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In 2005, Axtel began to shift its strategic positioning in order to achieve future growth. On December 7, 2005, the company began trading publicly on the Mexican Stock Exchange (Bolsa Mexicana de Valores) and signed agreements with Intel and the Mexican Federal Commission of Electricity (CFE) to develop two new technologies: Worldwide Interoperability for Microwave Access (WiMAX) and Power Line Communications (PLC), respectively. The deployment of these technologies will complement and empower Axtel’s portfolio of services by providing internet broadband services in a multi-service approach. Overall, we see the above as the beginning of a series of moves designed to strengthen Axtel’s position in the Mexican market; whether the moves will work remains an open question.
THE PYRAMID PERSPECTIVE
Using WiMAX, BPL and acquisitions to strengthen competitive position
WiMAX and BPL are expected to reinforce Axtel’s competitive position in the Mexican Competitive Local Exchange Carrier (CLEC) space. WiMAX represents an attractive opportunity for Axtel. The technology allows relatively low-cost infrastructure developments and the expansion of broadband access not only to current customers, but also to new ones. Another advantage of this technology is the array of new applications and services that can be offered using this platform, which can help Axtel gain a share of spending from current customers. Some of these potential services could be hotspots, residential internet access, wireless local loop, private enterprise applications, and public surveillance. BPL (Broadband over Power Lines), will enable Axtel to offer broadband access using CFE’s power line infrastructure. According to Axtel, the CFE covers 96 percent of the population in Mexico, and represents an important opportunity to increase coverage. PLC can be used to deliver Voice, internet, or any service based on Internet protocol.
To grow further, Axtel will have to look beyond organic expansion and into acquisitions. Axtel has mentioned Avantel and Alestra as potential acquisition targets and is also considering other companies in the industry. The reason behind this acquisition strategy is Axtel’s need to develop its infrastructure and geographical footprint, as well as a more competitive position in the long-distance and business solutions markets. Axtel’s success will be based on finding synergic conditions, target companies with robust financial positions, and a fair acquisition price.
Roadblocks for Axtel: Technology, Telmex and alternative service providers
The Axtel plan faces three key challenges: the precocity of WiMAX/BPL, the dominance of Telmex and the competitive forays of alternative players, such as cable company Cablemas. Although WiMAX and PLC are promising technologies, they are in their first stage of development, and in 2006, the time-to-market variable will define Axtel’s growth potential. This means that Axtel will have to ensure good synchronization of two variables—the operability and capability in the market of these technologies and the implementation of marketing plans—in order to effectively lure the customers towards the high use of these platforms. Alternative carriers are making some moves as well. Cable companies such as Cablemas have disclosed the acquisition of VoIP equipment in order to offer voice services in the future. Telmex’s strong position in the market represents another obstacle to Axtel’s growth aspirations. While the aggressive search of new technologies to boost coverage reflects Axtel’s confidence in the future of the Mexican telecommunications market, the company’s success will largely depend on its competitive position vis-à-vis the country’s incumbent.
Towards consolidation
Ultimately, we expect consolidation in the Mexican market over the next three years. For one, we are doubtful of the viability of niche strategies in the face of Telmex’s strong position, the impact of disruptive technologies and minimum levels of economies of scale needed to operate in the market. That, in essence, is the crux of Axtel’s strategy: staying ahead of the market by recalibrating its business model from niche player to a larger player targeting a broader segment of the Mexican market.
To learn more about Pyramid Research's upcoming report Communications Markets in Mexico 2006, please contact info@pyr.com.
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