regards the challenges, one of the major concerns of the industry throughout last year was personnel costs. Telecom is still among the top job-creating industries in Brazil. Nevertheless, its margins – despite higher net revenues – were impacted significantly by a higher minimum wage and lower unemployment rates. As a result, the industry is pushing the Federal Government to approve a law decreasing payroll taxes for software and IT companies until 2014.

Another challenge for the telecom and IT industries is fiercer and fiercer competition. The promising scenario has been attracting new international players that establish in Brazil to enter various segments of this market. In view of this situation, the market has been more favorable for the most innovative companies, able to offer top-quality products and services at competitive prices, and the companies that distinguish themselves for their service.