MVNO Exit Highlights Difficulties for Brazilian Mobile Network Operators

In Q4 2018, Brazilian insurance provider Porto Seguro publicized plans to shut down its MVNO, Porto Seguro Conecta, in order to shift focus to its core business and other opportunities “that have a competitive advantage.” This seemingly validates reports from earlier in 2018 that the insurance provider was concerned about its MVNOs performance. While it achieved the highest possible assessment in the Satisfaction and Quality survey of Brazil’s National Telecommunications Agency (Anatel), Porto Seguro Conecta failed to reach the number of subscribers originally forecast when it was Brazil’s first MVNO to launch in 2012 as an add-on automotive tracking service to its parent company’s insurance products.

Porto Seguro forecast that its MVNO would reach one million subscribers by 2017, but it fell short, ending the year with only a little over 560,000 voice and data subscribers. Porto Seguro will transition its customers to Telecom Italia’s Brazilian operator TIM, which was the MVNO’s infrastructure provider. While Porto Seguro states that it is not leaving the mobile space due to unfavorable results, its exit nonetheless highlights significant problems within Brazil’s mobile market as a whole for both MNOs and MVNOs, but specifically for the M2M market which has failed to meet expectations from both operators, enterprises, and the government. 

While the MVNO model has been successful in other regions such as North America and Europe, it has failed to have had as big of an impact on the Brazilian mobile market. It’s not necessarily a regional issue though, as other Latin American MVNO’s, such as those in Colombia and Mexico, have fared better than those in Brazil have. Additionally, Brazil’s early MVNOs expected to have a much bigger impact on the mobile market, with one early MVNO stating in 2011 that it would reach 16 million subscribers and revenue of US$1bn within five years. These expectations did not materialize, with the entire Brazilian MVNO market only having approximately 1.5 million connections at the end of 2018 accounting for 0.3% of all Brazilian mobile connections. The M2M market has fared better for MVNOs, but only relatively so. Before Porto Seguro Conecta left the market, MVNOs accounted for 4.1% of the total Brazilian M2M market; afterward, MVNOs will account for only 1.3%.

The primary inhibitors for the MVNO market in Brazil are government regulations and fierce competition from existing mobile network operators. Anatel created the MVNO regulatory framework in 2010 with the goal to expand the number of mobile operators in Brazil and to increase operator focus on niche verticals. However, regulations also entail that MVNOs comply with the same service, coverage, and quality requirements of MNOs despite having substantially fewer resources. Additionally, the government offered financial incentives in the form of significantly reduced taxes per device for operators targeting M2M connections with no human intervention, such as smart grid networks and vehicle telematics. While this incentive excludes POS, it still was a driving force in encouraging the growth of M2M services. The tax reduction led to increased competition among existing MNOs who improved their M2M offers and new market entrants who launched services in Brazil specifically targeting these particular verticals. 

To drive the M2M market in Brazil and increase competition, regulators must ease constraints on MVNOs. In July 2018, ANATEL updated its definition of “small provider” from providers with fewer than 50,000 subscribers to providers with less than 5% of the market share. Small providers do not face the same regulatory constraints as larger MVNOs who must comply with the same coverage and service requirements as the larger MNOs. While this change didn’t come soon enough to prevent Porto Seguro from exiting the market, current and future MVNOs may gain significant potential advantages if it is properly implemented. However, in Brazil, regulations often change and differ across states so while the intended impact of the regulation is to increase competition from MVNOs, the end result could be more consolidation within the existing major network operators which is what has happened so far. 

Successful MVNOs in other countries and regions have developed low-cost and low-feature plans in order to attract a higher market share to be profitable. This model simply does not work under the existing Brazilian MVNO regulatory framework. The issue in Brazil is that there has been aggressive pricing competition within the traditional mobile market between the dominant network operators—Vivo, Claro, TIM, and Oi—and this has significantly limited any opportunity for new entrants, especially MVNOs, to be profitable in this market. While this competition has benefited traditional mobile consumers and expanded the overall market for mobile network services, it has driven down the ARPU for operators for M2M devices. In order for operators to thus be profitable, they must then focus on lowering their churn rate and reducing customer acquisition costs.

However, the existing positioning and pricing of MNOs has essentially diminished the opportunity for MVNOs to create any sort of dominant position as a low-cost, low-feature player in the market. MVNOs need to be able to develop a business model that is tailored to the existing mobile network landscape, but in the Brazil, there are no real clear openings in either the low or the high-end of the market. While Porto Seguro Conecta was able to grow its M2M business by focusing on operators’ lack of focus on the business and enterprise market, its MNO competitors were able to charge up to half of what it was charging for similar plans.

Additionally, instead of seeing MVNOs as a means to increase revenues and customer base at a substantially lower cost, Brazilian MNOs still see MVNOs as pure competitors. As a result, not only has the development of the MVNO market been hindered, but also the M2M market has not been able to meet its full potential and meet the needs and expectations of the market. The MNOs have largely failed to package M2M solutions simply and easily and due to their market positions and government regulation other operators cannot profitably fill the existing service gap. At the end of the day, there seems to be a mindset issue in play, where Brazil’s major MNOs are afraid of expanding the market because in doing so they will potentially lose market share. MNOs can and should leverage MVNOs to expand their M2M deployments by focusing on creating solutions with more solid value propositions. However, until MNOs or regulators address these issues, the Brazilian mobile market will continue to fail to meet its once great potential.