Brazil’s big four operators prepare for fresh competition

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Brazil’s mobile market – the largest in Latin America – reported strong growth in 2009, but the country’s four main mobile operators could face a raft of new competitors later this year. According to Wireless Intelligence data, the Brazilian market grew by 16 percent year-on-year to reach 176 million by the end of last year and continues to be dominated by its ‘big four’ players: market-leader Vivo, America Movil’s Claro, Telecom Italia’s TIM Brasil, and local operator Tele Norte Leste Participacoes (better known as ‘Oi’).

These four players were the principle winners in the country’s first WCDMA (3G) auctions that took place at the end of 2007 and are in the process of migrating their customers to the new networks. However, the big four are expected to be barred from bidding for further 3G spectrum when the local regulator (Anatel) sells-off the so-called ‘H-band’ WCDMA bandwidth later this year.

Almost certain to bid at these auctions is Nextel, the iDEN operator that narrowly lost out on securing spectrum in 2007. Also in the frame is France’s Vivendi, which said earlier this month it is watching Anatel’s plans for new 3G auctions “extremely closely.” The French conglomerate entered the Brazilian market last November via the US$4 billion acquisition of fixed-line broadband firm GVT and is understood to be keen to break into mobile (it already competes with the fixed-line subsidiaries of the big four operators, including Telefonica’s Telesp and America Movil’s Telmex). 

Mobile spectrum is also set to be auctioned off at the same time in the WiMAX-capable 2.5GHz and 3.5GHz bands, which could serve to kick-start Brazil’s nascent WiMAX market. According to a recent report from Maravedis, Brazil has only around 130,000 WiMAX subscribers to date, mainly via local providers such as Neovia and Embratel. The WiMAX market is deemed to be suffering from a chronic shortage of spectrum; around 75 percent of 3.5GHz spectrum has yet to be released, while the use of mobility in 2.5GHz is restricted.

Further competition could arrive in the form of MVNOs, which are expected to be allowed into the market for the first time this year. As in Africa, MVNOs are uncommon in the Americas with less than ten in operation across the entire region, according to our data. This means that the introduction of virtual operators in Brazil could quickly establish the country as the leading MVNO market in the region, providing opportunities for operators to reach new market segments and boost competition. The Brazilian arm of French retail group Carrefour has already confirmed its interest in entering the market via this route and other big names could follow.

Meanwhile, the established players continue to dominate. Market-leader Vivo – a 50/50 joint-venture between Spain’s Telefonica and Portugal Telecom – surpassed the 50 million connections milestone in 4Q09 and captured over a third of net additions in the quarter (fourth-quarter additions accounted for 42 percent of Vivo’s total for 2009). Vivo also claims to be a market leader in data services, growing data revenues by 46 percent in 2009 (with non-SMS revenue accounting for 61 percent). However, ARPU declined 8 percent over the year.

Vivo’s migration from CDMA to GSM began in June 2006 when the operator announced it was to build a GSM overlay on its CDMA network. Investment analysts at the time estimated that the migration project would cost around EUR2 billion and take three years to complete. According to Wireless Intelligence data, the percentage of Vivo’s subscribers on its CDMA networks almost halved during 2009, dropping from 29 percent in 4Q08 to 16 percent in 4Q09. According to Anatel, Vivo’s EV-DO network was switched off in the quarter after the operator completed the migration of these 3G customers to its new WCDMA and HSPA networks.

Meanwhile, Brazil is one of the markets where second-placed America Movil is looking to ramp-up competition with fierce regional rival Telefonica by combining its mobile and fixed-line assets. Its Brazilian mobile arm – Claro – kept pace with Vivo during 2009 and it has also been the most successful of the big four operators in migrating customers over to WCDMA with 9 percent of its customer base converted by year-end. This resulted in an annual rise in data revenue of 51 percent in 4Q09.

The market shares of the big four have remained virtually unchanged during 2009 with only Nextel providing serious competition from among the smaller players; the iDEN operator grew its subscriber base by 37 percent during the course of the year, according to our data. Regional operator Sercomtel was the only player to lose ground in 4Q09, shedding around 5,000 customers – around 6 percent of its total subscriber base.

Will Croft, Analyst, Wireless Intelligence

Stimulating a market such as Brazil is a challenge on two fronts: both introducing competition and establishing rural 3G coverage are required to have any potential to disrupt the current status quo. Given that Anatel has already expressed intent to veto any overselling on network capacity, the chances of emerging from a pricing war (in a market with an effective price per minute already pegged at US$0.16) are slim. Instead, the key to unlocking additional revenue lies in the race towards improving 3G coverage, as demonstrated by the significant increases recorded in the contribution of data as a percentage of revenue at the big four operators. A clear set of tariffs and a streamlined portfolio will therefore be necessary to enact any disruption in Brazil, lest a new entrant be lost amongst the noise of triple-play offers that currently dominate the market. However, establishing coverage from scratch and reaching unconnected rural areas will not be easy, and will likely require network-sharing agreements on a site or infrastructure level to lessen the financial blow. For example, initial investment for Vivendi’s potential entrance into the market has been estimated at between EUR1.5 billion to EUR2 billion – including spectrum and build-out. Third-placed TIM Brasil recently stated that it hopes to expand its existing 3G coverage of 57 cities (representing just 30 percent of the urban population) to 60 percent of the entire country by 2012. Such rollout targets are expected to ensure that Anatel provides favourably ‘low and slow’ coverage requirements and a generous licence payback period, which should serve to lower the barrier to entry for potential new competitors.

Brazil mobile market, 4Q09
Source: Wireless Intelligence, Anatel, company data