Friday, November 12, 2004

Mobile substitution visibility

This is from my colleague Jacqueline Millan's morning meeting comment today:

Bloomberg is reporting that Hutchison will be heavily subsidising its 3G phones in Italy in the run up to Christmas. 3 Italy could offer phones for as little as €19 compared to Vodafone live! for 3G offers which are retailing for between €399-€499 and TIM's UMTS phones which are retailing for between €331-€474. 3 Italy is changing the dynamics of the Italian market at the moment by subsidising phones for customers in order to acquire them; in the past this is a market where subsidies did not exist. We also got the sense that TIM is starting to notice 3 Italy, as TIM's CEO mentioned that he was more interested in revenue market share vs. subscriber market share, but TIM invested a lot of resources over the summer to beef up their CRM system by contacting customers and offering 100 free minutes to customers who were willing to give personal details to the company.

In addition, at TI's fixed line business the Q304 YoY traffic turnover was down 3.2% vs. 1.7% in Q204. While Q3 is usually a weak quarter for the fixed line business as the mobile operators offer attractive bundled offers during the summer months, the worse than expected decline was attributed to the fact that 3 is starting to have more of an impact. We recently downgraded TIM to a neutral rating from outperform due to our view that in the medium term margins in Brazil will have a hard time hitting the 40% margin target that had previously been given by management, but we are also starting to witness an uptick in the competitive scenario in Italy which to date has been immune from any real competition.

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