Industry Trend Analysis - 2.5GHz Auction Limits To Curb Telcel's Dominance - NOV 2017

BMI View: America Movil ' s participation in the upcoming 2.5GHz auction will be severely limited , as the regulator has been trying to erode the operator ' s dominance in the mobile market . Given the importance of the 2.5GHz band, the outcome of the auction will influence the competitive dynamics of the Mexican market in the subsequent quarters.

Telefonica, AT&T, Totalplay, Cablevision and Axtel have requested to Mexican regulator IFT that incumbent America Movil-owned Telcel be impeded or limited from taking part in the upcoming 2.5GHz spectrum auction. The operators sent the letter on grounds of anti-competitive concentration of spectrum by America Movil. The incumbent holds almost 30% of all licensed spectrum in Mexico, and already holds 60MHz in the 2.5GHz band, which it acquired through a deal with MVS Comunicaciones in late 2016 ( see ' 2.5GHz Decision Not A Change Of Strategy For IFETEL ' , May 8 2017).

More Spectrum Needed To Keep Up With Mobile Data Demand
Mexico - Mobile And 3G/4G Forecasts
f = BMI forecast. Source: Operators, BMI

We expect the regulator to allow America Movil to participate in the auction with a restrictive cap, and only in the later rounds, allowing other players to bid first. The 2.5GHz band is crucial for its ability to penetrate through buildings and other solid structures, as well as its more attractive data-carriage properties, so it is optimal for urban areas. Frequency in this band would then allow operators to provide LTE phone and mobile broadband services with minimal latency to a large proportion of urban subscribers. As a result, investment in these frequencies can be effectively monetised.

Historically, America Movil has acquired the highest amount of spectrum it was allowed to bid for, and with the powerful financial backing of a giant global group, we would expect a similar outcome if it was allowed to participate freely, effectively having a monopoly on the 2.5GHz band. The company argues that, since its spectrum from MVS is geographically fragmented, it does need more spectrum to keep up with rampant mobile data demand, providing advanced services to its subscribers and wholesale services to MVNOs hosted on its network. Despite this, we do not expect the regulator to deviate from its new pro-consumer strategy of neutralising the incumbent's dominance.

Mobile data demand will be driven by migration to 3G/4G plans. We forecast 3G/4G mobile subscriptions to reach almost 110mn and represent 88.9% of the mobile market by 2021, up from 67% in 2016. A more even distribution of spectrum - allowing operators to compete more aggressively in migrating customers to 3G/4G plans - poses upside risks to our forecast.