Operator Series: Can AT&T Mexico Swing to Profit?

As 2018 drew to a close, AT&T Mexico welcomed a new CEO as it wrapped up its original US$7bn investment plan in the country.

In addition to the US$4.4bn it spent on acquiring Iusacell and Nextel Mexico to begin operating in the country in 2015, the US telco announced plans to invest US$3bn to launch high-speed mobile internet services with a target of covering 100mn Mexicans by end of 2018. 

At a press conference in December, AT&T Mexico's new CEO Laurent Therivel – the third chief executive to helm the telco – proudly said the coverage target had been met, while the number of subscribers doubled to 17.3mn in 3Q18 from 8.7mn at end-2015.  

Yet despite rising revenue, the company may have fallen victim to its own success and cannot seem to turn a profit in Mexico. 

Operationally speaking, AT&T Mexico has achieved remarkable results, considering that when it landed in 2015 the mobile voice market was basically a duopoly controlled by América Móvil and Spain's Telefónica.

Jump to the second quarter of 2018 and AT&T is nipping at the heels of Telefónica, with nearly 14% of the mobile voice market, while the Spanish telco's share has remained flat and Carlos Slim's local giant, though still the undisputed leader, dropped 5%.

AT&T's inroads are even more evident in mobile data, where it has become the second largest player.

In 1Q15, the companies that would become AT&T had 10% of the market, while Telefónica commanded 17% and América Móvil, 73%. As of 2Q18, AT&T controlled 14% of the market to Telefónica's 12%.

It has also achieved the highest average revenue per user in the Mexican market with 161 pesos (US$8) a month in 3Q18, above América Movil's 149 pesos and Telefónica's 53 pesos, according to a study by local telecoms consultancy The CIU.

That growth, however, has come at the expense of significant operating losses. The company reported an operating loss of US$267mn in 3Q18, preceded by a US$217mn loss in Q2 and a US$259mn loss in Q1. It has yet to report an operating profit in the country despite significant growth in revenues.

On its global strategic guidance for 2019, the US telco stopped short of promising a swing to operating profits in Mexico, instead highlighting opportunities for cash flow and Ebitda improvement during the year.

"AT&T has more than 17 million wireless subscribers in Mexico, nearly double 2015 levels, and is the fastest growing wireless provider in the country," it said. "At the same time, it has opportunities to reduce costs and capital expenditures as it completes its LTE network build and systems integration work."

But local CEO Therivel went further than the parent company in December. "We've really seen the growth that that investment has brought. In the second half of 2019 we will become profitable," he said at the press conference.

The company will continue to invest in capacity, coverage and in fiber optics, he added, but did not disclose a specific capex amount for 2019.

AT&T's continuous investments have turned it into the largest provider of 4G connectivity in Mexico in terms of availability, according to consultancy OpenSignal, with clients able to connect to their 4G networks close to 82% of the time vs 77% for América Móvil. But new investments will be required, as a separate report by the same consultancy said the company's download speeds in the country plummeted by 30% in the six months to August.

A STRONG COMPETITION SCENARIO

Part of the reason the company has struggled to make a profit in the country has to do with its own success as a new entrant.

AT&T's entry into Mexico disrupted the status quo and sent the three main mobile voice companies into a no-holds-barred price war that has contributed to a drop of over 43% in mobile service rates since the country reformed its telecommunications legislation in 2013.

Furthermore, infrastructure-heavy companies such as telecom operators have long cycles of capex amortization.

"Infra companies are, as a rule, capex intensive and need to make heavy investments to get started," Ernesto Piedras, head of The CIU, told BNamericas.

"I have the impression that AT&T Mexico has a very articulated business plan. First, they consolidated their networks and afterwards dedicated themselves to market expansion, which they've been being very successful at," Piedras adds. "This is not an easy market."

The company was also busy in 2018 with deployments of Internet of Things (IoT) and smart cities solutions.

Andrés Canales, AT&T's deputy VP of IoT, told BNamericas in June that the company is prioritizing infrastructure to take advantage of IoT.

"At the end of 2017, we completed the installation of the first LTE-M network in Mexico, dedicated to the deployment of IoT on a large scale in North America, and that will be essential to accelerate business in Mexico," he said at the time.

The telco also purchased new spectrum in the 2.5GHz band during an August tender, a move that put AT&T in the lead for spectrum licenses with 33.7% of the country's bandwidth.

As Mexico takes its time to evaluate future 5G mobile connectivity standards, Therivel believes the country will take its cues from the larger neighboring US market.

"I expect that Mexico will benefit from the investments and the efforts that we are putting in the US. We have essentially completed our 4G buildout in Mexico; whatever we do on 5G will be based on top of the investments that we have made," he said.