Brazilian operators merge mobile and fixed units

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Spain’s Telefonica and Mexico’s America Movil have both made recent moves to merge their mobile and fixed-line assets in Brazil in a bid to reduce costs and protect market share in an increasingly competitive environment.

America Movil-owner Carlos Slim is currently in the process of merging the firm with its fixed-line sister companies, Telmex and Telmex International, in a deal expected to be worth around US$22 billion. In the case of Brazil – America Movil’s largest mobile market outside of Mexico – the move will lead to a merger between its local mobile arm, Claro, and Telmex International’s fixed-line assets in the country such as Embratel – the long-distance arm of the former state-owned monopoly operator (Telebras).

As we discussed in an earlier edition of Snapshot, the merger will allow the newly-integrated operator to offer ‘triple-‘ or even ‘quadruple-play’ bundles of services (mobile, fixed-line, Internet, TV) across the majority of its markets. However, the deal appears more motivated by cost-savings and other efficiencies in the short term; analysts have estimated initial cost-savings of around US$2 billion. It is also considered a strategy that will strengthen America Movil’s position against Telefonica, its main competitor across most of its Latin American markets.

Competition between Telefonica and America Movil is particularly fierce in Brazil where they run the country’s first and second largest mobile operators, respectively, and two similarly sized fixed-line operations (see table). Telefonica responded to America Movil’s move by ramping-up its efforts to buy-out its joint-venture partner in its Brazilian mobile arm, Portugal Telecom (PT). The two firms jointly own a holding company called Brasilcel that controls 60 percent of Vivo, the country’s largest mobile operator. In an often strained relationship between the two partners, Telefonica has tried several times to buy-out PT’s stake in Brasilcel but has always had its offers rejected by the Portuguese firm. However, Telefonica has tabled a bid this week worth EUR6.5 billion, which PT is putting to its shareholders.

Telefonica’s renewed effort to take control of Vivo is understood to be part of a drive to more closely integrate Vivo with its local fixed-line arm, Telesp, which has been one of the biggest casualties of increasing competition in the Brazilian fixed-line market. The unit posted positive net additions in both fixed-line telephony and broadband customers in 1Q10 but this was the first time it had done so in a year. Similarly, fixed-line revenues dropped 2.6 percent year-on-year, yet this was still its best performance for five quarters. Telefonica’s plan is to therefore forge closer ties between Telesp and Vivo in areas such as network, marketing and back office functions, which it says could generate significant cost savings for both subsidiaries. Telefonica has pledged to invest BRL5 billion (US$2.77 billion) in Brazil this year.

Meanwhile, America Movil’s Telmex International managed to increase revenues in Brazil by 6.7 percent year-on-year in 1Q10 and has had some success in reducing its dependency on long distance revenue, which now accounts for around 45 percent of the unit’s turnover. Its satellite-based pay TV service – launched via Embratel at the end of 2008 – has been a notable success.

The fixed businesses of both Telefonica and America Movil continue to trail Brazil’s largest fixed-line provider, Oi, the locally-owned operator that also controls the country’s fourth-largest mobile firm. Oi has concentrated in recent years on integrating its 2008 acquisition of rival fixed-line firm Brasil Telecom, a process it claims had been completed by the end of 2009 with all its services – both mobile and fixed – now under the Oi brand. As the largest fixed-line player, Oi has suffered the most from the effects of mobile substitution with its fixed-line customer base declining by 3.5 percent year-on-year in 1Q10. However, as the operator is the most fully integrated in Brazil, it has been able to offset losses in its traditional fixed base by offering bundles of services, either a combination of fixed, mobile and broadband, or fixed and pay TV. Subscribers to its fixed broadband service – known as ‘Oi Velox’ – rose 8.3 percent to 4.3 million year-on-year in 1Q10.

The country’s other main mobile operator – Telecom Italia’s TIM Brasil – does not have a legacy fixed business. However, last year it acquired Brazilian long-distance operator, Intelig, and is now using the unit to provide fixed-to-fixed long distance calls to Brazil and 23 other countries. A pilot in Sao Paulo is also providing broadband access using BPL (Broadband over Power Lines) technology.

Competition in the Brazilian fixed market was ramped up last year following the entrance into the market of French media conglomerate, Vivendi, which acquired local fixed-line broadband firm GVT for US$4 billion in November. The firm is also expected to acquire mobile spectrum when the local regulator (Anatel) sells-off the so-called ‘H-band’ WCDMA bandwidth later this year. 

Matt Ablott, Senior Editorial Analyst, Wireless Intelligence

The Brazilian mobile market has long been an engine of growth for European operator groups such as Telefonica and TIM. But mobile penetration is fast approaching 100 percent (95 percent in the first quarter according to our data) and the growth in mobile continues to divert revenue from local operators’ traditional fixed-line telephony businesses. Against this backdrop, the drive to more closely integrate mobile and fixed operations can generally be considered a defensive tactic. Firstly, to ‘lock in’ consumers using bundled services to make them less likely to churn to rivals; and, secondly, to limit the cannibalisation of fixed revenues by mobile services. Oi has had notable success with this strategy in recent quarters, which has helped it keep pace with its larger rivals. As Telefonica has outlined, cost synergies in areas such as marketing and back office functions is also a key motivation. One key area of growth for all the country’s operators – in both mobile and fixed – is broadband, which we expect to be a key battleground in Brazil moving forward. WCDMA is still in its relative infancy in Brazil, accounting for only 10 percent of total connections in the first quarter. But moves to sell-off more 3G bandwidth to new market entrants could ramp up activity in mobile broadband over the next few years.

Brazil mobile/fixed-line connections (1Q10)
Source: Wireless Intelligence, company data

^† Totals include data for aeiou (Unicel), CTBC, Nextel (NII) and Sercomtel
^‡ Total ARPU includes data for Nextel (NII)