Why Is AT&T Betting Big On Mexico?

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AT&T (NYSE:T) has been increasing its presence in the fast-growing Mexican wireless market, as it looks to expand its bread-and-butter wireless business beyond the largely saturated and highly competitive U.S. market. The carrier entered Mexico in 2015, by purchasing wireless operator Iusacell and the wireless assets of Nextel Mexico for a total of about $4.4 billion. The carrier also pledged to invest as much as $3 billion to upgrade its network, improving LTE coverage to reach about 100 million user by 2018, up from around 51 million users currently. Below we take a look at why Mexico could prove an important market for AT&T.

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Mexico_Wireless

Regulatory Environment Is Favorable For Smaller Players

AT&T doubled down on Mexico after the Mexican government introduced a wave of new telecom reforms in 2014 to improve coverage, lower costs for customers and reduce the dominance of America Movil, the dominant player in the Mexican market. Mexican regulators asked America Movil to reduce its share of the Mexican wireless market to under 50%, or face certain penalties. As the carrier hasn’t been able to meet this requirement yet, given its slow progress with divestitures, regulators have forced it to eliminate interconnection charges that its smaller rivals had to pay for incoming calls to its network, as well as requiring it to share infrastructure with others. These asymmetric regulations are beneficial for AT&T, which holds under 10% of the Mexican wireless market.

Mexico_Wireless2

Growth Opportunities In Mexico

There were about 109 million mobile connections in Mexico as of Q1 2016, compared to a population of roughly 128 million, implying a mobile penetration of roughly 85%, which still provides room for some growth. While ARPUs in Mexico are much lower than in the U.S., at about $12.50 per month as of Q4 2015 they are meaningfully higher than some other Latin American markets (Brazil has a mobile ARPU of about $5 per month), allowing for better profitability. Smartphone penetration is also rising fast, growing from about 50% (as a percentage of total mobile users) in 2014 to about 72% in Q1 2016, with the number projected to rise to about 82.7% by the end of this year. [1] Higher mobile data consumption could also be a key near-term driver of growth. Cisco estimates that mobile data traffic per connection in Mexico stood at about 364 MB per month in 2015, which is less than a third of the consumption in North America. However, the metric is expected to grow to about 2 GB per month by 2020, translating into a CAGR of 41%, compared to a CAGR of about 22% in North America. [2]

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Notes:
  1. Smartphones Take Over Mobile Connections in Mexico, eMarketer, June 2016 []
  2. VNI Mobile Forecast Highlights 2015-2020, Cisco []