AT&T preparing to tackle the high end of the Mexican wireless market: Piecyk

Mexico City
AT&T has established a foothold in major Mexican urban areas such as Mexico City.

After spending billions to elbow its way into the wireless market in Mexico, AT&T is preparing to step up its game south of the border.

The second-largest wireless carrier in the U.S. closed a $2.5 billion deal to acquire the Mexican operator Lusacell in January 2015, then expanded its footprint shortly thereafter with the $1.88 billion acquisition of Nextel Mexico from bankrupt NII Holdings.

It has continued to invest to upgrade those networks to LTE, according to BTIG Research’s Walter Piecyk, who met recently with AT&T Mexico CEO Kelly King and two other top executives. And all those investments are beginning to pay off.

“AT&T’s attractive pricing on simplified, data-focused rate plans has yielded strong subscriber growth, although EBITDA is not likely to materialize by year-end as initially hoped,” Piecyk wrote (sub. req.) on BTIG’s website. “Over the past two years AT&T added 3.8 million new subscribers and grew its annual revenue run rate by 20% in local currency. They have seen a doubling of smartphone adoption over the past two years and they claim to have cut the consumer complaints filed with PROFECO (a Mexican regulatory agency) in half.”

The combination of improved service, low prices and an expanding LTE network has enabled AT&T to gain a foothold in the market. And AT&T sees that as an opportunity to pursue more lucrative segments.

“Having recently hit a critical milestone of reaching two-thirds of the Mexican population with LTE, AT&T now plans to leverage its network investments and pivot to move up-market,” Piecyk observed. “This likely means no incremental price cutting.”

Growing its business in Mexico has become a key strategy for AT&T as its U.S. wireless business continues to struggle. AT&T saw a net loss of 348,000 postpaid phone customers in the first quarter of 2017, and said revenue dipped due to record-low equipment sales in wireless.

The operator is pouring resources into a variety of pursuits in the United States. It has spent vast sums on fiber and spectrum in advance of 5G, for instance, and it is aggressively expanding into digital media and advertising. But it must continue to invest heavily in Mexico if it is to succeed as a provider of higher-end—and more lucrative—wireless services.

“AT&T expects to slow the pace of capex in this market after the strong investment cycle of the past two years,” Piecyk wrote. “However, local management’s planned pivot to move up-market combined with the growth of data usage will make it hard for AT&T to pull back too aggressively on investment."

“We expect their investments to shift towards cell densification for capacity in metro markets or investments to improve coverage outside of the city,” Piecyk continued. “AT&T plans to expand their LTE coverage to 100 million POPs by the end of 2018 from its current coverage of 85 million.”