Saturday, April 30, 2011

Is the Brazilian market now ready for MVNOs?

This week in Brazilian telecom was clearly in the sign of the MVNO and the derivatives that comes out of virtual retail business models on top of current mobile networks. Much of the discussion took place on the MVNO Summit (Twitter hash-tag #ITM_MVNOLA) held by Informa in Sao Paulo. This years event had more relevance than former years because the publication of the Brazilian regulation for the operation of MVNO a few months back.

D@tora and Porto Seguro had already announced their agreement to operate on TIM's network, and did now also announce Ericsson as their infrastructure supplier for Switching, HLR, Billing, Pre-paid, and other network nodes. In other worlds, we are talking about a full MVNO, which, as per the Brazilian rules can resell traffic from various network operators simultaneously, and also move their customer from one network to the other. To some extend the operators have pushed the market in to this mode by being reluctant to make the necessary investments in order to host have multiple wholesales customers in their network. This could yield a bigger pressure on their wholes sales prices, and turn out to have been a bad decision, but I will write more about that in another article.

The overall feeling that I get is that the market is reluctant to take the first steps into this new era, partly because there are unsolved legal issues in the way ANATEL has issues the regulation, and because the margins on Mobile Telecom in Brazil are already low, meaning that if you are to insert more companies into the food chain without increasing the prices to the end user, there will be less to everybody. The interesting fact is that the MVNO market in Denmark developed with even lower average EBITDA margins than in Brazil. It does not help that issues like ICMS (type of VAT tax) is not clearly resolved, meaning that MVNOs risk paying a tax-upon-tax which present further problems.

ANATEL has decided to issue the regulation in two flavours:

A Licencing, which gives even less room to maneuver than a conventional Branded Reseller as known from other markets, because the reseller in this case in sharing the legal responsibility in all aspects for the service, including the commercial ones with the host operator. This means, that if a customer to a reseller, or light MVNO as they are sometimes called, chooses to test a dispute in a courtroom, they can just as well go to the mobile host operators with their claims, who have more cash to go for. Furthermore, the host operator's brand has to appear in all marketing material and communication with the subscriber. This means that success cases that we have seen on other countries, where resellers have reached a customers satisfaction index of 0,90 against their host network with 0,70 are less likely to happen in this case as the brand will always appear together. As the market in Brazil believes that the MVNO's will not be able to obtain whole sales prices lower than what the market is offering today (though I think this will change), resellers will have to bet more on differentiation which is difficult as the regulation forces the resellers back to the host operators brand at any time.

The other tipe of certification is a so called Auhtorization, which in effect will give the MVNO the same rules and obligations as a network operator, meaning that they are also responsible for the technical and quality aspects of the services, even if they choose to leave all that to a host operator. This gives, in my opinion, MVNOs a better framework for effectively developing their own brands with increased brand value. Theoretically, the technical responsibilities should be be negociated back-to-back with the host operator. Unfortunately, this also means that MVNOs have to live up to the sames rules when it comes to having physical shops and outlets in all areas where they offering their services, which is putting the otherwise so popular Internet based distribution model in question. At lest, MVNOs would have to negotiate a representation through a retail store, which will limit the interest of smaller player who want to test unproven business model in the market. The official expression this week of interest by the national Brazilian post office to enter as an MVNO confirms that this is a market for larger players.

In both cases, the success of the business depends on the ability to negotiate reasonable traffic deals with the operators. After all, nobody will shift to a new service provider and pay more for their basic calls, just because the provider has a better call center with nice attendants, or more pictures of Micky Mouse to sell you.

So, all in all, after this week, my feeling is that the market could definitely have been more clear. There are substantial risks, taxes, cost, legal unclarities, that, initially at least, will hold new players back. After all, the critical voice by CEO John Strand, from Strand Consult on last year's event proves to be more right than many of the opponents on last year's edition of the conference. MVNO is never the same between two markets, and is just like learning to ride a bicycle: There is a limit to how much a pre-study will help you. You need to get up and try. You will stumble in the beginning, but eventually the market will succeed.

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