Built for speed: Brazil's wireless final four see the brass ring dipping within reach.

Cellular phones already seem to be everywhere in Latin America--suppliers like Samsung and Nokia now talk about the telephone handset replacement market, not growth from first-time users--yet the wireless gold rush is still raging on in Brazil.

Anatel, the country's telecom regulator, says economic recovery and competition among four major providers--three of them foreign--will push wireless use to 100 million by 2013, up from 45.5 million at the end of 2003, increasing penetration to 60% from 26%. "Brazil will experience one of the highest mobile subscriber growth rates in Latin America" says Jarbas Jose Valente, Anatel's head of private services.

Private analysts see more modest rates but nonetheless recognize that Brazil has room to grow. "In terms of number of potential new subscribers, Brazil is the biggest growth market in Latin America, ahead of Mexico and Argentina," says Edigimar Maximiliano, telecom analyst for Unibanco, Brazil's No. 3 private bank. "This is not just because of the country's population and room-for-growth penetration rate, but because the fixed-line sector is a no-growth market, leaving the mobile market to grow and steal market share away from the fixed-line market."

The companies dividing up the world's seventh-largest mobile phone market include Spain's Telefonica in league with Portugal Telecom, America Movil, the wireless spinoff of Mexican giant Telefonos de Mexico (Telmex), Telecom Italia and Brazil's Telemar. Companies seeking new business in the country will greatly benefit, ironically, by owning fixed-line assets in overlapping license areas. As the major carriers push down into lower-income markets to increase revenues, cost cutting--particularly reducing the cost of connecting wireless calls to the fixed phone system--will be a big part of the strategy.

"There are not significant goods-and-services differences separating the four major mobile phone players in terms of what they're offering here, which is basically the same commodity, a phone call," says Jeffrey Noble, a telecom-sector analyst for BBVA's Sao Patrio office. If any of them manage to considerably increase market share or revenues, it will be because of operational synergies, says Noble.

Thus three of the four main mobile players either have fixed and mobile assets in overlapping areas or are attempting to create them. The exception is Vivo, the joint venture of Telefonica of Spain and Portugal Telecom, which gut a huge early head start by taking part in the 1998 privatization of state run Telebras and now controls more than 40% of the market. America Movil is pushing hard to catch up with its Claro brand, now the No. 2 mobile company in Brazil with 22% market share. So far, America Movil has invested US$5.62 billion in mobile operations in Brazil and plans to continue to invest at the same rate the mobile sector grows here, says Claro President Carlos Henrique Moreira.

Growth plan. America Movil's most recent move into the market was in August, when it agreed to buy control of Sao Paulo wireless company BCP for $625 million. This follows its purchase in March of BCP's northeastern region sister company BSE for $180 million. The BCP purchase allowed America Movil to consolidate its operations in southeastern Brazil, especially Sao Paulo state, Brazil's most affluent. "Our growth plan is to sell more prepaid phones to the lower-income classes to generate scale and offer more value-added, high-tech goods and services to the higher-income and corporate subscribers to generate revenue" says Moreira.

Now Mexican billionaire Carlos Slim Helu, who controls Telmex, is fishing for fixed-line assets to back up the wireless operations he has bought. In December, Telmex bid on Embratel Participacoes, Brazil's biggest long-distance carrier, from the U.S. telecom giant MCI, formerly known as WorldCom. Telmex also recently won an auction for AT&T Latin America's assets in the region, pending regulatory approval, for an undisclosed sum. That deal is expected to close in early 2004.

Because America Movil was slower to enter the mobile sector here, it has had to grow by buying mobile licenses and by starting operations from scratch or by making acquisitions. If Telmex gets a green light to buy Embratel, the purchase would help America Movil compete, Moreira says. "A Telmex purchase of Embratel would create administrative synergies and allow joint, purchases with America Movil-owned Claro, thus reducing costs for both companies," he says.

Besides reducing administrative overlap, however. America Movil and Telmex would mostly benefit because companies that own fixed-line and mobile operations in overlapping areas can reduce each other's interconnection costs, what telephone companies charge to complete a call. Claro could, for example, offer cheaper long-distance services using the Embratel structure. Embratel also could offer corporate clients discounted mobile services.

"Were Telmex to buy Embratel, and since America Movil owns Claro, when Embratel completes long-distance calls to Claro phones, and when Claro complete long-distance calls made using Embratel lines, the interconnection costs for this traffic is kept within the same two sister companies, as opposed to going to competitors' pockets" says Rodrigo Magela, a telecom analyst for Banco Pactual in Rio de Janeiro.

Such operational synergy helped fixed-line Brazilian operator Telemar ramp up its mobile operator Oi in June 2002 in the 16 states in which it operates, grabbing an 8.3% slice of the mobile telecom market, 7.3 million subscribers, in 18 months. In starting up Oi, Telemar had the advantage of having reduced interconnection costs. All Telemar calls going to or from Oi mobile phones are a wash, since Telemar owns Oi.

Young and chatty. Oi did well, too, by targeting young consumers in all socio-economic classes. These days in Brazil, having a mobile phone means you're in vogue, especially if you're an adolescent or even elementary schooler. During the Christmas season, prepaid mobile phones were among the highest-selling items purchased by lower-income parents for their kids. Oi's growth plan involves "targeting young and youthful-spirited people who like technology, daring new services and innovative technology" says Oi marketing director Alberto Blanco.

Telecom Italia's TIM, the No. 3 mobile telecom player at an 18% market share, also would like to have the operational synergies now enjoyed by Telemar and Oi. TIM had a head start similar to that of the Telefonica and Portugal Telecom; it bought two state-owned mobile companies in 1998 and grew by buying new licenses all over the country.

To create fixed line-to-mobile synergies, however, Telecom Italia has to rejoin the controlling group that runs fixed-line carrier Brasil Telecom. Telecom Italia in July 2002 cut its stake in the carrier from nearly 39% to under 20% to raise money. Citigroup's Opportunity fund and six large Brazilian pension funds currently control Brasil Telecom. Under a shareholders agreement, however, Telecom Italia contends that it can buy back its co control stake, a position endorsed by Anatel. Now it wants back in.

Brasil Telecom, however, has mobile expansion plans of its own. Anatel gave the go-ahead to its plan to get into lucrative wireless markets once it meets build-out targets, such as increased fixed-line coverage and penetration tales, and increased public pay phone coverage. Brasil Telecom, spearheaded by Opportunity. has been buying mobile licenses too, to create its own fixed-to-mobile cost synergies.

If Telecom Italia manages to enforce its agreement and buy back in, it will be part of the control group of one mobile operator, Brasil Telecom, and the owner of another, TIM, in overlapping regions, making them competing companies. This. Opportunity argues, is a conflict of interest for Telecom Italia. But Telecom Italia argues that it signed the agreement allowing it to rejoin the Brasil Telecom control group before Brasil Telecom started buying licenses.

Executives from Telecom Italia and Opportunity declined to speak about their brewing fight. Analysts, too, were hesitant to speculate on the record on the outcome of the conflict. Yet, they cautioned that lots of new customers won't mean lots of new revenues.

Shrinking markets. A price war would drive down average revenues per user. known in the industry as ARPU, just as the mobile operators are pushing to add millions of lower-income customers, says Alexandre Constantini, a telecom analyst at the Sao Paulo office of Bear Stearns. "ARPU revenues have been going down considerably because reaching low-income subscribers means operators must push mainly prepaid mobile phones which many people use simply to receive no-cost incoming calls," Constantini says. "Brazilian mobile operators' dropping ABPU amid faster growth means that they shouldn't, and probably aren't, seeing growth as much as they'd like to be."

Getting out early was probably the only option for companies like U.S. carrier BellSouth, which sold its holdings in BCP and BSE, held with Brazilian banking brothers Moise and Joseph Safra, to America Movil. "We decided to exit Brazil to focus our effort on our remaining 10 Latin American operations, a portfolio of well-positioned companies, each occupying the top spots in the market where they operate," says BellSouth spokeswoman Maria Schnabel.

An early exit was just financial good sense for Grupo Splice, a telecom equipment firm that in January of 2003 sold its stake in east central regional operator TCO for $445 million to Vivo. Splice decided to get out of the mobile sector because it was having a hard time paying off the debt it took on to buy TCO, and because the sector was consolidating, says Grupo Splice CFO Ricardo de Souza Adenes. "We didn't have the economy of scale to compete with the four big mobile telecom players," he says. "We would have liked to have stayed in the mobile-phone sector because we believe growth potential is high."

Of course, foreigners are so interested in Brazil because their own wireless markets are saturated. And it's a no-lose situation for the right company--fat with cash and willing to spend to win. Brazil has 40 million fixed-line subscribers, 5 million less than the number of mobile subscribers. There are 10 million surplus fixed lines, but Brazilians living in remote regions of this continent-sized country don't have access to them. Their only option is a mobile phone, even though wireless service costs up to nine times more than a regular telephone line. Connecting those dots well is the key to fast growth for Brazil's final four.

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