Telefónica Brasil CEO Amos Genish isnt the telecommunications industrys fortune-teller; hes its future-builder. Since the late 1990s, when he co-founded a company called Global Village Telecom to bring telephony to South Americas remotest regions using cutting-edge satellite technology, Genish has been asking what more might be possible in the telecom industry and building the answers. When Spains Telefónica acquired GVT in 2015 and appointed Genish chief executive of the combined entity, whose 100 million customers made it the leader among Brazils telecoms, Genishs vision of the industrys future grew even grander. At the helm of Telefónica Brasil, he developed a strategy and made investments to hasten, rather than resist, the inevitable shift in demand from voice to data services. Investors and analysts were so taken with Genishs quick strategic shifts and obvious success with Telefónica Brasil that they ranked him Latin Americas top CEO among his Technology, Media, and Telecommunications counterparts in Institutional Investors 2016 Latin-America Executive Team.
Now, satisfied that the goal he laid out for himself back in the founding days of GVT has been met, Genish has announced that he will be stepping down as Telefónica Brasils CEO at the end of 2016. Eduardo Navarro de Carvalho, currently Telefónicas chief commercial digital officer, will take over as CEO of Telefónica Brasil, of which he is already chairman.
When I co-founded GVT in the late 1990s, my aspiration was to leverage state-of-the-art network technologies, relevant innovation, and a fact-based and results-oriented culture to build the best telecom operator in Brazil, Genish says. Having overseen the successful consolidation of GVT into Telefónica Brasil, he considers that goal met.
Genish hopes other telecom players have been paying attention to his companys recent strategic road map. The industry is, after all, in need of transformation. Globally, it has faced an increasingly formidable set of challenges over the past five years, in the form of pressure from regulators to keep rates low, while revenue from voice services has declined without sufficient compensation from data services, which require more up-front infrastructure investment. And competition is tightening, with new rivals forming out of companies that previously didnt pose a threat. One example is over-the-top (OTT) content providers: outfits like Hulu, Netflix, and WhatsApp, which offer films, TV, and text messaging via the Internet without requiring users to subscribe to cable, satellite, or mobile network packages. London-based research firm Ovum predicts that bet-ween 2012 and 2018 traditional telecom providers will lose $386 billion in revenue to OTT applications.
Genish believes telecoms will have to overhaul their business models and he believes Telefónica Brasil can lead the way, even while situated in a country that is two years deep into a recession. The key: investing heavily in the 4G and fiber infrastructure necessary to building up data business lines and capabilities. In 2015 and 2016, Genish increased capital expenditures while his competitors made cuts. By the second quarter of 2016, Telefónica Brasil (which operates under the Vivo brand) earned more than half of its revenue 56 percent from data and nonvoice services for the first time. Genish predicts that by 2018 the companys nonvoice revenue will constitute 80 percent of the total.
Its likely that Genishs predictions for Telefónica Brasil will hold even after he leaves his current post. In a sign of leaderships desire to maintain the strategy he put in place, Genish will chair a new strategy committee and remain a member of Telefónica Brasils board of directors.
Senior Contributing Writer Katie Gilbert recently spoke with Genish about where the transformation he foresees for the telecom industry is likely to lead Telefónica Brasil and just how soon he predicts the company will stop charging for voice services altogether.
Institutional Investor: What are the biggest challenges facing Telefónica Brasil and other telecom companies?
Genish: Telecoms worldwide have been having substantial difficulties in their business models. Revenues are in decline or stable at best, while ebitda margins for most of them are declining and capex is growing fast.
The main issues on the top line come from the fact that theres exponential growth in data traffic. From 2015 to 2020 we expect five times higher growth in traffic, while voice usage is going down at a rate of 20 percent per year. So clearly theres much less voice traffic something that generated a substantial margin in the past. Very light investment was required to provide voice services. What is growing at an exponential rate is data service, which requires huge investments in 4G and fiber.
Its a difficult challenge, which is why I think transformation in the telecom sector is required. I think all telecoms really have to rethink how to build sustainable business models and increase total returns for shareholders.
What are some of the things that have to change within Telefónica Brasil?
One of them is that we need to have more of a data-driven strategy from the revenue side. That means we should really start to rely less on voice revenues and understand that theyre becoming irrelevant quicker than we ever imagined. We need to do a better job of monetizing data. Thats requiring us to invest more in fiber and 4G than in legacy networks like 2G and 3G. It might impact customers at certain points, but we need to be focused on the future and how value will be generated.
Will it be a particular challenge to enforce this transformation in your business from within a country in recession?
When this crisis started, I always said, I continue to be optimistic about Brazil. I saw the 2002 crisis here. Those cycles will exist. And sometimes they seem really radical and hard.
The fundamentals of Brazil are strong with a young population, natural resources, and hardworking people. Its a very sophisticated country today compared to 20 years ago. There are a lot of educated people with MBAs from outside of Brazil. I knew that in a period of time the market would recover.
We were convinced enough to continue investing. We increased our capex in 2015 and 2016 while our competitors made cuts. One of the reasons for that was I always thought it wouldnt be a long contraction maybe just two, three or four years. In the infrastructure businesses you need to be ready. If you act only when the market is really open, it might be too late for the game.
Do you anticipate that an economic turnaround for Brazil is near-term?
Weve still not seen a major turnaround in the numbers. Inflation is still high, interest is still high, unemployment is still high. But its not about the numbers as much as about the sentiment. I think in the past three to four months sentiment has been positive on the investor side and on the consumer side.
I think well have a new golden age in Brazil for the next few years. Investors are putting money in the stock market big-time. Private equity we see a lot of inflow of dollars in Brazil like weve not seen for a long time. The financial sectors are an interesting barometer for what people think.
Can you talk about your strategy to target higher-income customers?
We are not going to focus on low-end products in a tough economy. Seventy percent of mobile revenues come from postpaid [customers], which is really the higher-income group. We dont ignore the other 30 percent, but we are not getting into fights on pricing in the prepaid market. We are not giving more for less, and that strategy is working well for us.
Within prepaid and postpaid there are more value segments. From a national price we went to regional pricing, and from regional we went to city-level pricing. All the pricing for postpaid is going to pricing segmentation based on customer profile. If you call for a discount or disconnection, or ask for a better rate because of financial difficulties, we can adjust, using big data. Weve been able to help many customers to get through the difficult time.
What does your increased focus on data mean for new business activities?
We need to generate revenue from other digital services. Content is important to us. I think telecoms have a huge competitive advantage they cannot forget: The data pipe belongs to us. Thats a huge advantage.
Second, we have transactional relationships with our clients. We know them. We send them a bill every month. Clearly, this has to be leveraged. You have to leverage this by selling content and other services to those clients. I think what we found is that we can segment our clients better than anyone else. Today we have 80 apps providing entertainment services like music and educational services; we have all kinds of apps in our Vivo store. We are generating half a billion dollars already, and its growing by double digits every year. Thats only the beginning.
Now we should think about the next steps and really think about how to sell Vivo content, in the style of Netflix, to our users. We are launching a new concept with a series that was designed for mobile-only, by exclusive agreements we have with Canal+ Group in Europe. We will launch with 25 series, with the concept of ten by ten ten series, each episode ten minutes, designed for mobile. Every week we will launch a new series. We think its the way to go.
What other new business opportunities are you pursuing?
The other one is big data. Facebook and Google for years made it a sophisticated tool for making money by selling advertising to companies. We are just now, in the last year, understanding big data. We have a 360-degree view on our customers more than any OTT. We have information on our customers from geo-location to what they like to see and what they dont, to their income and credit and so on. We can at least use that information for optimization and investment in our networks.
Now that we have big data as a tool, I feel like weve been flying blind for years. This is big its going to bring efficiency, more segmentation of our portfolio offerings to customers, and so on. On the other end, clearly its an opportunity to have big data as a business tool. We are really starting to use big data for advertising. We are selling advertising today to customers. Weve already had a few deals close: Unilever was the first one, but many others came after. Studies show that our advertising is seven times more effective than some OTT advertising. Clearly, it might not be the direction forever, but I think its showing that telecoms can use their big data for advertising.
Weve seen Verizon buy AOL and Yahoo! I think that is the way were going. If you think about that from the telecoms perspective, its really understanding the power of what we have to offer: owning the pipe and having a professional relationship; more data monetization; selling digital services as an app; then video on top of that; then advertising on top of that. That really can transform the revenues and make sure that we are leveraging our heavy investment into capex.
Will new privacy problems come to the fore as you move into this area?
One of the things that telecoms can offer that OTTs are not offering is safeguard operators. We all know OTTs have gone through difficult times with issues of privacy and security with regulators. We have an opportunity to let customers feel comfortable with the operators. We are building a platform where they will be able to see their own private information and have more control of their data than ever. I think thats where telecoms can play a major role in enabling more privacy and more security for users in what they do with the operators but, more importantly, what they do with other OTTs in general.
Does all of this mean Telefónica Brasil will soon stop charging for voice services?
We dont see voice as a relevant service anymore. Clearly, many customers dont want to pay for voice; they would like to get it free. We are very much focusing on charging for connectivity. Connectivity is just pipe. Voice is just one part of the pipe, of that charge for connectivity.
Today we still do charge per minute, but in a year or two it will be an obsolete idea. We should really get out of that as quickly as possible. Bundling will be key. Anyone who is charging for voice in two to three years will really have trouble with their clients.
It will not be a simple transformation, but we need to get there. Its the evolution into the gigabit economy and minutes have nothing to do with the gigabit economy.