Analyst Angle: Brazilian mobile content/services market set to take advantage of the 4G revolution

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
With 150+ million wireless subscribers today, Brazil has become one of the largest wireless markets in the world. While the market remains in its early stage, there is a growing appetite for mobile content and services. In Brazil, the average median age is 28 years old. In our opinion, this is likely to become a driving force as young adults tend to overindex in terms of mobile data spending and usage. Also, many new mobile entertainment companies are now entering the market in order to take advantage of the anticipated growth. However, several issues remain before the market reaches its full potential.
Brazilian wireless market, a fast-growing market, dominated by prepaid customers
With 80% of Brazilians using a cellphone today, and 150 million+ wireless subscribers, the Brazilian market has become one of the largest wireless markets in the world. By comparison, Africa has 300 million+ subscribers, and the U.S. has 276 million+ subscribers. Unlike other markets like the U.S., the market does not seem to be slowing down. With 85% of prepaid customers – vs 98%-99% in many African countries, and 90%+ in the U.S – the Brazilian wireless market is in many ways similar to many African countries. The market is dominated by low-income customers. In fact, according to the CIA, in 2005, 31% of Brazilians were living below the poverty line. There is also a lack of infrastructure, and good wireless coverage, especially in rural areas. On the positive side, the consolidation of the Brazilian wireless market has been a key driver for the Brazilian mobile entertainment market. In fact, with ~90% of the market captured by the big four carriers (Vivo, TIM, Claro and Oi), it has become easier for mobile entertainment companies to deploy their services in the country and reach out to their targeted audience.
SMS: most popular type of mobile data services in Brazil
With SMS being the cheapest and most efficient way to communicate in Brazil, SMS has become the most popular type of mobile data services in the country. Many Brazilians communicate via SMS rather than making phone calls. Not surprisingly, according to one of Flycell’s executives, SMS is being used by 90% of Brazilian wireless customers today. The fact that virtually all handsets in Brazil are SMS-capable plays another key role here. In fact, in Brazil, according to Flycell, 90%-95% of the handsets available on the market are feature phones. But SMS is not the only type of mobile data services experiencing strong growth in Brazil. In fact, we would point out that in Brazil there is a growing appetite for value added services such as mobile Web, ringtones and mobile games. The expected roll out of mobile app stores by Brazilian carriers in the coming quarters are also set to become key drivers. Of note, TIM is set to roll out a mobile app store, powered by Qualcomm’s Plaza Retail app store platform, early next year. Vivo is likely to follow suit as its parent company Telefonica, which jointly owns the Brazilian carrier with Portugal Telecom, launched its own app store – mstore – a few months ago.
D2C channel becoming a key channel. Foreign companies making inroads into the Brazilian market
In the past 12 months, the B2C market has gained good traction in Brazil as it allows customers to have access to a better and more affordable variety of content and models (e.g. subscription-based services, ad-supported models). In fact, today, a good portion of the total downloads (ringtones, mobile games, wallpapers, etc.) is purchased through the B2C/off-deck channel. Of note, Okto, which claims to be the biggest value added services provider in the country, and made inroads into the Brazilian market in 2003, has valued the off-deck market at $167 million. Clearly it has become a fairly significant revenue opportunity for many local and foreign mobile entertainment companies. Companies focusing on the off-deck space include TIM w.e., Flycell, and PlayPhone, to name a few. Other key players in the Brazilian mobile entertainment market include companies like Buongiorno and Zed.
Mobile advertising becoming a hot market
Based on the Brazilian’s demographics and the high proportion of low-income customers, ad-funded content is set to gain good traction in the coming years in Brazil. In fact, through mobile advertising, Brazilian carriers and mobile entertainment companies can offer mobile content at no cost or a reduced price; the carriers being paid by advertisers. Key players in the mobile advertising market include companies like Supportcomm, Okto, TIM w.e., Dada, and Takenet. In the meantime, many of those companies are already active in the country, creating mobile advertising agencies in Brazil.
Carriers’ migration toward 4G networks set to be a key growth driver for higher adoption of VAS
While the 3G penetration remains fairly low in Brazil for various reasons (low penetration of 3G handsets, poor 3G coverage, high cost of 3G services, etc.), the country is already looking toward the 4G revolution. In fact, while WiMAX is already available, Brazil’s largest carrier Vivo is expected to start pilots on LTE next year.
Many issues remain before the Brazilian mobile entertainment market reaches its full potential
Various issues will need to be overcome before the market reaches its full potential. As noted earlier, these include the lack of infrastructure, and good wireless coverage, especially in rural areas. Additionally, the regulation toward text alerts – carriers are putting restrictions in terms of how many text alerts can be sent during the day to avoid high traffic that cannot be handled by the carrier – have become a key restraining factor for companies like Flycell focusing on text alerts. Many Brazilian carriers are also using old billing systems, meaning that the quality of the billing systems can sometime get very volatile depending on the day. Sometime customers are facing download issues because of network issues.
Bottom line
The Brazilian mobile content/services market presents tremendous growth potential and new revenue opportunities for many foreign mobile entertainment companies. As carriers continue to upgrade their network, roll out new VAS and introduce more capable and affordable handsets, especially smartphones, this should help drive the adoption of VAS in Brazil. Mobile advertising, and the expected roll out of mobile app stores by Brazilian carriers in the coming years, are also set to become key drivers.
For more from Julien Blin check out theJBB Research Web site.