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Recent battles between Brazil’s telecom regulator, Anatel, and the country’s top mobile operators highlight that it is time for fundamental change in Latin America’s largest mobile market. Anatel made headlines around the world recently when it banned top mobile operators from taking on new customers after the operators failed to address ongoing concerns and customers’ service quality complaints adequately. However, these problems are actually only the tip of the iceberg; they highlight much larger and deeper problems in the mobile market—problems caused by a mixture of regulation, competition and lack of innovation.
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The combination of strong competition with a pre-paid base shaped a very unique market, one in which a price war has been going on for years, giving users many incentives to switch operators or use more than one operator. This situation is reflected in key metrics, such as ARPU, EBITDA margins and churn rates, all trending in the wrong direction. ARPUs have been decreasing for the past two years, and Vivo is the only operator with an average churn rate below 3% for the past two years.
On-Net Calls
Adding to the market’s uniqueness, operators have focused all their promotions on heavily discounted on-net prices. When comparing effective prices (after discounts), off-net prices can be, at the least, an astounding 456% higher than on-net prices. For the past four years, operators have launched more and more aggressive promotions: TIM, and more recently, Claro, charge per call, advertising unlimited in-call duration, and Oi offers a daily bonus of about U.S. $16.63 (R$34) for a monthly top-up as low as U.S.$8.32 (R$17); Vivo can be considered the least aggressive operator, offering about U.S.$0.03 (R$0.05)/min price rate.
This price gap between on-net and off-net rates is due to high mobile termination rates and high taxes. The average cost per minute for the mobile termination rate in Brazil is around U.S.$0.19 (R$0.39); on top of that, taxes can be as high as 40% of the final price.
This situation ended up making off-net traffic a heavy burden for operators, and as a result, prices are totally skewed toward on-net calls, driving the usage of multi-SIM cards by customers.
Conclusions
Recently, Anatel banned three operators (TIM, Oi and Claro) from activating new connections, citing a high level of consumer complaints. This is a direct consequence of the increased focus on acquisition offers. Not coincidentally, the only operator in the top four that was not banned is Vivo, the least aggressive in the price war.
All in all, the dynamics of the Brazilian pre-paid market with its high competition and high costs mean that operating at scale is even more critical than in other telecom markets. However, operators chose to engage in a long price war, which drove down overall profitability. As is true of most price wars, it is very difficult to stop the downward spiral, but Anatel’s ruling might be the opportunity for mobile operators to rethink their strategies and maybe choose a path that can balance growth with profitability over the long term.
Ari Lopes is the principal analyst for Latin America at Informa Telecoms & Media.
