The competitive stagnation in Brazil, which should be one of the world’s most dynamic mobile markets, was highlighted by the disappointing results of the flagship 700MHz LTE spectrum auction.
Despite being one of the world’s fastest growing markets for smartphones and mobile data, that traffic is still controlled by a trio of operators – Telefonica’s Vivo, Telecom Italia’s TIM Brasil and America Movil’s Claro. No new entrant emerged to bid in the auction, despite speculation that an international player like AT&T might show up.
The three giants, therefore, almost inevitably picked up the three national slots on offer, while one regional player, Algar Telecom, boosted its spectrum assets in its existing service areas. Two other regional lots went unsold and the country’s fourth cellco, Oi, did not take part.
That meant that regulator Anatel announced total revenue from the same of BRL5.85bn ($2.39bn), well below the BRL7.7bn the government had hoped for.
Of the three regional batches on offer, Algar bought the licences covering its current municipalities in the states of Sao Paulo, Goias and Minas Gerais; while the unsold slots were in the Londrina area, currently a concession for regional operator Sercomtel; and in the rest of the country, apart from the Sercomtel and Algar locations. Anatel is likely to conduct a second sale next year, in which Nextel has indicated it may participate. Another piece of spectrum which will soon come up for purchase is the 1.8GHz block in the Sao Paolo area, which used to belong to bankrupt Unicel.
The three major players paid just over the reserve price (between 0.02% and 1% above) for their national slices. Operators in some other countries will look enviously on a market where nationwide licences in the 700MHz band – coveted for its good propagation qualities for rural coverage and indoor penetration – can be acquired for such a reasonable price, but the results highlight the shortage of competition in Brazil.
The use of the 700MHz spectrum band, currently in use by TV broadcasters, will complement current 4G deployments in 2.5GHz. Analog switch-off was originally scheduled for 2016 but there will now be a staggered transition between 2015 and 2018.
The three winning operators are currently assessing how they will fund the licensing fees. They have also been given the responsibility of resolving interference issues in their 700MHz blocks, and compensating the current TV incumbents. As one of the 4G licences was not taken, Anatel will refund some of the licensing fees to help cover the costs taken on by the three winners. The regulator said these costs would be around BRL850m, bringing the total raised in the auction down to BRL5bn.
The conclusion of the auction is likely to spark the expected bids for Oi, which stayed out of the sale because of its debt problems and said it would focus its 4G efforts on its existing 2.5GHz frequencies, possibly adding 1.8GHz in future. A more probable outcome, however, is that Oi will be snapped up by one or more of its rivals, if the antitrust regulator permits a move that could reduce Brazilian competition still further.
Further consolidation is already on the cards with the possibility of America Movil acquiring TIM Brasil from Telecom Italia. The Mexican giant already owns Claro, Brazil’s third cellco, while TIM is the second. Reuters said last month that Movil was in talks with both Oi and Vivo about mounting a joint offer worth about BRL30bn ($13bn), though the stakes would have to be structured to satisfy regulatory concerns.
Vivo is owned by Telefonica, which is in the process of acquiring Brazilian fixed line car-rier GVT from Vivendi. In the process it will offload its interests in Telecom Italia, which had also wanted to purchase GVT to boost its TIM Brasil unit. That failure may spur it to sell that subsidiary, hence the interest of the other cellcos.
A bid could also pre-empt a possible offer for TIM, from Oi – which hired Banco BTG Pac-tual last month to help it acquire a stake in the Italian-owned player – or from the three-way alliance led by Claro.
The head of competition at Anatel, Carlos Baigorri, has said previously that Oi could be acquired or broken up if it fails to secure 700MHz spectrum, in addition to its debt issues. “What will happen with market consolidation will depend on the 700MHz auction – it will define the future of telecom in Brazil,’ he said in a recent interview with local journalists. “The company that doesn’t win in the auction, the market will very probably want to break up.”