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After years trying to modify the market dynamic by not subsidizing handsets, Brazilian operator Oi has changed its market strategy and will subsidize smartphones. The operator is struggling to increase its data revenues, and smartphones are vital to drive data services growth. In the beginning of the year, the operator already tried to raise smartphone adoption by increasing the number of payment installments from 12 to 18 months, but the measure doesn’t seem to have had the desired effect.
Oi was the first operator in Brazil to decide not to subsidize handsets and to start commercializing unlocked mobile phones. In addition, Oi had no permanency clauses (with a fine for canceling the service) in its contract plans. However, the increasing demand for tablets and smartphones has forced Oi to modify its strategy. “Although smartphones are not essential to use data services, it is challenging for the operator to boost data services with feature phones. Smartphones are user-friendly and are driving data growth worldwide,” said Marceli Passoni, research analyst at Informa Telecoms & Media.
When Oi decided against subsidizing handsets, it had forgotten the importance of attracting and retaining customers, mainly high-end users, via subsidies. Therefore, it was unable to attract postpaid customers, and 87.4% of its customers were prepaid at the end of this year’s third quarter. The operator also has one of the highest churn rates in the market, as prepaid customers are very sensitive to price and not loyal to the brand.
In addition, the Brazilian mobile market has changed significantly since the time that Oi made the decision not to subsidize handsets. At that time, mobile penetration was under 70%, the operators had only just started deploying their 3G networks, and mobile broadband was far from being a reality in Brazil. The operator was not expecting that data would be so important for revenue growth.
Given that Brazil’s mobile penetration rate is 117%, voice revenues are likely to flatten and data will play a key role in the operator’s growth. “Voice is becoming a commodity, while data offers operators the opportunity to differentiate their services. Oi was only attracting customers through aggressive voice promotion and was unable to retain them, while its competitors were protecting their most profitable users by offering handset subsidies and innovative services,” Passoni said.
“Oi took too long to realize the importance of subsidizing smartphones. It is not a matter of offering free handsets but a way to provide its users with access to value-added services, which will generate revenues,” Passoni said. While in the first nine months of 2011, Vivo’s and TIM’s data services drove service revenues growth by 30% and 25%, respectively, Oi’s increased by only 13% in the same period, according to Informa Telecoms & Media.
However, Passoni does not believe that investing heavily in handset subsidies for the whole subscription base is the best strategy — other measures also have to be taken. “Oi must offer subsidies for the most profitable users and have low-end smartphones in its portfolio for low-spending users, offering affordable data plans. Additionally, the smartphone per se is not able to provide value to customers, Oi has to differentiate its services and encourage its usage.”
Passoni gave the example of Sprint Nextel in the U.S., which has successfully encouraged smartphone usage. Sprint has launched Ready Now, a service that helps customers familiarize themselves with the features of their complex smartphones. Ready Now is available to all Sprint customers, whether the device is just being purchased or the customer has had it for some time. Sessions take 10 to 30 minutes, and the goal is for customers leave the store with their phones completely set up and personalized.
The lack of subsidy combined with low 3G-network investment has put Oi in a difficult position, making it challenging for the operator to attract high-end users. “Why would high-spending users migrate to Oi if it does not have a high-quality network and the user also has to pay the full price for a handset?” Passoni asked. If Oi does not invest in a 3G network, subsidies alone would not be enough to retain customers. Users must have a good quality of experience and be able to access enhanced services. It is also important to highlight that Vivo launched its HSPA+ network this month, which offers speeds of up to 21Mbps.
The increasing number of smartphones in Oi’s subscription base could compromise its network quality. However, Oi can take advantage of its acquisition of Vex by combining its 3G offers with Wi-Fi — experience from elsewhere in the world shows that this is a successful strategy for network offloading and, as a consequence, improving network quality.
The acquisition of Brasil Telecom in 2008 had a negative impact on Oi. The operator increased its debt significantly, preventing it from investing in its network and changing its subsidy strategy. However, Portugal Telecom’s acquisition of Oi’s stake could bring more investment, helping Oi to expand its 3G networks and change some strategic decisions, such as its subsidy policy.
In the past, Oi used to promote the concept of “freedom” for its customers – they stayed with Oi out of choice because they like the service not because they are locked in to their contracts by permanency clauses. For example, its so-called “Multa nao” (No Fine) market campaign, highlighted the fact that Oi does not have permanency clauses in its contracts. Now that Oi has changed its subsidy strategy, it will have to review its marketing campaigns as well.
In the past, TIM used to offer subsidies but the operator stopped offering them in last year’s first quarter. However, it is very likely that the operator will offer handset subsidies for its high-end users. TIM is aware of the importance of increasing smartphone adoption, even in the low-end segment. The operator has reduced its handset portfolio by 50%, allowing it to buy handsets in larger quantity and to negotiate better prices with suppliers. As a consequence, TIM was able to reduce the price of Internet-enabled handsets by 25%, offering affordable handsets to the low-end segment users.
