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Morningstar | We Expect TIM Will struggle in Brazil as Converged Wireless and Fixed-line Networks Gain Importance

TIM, a 67%-owned subsidiary of Telecom Italia, is one of the largest wireless carriers in Brazil, claiming about 25% market share based on customers served. Despite its size, we believe the firm is at a disadvantage to Telefonica’s Vivo, America Movil, and, to a lesser extent, Oi. These three rivals own extensive fixed-line networks, allowing them to cross-sell wireless and fixed-line services, especially broadband Internet. TIM is building a fixed-line presence, but this effort remains small, addressing less than 10% of the population.The Brazilian wireless market has been plagued by intense competition and challenging regulation. The four big carriers generated about as much revenue in 2018 as they did in 2013, despite increased adoption of data services and the sharp depreciation in the Brazilian real. Even ignoring lost interconnection revenue, which regulators have largely eliminated, TIM has grown wireless service revenue only 3% annually over this five-year stretch, trailing inflation (5%-6% annually). With economic and political stresses hurting the real, revenue in U.S. dollar terms has been cut by about a third during the period.TIM has performed relatively well in this environment. The firm has traditionally held a strong position in the lower-end prepaid segment of the wireless market, but it has pushed to lead the deployment of 4G technology, covering a larger number of small towns and rural areas than its rivals. Management has also attempted to avoid competing on price whenever possible. TIM’s total market share has slowly declined in recent years, but it has grown share in the postpaid market and roughly maintained its portion of total industry revenue. We expect the higher end of the market to ultimately gravitate toward converged services, benefiting Vivo and Movil, which both also continue to expand 4G coverage and prepare for 5G. TIM’s strong balance sheet may allow it to fix its structural weakness through acquisitions, but with Oi in restructuring, it is unclear how the market will evolve. We would certainly welcome consolidation, but taking on Oi could be tough given parent Telecom Italia is highly leveraged.