Telecom Italia looks to TIM Brasil to drive future growth - Mobile broadband at the heart of debt-laden operator’s plan for recovery

Telecom Italia, Europe's fifth-largest telecoms operator, is currently in the process of executing a wide-ranging cost reduction programme aimed at reducing its estimated €37 billion debt burden. In a three-year plan unveiled by CEO Franco Bernabe earlier this month, the operator said it would reduce headcount by a further 4,000 (in addition to the 5,000 job losses announced in June) and look to sell-off what it deems 'non-core' assets worth as much as €3 billion.

These divestitures are likely to focus primarily on Telecom Italia's fixed-line broadband businesses in Europe outside Italy, most notably its German subsidiary, Hansenet. However, the operator is also tipped to review some of its mobile assets in the Americas, which could see it divest its stake in Argentina's Personal and Cuba's Cubacel.

Despite recent media reports to the contrary, Bernabe stressed that TIM Brasil - Telecom Italia's flagship mobile operator in the Americas - will remain a core asset for the group. Indeed, the operator's new streamlined portfolio focuses on just two markets: Italy is referred to as "a cash generator" and Brazil as a "growth enabler." Although TIM Brasil is currently similar in size to TIM Italy in terms of subscribers, the dynamics in each market are different.

In Italy, TIM has focused on a revenue-share rather than market-share strategy in recent quarters, which has concentrated on mobile value-added services (VAS), the enterprise and business market segments, and mobile Internet. As a consequence, the operator is forecasting that ARPU will grow from €20.1 per month today (October 2008) to €22 by 2011, the end of the three-year review period. VAS is set to be the main driver for this uplift in ARPU; the operator is forecasting that VAS will account for 25% of mobile service revenue by year-end. Mobile broadband usage reached 2 million users by Q3, 2008 and is forecast to rise to 2.6 million by year-end.

However, TIM Italy has seen its subscriber base continue to retract due to market saturation; mobile penetration in Italy is over 150% - the second-highest level in Western Europe after Greece. Previously the largest operator in Western Europe by connections, the operator has now slipped to third (behind T-Mobile Germany and Vodafone Germany) as connections growth has slowed and its domestic market share has dipped below 40% for the first time. Rather than looking to build market share in a saturated market, TIM Italy is focusing on customer care and the micro-segmentation of its subscriber base in a bid to reduce churn, especially among its higher-value customers. Telecom Italia said it is also looking at site and backhaul sharing in Italy with rival mobile operators in a bid to cut costs.

In Brazil, TIM also sees mobile broadband as a catalyst for growth even though rollout of WCDMA and HSPA is at an early stage. As part of the three-year review, Bernabe said that TIM Brasil is aiming to grow its mobile broadband base from around 500,000 currently to 2.5 million by 2011. He noted that 3G coverage reach in Brazil should surpass fixed-line broadband (ADSL) to cover around 80% of the Brazilian population by 2010, a regulatory requirement for the country's 3G operators.

TIM Brasil is also targeting the fixed-line market following the commercial launch last month of TIM Fixo, its Brazilian fixed-line offering, which it plans to bundle with its mobile broadband and homezone products. It is targeting 3 million fixed-line customers by 2011.

As in Italy, TIM Brasil has lost market share recently. According to GSMA Intelligence data, the operator dropped from second to third in Q3, overtaken by America Movil's Claro, which is now second to Telefonica/Portugal Telecom's Vivo Brazil, the market leader. However, Telecom Italia says it is offsetting its declining market share in Brazil with a focus on higher-value customers. It claims to be the number-two player in terms of revenue share on 28%.

Matt Ablott, Analyst, GSMA Intelligence:

Telecom Italia's focus on its Italian and Brazilian mobile operations is an acknowledgement that next generation mobile services could be a major factor in Telecom Italia's recovery from its current financial situation. Far from seeing TIM Brasil as a disposable asset - as some reports in the Italian media have suggested - Franco Bernabe rightly sees TIM Brasil as a key revenue generator for the group moving forward. However, the success of mobile broadband in the country will be dependent on how quickly TIM Brasil can build-out its new high-speed network. As the parent group has committed to lowering capex over the next three years (from 15% of revenues today to 13% by 2011), TIM Brasil could struggle to reach its 80% population coverage target for 3G. Success in mobile broadband in Brazil will also depend on delivering flexible tariffs and a wide portfolio of compatible devices. Meanwhile, in Italy - where mobile broadband is well advanced - TIM must be careful not to cannibalise its existing fixed-line broadband business with mobile broadband.