Elephant Talk / Cleartech Deal Points to Bright Mobile Market Future in Brazil

Includes: AMX, TEUM, VIV
by: Dustin Moore

On January 12, 2011, Elephant Talk Communications (ETAK.OB) signed an agreement to become Cleartech’s Mobile Virtual Network Enabler, or MVNE, partner in Brazil. Cleartech is a joint-venture by several large companies, including EDS, a division of Hewlett-Packard (NYSE:HPQ). It is the Brazilian telecom clearinghouse managing services shared by all telecom operators, including telephone number portability. The deal provides Elephant Talk with a very influential partner to help promote the company’s infrastructure services to Mobile Virtual Network Operators (MVNOs). Elephant Talk is now well positioned to take advantage of the expected growth of MVNOs in the country.

As of now, however, there are technically no real MVNOs operating in Brazil. But this is expected to quickly change. In December, the Brazilian telecom regulator ANATEL finalized new rules that will drastically alter the mobile landscape of the country. “The regulatory changes stimulate new businesses to begin utilizing the mobile cloud,” says Elephant Talk CEO Steven van der Velden. The new rules pressure mobile operators, the owners of the mobile network infrastructure, to begin sharing their network with parties interested in becoming MVNOs. MVNOs can then begin providing their own mobile services to customers. The regulations even setup a framework in which the Brazilian government to step in and essentially force mobile operators to grant network access to aspiring MVNOs on fair terms. Banks, retailers, airliners, and even athletic clubs wanting to jump into the MVNO market can now easily do so.

The regulations have opened the floodgates for a rush of MVNOs eager to enter this lucrative mobile market. “Businesses are very much interested in using phones to reach a wider range of customers,” van der Velden points out. By establishing themselves as an MVNO, retailers, for example, can digitize their relationship with customers. This allows them to have better and more frequent access to their customers, manage loyalty, offer coupons, and process payments — all through the mobile phone. MVNOs provide a good opportunity for businesses to reach out to their customers in an individualized way. Mobile operators themselves can benefit from an increased number of subscribers and higher revenues.

Brazil provides fertile ground for these MVNOs to prosper. The country has favorable demographics being home to a large population of over 200 million people. In addition, the mobile industry there is on fire. In 2010, 29 million new subscriptions were added countrywide, up 16% from the previous year. Brazil now hosts over 200 million mobile handsets and counting. The number of smartphones alone jumped a whopping 257% in 2010.

Mobility is particularly important to the development of Brazil in the 21st century. The country is very large, covering a great deal of the South American continent. But landline infrastructure in remote areas tends to be poor at best. The government sees MVNOs as a solution in expanding mobile access and connecting Brazilians to the rest of the world.

Macroeconomic trends also make getting into the MVNO market attractive for businesses. “Brazil is one of the largest and fastest growing economies in the world,” van der Velden notes. In 2010, the Brazilian economy began to rebound faster than most, growing at a rapid 7.6%. Low unemployment and rising incomes have led to millions of people pouring into the middle class each year. The country also retains many key resources including oil, biofuels, water, and iron ore, all of which will be vital in fueling the world economy in the future. Brazil is a now modernizing world power, on the cusp of arriving on the world stage as it prepares to host the Soccer World Cup in 2014 and the Olympics in 2016. These events mean that Brazil will become a mecca for tourists in the coming years.

The problem is that telecom companies will be playing catch-up with demand, both from a growing middle class as well as the wave of tourists descending on Brazil in the coming years. Mobile infrastructure still lacks with much of the country yet to upgrade to 3G. To address the issue, mobile operators such as Vivo Participacoes S.A. (NYSE:VIV) and America Movil S.A.B. de C.V. (NYSE:AMX) have spent billions of dollars upgrading their networks.

But it is clear that MVNOs will be a necessary component in meeting future mobile demand. The Brazilian government acknowledges this and is establishing an MVNO industry to propel Brazil into the future. NEREO, a team of strategy and investment advisors with extensive work with MVNOs, predicts explosive growth of the industry in the coming years. They forecast over $1 billion in revenues from MVNOs in Brazil by 2015.

MVNOs have already begun taking root in other areas of South America, such as Mexico and Chile. Development in Brazil will likely have an impact on these places. “Brazil will accelerate the MVNO market throughout South America, with regulation changes spilling over into other countries,” says van der Velden. Currently, South America accounts for 11% of worldwide mobile users, but only 1% of MVNO subscriptions. But analysis by Pyramid Research predicts that changes in regulation will result in the “birth of mass-market MVNOs” across the region. They also project the number of MVNO subscriptions to grow at an impressive 27% compounded annual growth rate in the region over the next five years. This translates into millions of users across the continent flocking to these newly created operators.

Despite this, the current MVNO market in South America is largely untapped, particularly in Brazil where new rules have just now opened the doors to one of the world’s most promising emerging markets. These regulations are a clear declaration by the government that MVNOs will be a part of Brazil’s future. This support is being coupled by a booming economy and an increasing demand for access to the mobile cloud.

The Brazilian MVNO market is just heating up and businesses are eagerly looking to get a piece of the billion-dollar-plus opportunity. Elephant Talk, a company pushing the frontiers of mobile cloud management, security, and authentication, has found a foothold in the country. Cleartech provides Elephant Talk with a key local partner with strong industry and governmental relationships. The agreement is indicative of the bright future of mobile business in Brazil, but it is only the beginning. The opening of the MNVO market is an exciting new chapter unfolding in the Brazilian growth story.

Disclosure: I am long ETAK.OB.