Americas Market Perspective V O L. 9 I S S U E 1 J A N U A R Y 2009 AT&T s Acquisition of Centennial: A Good Deal for the Regional Giant Analyst: STELA BOKUN Email: sbokun@pyr.com Tel: +1 617 494 1515 Upon AT&T s acquisition of Centennial, AT&T will gain almost half a million of Centennial s high-end clients without incurring a significantly higher operational cost. Through the acquisition, AT&T will complement its service portfolio with services that will see increasing usage/revenue over the next five years and will gain entry into the Puerto Rican fixed access market. Finally, AT&T will also gain access to Centennial s high quality network and recently obtained 2.5GHz spectrum suitable for WiMAX. 2009 Pyramid Research While every effort has been taken to verify the accuracy of this information, Pyramid Research cannot accept any responsibility or liability for reliance by any person on this information. ID# 483 Pyramid Research Locations Worldwide www.pyramidresearch.com World Headquarters 10 Canal Park Cambridge, MA 02141 USA Tel: +1 617 871 1900 Fax: +1 617 871 1933 Latin America Waterford Business Park 5201 Blue Lagoon Drive Suite 971 Miami, FL 33126 USA Tel: + 1 305 629 3615 Fax: + 1 305 629 3100 Asia-Pacific 18/F Caroline Center Lee Gardens Two 28 Yun Ping Road Causeway Bay, Hong Kong Tel +852 2516 1329 Fax +852 2856 2907 Europe UBM, Ludgate House 245 Blackfriars Road London, SE1 9UY UK Tel: +1 20 7560 4471 Tel: +1 20 7560 4485
2 EVENT SPOTLIGHT In November 2008, AT&T announced the US$944m acquisition of Centennial Communications in Puerto Rico. Currently, AT&T is the leading mobile operator on the island with approximately 700,000 mobile customers as of Q3 2008. In Q3 2008, Centennial had 430,600 customers in the wireless segment, as well as 98,300 switched access lines and 498,400 dedicated access lines within its Puerto Rican broadband operations. Puerto Rico, which has a population of around 4m, hosts six mobile operators and several large fixed operators. In this very dynamic competitive environment, the acquisition of Centennial comes with some liabilities but also key advantages for AT&T. We believe that following the acquisition, AT&T will significantly improve its competitive standing in the Puerto Rican telecom market by: adding almost half a million high-end mobile clients to its Puerto Rican subscriber pool, complementing its service portfolio by gaining access to the Puerto Rican fixed market and obtaining Centennial s high-quality network and its newly acquired spectrum suitable for WiMAX. BEHIND THE HEADLINE Upon AT&T s acquisition of Centennial, AT&T will gain almost half a million of Centennial s high-end clients without incurring a significantly higher operational cost. Prior to its acquisition of Centennial, AT&T was the mobile market leader in Puerto Rico; however, its leading position was weak compared with that of the challenger, Claro (America Móvil). AT&T controlled approximately 28.2% of the market in Q3 2008 and closed 2007 controlling 28.4%. However, the operator has been losing market share consistently since 2003, most notably to Claro, formerly known as Verizon Wireless. Claro controlled roughly 28% of the market in Q3 2008, up from 27.1% at year-end 2007. AT&T s acquisition of Centennial, the third largest player, results in an increase in the total market share and also gies it the tools to maintain its leadership in the Puerto Rican mobile market. Following the acquisition, AT&T will add 430,000 new mobile customers to its mobile subscriber pool to control approximately 44% of the mobile market, or around 16 percentage points more than second place Claro. Going forward, Pyramid Research believes that the expanded AT&T will further increase its market share in the Puerto Rican mobile market over the next five years, reaching 45.9% in 2013 (see Exhibit 1).
3 Exhibit 1: Subscriber market shares of the six Puerto Rican mobile players, 2008-2013 50% 45% 40% 35% 30% 25% 20% 15% 10% Claro Centennial ATT Open Mobile T-Mobile Sprint 5% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Pyramid Research Not only will AT&T acquire almost half a milion new mobile customers, it will do so without incurring a significantly higher operational cost. On top of benefiting from its knowledge of the Puerto Rican market (having the necessary infrastructure and knowhow), after it merges Centennial s operations with its own, AT&T will be able to achieve cost-reducing synergies in advertising, corporate overhead, customer care, etc. Finally, the Centennial subscribers who AT&T will add to its pool are, for the most part, high-end clients. Ninety-eight percent of Centennial s mobile subscribers were postpaid at Q3 2008, and ARPS was $66, approximately $7 above the market average. AT&T s projected post-acquisition market share of revenue reflects the high quality of Centennial s subscribers (see Exhibit 2).
4 Exhibit 2: Market shares by revenue of the six Puerto Rican mobile players, 2008-2013 50% 45% 40% 35% 30% 25% 20% 15% Claro Centennial ATT Open Mobile T-Mobile Sprint 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Pyramid Research By acquiring Centennial, AT&T gets access to the Puerto Rican fixed market Through the acquisition of Centennial, AT&T will complement its portfolio with services that will see increasing usage/revenue over the next five years and will gain entry into the Puerto Rican fixed access market. Since AT&T provides only mobile services in Puerto Rico, Centennial s service portfolio will diversify AT&T s service offerings. Centennial offers mobile voice and data, switched voice, private lines, VoIP, international long distance and corporate data services. In its retail business segment, it provides switched voice, high-capacity data and IP services to mostly large and midsize companies. In its wholesale business, Centennial provides connectivity between cell sites and switching equipment for most of the wireless carriers in Puerto Rico, backhaul capacity for the long-distance carriers and connectivity to the US. In addition to diversifying its service portfolio, AT&T will gain access to the Puerto Rican fixed market, adding the potential to offer bundles of mobile and fixed services, a key competitive factor for this operator in the future. Given that its main competitor, America Móvil, owns both the second largest mobile market player, Claro, and the fixed market incumbent, PRTC (Puerto Rico Telephone Company), AT&T s entry into the fixed market is of immense importance to the operator s standings in Puerto Rico s overall telecom market. Going forward, we expect both service providers to move toward an integrated service offering.
Revenue (US$ millions) VOLUME 9 ISSUE 1 5 In addition, the fixed services of Centennial are expected to be a growth engine in the next five years. Among them, broadband Internet access will be the most lucrative. While traditional voice revenue is likely to drop by 33% in the next five years, Puerto Rican annual broadband Internet access revenue is slated to almost double in the same period (see Exhibit 3). The Puerto Rican broadband Internet access market will generate a cumulative $1.4bn in the 2008-2013 period, growing at a CAGR of 16% in the same period. Exhibit 3: Fixed communications service revenue in Puerto Rico, 2008 and 2013 $600 $500 $400 $300 2008 2013 $200 $100 $0 Traditional voice VOIP BB Internet access IPTV Source: Pyramid Research Through the acquisition of Centennial, AT&T will gain access to Centennial s 3G network and WiMAX spectrum Finally, by acquiring Centennial, AT&T will also gain access to Centennial s high quality network and recently obtained 2.5GHz spectrum suitable for WiMAX. In Puerto Rico, Centennial operates a 3G network using CDMA 2000/EVDO technology and has recently launched EVDO Rev A. While Centennial s network is a high quality 3G network, by simultaneously running its GSM network and Centennial s CDMA network in Puerto Rico, AT&T will incur high operational costs. Therefore, AT&T will likely opt for a GSM overlay and migration of Centennial s customers to GSM sooner rather than later.
6 AT&T will also gain access to Centennial s high quality fixed network and a spectrum suitable for WiMAX. Centennial s wireless network is supported by a 1,300-mile fiber backbone connected to more than 2,000 buildings. Their fiber network also connects to their submarine capacity, which connects Puerto Rico with the US mainland. The capacity of the submarine network was doubled in 2008. Also, after the acquisition of Islanet in 2007, Centennial came into the possession of Islanet s 2.5GHz spectrum suitable for WiMAX. Given the increasing demand for broadband Internet access in Puerto Rico, AT&T can decide in the future to offer WiMAX-based services or simply to sell the spectrum to a third party. Therefore, in addition to gaining high-end mobile clients and access to the fixed market, AT&T also gains Centennial s high-quality network and WiMAX spectrum, valuable assets that further justify the soundness of AT&T s acquisition. CLIENT RECOMMENDATIONS AT&T Replace Centennial s CDMA network with a GSM network sooner rather than later. The economies of scale that this may bring in the long run overshadow potential gain from the roaming revenue and the costs associated with network replacement. America Móvil Look at other acquisition targets in Puerto Rico to respond to AT&T s acquisition of Centennial and to improve your competitive position; some obvious targets may be Open Mobile and Sprint, the two smallest operators in the market. Consider launching IPTV in the near future to complement your bundle.
7 Recent reports and other products from Pyramid Research VoIP Service Adoption in Puerto Rico Latin American Regional Perspective published October 2008 Puerto Rico s broadband penetration will grow from 8% in 2007 to 19% in 2013, thus driving VoIP adoption. VoIP s complementary role in converged offerings, as well as its affordability, also contributes to its adoption. This Perspective takes a close look at the Puerto Rican market to predict what impact VoIP will have in terms of revenue and operators offering. Communications Markets in Puerto Rico Country Intelligence Report published August 2008 Pyramid Research expects the Puerto Rican telecom services market to expand at a CAGR of only 3.1% over the next five years. Most of the growth will come from the IPTV and fixed VoIP markets. Revenues from both fixed and mobile data will also grow at a fast pace. This Country Intelligence Report analyzes Puerto Rico s communications, media and technology industries, including key trends, regulatory pressures and the competitive landscape, making it an excellent complement to our Forecast products. Oi Acquires Brasil Telecom for $3.3bn and Consolidates Its Leading Position Latin American Regional Perspective published May 2008 On April 25, Oi announced the acquisition of Brasil Telecom for $3.3bn, creating a $22bn-a-year giant. Pyramid Research estimates that Oi will hold a sound share of the telecommunications pie in Brazil, with total revenue representing nearly 30% of the total telecom services market in Brazil. This Perspective examines the short term for the new company as it integrates the two businesses into one stronghold and also its prospective entry into Sao Paulo, the richest and most populated state in the country. Latin America Fixed Operator Market Share Forecasts, Q4 2008 Forecasts published December 2008 Updated on a quarterly basis, our Fixed Operator Market Share Forecast products provide a complete picture of wireline voice and data communications in each of 19 Latin American markets. The Excel output includes five years of historical data and five years of market projections for metrics such as fixed lines, voice telephony, VoIP, circuit-switched lines, ARPM, narrowband, broadband, Internet accounts, fiber, DSL, cable and revenue most of them broken down for the mobile operators in the respective markets. We believe our Fixed Operator Market Share Forecasts are superior because they capture granular data gathered through extensive field research and use a thorough methodology consistently applied to all markets. Mobile Payments in Latin America Could Help Operators Boost Data Revenue Latin American Regional Perspective published December 2008 In November 2008, Visa said it would start a mobile payment trial using NFC technology in Guatemala. This is one of the first attempts to use the technology in Latin America, but it is not the only mobile payment service: In Brazil and Mexico, for example, providers are using SMS as the communications medium. This Perspective examines the mobile payments opportunity for operators in Latin America, with particular attention to the lack of banking infrastructure, ongoing adoption of advanced mobile services and the recent advances in payment technology. How Televisa Tries to Gain a Share in the Mexican Telecom Market Latin America Regional Perspective published November 2008 A close look at Grupo Televisa s Q3 2008 financial results shows an increase of 64% in the telecom business, which includes pay-tv, broadband and telephony activities, while the traditional media revenue increased only 7%. These developments hint at Televisa evolving over the next few years into a larger player in the telecom field. This Perspective looks at Televisa s strategy in the Mexican telecom race and the impact on market share. Additional products Forecasts Updated on a quarterly basis, our Forecast products provide a complete picture of demand trends affecting each geographical market covered. The Excel output includes five years of historical data and five years of market projections, providing complete macroeconomic and market-sizing information. Available for: Mobile Demand, Fixed Communications, Mobile Data, Mobile Handsets, Media, Mobile Operator KPIs and Fixed Market Share. Country Intelligence Reports Country Intelligence Reports offer insightful analysis of a country's communications, media, and technology industries, including regulatory pressures and overall competitive landscapes. These data-intensive reports are published annually for 65 countries worldwide, and illustrate key trends within given markets, making them an excellent complement to our Forecast products. For more information or to purchase, contact Pyramid Research at: +1.617.494.1515 or sales@pyr.com or www.pyramidresearch.com