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Analyst Angle: Puerto Rico mobile market update

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.

Puerto Rico’s telecommunications market exhibits the dichotomy characteristic of most liberalized markets: hyper-competition on the mobile service side while keeping an almost unshakeable fixed line incumbent, in this case Puerto Rico Telephone (PRT), controlling the lion’s share of the fixed lines in service. Thus, Puerto Rico has experienced a slow uptake of broadband services—typically promoted by the incumbent fixed line operator and CATV operators—lagging behind hemispheric neighbors such as the Bahamas, Canada, Chile, the United States and Venezuela. Nevertheless, Signals Telecom Consulting considers Puerto Rico’s incipient broadband penetration a strong opportunity for wireless broadband services.

Case Study: Broadband Penetration Status
Signals estimates Puerto Rico’s broadband penetration was  less than 37% by the end of 2011. This contrasts with the reported broadband household penetration rates of Latin American countries such as Argentina, Mexico, Uruguay and Chile with 44.18%, 42.73%, 38.83% and 37.47% respectively. The difference accentuates when GDP per capita (PPP adjusted) is considered as a metric: Argentina’s U.S.$17,674, Mexico’s U.S.$15,340, Uruguay’s U.S.$15,181 and Chile’s U.S.$17,125 GDP per capita only represent 65%, 56%, 55% and 63% of Puerto Rico’s U.S.$27,384 GDP per capita respectively.

Puerto Rico’s household broadband penetration, when compared to the 34 member countries of the Organization for Economic Cooperation and Development (OECD), ranks below the organization’s average of around 63%. If Puerto Rico was a member of the OECD, it would rank last in broadband household penetration.

Mobile Services Overview
Contrary to the broadband market development, Puerto Rico’s mobile industry is characterized by a large number of service providers—five mobile carriers, one iDEN carrier and several MVNOs—attending a total population of 3.7 million inhabitants. Thus, Puerto Rico has the largest number of mobile service providers attending one market in Latin America and the Caribbean, allowing the island’s mobile penetration to grow faster than many of its hemispheric neighbors.

With around 78.2% mobile penetration in June 2012, Puerto Rico lags behind most Latin American and Caribbean islands that boast penetration rates surpassing 100%. Despite the large number of carriers, Puerto Rico’s mobile market is polarized between two operators controlling around 70% of all subscribers with the remaining 30% of subscribers shared among three mobile carriers.

In spite of the large numbers of mobile providers currently present in the market, several companies that in the past acquired RF spectrum, such as Omnipoint and Pegasus, never launched services. Signals Telecom Consulting believes one of the main the reasons these operators decided not to enter the market is the fact that Puerto Rico doesn’t have an addressable market capable of sustaining the large number of players already present on the island.

Mobile Operators
Originally mobile operators entered or remained in Puerto Rico as part of their “macro” strategy as national operators in the United States. Besides the original Band A and B local operators—Verizon Wireless and Cingular Wireless respectively—Puerto Rico has experienced the arrival of two other “national brand names” in recent years: AT&T Wireless (through the acquisition of TeleCorp) and Sprint PCS.

Contrary to industry expectations the acquisition of AT&T Wireless by Cingular Wireless in the United States didn’t translate into consolidation of Puerto Rico’s hyper-competitive mobile market. Instead, Cingular exchanged AT&T Wireless’ Puerto Rican operation for spectrum in Georgia (20 MHz in Augusta and 5 MHz in Savannah), BTAs in Virginia, and a payment of U.S.$175 million from Triton PCS. This company returned the recently acquired assets to its pre-AT&T Wireless brand, SunCom, which was eventually acquired by T-Mobile.

On the other hand, the merger between Sprint PCS and Nextel Corporation signified the arrival of the Nextel brand in Puerto Rico. Finally, the decision of Verizon to divest from its Verizon International assets signified the return of América Móvil to Puerto Rico, only this time under the Claro brand.

Puerto Rico’s two other mobile service providers, Open Mobile and ProxTel Wireless, view the market from a different perspective. Open Mobile arrived in Puerto Rico under the brand Movistar, emulating Telefónica Móviles strategy for its Latin American operations. However, a schism between the shareholders of the operation ended with Telefónica Móviles canceling their management contract and local investor, Newcomm, assuming the company’s management. Eventually, the company adopted the brand Open Mobile and launched a market approach similar to the one implemented by regional U.S. carrier Metro PCS.

Finally, ProxTel Wireless is the last digital facilities-based operator to enter the Puerto Rican market. The company was founded in 1982 and has offered services on the island as an analog SMR carrier. During the fourth quarter of 2004, ProxTel Wireless announced that Motorola was deploying a parallel iDEN network in the same 19 locations where its analog antennas were located and finally providing U.S. iDEN subscribers with roaming services on the island. ProxTel’s iDEN services commercial launch was planned in two phases.

The first phase started on March 1, 2005 and involved replacing all analog terminals used by its clients with iDEN units. The second phase was supposed to launch on July 1, 2005 and involved the mass market promotion of the iDEN-enabled services offered by ProxTel Wireless as well as the announcement of roaming to U.S. iDEN subscribers traveling to the island. After initial efforts to gain customers in the local market, the second phase was shelved.

MVNOs
Puerto Rico’s mobile market also has several MVNOs reselling services on the island. For most of these players, their presence in Puerto Rico was the result of an agreement between the MVNO and the U.S. national mobile operator that also provides service on the island. Signals Telecom Consulting thinks that there will be minimal impact of MVNOs such as Tracfone or Virgin Mobile that provide service in Puerto Rico as a result of their agreement with a U.S. national mobile carrier.

On the other hand, Signals considers the only route for an MVNO to be successful in the local market would be to bundle its offering with other telecom services, i.e., an ISP or CATV operator launching an MVNO. That said, it would be easier for these companies to just resell services from one of the already established mobile operators rather than to commercialize them under their own brand.

Outlook
Consolidation of Puerto Rico’s mobile market is inevitable due to the limited size of the island’s potential addressable market. That said, the U.S. national operators seem to be the primary candidates for maintaining a presence on the island. Other operators will find it increasingly difficult to compete against the economies of scale, handset subsidies and roaming privileges offered by national operators.

The main acquisition target among Puerto Rico’s mobile operators is Open Mobile, which will be even more attractive if it is able to rapidly grow its LTE subscriber base prior to the launch of new networks. On the other hand, the CATV players on the island must include mobile services in their portfolio either through a direct offering (i.e., acquisition) or through an MVNO deal with one of the island’s operators. Finally, low levels of broadband household penetration together with its high price create a great opportunity for LTE providers to position themselves as real alternatives to the wired broadband offerings available on the island.

Jose F. Otero is president of Signals Telecom Group, his Twitter is @Jose_F_Otero

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