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brazil telecoms at Credit Suisse in São Paulo. At the same time, dial-up internet traffic is declining because of broadband, he adds. Oi’s heavy reliance on fixed line is not ideal, says Carlos Eduardo Sequeira, telecoms analyst at UBS Pactual in Rio de Janeiro. “[It] is like giving a square ball to Pelé. He won’t be able to play soccer too well,” he quips. Fixed-line penetration in Brazil is relatively low at 20% and has been slowly declining, but there are still attractive niches, says Paulo Pessoa, corporate marketing director at Embratel, a subsidiary of Mexico’s Telmex. Small and medium enterprises (SMEs) have fallen between the cracks: larger telecom firms are more interested in high-end residential and big corporates, he says. Embratel intends to be able to serve 50% of the SME market in three or four years and anticipates growth of 50% per annum over the next few years, albeit from a small base. mobiles and penetration is rising by some 10% per year, says Campbell. Mid-2008, penetration passed the 70% mark, having finished 2007 at 65% and 2006 at 55%, he says. He and others see no reason that this growth should not be sustained for at least three years, noting that Argentina has penetration of 100%, with some clients using multiple handsets. Vivo, owned by Spain’s Telefónica and Mobile Battleground Things could hardly be more different in the mobile market. Cracking it is a tall order because Brazil has the most ferocious competition in LatAm, and margins are relatively skimpy, analysts say. In Brazil, Ebitda margins are some 24%-25%. In the rest of LatAm, they are typically 35%-40%, says Campbell. For Carlos Slim’s América Móvil, which has more than 75% market share, Ebitda can be as high as 50%, he notes. América Móvil controls the Claro brand in Brazil and has focused on other Latin markets where the fruit is more low-hanging. Moreover, the Brazilian market produces low revenues. A whopping 82% of cell phones are pre-paid, generate very little revenue and are used almost exclusively to receive incoming calls, Cuza notes. The average US client spend is $60 per month, versus just 13 reais in Brazil, adds Sequeira. Margins are recovering slowly however, as competitive behavior between mobile providers becomes more rational, he believes. After scrapping over low revenue, pre-paid clients, the battle has sensibly moved to bigger spending, longer-term, plan-based users. There is much to play for as Brazil’s mobile market is big and in expansion mode. There are some 133 million Vivo has been pursuing expansion. It swallowed regional Telemig Celular in early 2008 for 1.2 billion reais. Telefónica agreed to buy all 6.2 million voting shares for 120.93 reais apiece and in May the board approved a 990 million reais capital increase to provide a tag-along offer. Banco Espirito Santo Securities is managing the issue. Since then, Vivo has launched a 500 million reais one-year promissory note issue paying interest of DI of 106.5% to refinance debt. Claro is the third player while Oi/Brasil Telecom is fourth. For all the nationalistic hype, the impact of the Oi/Brasil Telecom may well be underwhelming. Although Brasil Telecom has been rapidly growing its mobile business, the merged firm faces stiff competition nationwide and is absent in the key market of São Paulo, which it is entering only this year, says Eduardo Tude, president of São José dos Camposbased Teleco, a consultancy. The combined firm has less than 20% of the market, while others have at least 25% each, he adds. Calling Higher Margins Learning from past 3G mistakes, says Tude Portugal Telecom, is ensconced as Brazil’s market leader with 40 million subscribers and more than 30% market share. Telefónica earned yet more to crow about last year when it consolidated its advantage over America Móvil by snatching Telecom Italia, owner of TIM in Brazil. That deal may finally allow for consolidation among Brazil’s mobile players, if Telefónica can put together TIM and Vivo, both of which have been loss making this year. The best thing that could happen is a reduction in competition, analysts agree. But this is difficult as operators cannot hold multiple licenses in the same region, says Campbell. Telefónica’s 50/50 share in Vivo with Portugal Telecom may also complicate any deal. Even so, shares in TIM have occasionally spiked on the possibility, say analysts, and if it were to occur, it would create a truly dominant national player as TIM is number two in Brazilian mobile. Whether the deal happens or not, A fresh squeeze on margins may come from new regulations. Number portability is being introduced gradually. That is likely to exacerbate what is already a high churn rate of 2% per month, says Cuza. Marketing and promotions to keep and win customers is already costing operators, he adds. The other issue is a review of mobile termination rates, the charge levied to receive a call from different operators, which are high in Brazil at 40 centavos. Vivo generates 38% of its revenues this way and TIM 45%, says Sequeira. Regulator Anatel will probably introduce maximum charges well below current levels in 2010, he says. Mobile companies are hoping 3G will drive up profit and bind customers to providers. The push really started this year in Brazil with Vivo and Claro and later TIM, says Elia San Miguel, analyst at research firm Gartner in São Paulo. She is cautious that the technology is expensive and will require heavy investment. The payback is likely to be the offer of broadband, which is still desperately underused in Brazil, with just 4% population penetration. 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Latin Finance - October 2008

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