Mon, March 05, 2007

Quick: Who has more cellphones, Brazil or Japan? Japan may be the epicenter of the mobile phone culture, but when it comes to cellphone subscribers, Brazil is ahead. It's a slim lead. Brazil has 100.7 million cellphone subscribers, according to a recent estimate by Brazil's telecom regulator. Japan, meanwhile, has 100.2 million, the country's telecommunications carriers association announced last month.

But, of course, to get the whole picture you must take into account that Japan's population (127.46 million) is smaller than Brazil's (188.2 million). So while in Japan nearly 8 in every 10 people have a cellphone, in Brazil the rate is only about 5 in every 10. That means Brazil still has a way to go in making cellphones more widely accessible. (Those rates assume one phone per person.)

That's not to say that mobile telephony isn't a success story in Brazil. Quite the opposite. Brazil privatized its telecom system in 1997. In the following six years, the number of cellphone users increased sixfold, from 7.4 million to 46.3 million, and four years later it more than doubled to the current 100.7 million.

One of the main factors fueling this phenomenal growth was the pre-paid cellphone. With relatively cheaper handsets and no monthly bills or annual contract commitments, pre-paid service became a huge success among low-income Brazilians. Suddenly, street vendors, cab drivers, and others who normally couldn't afford a cellphone became the happy owners of a pre-paid handset. In 1998, after the privatization, pre-paid subscribers accounted for less than 1 percent of total users. They now account for 80 percent.

Today, you can buy a pre-paid phone for around US $50 in Brazil, and then pay only for air time you effectively use. It's a far cry from the days when cellphones first arrived in Brazil. I still remember when in the mid-1990s a Brazilian friend acquired a Motorola MicroTAC. The thing cost something like US $2000, and with a weight of more than 300 grams, it could have also been used for self-defense.

But although pre-paid customers may be the propeller of the mobile phone market, they could also be its anchor. Because so many of them spend so little, pre-paid service means razor-thin profit margins for mobile operators. And the companies can't charge a minimum per month because a vast number of customers could simply vanish (as has happened with fixed telephony).

Throw in heavy taxes and the constant need to invest in technology and the result is not a rosy scenario. One of the largest mobile operators in Brazil, Vivo, a joint operation between Spanish telecom giant Telefónica Móviles and Portugal Telecom, is going through some rough waters. Another, TIM, the Brazilian unit of Telecom Italia, has been up for grabs, with apparently no takers so far. Given these circumstances, there's no sign that an American or European operator could enter the Brazilian market, as some analysts have speculated in the past.

Then again, emerging markets have their share of ups and downs, and a number of companies are willing to take the risk to ride the profitable "ups" of the market. In fact, much of the growth in the world's cellphone subscriber base is coming from China and India and developing countries in Africa and Latin America. These markets have proved that with the right prices, cellphone customers will come—and call. Whether operators can turn those calls into profit, only time will tell.