Tim Undercutting Vivo to Spur Brazil’s Best Telecom Gain

Tim Participacoes SA, Brazil’s best-performing telecommunications stock this year, is gaining market share by undercutting rivals on voice and data plans.

Tim’s strategy to offer mobile Internet for as little as 50 centavos (22 cents) a day and unlimited in-network calling is undermining market leader Telefonica Brasil SA’s Vivo brand and drawing praise from investors and analysts at JPMorgan Chase & Co. and Banco Santander SA. Vivo’s lead over Tim has been reduced by almost half in the past year, with Vivo now controlling 28.7 percent of the market for mobile phones and Tim holding 27.2 percent.

The carrier, based in Rio de Janeiro, gets most of its revenue from wireless service, while Vivo and Oi SA’s slowing landline businesses are sapping mobile-phone unit gains. That enables Tim to be more aggressive on price even as it invests 10.7 billion reais through 2015 to improve quality and attract more so-called postpaid contract subscribers.

“Tim has been able to gain a lot of market share with its pricing, improvement in quality and marketing investments,” said Gustavo Serra, an analyst at Planner Corretora de Valores SA, in a telephone interview from Sao Paulo. “The company could surpass Vivo, so long as it doesn’t ignore the fact that the growth puts pressure on the quality of service. Tim has to focus on quality or else it will lose credibility.”

Tim’s Gain

The company said on July 30 that second-quarter net income rose 12 percent from a year earlier to 386 million reais, while Telefonica Brasil announced on July 24 that its profit fell 16 percent to 914 million reais.

Tim, analysts’ favorite Brazil operator with 14 buy recommendations, 5 holds and no sells, is also the only telecommunications stock posting gains this year. Its 7.2 percent increase through yesterday compared with a 1.5 percent drop for Vivo, a 52 percent plunge for Oi and a 22 percent decline for the benchmark Ibovespa index. Tim rose 1.3 percent to 8.90 reais at 12 p.m. in Sao Paulo.

Oi had the most complaints from customers because of poor service in May, followed by America Movil SAB’s Claro brand, Tim and Vivo, according to telecommunications regulator Anatel. Oi declined to comment. Claro’s press office didn’t respond to an e-mail request for comment.

In addition to Internet, Tim is pushing its 28-real a month plan that offers unlimited Tim-to-Tim calls. In-network calling benefits the company because it doesn’t have to pay connection fees to other operators. Vivo charges users by the minute and offers no unlimited plan, even for in-network calling.

‘Capital Strength’

The global industry is littered with carriers who have tried low-price tactics and found them unsustainable, Richard Dineen, an analyst at HSBC Holdings Plc, said by telephone from New York. Those that have succeeded, such as Iliad SA in France, tend to be new entrants without unprofitable businesses they are forced to maintain, such as pay phones, which Tim doesn’t have either. In 18 months, Iliad has captured 10 percent of the French market.

“If you spend a lot of money on buying spectrum and laying infrastructure and renting for high fees -- that’s really going to crimp your ability to discount over anything but a very short period of time,” Dineen said. “Tim has never really had the same capital strength to invest incrementally to build the best network in Brazil.”

Tim is focusing on making gains in the postpaid market, in which subscribers sign up for long-term contracts. Vivo has the greatest share of postpaid clients in Brazil, with 37.8 percent compared with Tim’s 20.8 percent. That has helped Vivo maintain its lead in mobile data, with 1.68 billion reais coming from data and other services, compared with 1.29 billion reais for Tim, according to regulatory filing.

‘Top Priority’

“Our top priority is to pass Vivo in terms of revenue,” Rogerio Tostes, investor-relations director for Tim, said in a telephone interview from Rio de Janeiro.

Half of Tim’s users have smartphones, while just 30 percent of them use data, representing growth opportunities, Tostes said. Data revenue will grow annually 25 percent for up to three years, he said.

“Tim is focusing on the migration of prepaid users” to postpaid contracts and more lucrative prepaid offerings, said Georgia Jordan, an analyst at Frost & Sullivan in Sao Paulo, in a telephone interview. “That’s important to improve margins.”

‘Very Confident’

Vivo’s strategy “is based on coverage and quality for all segments,” said Christian Gebara, Telefonica Brasil’s executive director for the individual national market, in charge of marketing and sales for mobile. “We are already ahead in 3G and are leading in 4G. We are very confident.”

3G telecommunication networks allow mobile Internet surfing, while 4G networks are its faster successor.

Tim’s parent company, Telecom Italia SpA, is depending on Brazil to offset revenue declines at home. Telecom Italia is posting the biggest annual loss relative to revenue among its peers in Western Europe, according to data compiled by Bloomberg. It reported a second-quarter 1.7 billion-euro ($2.3 billion) loss.

Tim’s successful low-price strategy is dependent on staying creative to stay ahead of competitors, Jordan said.

“It’s a business model that is working for them but they have to be constantly innovating and looking at new things to maintain growth,” she said.

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