Brazil: a Tale of Two Technologies 1

BRAZIL: A TALE OF TWO TECHNOLOGIES 1

Brazil: a tale of two technologies

04 November 2005 Robin Hearn

At the end of 2004, GSM in Brazil overtook CDMA. Recently, the number of GSM connections also overtook the total connections of Vivo, the operator whose regional properties are migrating out to CDMA. So GSM is achieving the volumes, but what about next generation? The end of 2004 also saw Vivo launch cdma1xEV-DO, and with widespread WCDMA adoption not expected until 2008, the CDMA operator has a clear opportunity to secure first-mover advantage, which is essential if CDMA must settle for second best in terms of scale. Figure 1 Total GSM and CDMA connections (millions)

Total GSM, Vivo and CDMA connections (millions)

50 45 40 35 30 25 20 15 10 5 0 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005

Total - GSM Total - Vivo Total - CDMA

Source: Wireless Intelligence

Analysis

Brazil is the world’s fifth largest market in terms of cellular connections. It has the fourth largest CDMA market, run by the Vivo group of operators owned by Spain’s Telefonica and Portugal Telecom. It also has the 13th largest GSM market, even though services only started in early 2002. The key players here are Claro (the America Movil group of operators), Telecom Italia Mobile (TIM Brasil), Oi (Telemar), and Opportunity (Telemig and Amazonia). As Figure 2 shows, it is the GSM operators that are currently making the most of the growth in the market, growth which looks set to continue, with penetration rates currently at 44%. Figure 2 Market share of net additions by operator migration path

Market share of net additions by operator migration path 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005

Operators migrating to GSM Operators migrating to CDMA

Source: Wireless Intelligence

Figure 3 shows how GSM came to be the clear technology leader, a position which will be further cemented as the remaining TDMA and analogue subscribers are migrated out. Of course there will be churn between operators and technologies during this process, but the CDMA operators are going to have to buck a well- established trend if they are to redress the balance of power. Not easy when Vivo only has a presence in eight of the ten licence areas in Brazil and is missing Minas Gerais, the third largest regional economy, and six states of the Brazilian Northeast.

Figure 3 Brazil technology migration (millions)

Brazil technology migration (millions) 100 90 80 70 60 50 40 30 20 10 0 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Total connections Operators migrating to GSM Total GSM Operators migrating to CDMA Total CDMA

Source: Wireless Intelligence

However, for all the success that the GSM operators are currently enjoying, when Vivo launched its next generation 1xEV-DO services in October 2004 it created an opportunity for the CDMA operators to capture significant market share in the higher- value market segments which the GSM players are going to struggle to overcome before the end of the decade.

As Figure 4 shows, adoption of 1xEV-DO to date has been slow but steady, and we anticipate that the pace will start to pick up over the coming quarters.

Figure 4 cdma2000 1xEV-DO adoption (000s)

cdma2000 1xEV-DO adoption (000s) 450

400

350

300

250

200

150

100

0 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005

Source: Wireless Intelligence

But the introduction of WCDMA into the market is lagging well behind. Licensing is set to take place in 2006/2007, and network deployment will commence the year after. It seems unlikely therefore that Brazil will see stable, well-established WCDMA-based services in the market until 2008 at least, possibly longer. And although we are not discounting what EDGE can bring to the GSM players during this time, Vivo still gets the next three years as market leader. And it must make the most of this first-mover advantage and tie in subscribers, particularly those in the affluent parts of Rio de Janeiro and Sao Paulo where it has launched its initial offering.

Where will it all end? When WCDMA eventually does come to Brazil, it will come fully equipped to compete. If Vivo gets it right, which it has the time to but is not inevitable, the balance of technology in next-generation Brazil may just be more equal than it is in the overall market.

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