Cellular conquests

Latin CEO: Executive Strategies for the Americas, Dec, 2001 by Elizabeth A. Johnson

When Portugal Telecom entered Brazil's cellular telephone market, industry observers thought the company had paid too much for incumbent Telesp Celular. More than three years later, Telesp rules the Brazilian market - and CEO Carlos Vasconcellos Cruz intends to keep it that way.

IT HAS BEEN MORE THAN 500 YEARS since Pedro Alvarez Cabral first landed in Brazil, claiming the region as Portugal's first colony in the Americas. Five centuries later, Portuguese businesses have rediscovered Brazil and are investing heavily here, particularly in its telecommunications sector.

Leading the modern conquistadors is Portugal Telecom (PT), and the crown jewel among its conquests is Telesp Celular Particapacoes. Acquired for around US$2 billion in 1998, Telesp Celular is Brazil's largest cellular telephone company; as of third-quarter 2001, it held more than 63 percent market share in Sao Paulo, its primary customer base. At the time of purchase PT was criticized for paying too much for the creaky former monopoly, but the chance for growth was apparent from the start. "Today, Telesp Celular has over 7 million clients, whereas PT Telecom's mobile phone company in Europe has only 3 million," says Telesp's Brazilian CEO, Carlos Vasconcellos Cruz. That jump has catapulted PT onto the global cell phone stage.

At the time of the acquisition, cell phones in Brazil were expensive to obtain - averaging US$1,000 in a nation where the minimum monthly wage is less than US$100. Today such phones are ubiquitous, thanks to a combination of savvy marketing and reduced costs. Indeed, Brazil's cell phone penetration has more than quadrupled since Telesp Celular was privatized in July 1998, when there were fewer than 7 million subscribers could exceed 40 million by 2004, lifting Brazil from No. 10 to No. 4 among wireless telephony markets. "Only China's mobile telephone market has greater potential than Brazil," Vasconcellos gushes.

The Rule of 'Baby'

The 44-year-old Vasconcellos took the helm of Telesp Celular last February after former CEO. Abilio Anca Henriques resigned to return to his family in Lisbon. A rising star at the company, Vasconcellos' pedigree included heading up e-commerce firm Tradecom, another PT company. Not surprisingly, he has taken Telesp Celular firmly down the path toward "mobile commerce," or m-commerce, as a way for the company to tap new revenue streams and boost market share. But first he has had to put the technology in as many hands as possible.

That's where "Baby" came in. The pre-paid cell phone, Introduced in 19999 and marketed under the Baby moniker, has become Telesp Celular's best-selling product. Similar in concept to pre-paid calling cards the phones have a pre-set spending limit that can be replenished by the user. Today, the Baby phones are in the hands of roughly 68 percent of Telesp Celular subscribers.

Telesp [Celular] doubled its pre-pay subscribers during the fourth quarter of 1999 alone and, at the same time, ended the erosion of its market share," says Juliana Abreu, a telecom analyst at Boston-based Pyramid Research.

Indeed, much of Telesp Celular's subscriber growth can be attributed to the introduction of the pre-paid cell phones-which are marketed to lower income groups and people who don't have terrestrial phone lines. And competitors have been quick to follow Telesp's lead, though the products popularity has also had an unexpected downside for earnings in Brazil, where callers foot the bill to talk to a cellular user, rather than the person receiving the call.

"Most pre-paid users tend to receive more calls than they make. They want to have cheap voice service and not much more," says Alexandre Constantini, a telecom analyst at Bear Stearns in Sao Paulo. "The introduction of pre-paid phones has caused the average revenue per user to fall from 55 reais per month (US$22) to 45 reais (US$18), and that number could fall more as people migrate to pre-paid service."

Nevertheless, Vasconcellos says the company is pursuing a two-track strategy of increasing the number of Brazilians with access to cell phones (through pre-paid and other programs) while courting high-end corporate clients. "We're now trying to concentrate growth on the most profitable sectors," he says.

But with costs and competition mounting, and the value of the Brazilian real sliding, that growth may come more slowly than planned.

When PT acquired Telesp Celular, it inherited an antiquated, overloaded network that had only 800,000 subscribers. With no new cell phone lines to offer, demand in the nation's main market, Sao Paulo, had effectively been bottled up. Within months of Telesp's acquisition, new companies--BCP, owned by BellSouth, and Tess, owned by Telecom Americas--moved in and grabbed more than 50 percent of the market by installing new network infrastructure and meeting pent-up demand. Unlike the fixed-line market, where former monopolies continue to control more than 90 percent of the market, Telesp Celular has had to struggle to maintain its lead.