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.
- increase backhaul capacity for its mobile operation;
- reduce costs by replacing leased lines from third parties;
- accelerate its growth in the Brazilian corporate market: São Paulo and Rio de Janeiro metropolitan areas concentrate around 35% of this market;
- complement Intelig’s network, a company TIM acquired in 2009 that provides connectivity for corporate business as well as backhaul for TIM mobile operations; and
- enter the retail broadband market offering superfast access.
All the reasons above are strong justifications for the acquisition, but the last one was the most commented on after the purchase. AES Atimus network would allow TIM Brasil, until then a mobile operator with very limited interests in the fixed-line market, to compete in a new market.
The Brazilian market has seen telcos heavily focused on multiplay offers, bundling broadband, TV, fixed-line and mobile, given that Oi, Vivo and Claro now offer these services. The aim is to win the household, offering a complete solution for the family. Bundling these services means that operators can sell more to the same customers, in many cases displacing competitors. It can also act as a barrier to exit for consumers, since it is more difficult to replace several services at once.
Strategic goals
Brazil had around 20 million fixed broadband connections by December 2012, but the broadband penetration rate stands at only 32% of households, and 55% of connections have speeds of 2Mbps or less. The São Paulo and Rio de Janeiro metropolitan areas, which are covered by the network acquired by TIM Fiber, are the two biggest urban areas in the country; they represent 16% of the Brazilian population and 31% of the broadband connections.
Broadband competition has been intense but restricted to a few companies for some years. Although the top four operators in Brazil account for 86% of the market, they do not have national coverage, so in many cities, it is common to find only one or two providers. São Paulo’s main broadband operators are Vivo (Telefónica) and NET Serviços, while in Rio de Janeiro, Oi holds the top spot and NET Serviços the second position. The most successful alternative operator in Brazil, GVT, started to operate in Rio de Janeiro in 2010 and had 91,000 subscribers in Rio de Janeiro city and neighbouring cities by the end of 2012. GVT has yet to enter the São Paulo city market, but it has acquired another 91,000 subscribers in cities near São Paulo, like Guarulhos.
Business model
The strategies of TIM Fiber’s competitors in São Paulo and Rio de Janeiro can be summarized by three main points:
- Focus sales strategy on multiplay: all major operators offer some sort of benefits for consumers that acquire bundles, such as discounts over stand-alone prices and/or waiver on installation fees. Oi, for instance, have been betting on this for some years, and increased the number of households with more than one product from 46% at Q411 to 53% at Q412.
- Increase broadband speed delivered to customers: as seen in the section above, average speeds contracted by customers in Brazil are still low; this is a huge opportunity for newcomers like TIM and GVT. This threat is recognized by incumbents and is behind Oi’s and Vivo’s efforts to invest in offering better broadband products, be it via extending copper lifetime with xDSL or via FTTx. Vivo announced that from 2011 to 2012, the number of its FTTx network customers grew by 100%, reaching 112,000 subscribers, while Oi stated that in December 2012, 31% of its broadband customers were covered by plans of 5Mbps or higher.
- Increase number of customers under contract: both strategies described above are used to reduce churn rates, either by increasing customer satisfaction by offering multiple services at a discount or by renewing contracts (and adding penalty fees); for instance, 60% of Oi’s broadband customers were under contract as of December 2012. A high exit barrier can work as a last resort in avoiding churn.
TIM’s answer to the status quo has been very innovative and can be summarized as:
- “Best-of-breed”: TIM Fiber’s declared ambition is to pursue a “best-of-breed” strategy based on its high-quality network. Their choice of 35Mbps and 50Mbps plans is not a coincidence, both speeds are beyond what traditional xDSL and cable technologies can deliver. Oi, Vivo and NET can only match these plans via FTTx, but coverage is still limited.
- Emphasis in simplicity: Another stark difference between TIM Fiber and its competitors is the emphasis on simplicity. Other telcos invest on flexible bundles, which enable consumers to choose from a wide range of options for broadband, TV, fixed-line and to a less extent, mobile. In some cases, such as NET’s, there can be more than 300 different bundle combinations. Additionally, depending on the chosen bundle, the operator can waive the installation fee, give a discount, and/or give different levels of discounts on the monthly fee for the first months of the contract. There are also discounts available for those willing to pay via direct debt and special deals via the Internet. On the other side, TIM Fiber has only two broadband plans, 35Mbps and 50MBps. The company does not charge penalty fees for early termination. It also does not include data caps, and the monthly subscription price is constant throughout the contract. All in all, users can easily understand how much they will pay, whereas the same is not true with other telcos.
- Innovative network architecture: unlike Vivo and Oi, which chose to implement FTTH, TIM Fiber has an aerial optical backbone that connects to multi-service access nodes (MSANs) on the edges. These are no more than 250 meters from customer locations. Even though TIM Fiber can use optical fiber to connect to the building, the most common configuration is using VDSL from the MSAN to the home. This architecture combines low CAPEX per household with a fast deployment. Even though this architecture does not offer the same potential maximum speed of FTTH and operational costs might be higher in the long term, TIM Fiber can still grow its network faster than its competitors and remain commercially aggressive due to the CAPEX advantage.
Finally, TIM’s “naked” broadband strategy is highly disruptive for another reason: most operators are wary of cannibalizing fixed-line revenues and therefore, demand that users acquiring broadband also acquire fixed-lines. This is true even for FTTH. Oi and Vivo still require users to have a fixed-line to have fiber-based broadband. Only NET Serviços does not require users to subscribe to a fixed-line, even though the price for “naked” broadband is up to 45% higher than the broadband price in a bundle.
Results
So far, it is too early to tell if TIM Fiber’s strategy will be successful. Q412 was the first quarter when it was fully operational, and the results are still modest. TIM’s customer base reached 10,000 users by December 2012, and the company is getting around 5,000 in sales per month with an additional 160,000 prospects registered at its website. TIM’s coverage reaches 500,000 households with 4,200 connected buildings out of the 8,500 which granted authorization. Its coverage has grown by 20,000 households per week. During TIM’s Q412 financial results conference call, TIM Fiber disclosed its average market share per installed MSAN per week in operation: on the older MSANs in operation for 33 weeks, they are reaching 10% market share.
All in all, TIM Fiber has built a very compelling offer for customers who prioritize broadband over TV and voice, or who don’t mind acquiring these services from different companies. The crucial question is whether this is what consumers are looking for.
