Telefonica Brasil SA, the nation’s biggest telecommunications company, is beating Oi SA and Tim Participacoes SA at squeezing more revenue from users as slowing demand prompts a hunt for more profitable customers.
With the market maturing and the number of first-time subscribers dwindling, Telefonica Brasil, which operates the Vivo brand, still managed to increase average monthly customer bills by 3.4 percent in the first quarter from a year earlier. That compares with a drop of 3.6 percent for Tim, 3.8 percent for Oi and 11 percent for America Movil SAB’s Claro, according to data compiled by Bloomberg.
There are already 32 percent more phones than people in Brazil, the world’s fifth-largest mobile market, according to regulator Anatel and consulting firm Teleco. More than 80 percent of users are in the prepaid segment, and their migration to long-term contracts represents the best opportunity for carriers, said Richard Dineen of HSBC Holdings Plc.
“We expect Vivo will continue to enjoy the dividends of high and consistent investment in building the leading quality network in Brazil,” said Dineen, a telecommunications analyst in New York. “You can see it in the company’s margins, which are comfortably above the margins of rivals.”
Profit margin at Telefonica of 32.1 percent in the first quarter exceeded that of Oi, at 30.5 percent, and Tim, at 25.9 percent, leaving out items such as interest, according to data compiled by Bloomberg. Telefonica Brasil, based in Sao Paulo, last quarter overtook Spain as the the biggest source of revenue of Madrid-based parent Telefonica SA.
Telefonica was little changed at 53.84 reais at the close in Sao Paulo. It has gained 9.9 percent this year, compared with a 2.7 percent gain for Tim and a 44 percent decline for Oi. Telefonica and Tim are trading at 13 times 2013 earnings, with Oi at 8.6 times.
In a market where mobile-phone customer satisfaction has been falling, Telefonica’s Vivo is boosting revenue by improving network coverage and quality. An Anatel industry survey released this year showed that 53.7 percent of mobile-service contract subscribers were satisfied in 2012, down from 71.4 percent in 2002; among prepaid clients, customer satisfaction fell to 60 percent from 77.5 percent.
Investing in the network to reduce dropped calls and improve Internet connections “has made the company transform something that was apparently a commodity into something that can be priced differently,” said Marcelo Mollica, a partner at Rio de Janeiro-based GAP Asset Management, which manages about 12 billion reais ($5.89 billion), including Telefonica shares.
Vivo receives fewer complaints than competitors, with 20,800 in February, the most recent month available, compared with 24,700 for next-best Tim, according to Anatel.
Vivo offers “the most attractive plan currently on the market, in terms of both pricing and attributes,” according to an Itau BBA report last week by analysts Susana Salaru and Gregorio Tomassi.
Users of data, such as music downloads and video streaming, climbed 64 percent at Vivo in the first quarter compared to a year earlier. Postpaid, or contract, subscriptions climbed 17.4 percent. Vivo offers 3G coverage -- short for third-generation - - in 3,121 cities, more than double the amount of Claro, the next-closest competitor, according to Teleco.
“Our 3G coverage is greater than our competitors’, and that allows us to capture more clients,” said Cristiane Baretto, Telefonica Brasil’s executive director of financial strategy and investor relations.
Oi attributed its drop in first-quarter average revenue per user to industrywide fee cuts mandated by Anatel, even as prepaid subscriptions grew and the postpaid business improved, said Chief Financial Officer Alex Zornig in a written response to questions. The number of prepaid clients at Rio de Janeiro-based Oi rose 3.6 percent to 40 million in the first quarter from a year earlier.
Tim’s press office in Rio de Janeiro didn’t respond to a request for comment on the decline in average revenue per user. An America Movil press official in Mexico City declined to comment.
While Telefonica Brasil’s wireless business is thriving, it’s been “canceled out” by the declining landline business, where sales slipped 8.9 percent in the first quarter, Dineen said. More users are shutting off their home phones to go mobile-only as wireless prices become more attractive.
Contract wireless subscribers are a steadier source of revenue compared to prepaid users, who have the flexibility to postpone topping off their accounts in times of economic turbulence, Mollica said. Brazil’s economic expansion slowed to 0.9 percent in 2012 from 2.7 percent in 2011.
“It clearly has an effect on the level of recharging and phone-buying in the prepaid segment,” Mollica said by telephone. “Postpaid users are the most valuable in Brazil, and that’s the big driver behind the focus on that segment.”