Improving Competitive Balance in Brazil Continues to Benefit TIM

Director

Michael Hodel

TIM, 67%-owned by Telecom Italia, is the smallest of the three remaining major wireless carriers in Brazil, claiming about 24% market share based on customers served. The removal of Oi from the market in 2022 has greatly improved the competitive environment, allowing TIM and its rivals to increase prices and improve profitability. While we expect TIM will generate steady results in the coming years, we believe the firm’s modest fixed-line footprint leaves it at a disadvantage to both its larger competitors.

The Brazilian wireless market has historically been plagued by intense competition and challenging regulation. Revenue across the industry was essentially flat from 2013 through 2021, despite the rapid adoption of data services. With the Brazilian real declining steadily versus the dollar, U.S. investors have fared even more poorly: average monthly revenue per wireless customer at TIM dropped to $4.70 in 2021 from $6.60 in 2013 (excluding interconnection), even as the industry has shifted heavily toward the postpaid market. 

TIM has pushed to lead the deployment of 4G technology in recent years, covering a larger number of small towns and rural areas than its rivals, and has aggressively added 5G to its network recently. Management has also attempted to avoid competing on price whenever possible. With Oi no longer in the market and desperate for growth to shore up its weak financial position, Vivo and America Movil have joined TIM in exercising improved pricing discipline, allowing all three carriers to post solid revenue growth over the past year. 

TIM has struggled to maintain market share in recent years, a trend we expect will continue. America Movil and Vivo each own extensive fixed-line networks and serve a large number of broadband customers, claiming roughly 21% and 14% share, respectively. We expect these two firms will increasingly bundle wireless and broadband services. TIM is expanding its fixed-line footprint through an infrastructure joint venture, but it remains a small player with less than 2% market share. The Brazilian broadband market is highly fragmented, though, which could provide opportunities for TIM to pursue acquisitions to gain scale.

Business Strategy & Outlook

We don’t believe TIM has an economic moat, despite its large subscriber base in Brazil. The Brazilian wireless market has three primary players. Telefonica Brasil (Vivo) is the largest, with 39% market share based on customers served. Vivo has historically placed an emphasis on higher-end customers, and it claims more than 40% of industrywide wireless services revenue. TIM is the third largest, with its 24% customer share and 28% revenue share, trailing Vivo and America Movil. TIM has lost significant customer share in recent years. It held 24% at the end of 2018 but saw this metric drift to only 20% immediately prior to the Oi acquisition. The firm has held revenue share versus its two primary competitors roughly steady, though, as it has tried to hold the line on pricing and promotion. 

A four-player market structure resulted in a long history of stiff price competition, initially as carriers scrambled to gain share in a growing market and more recently as carriers fought to keep customers in a tough economic environment. The gap in revenue per customer in Brazil and Mexico, a three-player market, illustrates the challenges in Brazil. The typical Mexican wireless customer spends more than $9 per month versus $5 for the typical Brazilian, a gap only partially explained by differences in penetration rates and incomes. Given the competitiveness in Brazil, we believe TIM and its peers have derived little benefit from efficient scale in this market. Without a scale advantage versus Vivo or Movil, we also can’t conclude that TIM has a cost advantage.

Oi was the smallest major carrier in Brazil, with about 17% customer share. TIM, Vivo, and Movil agreed to carve up Oi’s wireless business, a transaction that closed in May 2022. The transaction has shown promise to significantly improve the structure of the Brazilian wireless market. The three remaining large players have started to emphasize differentiated offerings over price to attract customers, which has allowed average revenue per customer across the industry to move higher. 

While we expect TIM will benefit as the Brazilian wireless business improves over the coming quarters, we believe TIM’s minimal fixed-line network assets leave it at a disadvantage to Vivo and Movil. Movil owns the largest cable network in Brazil, reaching around half of the country. Vivo is the incumbent phone company in Sao Paulo, and it acquired GVT, a firm that has built fiber extensively throughout Brazil, in 2015. TIM’s I-Systems joint venture, of which it owns 49%, is building fixed-line infrastructure, but it can only currently reach about 9 million households, less than 15% of the country. We expect dense fixed-line networks will provide an advantage in deploying new generations of wireless technology. Also, owning both types of networks should allow Vivo and Movil to effectively bundle mobile and internet services to attract customers.

The Brazilian broadband market is highly fragmented, with nine firms holding between 1% and 3% market share, including TIM at a bit less than 2%. Another 40 firms serve 50,000 customers or more. Acquiring smaller players that have built fiber in recent years could prove attractive, but I-Systems and TIM seem content for now allowing these players to battle for share and consolidate among each other.

None

Economic Moat

Tim SA

TIM SA (Brazil) engages in providing mobile telephony, internet, and media telecommunication services. It offers modem, tablet, cell phone, and ultra fixed broadband. The company was founded on March 9, 1998 and is headquartered in Rio de Janeiro, Brazil.

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