Biz Views

Op-Ed: Is AT&T’s exit from P.R. a harbinger of bad tidings? Perhaps.

Today’s news about the acquisition of AT&T by Liberty comes as no surprise to those that have been monitoring the industry and following the latter’s expansion strategy in Latin America. The surprise here is the target: AT&T.

Due to the perceived strength and tightness of the top tier operators in Puerto Rico, it was always speculated that Liberty’s move would be tied to either a strategic alliance, an Mobile Virtual Network Operator (MVNO), or the acquisition of a smaller operator. The fact that it was AT&T opens a lot of speculation or theories to be be derived out of this announcement.

In some ways, and not intending to diminish Liberty’s acquisition, AT&T’s exit from the Puerto Rico market is an economic “canary in a coal mine” and I will expand on this theory.

It is not a secret that Liberty has been aggressively and successfully expanding its presence while converging services in Latin America and the Caribbean, so Puerto Rico is a must. But one must ask why one of the two top carriers on the island with a $3 billion valuation, 1,000 employees, great brand equity, national presence, great network and more than 1.1 million subs would exit at this point?

Given Puerto Rico’s reality, the offer of $1.95 billion is really tempting and no doubt the acquisition is a fit for Liberty’s regional strategic objectives. Even though the offer is not close to the original $3 billion sought by AT&T, the amount surely is welcomed by the national carrier as it has announced that it is selling part of its noncore assets to help amortize its $80 billion acquisition of Time Warner.

But is the Puerto Rico operation a noncore asset of AT&T? I have my doubts, but I think that there is a more specific reason on the part of AT&T to consider such an offer for the Puerto Rico operations. I suggest that the offer acceptance may had been strongly influenced by Puerto Rico’s unappealing long-term demographic and economic perspective.

In October of 2016, Estudios Tecnicos, Puerto Rico’s principal economic and planning consulting firm, submitted a report to the Department of Economic Development and Commerce on which it provided multiple scenarios for Puerto Rico’s economy and population for the period 2016-2030.

Some of the key takeaways in the report are:

  • For the short and medium term, uncertainty is the defining factor in Puerto Rico’s economy.
  • In almost all the scenarios, Puerto Rico will have a substantial downsizing in its demographic and economic base, with higher percentages of elderly population and a challenging labor market. Some scenarios put the population of Puerto Rico at under 3 million by 2030.
  • There remains a desperate need for policy and institutional reforms to address long-standing structural weaknesses in the economy.
  • Even with economic reforms in place, the path to recovery is expected to take more than 15 years.
  • The economy is not expected to recover to the 2006 real GNP pre-recessionary level until 2034.

The combined economic and population trends do present a picture of a market in retreat with no significant rebound for the next two decades. Still, three years after the production of this report, the key elements not only remain significantly relevant, but are fueled negatively by the after-effects of Hurricane María and the current political scenario which is yet to yield a game plan for recovery addressing our two most critical elements, the economy and population exodus. The clock is ticking.

Take the money and run
So how do economic and demographic trends relate to the sale of AT&T? Simple, consumer technology-based services such as telecom, rely on an ever-expanding subscriber base and ongoing adoption to new services and applications for their long-term sustainability.

A smaller and aging population combined with a decades long unrecovered economy is a sign that can’t be ignored. To put it bluntly, it is the wrong equation with the horizon pointing to less people, consuming less services and generating less revenues.

If the business was valued at $3 billion recently and sold for $1.95 billion given projected expectations, one could only argue that the direction for future valuations is downward. So, take the money and run.

Thus, I believe that AT&T’s exit may in fact prove to be a very smart decision for the telecom giant. Faced with the reality that the required ongoing technological evolution that demands a continuous investment to remain competitive may yield a curve of significant diminishing returns in Puerto Rico, exiting and cashing out is be the best option. It is the logical business decision, maximize your value and exit. The time is now.

When completed, the combination of services and infrastructure would no doubt make Liberty the “telecom powerhouse” on the island. It will have the opportunity of offering the most complete suite of services with respective convergence/bundling that should add “stickiness” to the combined subscriber base with a promise of better consumer alternatives and more competitive options. The opportunity is there.

I’m sure the next months will bring interesting comments on the prospective acquisition from the opposition within the industry and given the process we cannot discount the final requirements from the regulatory entities that may in the end reshape the acquisition in some way or another.

As it has happened in the last two decades, the face of the Puerto Rico wireless telecom industry will be reshaped once again. A “post Sprint acquisition” T-Mobile would leave us with only two national carriers on the island.

But with the sale of AT&T, this number would be down to one by late 2020. The loss of such a strong brand (AT&T) and its position as the premier national carrier will be a challenge to Liberty and may yield benefit to competitors that have the power and aggressiveness to seize the opportunity.

The weight of brand equity and national presence on customer choices cannot be discounted. A point to be made is the fact that all carriers will navigate the reality of declining demographics and depressed economic trends which will impact their operating capabilities, investments, acquisition strategies and profitability. This is a fact to be faced by all and a consumer impact to be shared by all.

Market concentration is not unique
Concentration in the telecom sector is not unique, more than 75% of U.S. industries have experienced an increase in concentration levels over the last two decades and some academics expect even more consolidation still.

Regardless of these trends and out of a practical need, we must wish success to any business activity on our soil and hope that such activity will have a positive multiplier effect on our economy.

Author Raul Burgos is the founder of Global 1080 Business Solutions and an experienced executive with almost three decades of wireless telecom industry expertise. He is the founder of the Puerto Rico Business Group on LinkedIn and can be reached at: rburgos@global1080.com.

Thus, we come back to that “canary in a coal mine” comment. All economies benefit from a more competitively diverse market which is always good for the consumer; telecom is not the exception.

But the path ahead under the current economic, political and demographic conditions makes it untenable for investment intensive industries such as telecom to remain diversely competitive. Such a scenario that continues to reduce market options for the average consumer is a harbinger of bad tidings.

The canary in the coal mine is sick…

Author Details
This story was written by our staff based on a press release.

Comments (3)

  1. Eye opening! Well stated.

  2. Feedback from readers:
    • “Good writing Raul and agree with you in all points.”
    • “nice report! Transaction does not come as surprise….”
    • “Bottom line, industry consolidation continues in P.R…. next?”
    • “just read your column about Liberty’s acquisition of AT&T and thought it was very interesting.”
    • “this has implications on many levels, one of them related to the structure of the markets”
    • “really great op-ed”

  3. Marialba Martinez

    Very interesting and well-presented Op-Ed about the situation with AT&A. Not looking forward to impact on customer service and competitive offers.

Comment here