Telefonica’s takeover of Brazilian mobile operator Vivo from Portugal Telecom is the latest move by the Spanish incumbent as it flexes its muscles in the Latin American market, and a decisive chapter in the protracted development of the Brazilian market.
Telefonica is looking to Latam markets to fund its growth as business slows in its home market – in the second quarter this year Telefonica’s Latin American revenue was up 16% year-on-year to €6.44 billion, in contrast to a 3.2% drop in Spain.
The Brazilian fixed-line market is mature, so here, as in other Latin American and world markets, the trend is towards bundled services. Telefonica will merge Vivo with Telesp, its fixedline operator that serves the Sao Paulo region. Says Jose Manuel Mercado, senior analyst at Pyramid Research: “Evidently, Telefonica’s strategy is focussed on merging mobile services with their existing fixed services to provide the quadruple play in the biggest and fastest growing economy in the region. This will position Telefonica with scale economies, so it can move faster and more efficiently.”
One of the factors leading to the takeover was clearly the history of Brazilian telecoms regulation. The government created a number of telecoms regions in the late 1990s, today served on an increasingly less regionalised basis by Telefonica, Telmex and Oi. The takeover also raises a number of questions for Telefonica’s competitors in Brazil about the best way to compete. Vivo was a joint venture with Portugal Telecom (PT). Telefonica had tried to buy PT’s share for some time, eventually making an offer for the 50% stake – $10 billion – that shareholders felt unable to refuse. Portugal Telecom is valued at about €7.5 billion.
But the deal would have left PT without an interest in the largest Portuguese speaking market in the world. So at the insistence of its shareholders and the Portuguese government, PT is buying a 23% stake (valued at €3.7 billion) in Telefonica’s Brazilian rival Oi, which merged with Brasil Telecom in 2009. Says Erick Contag, COO of Oi’s international carrier’s carrier business, Globenet: “It’s a win-win for all concerned. Oi gets a large sum of money to fuel its growth and international expansion plans and Portugal Telecom gets an interest in a heavyweight international player and remains in Brazilian telecoms.”
That said, Oi has more to lose from Telefonica’s acquisition of Vivo, according to some observers. Telefonica was already the fixed-line operator in Sao Paulo state, where the majority of enterprise customers lie, according to Wally Swain, senior vice president at Yankee Group. Although there are 40 million people in Sao Paulo state – Brazil has a population of 190 million – the majority of Brazilian businesses are headquartered there. “It will allow them to jump-start a national fixed offer,” he says, “Telefonica has the opportunity to raise Telesp to a truly national competitor. It can do non-TV triples today and quad-play very shortly.”
Telefonica is making its presence felt all over the continent – it’s what one carrier jokingly called the “800lb gorilla” of Latin American telecoms. The Latam mobile market is carved up between two companies: Telefonica and America Movil, owned by Mexican billionaire Carlos Slim. Slim’s Telmex and America Movil were combined in January this year in order better to compete with Telefonica in the continent. According to Pyramid Research, between them Telefonica and America Movil have 65% of the Latin American mobile subscriber base (2008 figures), Telefonica with 26% and America Movil with 39%. Says Mercado: “This competition between both companies – and depending on in which market they are leaders – determines the type of competition and strategic movements that both take.”
There is no homogeneity about Latin American telecoms, from either an economic or from a technology standpoint: the region has countries where the mobile markets are mature, like Argentina and Chile where mobile penetration is over 100%, and markets like Bolivia, where it is about 50%. Adds Mercado: “For voice traditional services, Latin America is getting to maturity. Mobile services combined with bundle services will be key in this market where mobile broadband, although growing very fast, is still unaffordable for the vast majority. Some governments have auctioned enough spectrum for 3G services and some are still facing regulatory impediments to push the sector onwards. Costa Rica is the latest country where market liberalisation took place in the last year, opening the mobile market to competition, auctioning spectrum to drive the penetration rate from a low 52% in 2009 to achieve more than 100% in 2012.”
While Brazil is the largest telecoms market in Latin America, Argentina, Venezuela and Mexico are also large and very significant. And Telefonica is moving in on Telmex’s home turf: this summer it inked a deal with Mexican cable company Megacable which sees the cable operator now able to offer quad-play services using Telefonica’s mobile services. It also, jointly with cable operators, bought a significant amount of fibreoptic cable capacity auctioned off by the Mexican government. Says Yankee Group’s Swain: “Telmex has always used its capillarity in Mexico to dominate. This fibre makes a big difference.”
