Three weeks ago, AT&T announced plans to buy Nextel Mexico for $1.875 billion. In return, the United States’ second-largest telecom company will acquire the accounts of three million Nextel Mexico subscribers, Nextel’s retail stores, as well as related spectrum licenses and network assets. The Nextel Mexico purchase is AT&T’s third major investment in the Mexican telecom market over the past year.
In early January, AT&T finalized an agreement to buy Iusacell from Grupo Salinas. That deal includes about 9.2 million subscribers. And just over six months ago, AT&T purchased DirecTV for more than $50 billion. This is an enormous sum, especially given that the number of subscribers to multichannel TV in the U.S. is probably at its peak.
The deal makes sense though, given that cable TV and broadband is found in roughly half the percentage of homes in Mexico as in the United States. In Mexico, DirecTV is expanding rapidly. “If you step back and think about Mexico, it is a place that’s prone to move into an incredible growth cycle,” said AT&T Strategy Chief John Stankey.
Mexico’s “growth cycle,” which comes amid a slowdown in other emerging markets, began when newly inaugurated President Enrique Pena Nieto announced a spate of reforms under the heading of “Pact for Mexico” in December 2012. One key goal was to break up the country’s monopolized telecom sector, and thereby improve overall economic competitiveness by lowering costs and improving the quality of telecom services. On the basis of AT&T’s investments, the reform is working.
The Cooperative Monopolist
For all the initial excitement over Pena Nieto’s reform plans, a big factor in determining the ultimate success of the telecom reform is the billionaire Carlos Slim, whose America Movil and associated companies have held a preponderant stake in Mexico’s telecom market since the early 1990s. Rather than fight the reforms, last July Slim said that his companies would sell off assets in order to comply with the new law. Slim’s acquiescence came as a surprise to many. But then Slim initiated a series of moves to shrink control over the telecom market. In a conference call this week, America Movil announced that its planned spinoff of cell towers was at a “very advanced” stage and should be finalized by May or June, the most recent sign of progress.
Like many monopolists, Slim’s fortune owes in part to political mismanagement; in this case the blame goes to the country’s now-defunct telecom regulator, Cofetel. One key element that has been frequently overlooked in the reform package is the creation of Ifetel, a telecom regulatory agency with real authority to sanction companies and the technical wherewithal to monitor the country’s ICT networks. This is precisely what Cofetel, staffed largely by political insiders, lacked.
Recent Signs of Progress
Today, much of the excitement behind the telecom reform has abated. After the disappearance of 43 students in Iguala last September, followed by renewed allegations of corruption, Pena Nieto has spent the last six months on the defensive. And what little energy he has devoted to the 2013 initiatives has come off as premature self-congratulation. “Mexico’s reform agenda is now complete,” is the opening line to Pena Nieto’s op-ed in the Financial Times last summer.
Yet, despite the political scene, the telecom reforms continue to take hold. Pena Nieto initially set out to expand broadband access to at least 70% of its households, and 85% of small businesses, by 2018.
Now AT&T’s strategy is becoming clearer. Before long, AT&T forecasts that its customer base will grow to include 400 million people and businesses in the United States and Mexico, and effectively merge the two countries into a single telecom market. According to AT&T chairman and CEO Randall Stephenson, “It won’t matter which country you’re in or which country you’re calling – it will all be one network, one customer experience.”
AT&T’s rapid inroads into the Mexican market signals that improved ICT is bolstering the economy’s competitiveness. Beyond that, AT&T’s move points toward an openness to foreign investment that is quite rare in a world where telecoms are, on the whole, heavily regulated. As Stephenson noted after the Iusacell deal, “The quick approval of this deal is one more example of why Mexico is an attractive place to invest.” And yet, the biggest shock is just beginning to be realized; it will come as more and more Mexicans gain access to a competitive telecom market for the first time.