Cellular conquests

When Portugal Telecom entered Brazil's cellular telephone market, industry observers thought the company had paid too much for incumbent Telesp Celular. More than three years later, Telesp rules the Brazilian market - and CEO Carlos Vasconcellos Cruz intends to keep it that way.

IT HAS BEEN MORE THAN 500 YEARS since Pedro Alvarez Cabral first landed in Brazil, claiming the region as Portugal's first colony in the Americas. Five centuries later, Portuguese businesses have rediscovered Brazil and are investing heavily here, particularly in its telecommunications sector.

Leading the modern conquistadors is Portugal Telecom (PT), and the crown jewel among its conquests is Telesp Celular Particapacoes. Acquired for around US$2 billion in 1998, Telesp Celular is Brazil's largest cellular telephone company; as of third-quarter 2001, it held more than 63 percent market share in Sao Paulo, its primary customer base. At the time of purchase PT was criticized for paying too much for the creaky former monopoly, but the chance for growth was apparent from the start. "Today, Telesp Celular has over 7 million clients, whereas PT Telecom's mobile phone company in Europe has only 3 million," says Telesp's Brazilian CEO, Carlos Vasconcellos Cruz. That jump has catapulted PT onto the global cell phone stage.

At the time of the acquisition, cell phones in Brazil were expensive to obtain - averaging US$1,000 in a nation where the minimum monthly wage is less than US$100. Today such phones are ubiquitous, thanks to a combination of savvy marketing and reduced costs. Indeed, Brazil's cell phone penetration has more than quadrupled since Telesp Celular was privatized in July 1998, when there were fewer than 7 million subscribers could exceed 40 million by 2004, lifting Brazil from No. 10 to No. 4 among wireless telephony markets. "Only China's mobile telephone market has greater potential than Brazil," Vasconcellos gushes.

The Rule of 'Baby'

The 44-year-old Vasconcellos took the helm of Telesp Celular last February after former CEO. Abilio Anca Henriques resigned to return to his family in Lisbon. A rising star at the company, Vasconcellos' pedigree included heading up e-commerce firm Tradecom, another PT company. Not surprisingly, he has taken Telesp Celular firmly down the path toward "mobile commerce," or m-commerce, as a way for the company to tap new revenue streams and boost market share. But first he has had to put the technology in as many hands as possible.

That's where "Baby" came in. The pre-paid cell phone, Introduced in 19999 and marketed under the Baby moniker, has become Telesp Celular's best-selling product. Similar in concept to pre-paid calling cards the phones have a pre-set spending limit that can be replenished by the user. Today, the Baby phones are in the hands of roughly 68 percent of Telesp Celular subscribers.

Telesp [Celular] doubled its pre-pay subscribers during the fourth quarter of 1999 alone and, at the same time, ended the erosion of its market share," says Juliana Abreu, a telecom analyst at Boston-based Pyramid Research.

Indeed, much of Telesp Celular's subscriber growth can be attributed to the introduction of the pre-paid cell phones-which are marketed to lower income groups and people who don't have terrestrial phone lines. And competitors have been quick to follow Telesp's lead, though the products popularity has also had an unexpected downside for earnings in Brazil, where callers foot the bill to talk to a cellular user, rather than the person receiving the call.

"Most pre-paid users tend to receive more calls than they make. They want to have cheap voice service and not much more," says Alexandre Constantini, a telecom analyst at Bear Stearns in Sao Paulo. "The introduction of pre-paid phones has caused the average revenue per user to fall from 55 reais per month (US$22) to 45 reais (US$18), and that number could fall more as people migrate to pre-paid service."

Nevertheless, Vasconcellos says the company is pursuing a two-track strategy of increasing the number of Brazilians with access to cell phones (through pre-paid and other programs) while courting high-end corporate clients. "We're now trying to concentrate growth on the most profitable sectors," he says.

But with costs and competition mounting, and the value of the Brazilian real sliding, that growth may come more slowly than planned.

When PT acquired Telesp Celular, it inherited an antiquated, overloaded network that had only 800,000 subscribers. With no new cell phone lines to offer, demand in the nation's main market, Sao Paulo, had effectively been bottled up. Within months of Telesp's acquisition, new companies--BCP, owned by BellSouth, and Tess, owned by Telecom Americas--moved in and grabbed more than 50 percent of the market by installing new network infrastructure and meeting pent-up demand. Unlike the fixed-line market, where former monopolies continue to control more than 90 percent of the market, Telesp Celular has had to struggle to maintain its lead.

"BCP entered the market with a very aggressive strategy and quickly obtained 50 percent of the [Sao Paulo] market," says Dario dal Piaz, a vice president at research firm Yankee Group. "By changing the company mentality, Telesp has been able to regain market share, and now has roughly 65 percent. Today BCP looks like the incumbent, not Telesp."

The turning point for the company was its switch to CDMA (Code Division Multiple Access) handsets, which use clearer sounding, all-digital networks that are easier to upgrade with new technology For example, when telecommunications regulator Anatel approved wireless Intenet access-known as WAP--in June 2000, Telesp Celular was able to launch its WAP service one month later (See sidebar). BCP and Tess, by comparison, held off for nearly six months because they were unable to obtain handsets quickly enough that would accept WAP services.

Telesp Celular's race to offer new services is all the more critical considering that even more competition is expected next year. That's when Telemar, a dominant fixed-line player in 16 Brazilian states, and Telecom Italia Mobile (TIM), will both launch cellular services using newly available bandwidths. Both Telemar and TIM will be using GSM (Global System for Mobile) communications technology, which is used extensively in Europe, and allows much faster wireless data transmission than what is currently available. Fortunately for Telesp Celular, Telecom Italia is currently involved in a dispute with fellow shareholders at Brash Telecom and may not be able to offer the new services until 2003, giving Telesp Celular an opportunity to move first and increase its market share.

While Telesp's stronghold is in Brazil's industrial heartland of Sao Paulo, the company has moved aggressively to expand into other regions. Early this year, PT acquired Global Telecom, which offers mobile services in the southern Brazilian states of Santa Catarina and Parana. Global's market footprint contains 15 million inhabitants but has only 13 percent cell phone penetration--lots of room to expand. But with TIM the dominant player in Global's market, the acquisition has been criticized as too costly.

"Telesp Celular paid a high price per user for Global Telecom--nearly US$2,600 per person," says Bear Stears' Constantini. "And because of the competition, Telesp has been forced to invest aggressively in the region. The results have been positive, [but] it has also hurt Telesp this year."

In October, the company reported a third-quarter net loss of 317.2 million reais (US$116.4 million), blaming the disappointing results on its acquisition of Global. Even so, the Global acquisition did expand the company's national market share; within the region served by Global, market share rose from 24 percent to 32 percent, as the subscriber base rose from 1.88 million in January to 2.13 million in November--the fastest growth of any Brazilian cell phone company this year.

The economics of the cell phone business also seems to have bred strange bedfellows. In January, PT announced a US$10 billion joint venture with Spanish telecom rival Telefonica that put the two companies' Brazilian wireless units under one roof. The venture was designed to effectively control Brazil's Largest and most lucrative mobile telephone markets--Rio de Janeiro and Sao Paulo, and the wealthy regions of Parana and Santa Catarina--while at the same time creating the largest cell phone company in Latin America.

Regulatory hurdles in both Portugal and Brazil have sidelined the venture, however, limiting it so far to the sharing of text messaging services. In the meantime, investors have not been forgiving. Shares of Telesp Celular have taken a rollarcoaster ride this year.

In May, PT tendered an offer to buy the 58 percent of Telesp Celular shares that it didn't already own, announcing it would pay a 40 percent premium for them (while PT owned nearly 42 percent of Telesp Celular shares--the rest being publicly traded--it owned 85 percent of the voting stock, and hence management control).

At the time of the tender, Telesp Celular shares were trading on the New York Stock Exchange in the US$15-to-US$20 range. But fearing that PT was over-extending itself in emerging markets, shareholders-rescinded the offer on Sept. 4, sending Telesp Celular shares plummeting 28 percent in one day. During the days following the Sept. 11 terrorist attacks, the company's shares dropped further, dipping at one point to less than US$5, though they have since come back to more than US$7 per share.

The stock drop, combined with this year's 30-percent plunge of the real against the dollar, maybe putting a strain on PT's joint venture with Telefonica, analysts speculate. Althought the CEO of Portugal Telecom, Francisco Murteira Nabo, has ruled out another offer this year--despite the low price--he hopes that PT will make a new bid in the first half of 2002, placing PT on more equal footing with Telefonica.

What is certain is that consolidation in the Brazilian cellular market will continue. Already Telefonica has made an offer to buy Telemig Celular, which covers the populous state of Minas Gerais. Though the offer was rejected, Pyramid Research's Abreu says it's likely that Telesp Celular or Telefonica will offer services in that region when regulator Anatel auctions cellular licenses during first quarter 2002. In the meantime, there is a new player to contend with, now that Telecom Americas--a consortium formed by Mexico's Telmex, Bell Canada International and SBC--has racked up 3.5 million subscribers throughout Brazil, and is moving to acquire more.

"Telecom Americas is also trying to gain a nationwide footprint," Abreu says. "To stay on top, Telesp Celular is going to have to increase customer loyalty and increase their market share before 2002, when the market will become even more competitive."

For his part, Vasconcellos says he's confident the Iberian giants will remain on top. "In the very near future, Brazilians will be transformed by the concept of mobility and the cellular telephone will become a basic tool for survival in business, and in terms of communication, and in terms of access to information," he says. "For Telesp Celular, the sky's the limit."

[GRAPH OMITTED]

While Telesp's market share remained steady ...


4Q00  62.8%
1Q01  63.0%
2Q01  63.5%
3Q01  63.6%

Note: Table made from bar graph

RELATED ARTICLE: Wireless Information

In the fierce struggle for cellular market share in Brazil, keeping the lead in technology has become essential both for image and revenue. To that end, in September, Telesp Celular created a new unit--Telesp Celular Empresas--to offer advanced cellular telephony applications and services to its corporate clients. One of its areas of concentration is the mobile Internet, known as WAP (Wireless Applications Protocol).

To date, Telesp Celular has sold 1.8 million WAP-enabled handsets, more than half of which are used monthly to access the Internet. While most cellular companies worldwide have been disappointed with WAP, Telesp has plumbed several successful niche markets.

Surprisingly," says Luis Avelar, Telesp Celular's director of Internet and e-commerce, one of the greatest successes has been the WAP chat rooms." The average chat room user navigates 8 minutes a day from his cellular phone. Avelar believes that WAP chat groups attract young people who don't have access to computers at home, but are eager to participate in the Internet culture. "The chat rooms have been such a huge hit that Portugal Telecom has exported the idea to Portugal' he adds.

Telesp has also excelled in content, thanks to its ties with Universo Online, the leading internet service provider in Brazil. Earlier this year, Zip.Net, an ISP owned by Portugal Telecom, merged with UOL Together, UOL and Zip.Net are Brazil's largest WAP content providers.

Telesp Celular is determined to push forward with other advanced applications as well. This year, it took the lead in in-commerce, offering the first system of payment via cell phone in the country. Telesp customers can now purchase theatre and concert tickets through TicketMaster, and pay for dinner at some of Sao Paulo's best restaurants.

Users can also purchase airplane tickets for the Rio-Sao Paulo shuttle and even check their mileage balance with airline Varig's frequent flyer program.

The company's next move is to offer high-speed Internet access using so-called 2.5-generation technology. When 2.5G services become available in 2002, Telesp Celular's users will be able to access the Internet at rates 10 times Easter than current speeds.

"Telesp Celular has been he leader in new technology," says Yankee Group researcher Dario dal Piaz. Just as importantly, he adds, "It has a modern image among consumers."

COPYRIGHT 2001 Americas Publishing Group
COPYRIGHT 2003 Gale Group