re: Brazil's Confusing (to me) Wireless Scene
This one's about 45 days old ...
... but it does an excellent job of framing the issues that exist in Brazil that you have mentioned
* Seventh biggest cellular market in the world
* 29 million subscribers at the end of 2001
* Opening up to GSM (big time)
* Anatel sees the introduction of PCS as an opportunity to intensify competition and wants incumbent cellular operators to move from concession contracts (SMC) to the same authorisation contracts (SMP) that govern the new PCS entrants.
* Four big multinational operator groups tussle over the market - ultimately managing 80 per cent of all subscriptions:
- Telefonica Moviles
- Telecom Americas
- BellSouth International
- TIM
Brazilian Mobile Operators By Region & Technology
Region Operator (Group) Digital Technology
1 - Telesp Celular (Portu-fonica) IS-95 (CDMA)
- BCP (BellSouth) IS-136 (TDMA)
- TIM GSM
2 - Telesp Celular (Portu-fonica) IS-95 (CDMA)
- Tess (Telecom Americas) IS-136 (TDMA)
- TIM GSM
3 - Telesp Celular (Portu-fonica) IS-95 (CDMA)
- ATL (Telecom Americas) IS-136 (TDMA)
- Telemar GSM
- TIM GSM
4 - Telemig Celular (CVC Opportunity/TIW) IS-136 (TDMA)
- Maxitel (TIM) IS-136 (TDMA)
- Telemar GSM
5 - TIM Sul (TIM) IS-136 (TDMA)
- Global Telecom (Portu-fonica) IS-95 (CDMA)
6 - Telefonica Celular (Portu-fonica) IS-136 (TDMA)
- Claro Digital (Telecom Americas) IS-136 (TDMA)
- TIM GSM
7 - Tele Centro Oeste Celular (Fixcel) IS-136 (TDMA)
- Americel (Telecom Americas) IS-136 (TDMA)
- TIM GSM
8 - Amazonia Celular(CVC Opportunity/TIW) IS-136 (TDMA)
- Norte Brasil Telecom (Fixcel) IS-136 (TDMA)
- Telemar GSM
- TIM GSM
9 - Tele Leste Celular (Portu-fonica) IS-95 (CDMA)
- Maxitel (TIM) IS-136 (TDMA)
- Telemar GSM
10 - TIM Nordeste (TIM) IS-136 (TDMA)
- BCP (BellSouth) IS-136 (TDMA)
- Telemar GSM
Notes: Portu-fonica is a proposed 50/50 alliance between Portugal Telecom and Telefonica Moviles in Brazil. Telecom Americas is a consortium led by America Movil of Mexico and Bell Canada International. CVC Opportunity is a Brazilian investment consortium while TIW is the Canadian company Telesystems International Wireless.
>> Brazil
Francis MacDermot
Mobile Communications International
Issue 89, 01 March 2002
Brazil likes to be big. Luckily, in mobile communication, it is. Despite its relative poverty it has become the seventh biggest cellular market in the world with nearly 29 million subscribers at the end of 2001.
Penetration, at about 17 per cent, is respectable by the standards of Latin America.
Four big multinational operator groups tussle over the market, and in the next months, two PCS operators will launch services, ending five years of duopoly and introducing gsm/gprs to the market.
Yet the market still looks immature. Although the four multinationals - Telefonica Moviles, Telecom Americas, BellSouth International and TIM - ultimately manage 80 per cent of all subscriptions, technically there are still over 20 individual operators. The vast majority of customers would not notice if data services suddenly disappeared and, although the demise of TDMA and the arrival of GSM/GPRS would apparently make it urgent that the 15 TDMA operators define their migration paths to 2.5G, not one has started the process.
The reason for this is that consolidation and migration are gridlocked in negotiations between the regulator, Anatel, and the operators' umbrella association, Acel. Anatel, an assiduous, consumer-oriented body, sees the introduction of PCS as an opportunity to intensify competition and wants incumbent cellular operators to move from concession contracts (SMC) to the same authorisation contracts (SMP) that govern the new PCS entrants.
Incumbents can, in theory, wait until their 15-year concessions end (between 2005 and 2013) but if they do this they are prohibited from collapsing their ownership structures or from buying the spectrum needed (by TDMA operators at least) to migrate their networks to 2.5G.
Negotiations have been tense. One sticking point has been termination fees for calls from fixed lines to mobiles. For SMC operators these are regulated by Anatel and are protected from inflation. Under the SMP regime, operators must negotiate them with carriers and they fear that the change would hit revenues. Currently 30 to 50 per cent of operators' income comes from termination fees and they are the lifeblood of the prepay market: one indication of this was a recent scheme launched by BellSouth's BCP to reward users who received calls from the fixed network with 'free' outgoing minutes.
How damaging a change in the regime this would be is hard to tell. Juliana Abreu, Brazil analyst at Pyramid Research, thinks that this element of SMP, "is not as big a problem as operators think," and that their stonewalling is in part a negotiating ploy. Credit Suisse First Boston (CSFB), an investment bank, sees it differently: SMP "would reduce the visibility of a crucial part of the revenue stream. This is a risk operators would prefer to avoid," says a recent report.
A second obstacle to agreement is a proposal to introduce long-distance carrier selection. This is already the norm in the fixed sector: anyone making a long-distance call must select a carrier by dialling a two-digit prefix. Ostensibly, introducing this to the mobile sector as mobiles start to outnumber fixed terminals in Brazil would guarantee long-distance competition.
But the cellular operators which, CSFB estimates, earn five to ten per cent of their revenues from long distance calls, see nothing but trouble. One objection is that this happens nowhere else in the world and is technically complicated. Anatel's counter is that Brazil is a big enough market to plough its own furrow if it dares. A second objection is that it would leave a convoluted 'money trail' particularly for roaming customers. Another is that it would prevent operators from offering juicy one-rate tariffs in their consolidated concession areas.
The third obstacle concerns the 10MHz 'extension band' PCS spectrum operators would get if they moved over to the SMP regime. Both parties agree that this should be in the 1.8GHz band but the dispute now revolves around timing. Anatel would like them to buy it (at a price worked out using a pre-set formula) the moment they move to SMP. The operators would like to be able to move to SMP while retaining an option to buy the spectrum at a later date.
Though being negotiated at an association level, the issue of spectrum concerns some operators more than others. The CDMA operators, comprised of the Portugal Telecom and Telefonica Moviles subsidiaries, have scant need of additional spectrum, least of all in the 1.8GHz band, since they can introduce 2.5G services in the 850MHz range. On the other hand, the TDMA operators that know they will migrate to GSM (particularly the four TIM networks) have an urgent need of 1.8GHz spectrum. Their only alternative would be to wait for the untried GSM 850 which some vendors are promising.
In between are a group of operators, possibly including the BellSouth companies, which have yet to decide between CDMA and GSM. These may want to see what opportunities are opened by the process of consolidation (that the SMP regime should unleash) before they decide on migration. As Abreu of Pyramid points out: "If they make the decision [to migrate] they increase their value to some but reduce the options of other potential buyers or partners."
Both Anatel and the operators could do with a resolution of the SMP issue. However, it is difficult to see either side making concessions quickly. Although the operators would like to be able to consolidate, there is a general feeling that this is a time to resist regulatory interference.
In parallel to the discussion of SMP they have been drawing attention to a tax regime that takes 40 per cent of all revenues. And some operators might be in no hurry to move to 2.5G. Pyramid Research, using Tele Centro Oeste (TCO) as an example, showed recently that the return on CDMA1x or GPRS would hardly justify the investment. BCP, BellSouth's operator in Sao Paulo, later confirmed that it had looked at CDMA1x and reached the same conclusion.
However, what might add urgency to the negotiations is the incumbents' need to confront the threat of new PCS entrants, TIM and Telemar. The least pressed of the big groups may be the subsidiaries of Portugal Telecom and Telefonica Moviles. These encompass five operators often now referred to as the 'Portu-fonica' group since the parent companies agreed to merge their wireless assets in Brazil (a move that can only be finalised when the operators move to SMP contracts). One strength of Portu-fonica is that it owns three A-Band companies, including those covering the two major cities, Sao Paulo and Rio de Janeiro. Its market share in Brazil is about 40 per cent, but in these two cities it is over 60 per cent.
Its other trump card is CDMA technology used by four of the five group companies. This was inherited at privatisation and for some time seemed like a potential handicap. But it has meant that the group does not have to wait on negotiations over SMP to introduce 2.5G services: 1xRTT was launched in Sao Paulo in 2001 and the network is being upgraded for it in Rio de Janeiro. Another plus is that Portu-fonica will only have to migrate one network away from TDMA. This will provide a major cost saving in the next two years.
Telecom Americas and BellSouth have more cause for concern. Telecom Americas is a still-evolving partnership and although it is expanding coverage within its territories, it has not had much time to glue together a common strategy. BellSouth, through its BCP subsidiary, controls just two operators, though one covers the key city of Sao Paulo. Both groups are entirely made up of B-Band operators. Thus their market share is still low - the best being 38 per cent in the case of Telecom Americas' subsidiary in Rio de Janeiro - and they have high debt: each group paid over $3 billion for their licences alone in 1997. Both groups also have limited footprints compared to TIM and Telefonica.
All operators will be presented with an opportunity to expand coverage through the purchase of leftover 1.8GHz spectrum in March. However, analysts do not believe there will be much appetite to invest in new networks, except perhaps in Region 5 where, by an idiosyncrasy of the PCS licensing process, there are only two competitors. A more likely scenario is that the big groups will choose to grow through mergers and acquisitions. Potential targets are TCO and Telemig Celular, A-Band operators with 2.4 million and 1.7 million subscribers respectively. Another, much-vaunted possibility is that BellSouth could choose to ally with Telecom Americas by buying some of Bell Canada International's 39 per cent stake in the company.
Watching these moves will be TIM. Having paid $778 million for PCS licences covering the whole country, it is now energetically building out the network in the regions where it did not previously have coverage. The launch is planned for the first half of the year, though this depends on the company persuading Anatel that Telecom Italia, as a shareholder in Brasil Telecom, a fixed line operator, was not responsible for the latter's failure to meet stipulated expansion targets. TIM makes light of this hurdle but potentially it faces an awkward and expensive delay.
TIM's investment, the company says, will be $716 million (€823 million) in the three years to 2004. A further $398 million is to be spent on migrating its four incumbent networks to GSM. Details of the commercial strategy to be employed are still sketchy but the company has acknowledged that it means to offer cheap handsets to gain market share and estimates that the new network will generate about $370 million in revenues by 2004.
TIM's launch will probably coincide with that of Telemar, a Brazilian-controlled fixed-line operator that successfully bid for a PCS licence covering its concession area. Telemar, operating under the brand 'Oi', has no previous experience as a mobile operator and will rely heavily on the expertise of its infrastructure suppliers. But it is a relatively canny operator and can be expected to exploit to the full its position as a fixed-line incumbent. It may also plan to establish low charges for calls from its fixed network to Oi handsets: in the build up to the latter's launch, its mother company has used advertising to warn fixed subscribers of the current high cost of calling mobiles.
The difficulty both PCS operators face is that they come to the market late. Although penetration is still under 20 per cent, most new prepay additions generate on average only about $8 in revenues per month - hardly enough to cover costs. Nor will it be easy to win high-usage subscribers from incumbents. The corporate market has been well attended since operators started to set up dedicated corporate sales teams to contend with the challenge of Nextel International. Early data users could be kept content with IxRTT. And a recent flurry of initiatives could dull the appeal of more basic GSM strongpoints such as SMS. There have, for example, been several inter-operator SMS agreements signed in the last months and traffic is building fast. Lack of coverage will also be a big disadvantage in the race for subscribers, says Pyramid's Abreu, pointing out that, "Band B operators that have increased their coverage in 2001 have also increased their subscriber base quite fast."
The key, both operators know, will be to keep costs down while building out networks as extensively as possible. This has led to the first infrastructure-sharing agreements in Brazil. In the first stage 1,400 sites are being shared but TIM has indicated that negotiations are under way to share a further 600. Since Telemar's initial aim is to install 2,230 sites, this represents an impressive degree of co-operation considering the two will be rivals in many states. The thinking may be that both companies can prosper if GSM prospers and gains economies of scale in the country.
This sense of fellowship, of course, makes a sweet and sour dish for the GSM vendors. On the network side there may be a little disappointment that TIM's and Telemar's will be the only contracts available. Still these have been worth about $1 billion in the case of Telemar and $716 million at TIM. The contracts, though gained at the cost of 125 per cent financing at Telemar (according to Teletime, a local news service), have at least allowed Nokia, Siemens and Alcatel to establish a presence in Brazil's infrastructure market. On the handset side, vendors can hope that low infrastructure costs will make the operators highly competitive. Certainly the handset manufacturers are all fighting for a foot in the door at Telemar and TIM, though Siemens seems to have walked away with the first contracts.
But, of course, even as the GSM operators launch, vendors will be looking ahead to the next great opportunity: TDMA migration. Whether they get honey this year or next depends on resolution of the operators' impasse with Anatel. But they know that good orders here can set them up well in the hemisphere. As the business adage goes: "If you're big in Brazil, you're big in Latin America." <<
- Eric - |
