Tag Archives: Industry Structure

Tweet of the week for July 14 to 20 Brazil politicians try to rewrite the laws of physics

Posted on by
1

Source: Yankee Group Latin America Mobile Carrier Monitor June 2012

Brazil gets ugly. #TIM #Oi & #Claro suspended from sales in various states for poor customer service. Operators blame antenna laws #ygmb

Could there be any doubt about this week’s choice?

  • A triumph of politics over logic, over the laws of physics
  • A bewildering move by a country that pretends to be in the top rank of nations but comes off looking like an ignorant backwater

Full Disclosure #1: I left Comcel as President in December of 2001 having spent 13 months working for America Movil. Since I left, I have on occasion provided advice to the group mostly in regulatory issues. I have advised principal competitor Telefonica through my association with Yankee Group.

Full Disclosure #2: I wrote a lot about this during the week and I have cribbed some of my other texts to create this one.

This event shows why CEO’s can’t take vacation.

From a public point of view, this wasn’t even on the radar screen two weeks ago. Last Thursday July 12, the Minister threatens TIM with this kind of sanction because of quality issues, but only mentions TIM. Tuesday July 17,  the city of Puerto Alegre’s consumer advocate stops sales of all operators pending better quality of service. The next day the national telecom regulator Anatel calls a hurried conference call to sanction all but Telefonica’s Vivo. TIM remains the target blocked from selling in 19 of 27 administered areas (26 states plus the federal district of Brazilia). Partially state-owned Oi comes a distant second with 5 states affected and America Movil’s Claro is blocked in three states.

Quick math shows that 19+5+3=27 showing that exactly one company was picked to be sanctioned in each of the administrative areas. Now either by sheer luck there was exactly one operator below standard in each area or – as one press report had it – the lowest operator in each area was selected regardless of whether or not they met the regulator’s quality standard. More likely the latter since some politician or politically-minded bureaucrat would 1) want every state to feel the federal government was looking out for them 2) it is a simple rule that would be easy to explain.

The problem is that it makes no sense and to my mind it should be illegal.

  • It should be illegal to punish an operator who was above standard but nevertheless selected. No doubt TIM’s lawyers are pursuing this course of action.
  • The rule makes no sense except as a one-time application. As an ongoing rule there will always be one operator with a stop sell because there will always be someone at the bottom of the list in each area. Does Antel plan to continually shut off the bottom operator for a period of time until some other poor soul drops behind?

It’s hard not to think of this as some sort of political one-upsmanship given the timing of the annoucements and especially the last-minute nature of Anatel’s action. It looks like  the Minister got wind of Porto Alegre’s decision and wanted to get out in front. Or he was floating a trial balloon and Porto Alegre jumped on it. They at least banned everyone until the industry got its act together. In either case, the minister was embarrassed by Porto Alegre’s action and ordered Anatel to get an even more draconian action in place and in front of the national press within 24 hours.

I’m unfortunately not sufficiently familiar with the Brazilian political situation to know what really motivated the minister. In the byzantine world of factions and parties within the government’s coalition anything is possible. Dilma has dismissed a number of ministers for corruption, incompetence or both. A crowd-pleasing stand in front of the press is a good way to ensure continued employment at least until the story dies down.

But real customers and especially shareholders are the collateral damage. Friday July 13, TIM’s stock dropped 7% just on the hint that something like this might be in the works. Its stock dropped again after Anatel’s announcement as did Oi’s. Even Vivo’s stock was affected. America Movil doesn’t trade in Brazil.

As to whether consumers will actually benefit, that is by no means clear. If anything TIM BR spent a higher percentage of its revenue on CAPEX than its peers. See the chart at the start of the article. It has also has the highest spending in absolute terms over the past four quarters to 1Q12. If despite this spending it is at the bottom of the quality list then either TIM’s problems come from many years prior or it wasn’t spending on items directly related to quality. Among other possibilities, no doubt TIM was overspending in high-economic-impact states like Sao Paulo and under-spending in low-impact– but politically sensitive – states like Amazonas and that’s where they got into trouble.

Government-controlled Oi is the most miserly operator and Claro the second. Both got the lightest slap on the wrist. Claro was uncharacteristically contrite and said they wouldn’t contest the result.

Only Vivo/Telefonica seems to show a relationship between CAPEX spending and this measure of quality: they were just behind TIM in spending and got off without penalty (except in Porto Alegre).

On the one hand 30 days is a dreadfully long time for a “stop sale”. On the other, it is impossible to fix network quality issues that quickly. If the government sticks to its guns, it will be months before operators can start selling again.

The operators say that the issue is tower permits with local governments reluctant to authorize more base stations. Puerto Alegre — which fired the first real shot — doesn’t permit towers to be within 500m of each other. If the solution is more towers then we will have irresistible force meeting immovable object.

This is yet another case of regulators trying to deny the laws of physics — and another full-employment act for lawyers.

As to what this means for Anatel, I doubt they come off looking well. This has all the ear-marks of a grandstanding move by the Brazilian telecom minister for some internal Brazilian or personal political reason. Anatel’s hurried press conference on Wednesday after Porto Alegre’s announcement of a similar move on Tuesday shows desperation not deliberation.

Worse, Brazil once again looks like a country which makes up the rules as it goes along to suit short-term political considerations with little or no consideration of the big picture. The operators who are already there are trapped. Soros must be rueing that he bid for a 4G license. Other operators will give the country a wide-berth despite its obvious potential.

I sure hope the minister gets what he wanted. No one else is likely to benefit.

Bottom Line: I believe this was a politically motivated mess that will do significant harm to Brazilian telecom. It is particularly damaging if the affected companies were above Anatel’s stated quality standards: that’s what they what they should use as a guide for investment. That being said, there was obviously a level of customer complaints about which the operators were not demonstrating sufficient public concern, giving the minister and Porto Alegre the pretext for their arbitrary actions. Finally, operators have to give a higher priority to tower sharing and even network sharing. Engineering-driven companies believe that tower placement is their value add because that’s all they understand. It is becoming their Achilles heel.

Tweet of the Week July 1 to July 7 2012 What happens if you call an auction and nobody comes?

Posted on by
Reply

Colombia delays 4G ‪#spectrum‬ auction to Sept. Hopes to attract new players. So does everyone. Few achieve this. Incumbency counts.

It’s tragic really. Governments consistently say they want to attract new players to Latin American spectrum auctions. It rarely happens.

The last truly new player to enter via auction was probably VTR in Chile a few years back. Before that? Brazil Telecom? Colombia Telecom (now TIGO)?

I’m excluding Nextel International which got “mainstream” spectrum because in Mexico, Brazil and Argentina they already had an established brand, the same reason I’m excluding established players like America Movil and Telefonica when they enter new markets like Cost Rica.

I should add the Peruvian operator Viettel but that would be (correctly defined) “the exception that proves the rule” or perhaps the corollary of my theorem: those new operators that enter are failures.

VTR has taken two years to get going and so has Nextel in Chile. So long in fact that both companies are under investigation by the government for “wasting” their spectrum. Let’s not even discuss Viettel– too many years to launch, limited coverage, no chance to make an impact on the market etc.

I can understand the strategy completely: more operators should lead to greater competition and lower prices. There would be an argument that too much competition leads to lower levels of investment and less technological innovation. But frankly there are few concrete examples of this except perhaps India and the UK but there are many confounding factors like poorly organized spectrum (India) and a regulator who seems to be indifferent to the need for 4G spectrum (UK).

I can understand the statistical evidence that Latin American countries should be able to support more than three operators. Brazil has four plus Nextel. The Dominican Republic has four. Many emerging markets in Africa, Asia and Eastern Europe have four or more. But in the major markets of Latin America:

  • Mexico and Argentina have three plus Nextel;
  • Colombia has three plus an essentially irrelevant Avantel;
  • Venezuela and Ecuador have three;
  • Chile has three plus two that have barely launched after two years;
  • Peru has only two plus the aforementioned Viettel.

Worse in economic terms in three of these countries with three or three plus Nextel, the leading operator has over 60% share (Mexico, Colombia, Ecuador). In Ecuador and Venezuela the third operator has small market share. Nowhere (at least so far) does Nextel have more than about 5% share.

What is going on and how can this be fixed?

I touched on this problem in Colombia in my recent note on Dominant Carrier Regulation: for most of these countries it is too late. Brazil has four relatively balanced operators because it started with a large number of operators distributed over multiple regions. It has four because that’s how far consolidation has gotten to date. The same is true of most of the other examples of multi-competitor markets: they have more than the average number of Latin American competitors because they started with many, many more and consolidated.

The Colombian market was doomed to consolidate to two because it started with two per region. It managed to add a third by essentially giving spectrum to two municipally-owned companies who proceeded to mess up completely and were forced to sell out cheap to Millicom.

Ecuador has a similar tale of woe, only the government telco still hasn’t sold out probably because no one would buy them. Mexico has three because they started with three. Likewise Argentina and Chile. Peru started with two, went to three briefly, then went back to two.

With penetration near 100% no multinational operator will convince their board to invest hundreds of millions of dollars trying to steal share from America Movil and Telefonica. No doubt we will see more Alegro’s and Colombia Movil’s — state-owned companies who have no idea what they are doing but have apparently infinite cash to waste on national champions.

Governments can declare their openness to new entrants all they want. They can fly to foreign capitals and woo multinational presidents. They can hold long dinners with the Chinese government and offer ridiculous terms. They can twist spectrum rules to favor new entrants.

At best they will get VTR — a year or two late but with enough brand strength that maybe they will make a dent in the existing operators’ hegemony. At worst they will get Viettel: an irrelevancy.

Its too late to get more viable operators.

Tweet of the Week for June 23 – 30 The Death of Comcel The Birth of Claro

Posted on by
Reply

#AMX changes venerable & valuable Comcel brand to #Claro ow.ly/bQBW0 The $$$ to change not the only cost – lost sales? #yg

Full Disclosure: During the period 1998 to 2001, I was COO when Comcel’s branding strategy consolidated and CEO during the ownership transition from Bell Canada to America Movil when the branding was confirmed by the new owners.

I no longer work for America Movil and have no strong desire to do so again. It’s not the kind of company I want to work for, for various personal reasons. But I consider it a well-run company with strategically smart executives. I have rarely disagreed with any strategic decisions they have made over the past decade.

This time I think they have made a mistake.

My ex-boss Peter Burroughs — who was CEO virtually from the beginning of the company through the America Movil purchase — has recently come out publicly against the move and I can understand his personal frustration. He was responsible for building the foundation of where the brand is (or perhaps was) today. He used his consumer goods experience to build a massive placement strategy, putting the name “Comcel” virtually everywhere in Colombia (even in places where we didn’t yet have coverage!).

I like the brand name “Claro” and I agree with most of the other brand consolidation decisions America Movil has made over the years. I recognize that stating my disagreement with their decision in the case of Comcel (and Porta Ecuador which is a similar case) is some how a waste of “ink” (or perhaps electrons). Peter may have been frustrated but coming out in public was frankly a waste of time. Did he think they would change their minds? Did he think it would help with his current role running a coal railway in the north of Colombia? But the reasons why I agree with some brand consolidation decisions and not with this one might help others facing similar challenges.

When America Movil consolidated disparate “Telecom America” properties in Brazil under the “Claro” brand that made perfect sense. Multiple brands within a single geographic market is a complete waste of money. The synergies were obvious. “Claro” was the best of the then existing brands (one of the few things Bell Canada International did right) and only needed a change of colors and logo for the relaunch / consolidation.

When America Movil changed CTI in Argentina and Smartcom in Chile, they relaunched companies with damaged brands, erasing a sorry past with a new brand for a (hopefully) better future. “Clearly” Claro was the right choice since it had already proven its worth in Brazil.

For similar reasons, where the company had bought integrated operators in the Caribbean and Central America, the change to Claro made it clear the break with the monopoly fixed line telecom past.

In Peru, with a brand new company it made perfect sense to use Claro. Why invent yet another brand?

But that left three markets with long-established, undamaged non-Claro brands: Mexico (Telcel), Colombia (Comcel) and Ecuador (Porta). In all three markets, the company’s market share is north of 60%.

Changing logos is expensive. Changing brands is even more so. I think it is justified in the following circumstances:

  1. To replace a damaged brand e.g. CTI Argentina, Smartcom Chile
  2. Consolidation e.g. Telecom Americas Brazil regional brands
  3. To take advantage of spillovers / synergies between product / services within a geography e.g. Telefonica’s elimination of “Telefonica” for fixed services in favor of “Movistar” in many markets
  4. To take advantage of spillovers between geographies

By “spillovers” I mean the synergistic benefit for one market from advertising destined for another market under the same brand say, fixed services when advertising mobile under the same brand. The best example in mobile is the benefit that Samsung gets for its mobile devices from the advertising it does for TVs.

America Movil no doubt argued to its board about spillover synergies from consolidation of Telmex and Comcel under a single brand. But that would argue for getting rid of the weaker (and somewhat damaged) Telmex brand in Colombia in favor of the much stronger Comcel. Recently Telefonica chose to use “Vivo” in Brazil for both fixed and mobile (dropping “Telefonica”) and decided not to use “Movistar” preferring to use an existing strong brand rather than introduce a new one.

The only argument for changing Comcel to Claro has to do with cross-geography synergies, not cross-product synergies.

  • There are synergies with having say, one creative agency and using common promotions, web-site design etc. across multiple countries. But these would seem to be in the single or low double digit millions whereas the brand damage could be much larger. Furthermore one of the advantages America Movil has had over Telefonica was that while technology decisions and strategic decisions were centralized marketing was decentralized. Decentralized marketing dilutes the benefits of centralized, synergized creative.
  • But spillover requires cross-border media consumption, such as might be expected in Western Europe or between Canada and the US. But the only cross-border media consumption is pay-TV, especially football (soccer). This would seem to be a small benefit applicable to only a subset of households.

On the other side of the ledger there is the cost of which the US$40M (to physically change branding and launch the new brand) is the smallest part as I suggest in the tweet.

To me the biggest cost is the potential loss of sales while the new brand gets established in the public’s collective mind. For a period of time, a (hopefully decreasing) percentage of consumers will not understand that the red-and-white “Claro” is the same as blue-and-white “Comcel”. The consequence is that they will probably go to one of their second or third top-of-mind choice, the blue-and-green Movistar or the dark blue-and-white TIGO.

The question — now that the decision has been taken — is how long before 100% of consumers understand the change. During this time America Movil will lose sales and the synergies — in my opinion — will be minimal.

Frankly, I question why this was necessary at all. What problem were they trying to solve? I just don’t understand.

I do know the happiest guys in Colombia will be marketing managers at Movistar and TIGO who will no doubt take advantage of this uncertainty to increase their share.

Members of the Colombian Communications Regulatory Commission (CRC) may or may not be happy. On the one hand, they should achieve their objective of reducing America Movil’s market share. On the other hand, they will have had nothing to do with it.

Bottom-Line: This is a decision America Movil will regret but for now they must minimize the damage with a blitz to get the equation Claro=Comcel firmly embedded in the public’s psyche. For Telefonica and TIGO, now is the time to invest heavily in advertising and promotions to drive confused consumers into your stores.

What to do about Dominant Carrier Regulation in Colombia?

Posted on by
1

I recently had a chance to review America Movil/Comcel’s economic testimony used in their bid to avoid or mitigate Dominant Carrier Regulation in Colombia. As might be expected given the financial resources of the company, it was prepared by recognized economic experts who argued their points well. I have some technical quibbles with the statistical analysis by the Latin American group NERA but even then I’m not sure correcting these would have changed the conclusions.

Full Disclosure: I left Comcel as President in December of 2001 having spent 13 months working for America Movil. Since I left, I have on occasion provided advice to the group mostly in regulatory issues. I have advised principal competitor Telefonica through my association with Yankee Group.

I don’t think it worth discussing whether Comcel is in fact dominant or whether dominant carrier regulation is necessary. Regions as diverse in their economic policies as the United States and the European Union think it necessary to take action when one player has more than 60% market share in a multiplayer market. As well, the Colombia-US Free Trade Agreement requires both parties to have effective dominant carrier regulation. Comcel sticks out like a sore thumb with its above 65% Line Market Share.

The CRC has tried to address this by forcing a narrowing of on-Net/off-Net tariff differentials which are presumed to be the reason why Comcel has achieved and maintained its high market share.

My argument is that the CRC has been manifestly ineffective and their strategies might even make the presumed “problem” worse because they fail to attack the core reasons why Comcel has had the success that it has had.

The CRC has been ineffective:

  • Market Share measures (Lines, Revenues, Voice Minutes, EBITDA) remain essentially where they were before the CRC took action in 2009;
  • Theoretical arguments (as advanced by Comcel’s economic consultants) show that taking this kind of regulatory action can only result in HIGHER prices for consumers – not the lower prices that presumably is the objective of dominant carrier regulation;
  • I believe that in a multi-SIM environment such as we have in Colombia, lowering on-Net/off-Net differentials removes the customer incentive to have extra SIMS and thus could easily result in the disconnection of second and third-player extra SIMs reinforcing the “dominant” carrier’s position;
  • Voice revenue – while still representing over 50% of revenues in Colombia – is in decline so using voice tariffs to control the industry structure will be increasingly ineffective.

The core reasons why Comcel has been so successful in terms of Line Share have to do with handsets, distribution and a fundamental aspect of consumer behavior – what I call the “Winner Effect”:

  • Share of Sales = Share of Stores: aka “A bigger net catches more fish”— Comcel had always emphasized having a massive distribution network and America Movil – which had the same philosophy – accelerated investment in sales points. I wrote a long paper for Yankee Group proving the validity of this “theorem”. So long as Comcel has a broader network of sales points than its rivals, it will continue to lead in share of Gross Adds and so maintain its current Line Market Share.
  • Controlling the supply of “hot handsets”. The industry – and especially telecom regulators – see the market in terms of telecom services. But what drives Line Market Share is sales and what drives sales are handsets. (Voice and other tariffs impact prepaid behavior and to some extent postpaid churn but what brings consumers in the door is a hot handset.) Handset vendors want to sell the maximum number of phones. Winners have faith in their marketing capabilities to handle large volumes of sales. Thus operators who have already achieved the leading position are prepared to commit to large sales volumes in exchange for exclusivity or at least a “headstart” like a period of exclusivity for a number of months. And handset vendors, to achieve their sales targets more easily, have no problem extending this exclusivity even at the expense of their relationships with the number two or three operator in a market.
  • Once a winner, always a winner. A leading brand attracts criticism but also admiration. Consumers often hope some of the winning brand’s success rubs off on them. The leading brand also leads in “Top of Mind” surveys for the obvious reason that more consumers are their clients. Being the winner (for whatever reason) impacts important mobile market purchasing drivers like coverage and technological leadership. The winner is presumed to have both of these (whether they actually do or not). Massive distribution strategies reinforce coverage leadership since an operator is presumed to have coverage where they have distribution (whether they actually do or not). And vice versa: it is easier to attract distributors – and dictate commission terms – if you already have the leading market share.

(I have a long – very long – version of this note that develops these ideas in greater detail. Contact me if you want to see it.)

Thus the CRC’s chosen tools are ineffective and repeated application can only continue to be ineffective. Madness is repeating the same action and expecting a different outcome.

At best they may achieve a transfer of wealth from Comcel’s shareholders to those of its rivals but so far that hasn’t happened either. Furthermore, I don’t believe any telecom regulator has the right or the obligation to directly impact shareholder outcomes: their only legal scope for action has to be on consumer outcomes.

To exert effective control over Colombian market outcomes – and again assuming that something must be done if only to maintain the countries obligations to the US – then action has to be taken in the DISTRIBUTION (including handsets) market, not in the market for voice services.

This is probably impossible. My contention that the naturally-evolved structure of the mobile handset market creates distortions in the market for telecom services would create a field-day for Colombia’s lawyers.

Besides, America Movil is about to do the CRC’s work for them. Retiring Colombia’s most valuable brand – Comcel – to introduce an essentially unknown brand – Claro – and merging it with a so-so brand like Telmex will do the company untold damage.

It might even get them below 60%.

Bottom-Line: Colombia at least will continue to experiment ineffectively with voice tariff interventions trying to “correct” a situation nearly impossible to correct – Comcel’s “north of 60%” Line Market Share. That “horse left the barn” a long time ago (nearly 10 years ago in fact) and there is little that can be done now. Intervention in the mobile handset market might have an impact but that is no doubt politically and legally impossible.

Tweet of the Week for June 2-8 2012

Posted on by
Reply

#Nextel BR (#NII) denied right to sell to consumers. Judge says license forces only to sell to Co.s or professions. ow.ly/bo5zo #yg

Full Disclosure: I have advised Nextel International in the past through my association with Yankee Group.

Admittedly this looks like the case of a lower level judge ruling in favor of established players (the law suit in question was brought by Telecom Italia Brasil — TIM BR) who will get overturned as the suit rises up the judicial hierarchy.

I won’t ask how or why the judge decided to rule the way he did. That might lead me into speculations that could in turn lead into legal problems. I will say I find it strange that Nextel’s US lawyers – a breed usually known for being hyper-conservative bordering on paranoid – would let Nextel Brasil offer consumer services if it were obvious that the license wouldn’t permit this.

There is the possibility that Nextel BR’s leadership knew about the restriction but hid this from the Board thinking “No one will care” or “That was so long ago that it no longer matters” or “We’ll work this out when we get to it” (nudge-nudge, wink-wink, say-no-more to quote a famous Monty Python sketch). This is a particular vice of certain old-school Latin American managers (no matter how old they might be) but I have a higher opinion of NII BR’s managers than this.

Much more likely that the license itself isn’t explicit but the preamble to the license ruling was explicit that the authorization was for NII BR’s activities in the business market. This could be interpreted to mean that the company could only sell to personas juridicas i.e. companies rather than personas naturales i.e. human beings.

In a later twitter exchange on the absence of NII BR from the Brazil 4G auction, @miguelsmirnoff connected the two stories together, suggesting that – for now at least – cut off from the consumer market in Brazil, NII BR stayed out of the auction.

I agree that is a possibility although I also find it an excess of caution.

Spectrum auctions arise infrequently. This particular auction has been well over a year in gestation. They are opportunities that cannot be missed. Changing licenses to remove any doubt about provision of consumer services can come simultaneously or later.

Bottom Line: I suppose the Brazilian government can be cocky about this kind of “legal instability” since one relatively new player (Sky BR) and a brand new player (a George Soros vehicle) have come to the 4G party. But this has to put a chill on any serious player thinking about investing in Brazilian telecom, especially combined with Brazil’s “industrial policy” measures like the requirements for Brazilian-provided equipment. That… or some people – very senior people – in NII BR’s executive suite should get fired.