Telefónica|Vivo held an Investor Conference in March 2018, showcasing the market strength of the converged Brazilian operating business, while setting out a vision of how to maintain and reinforce its hold on the market.

  • Battle-hardened operating business emerging from downturn with stronger hand against local rivals.
  • At the centre of the day was a new commitment to accelerate fibre rollout, with a carefully targeted investment of BRL 2.5bn (EUR613m) over the coming three years.
  • Spain’s fibre rollout used as a template.
  • While capex is on the rise, annual opex savings of BRL 1.2bn envisaged from digitalisation by 2020.

Telefónica|Vivo’s management presented a confident image of the business to analysts at an event for investors in New York, which looked back at the progress made since the acquisition of fixed-line operator GVT in 2015, as well as the Group’s plans for the future.

While the operating business (OB) was able to highlight better-than-anticipated performance against merger synergy targets – it expects to reach full annual run rate a year early in 2019, with an estimated BRL 22bn in total savings – perhaps more significantly, it was able to show that the business had not only weathered the storm caused by the country’s economic downturn, but had become stronger in the process.

Highlighting a range of metrics going beyond its 31% customer market share, Telefónica was able to point to increasing its share of total market net revenue and net earnings before interest, taxation, depreciation, and amortisation (EBITDA) when compared to its three major competitors, taking comfortably more than one-third of total revenue and near-40% of EBITDA.

Most strikingly, the OB said that by 2017 it was generating virtually half of all operating cash flow in the Brazilian communications sector.

This demonstration of dominance in a four-player market is now to be used as a foundation for the local unit’s continued transformation, which is embracing the Group’s platform business model and running fast towards digitalisation, having been an early adopter of several of the Group’s programmes in the area. A key element of this change, and the main headline generated by the investor event, is the accelerated drive towards full fibre rollout in the country.

Fibre life a bowl of cherries

Naturally, Telefónica’s network infrastructure underpins its transformational plans, and the Brazilian OB unveiled a BRL 2.5bn non-recurring capital expenditure (capex) turbo boost for 2018-20.

This is expected to see one million additional homes passed in 2018, and a total of three million extra passed by end-2020. The spending marks a 10% boost over the anticipated BRL 24bn in recurring capex over 2018-20.

The predictions of quick coverage expansion flow from the OB’s two methods for selecting new sites to be included in the accelerated programme:

  • Building on presence. Telefónica is to unapologetically cherry-pick new areas in cities with 100, 000+ inhabitants where it already has an FTTP network and which it considers will offer sufficiently affluent residents and quick customer wins. There are 87 cities said to have these characteristics.
  • Up-and-coming urban centres. It is also to roll out to other towns and cities with populations exceeding 50, 000, which feature a relatively high proportion of “economically attractive” consumers but very low current rates of ultrafast broadband availability. More than 400 cities match this profile.

Telefónica foresees significant and rapid uptake of fibre services once sites are passed, and is forecasting that the additional outlay will generate an extra one million fibre customers by the end of the three years. This would nearly double the current Telefónica|Vivo customer base for FTTP services, and support the OB’s efforts to replicate in the fixed-line sector the reputation for quality its mobile operation has maintained under Telefónica leadership.

Spanish lessons

  • Telefónica in Brazil is expected to undertake a speedy full fibre rollout drawing on the experience and knowledge gained by the Group in its home market of Spain, which has already seen an extensive FTTP delivery programme. With these learnings, Telefónica’s Brazilian OB is said to have reduced by a third the level of capex-per-home passed between 2015 and 2017.

Brazil remains a big spender

  • For the past three years, the Brazilian Telefónica business has recorded above-average ratios of capex spending relative to sales, when compared with the Group average of around 16% for the period. The Brazil spending ratio has, however, dropped from near-20% to 18.5% over the past three years. Although it is injecting another burst of funding into fibre, the trend for Telefónica in Brazil is expected to remain downward on an underlying level in future years.

Digital dividend to accompany fibre expansion

From investment in network infrastructure and the development of more robust access across both fixed and mobile connections, Telefónica in Brazil anticipates that associated opportunities to digitalise its business will create significant savings in operating expenses (opex).

According to the OB, around one-third of its annual BRL 29bn spend on opex is in areas that are ideally placed to see significant cost savings from the adoption of digital processes. Pursuing this digital approach is expected to lead to annual opex savings of BRL 1.2bn.

As with the plans for targeted fibre rollout, the areas that Telefónica is targeting for digital transformation represent an opportunity for quick wins. Billing and collection, top-ups, and customer care are three segments that the OB has pinpointed as providing the biggest opportunity for digitalisation, while also making the most marked improvement in customer experience, and will be a priority until 2020.

Subsequent areas of focus for transformation may see Telefónica in Brazil look to the retail commissions system and other back office functions that are considered strong targets for digital alternatives. Meanwhile, the OB recognises that improvements in the customer experience can be made through improving the physical retail experience and processes around service installation and maintenance, although these are deemed less susceptible to a quick digital overhaul.

Digitalisation already underway

Telefónica has already invested substantially in introducing the digital systems that are expected to improve operational efficiency. The OB noted that of its total BRL 48bn organic capex spend between 2012 and 2017:

BRL 42bn was committed to upgrades and maintenance of fixed and mobile infrastructure (what Telefónica refers to as the First Platform).

BRL 5bn was spent on transforming its IT and systems (the Second Platform), with a focus on end-to-end (E2E) processes and models, and Full Stack IT transformation. At the end of 2017, fewer than 5% of consumer accounts were managed with Full Stack systems, but by 2020 this is expected to reach more than 90%. This has also seen greater automation and an online and app focus for customer service, as well as back office transformation.

BRL 1bn was spent on the development of digitalised commercial offerings (Telefónica’s Third Platform). The focus to date has been on converged offerings in the consumer sector, including IPTV development, and partnering with external companies to provide digital content and services. For the business market, the introduction of cloud services and cybersecurity offerings has been the early outcome of the investment.

Figures were not provided for any legacy spending that would provide a basis for Telefónica’s cognitive intelligence Fourth Platform. However, the development of big data services and technology that will permeate the development of interfaces and systems that drive it look likely to feature more fully in future investment plans. The OB is also expecting to apply big data capabilities to its own broader investment plans to help control costs and improve capital allocation.

Telefónica exudes confidence in itself, and in the country

In concluding the vision for investors for the next three years, Telefónica was keen to stress the improving economic conditions in the country.

While Telefónica could be said to have had a ‘good recession’, in that it was able to bolster its market position while other players scrapped it out, the OB is now framing the country’s macroeconomic environment as creating more opportunities for tangible growth. Brazilian gross domestic product is expected to see steady annual increases over the 2018-20 period after years of shrinking or modest recovery, and unemployment is envisaged to drop towards the low levels experienced in 2015 and previously. Meanwhile, inflation appears manageable, as do anticipated interest rates, providing a stable background against which Telefónica can pursue its plans.

Adding to the rosy picture, Telefónica suggested that the regulatory environment may become more amenable, through an easing of licence obligations, and the revisiting of demanded service quality goals. The Telefónica optimism on the regulatory environment does, though, appear to conflict somewhat with disputes currently ongoing regarding regulatory penalty fines and Telefónica’s commitments to bringing fixed-line infrastructure to parts of Brazil that do not fit its preferred profile of modern, well-off urban areas (see separate report).

Image: Telefónica.

Table of Contents

EXECUTIVE BRIEF

GROUP

Operations

Telefónica gets house in order through streamlining [p6]

  • Management changes put new hands on purse-strings
  • Table 1: People movement highlights

GLOBAL RESOURCES

5G

Parallel and TIP support Telefónica open RAN trials [p9]

  • Facebook has a friend in Telefónica
  • Multi-pronged approach as Telefónica tests virtualisation’s open potential

Telefónica gives another nod to Cohere’s OTFS tech [p11]

  • Testing, testing, testing

Alliances

Unicom and Telefónica revive partnership for IoT [p12]

  • Unicom a good fit with IoT Alliance partners

Suppliers

Telefónica signs ten-year ESaaS deal with Vertiv [p14]

  • Casa reminds market of Telefónica deal

Telefónica Business Solutions

Huawei backs Telefónica big data for enterprise [p15]

  • Bosch Security using Telefónica M2M Global SIM solution

Azure added to Telefónica’s cloud portfolio [p16]

  • Azure a key platform for Telefónica

Telxius

Telxius to speed expansion of Sigfox network in Germany [p17]

  • Telxius agreement a chance for Sigfox to prove its value in Europe
  • Telefónica leading TIP energy group

Virtualisation

Telefónica backs ‘gold standard’ ONF plan [p18]

  • Get production-ready
  • OSM moves

DIGITAL SERVICES

Big data

Telefónica focused on social benefits of big data [p21]

Open Future

Telefónica invests in personal data management blockchain startup [p22]

Wayra

Wayra and VW on the road again [p23]

  • More emerging ideas to receive a jumpstart

LATIN AMERICA

Argentina

Telefónica preps Argentina IPO to fund quad-play [p26]

  • More skirmishes erupt on Telefónica’s fine swap agreement

Brazil

Vivo puts pedal to metal in fibre drive [p27]

  • Fibre life a bowl of cherries
  • Spanish lessons
  • Brazil remains a big spender
  • Digital dividend to accompany fibre expansion
  • Digitalisation already underway
  • Telefónica exudes confidence in itself, and in the country

EUROPE

Germany

O2 Germany strengthens 5G alliance with Huawei [p32]

  • Faster links and 5G kit
  • TechCity influence goes global

O2 Germany supporting 5G testing for FeMBMS

  • More vendors in the mix with additional city projects

O2 Germany picks Gemalto for prepaid ID [p34]

Could Telefónica be mulling a German exit? [p35]

  • Factors to consider
  • O2 the big spender in UK auction
  • Table 2: UK 2.3GHz and 3.4GHz spectrum auction results, April 2017

UK

O2 extends contract with Jacada [p37]

  • Preparations underway for a 2019 700MHz auction

Telefónica UK confirms P.I. Works SON deployment [p38]

  • Years of work paying off for P.I. Works

O2 UK builds up 5G momentum [p39]

FURTHER READING

INDEX

Index

A

AI 23
Amazon 16, 21
América Móvil 26, 30
– Claro 26, 30
Anatel 28
Arsat 26
AT&T 10, 18, 19

B

Bharti Airtel 21
Bosch 16
– Bosch Security Systems 16
BT Group 10
Bundesnetzagentur für Elektrizität, Gas, Telekommunikation, Post und Eisenbahnen (Federal Network Agency for Electricity, Gas, Telecommunications, Postal Service and Railways, BNA/BNetzA/RegTP, Germany) 36

C

Casa Systems 15
Cellwize 38
China Mobile 10, 15
Cisco Systems, Inc 12, 39
Climate Group 14
CNMC 36
Cohere Technologies 11
Comcast 19

D

Deutsche Post 34
Deutsche Telekom 10, 19, 29, 35
– T-Systems 29
Drillisch 36
– Yourfone 36

E

Emerson 14
ENACOM 26
Ericsson 33, 39
European Telecommunications Standards Institute (ETSI) 19

F

Facebook 9, 10, 18, 21
– OpenCellular 10
– – Telecom Infra Project 10
Federal Network Agency 36

G

Gemalto 34
Giesecke & Devrient 12
Grupo Clarín
– Cablevisión 26
GSM Association (GSMA) 21
– Mobile World Congress 11, 15, 21, 22, 32, 35

H

Huawei 11, 12, 15, 23, 29, 32, 33, 36

J

Jacada 37
Juniper Research 39

K

Kathrein 33
KDDI Group 21

L

Liberty Global 36
– Virgin Media 7

M

MegaFon 21
Microsoft 16
– Office 365 16

N

National Health Service (UK) 39
Nokia 11, 33, 36, 39
Nominet 39
NTT 10, 12, 19, 21

O

O2 Arena 33, 39
Ofcom (UK) 38, 39
Open Networking Foundation 18
Orange 10
OT-Morpho 34
Oxbotica 39
Oxfordshire County Council 39

P

Parallel Wireless 9
P.I. Works 38

R

Regions
– APAC
– China 10, 12, 15, 19
– EMEA
– Europe 7, 10, 12, 14, 15, 17, 19, 31, 38
– Germany 7, 16, 17, 23, 32, 33, 34, 35, 36
– Spain 6, 12, 15, 16, 19, 21, 23, 27, 29, 32, 33, 35, 36, 39
– UK 6, 7, 37, 38, 39
– Latin America 7, 9, 12, 15, 17, 18, 21, 25, 29, 32, 38
– Argentina 15, 16, 26, 29
– Brazil 16, 21, 27, 28, 29, 30, 32
– Chile 15, 16, 21, 29
– Colombia 21, 32
– Costa Rica 30
– Ecuador 29
– Mexico 29, 32
– Peru 9, 10, 29
– North America
– USA 14, 29
Rohde & Schwarz 33
Royal KPN 12, 36

S

Sigfox 17
Softbank
– Sprint 15
SoftBank 21
Sprint Nextel 15
Sutel (Costa Rica) 30

T

Technologies
– 3G 9
– 3.5G 32
– 4G
– LTE 9, 10, 11, 15, 17, 26, 30, 32, 39
– LTE-A 30
– 5G 9, 11, 19, 32, 33, 36, 39
– – ADSL 36
– – Broadband 15, 19, 26, 28, 36, 39
– – eSIM 34
– – GSM 21
– – ICT 33
– – Internet of Things 12, 16, 21
– – IP 10
– – IPTV 30
– – LPWA 17
– – LTE-A Pro 30, 32
– – M2M 12, 16, 17, 34
– – MIMO 32
– – NB-IoT 17
– – Network functions virtualisation (NFV) 18
– – OpenStack 15, 29
– – SIM 12, 16, 21, 34
– – Smart City 7
– – Software defined networking (SDN) 18, 19
– – TV 26, 33
– – V2X 32
– – VPN 15
– – Web Services 16, 21
– – WLAN
– Wi-Fi 9
Telecom Argentina 26
Telefónica Group 6, 7, 14, 16, 18, 19, 21, 22, 29, 32, 34, 35, 38, 39
– Associates and investments
– China Unicom 12, 19
– Sigfox 17
– Digital services
– AURA 10, 21
– Dynamic Insights 7
– ElevenPaths 16, 21
– Global Video Unit 7
– M2M 12, 16, 17
– Open Future 22
– Smart Center 16
– Synergic Partners 16
– Telefónica I+D 9
– Wayra 23
– Europe
– Acens Technologies 6
– E-Plus 35, 36, 38
– Germany 17, 23, 32, 33, 34, 35, 36
– O2 7, 32, 33, 34, 35, 36, 37, 38, 39
– Spain 7, 15, 36
– Telefónica Deutschland 7, 32, 33, 34, 35, 36, 38
– UK 7, 37, 38, 39
– Executives
– Abou-Alam, Tamer 7
– Bertram, Jo 7
– Carbajo, Cayetano 32
– Caro Bernat, Juan Manuel 14
– Dowd, Ben 7
– Evans, Mark 7, 39
– Goncharov, Boris 7
– Haas, Markus 35
– Ibarra Pichardo, Alejandro Alberto 7
– Kern, Christian 7
– Kickartz, Manfred 17
– Martín-Villa, Gonzalo 22
– McManus, Derek 39
– Montero Garcia, Ignacio 7
– Muñoz, Vicente 21
– Plumb, David 7
– Sweeney, David 7
– Turpin, Gareth 7
– Zaragoza, Gemma 7
– Global Resources
– 5TONIC 11, 33
– Telefónica Business Solutions 15, 16
– Telefónica International Wholesale Services 6
– Telxius 17, 26
– Telyco 6
– UNICA 19
– Latin America
– Brazil 27, 28, 29
– Vivo 27
– Products and services
– Living Cloud 16
– pay-TV 26
– SealSign 16
– Speedy (Latinoamérica) 26
Telenor 12, 21
Telstra 12
Transport for London 39
Transport Research Laboratory 39
Turkcell 21
Turk Telekom 19

U

United Internet 36
United Nations 21
– Food and Agriculture Organization 21

V

Vertiv 14
Virgin Group 7
Vodafone Group 7, 10, 35, 36
– Germany 35
Volkswagen Group 23

W

Warburg Pincus & Co. 36
Wibson 22

X

XL Catlin 39

Z

ZTE 11, 33

About

About Telefónicawatch

Report: #125
Published: March 2018
Next report: April 2018
For more information visit: Telefónicawatch