AT&T plots next stage in Mexican market push

Sue Marek

Now that it has completed its $2.5 billion acquisition of Mexican operator Iusacell and its $1.88 billion purchase of Nextel Mexico's wireless assets from bankrupt NII Holdings, AT&T (NYSE: T) is ready to push ahead with its Mexican agenda. That agenda, specifically, is to create a Mexican stronghold by replicating what the company has done in the U.S.: deploying LTE and selling smartphones. But will the company's investment in Mexico pay off?

When AT&T announced the Nextel Mexico deal, analysts such as Macquarie Capital's Kevin Smithen and Will Clayton called it "one of the savviest deals" that the company had made in years because of the 2.8 million postpaid and corporate subscribers that AT&T got as part of the deal, as well as the 20 MHz of 800 MHz spectrum and around 100 MHz of total nationwide spectrum it acquired for that $1.88 billion price.

During a Jeffries TMT investor conference last week, AT&T Senior Executive Vice President and CFO John Stephens touted AT&T's Mexico plans, noting that the Mexican market is under-served and lacks a large LTE footprint.

AT&T is right about the lack of LTE in Mexico. According to GSMA Intelligence, the research unit of the GSMA trade association, only about 35 percent of POPs in Mexico were covered with LTE as of first quarter 2015. The firm said 95 percent of POPs were covered with 3G. 

But AT&T will likely face some hurdles to its Mexican deployment plans. According to Jose Otero, director of Latin America and the Caribbean for 4G Americas, merging Iusacell's network and Nextel Mexico's network will not be an easy task. He noted that Iusacell, before it was acquired by AT&T, had not been investing much in its network, and it lacks a nationwide footprint. In addition, Otero noted that Nextel Mexico, which also lacks a nationwide footprint, has never targeted the consumer market with its service and therefore lacks a retail presence.

Otero added that since AT&T finalized its acquisition of Iusacell and Nextel Mexico, existing Mexican operators such as Movistar and Telcel have become much more aggressive by launching more competitive rate plans and handset offers.

Of course, AT&T has a strategy in place to combat those aggressive rate plan moves and handset offers. According to Stephens, smartphone penetration is fairly low in Mexico as compared to the rest of Latin America. Indeed, Mexican analyst firm Competitive Intelligence Unit which said that Mexico ended 2014 with 53.3 million smartphones in service, which equates to 50.7 percent penetration.

Stephens said AT&T plans to exploit that smartphone penetration gap by selling refurbished phones that have been traded in through the company's Next equipment installment plan (EIP). He also noted that smartphones, in particular Apple's iPhone, retain their value so that the company has less economic risk when customers trade them in. 

Stephens also thinks AT&T's Mexican network will be an asset when it comes to cross-border calling plans, since he said there are many companies AT&T currently works with that do business with Mexico.

But AT&T is not the only operator targeting cross-border callers. Sprint (NYSE: S) recently hired Roger Solé as senior vice president for the Hispanic market and senior vice president of innovation. One of Solé's primary objectives is to target the Hispanic market in the United States. Likewise, T-Mobile US (NYSE:TMUS) earlier this year teamed with Univision to launch its own branded MVNO targeted at Hispanic consumers in the United States.

AT&T's strength may be its ability to not just offer cross-border calling but to offer a seamless network between the two countries that offers the same services and technologies regardless of whether you are in the United States or Mexico. And if it can also use its marketing finesse to educate the market on those streamlined services and devices, it may actually reap the rewards of these deals. --Sue