Nextel Mexico foresees increased commercial opportunities arising from reforms being applied to Mexico's staid telecommunications market and has outlined ambitious 4G LTE rollout plans for 2014. BMI welcomes Nextel's efforts to push into mass market mobile broadband offerings, not least because of the increased consumer choice it would deliver. However, Nextel's larger and more powerful rivals are pursuing similar strategies and we believe they will be better placed to monetise the opportunities from increased commercial manoeuvrability.
Nextel claims to have launched 4G services already, saying that one-third of subscribers would be served by 4G by the end of 2013. However, BMI notes that this refers to services provided over the 3.75G HSPA+ platform Nextel recently laid over its existing W-CDMA 3G network. In its Q313 results, Nextel Mexico noted that 25% of its 3.654mn registered subscribers were using its 3G network. As the company only launched 3G services in Q412, this is an impressive achievement and lays the foundations for equally rapid 4G adoption. Nextel plans to have its entire network LTE-ready by end-2014 and would be interested in acquiring additional spectrum to enable it to fully leverage its latent capabilities, should the government auction the requisite frequencies.
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However, the 3G migration project has been expensive, contributing to hefty capital expenditures of US$225.7mn in 9M13 alone (US$337.4mn in 9M12), while underlying revenue growth remains negative due to price competition and waning interest in voice services. Revenue fell from US$523mn in Q312 to US$442mn in Q313. Nextel continues to enjoy the highest mobile ARPU in Mexico, largely the result of its focus on postpaid and business customers, but this has also been falling, from US$38.96 in Q312 to US$33.35 in Q313. We expect its ARPU will continue trending downwards, not merely because of its push into mass market and prepaid services, but also due to increased price competition wrought by rivals such as Telcel (part of América Móvil) and Móvistar (part of the Telefónica Group) as well as the loss of subscribers served by its legacy iDEN network.
Mexico's telecommunications legislation was rewritten in June 2013, giving greater commercial freedom to independent players and (potentially) curbing the excesses of dominant players. Nextel is pinning its hopes on newly-written secondary laws that will eliminate very high national long-distance rates as well as introducing new interconnection rate mechanisms that will benefit smaller players with limited geographic reach. However, given the political influence of players such as América Móvil, it is possible that these laws could be challenged through the courts or significantly diluted before being adopted.
Therefore, although we acknowledge the potential for growth engendered by reforms, we remain bearish regarding Nextel Mexico's outlook for the foreseeable future and highlight the fact that it is unlikely to be profitable in the medium term, particularly while price competition intensifies and customer acquisition and retention costs remain high (US$568 per gross add in Q313 versus US$487 in Q312).