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Telecommunications in Mexico

by Brady Hicks

Copyright 2017, Faulkner Information Services. All Rights
Reserved.

Docid: 00017954

Publication Date: 1707

Report Type: MARKET

Preview

Over the years, Mexico’s telecommunications industry has seen very few
competitors. Consensus mobile service provider leaders now include America
Movil’s Telmex, Telefonica, and – following its acquisition of Iusacell and
Nextel Mexico in 2015 – US carrier AT&T. This level of
competition was largely influenced by the 2013 establishment of a new
regulatory body charged with an aggressive reform agenda. All eyes have
been on this agency to see whether it will effectively assert its newly granted
authority to bring Telmex under control and stimulate more competition to lower
rates. This report takes an extended look at Mexico’s telecommunications
landscape.

Report Contents:

• Executive Summary
• Market Dynamics
• Market Leaders
• Market Trends
• Strategic Planning Implications
• Web Links

Executive
Summary

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Technically, Mexico’s telecom industry has been open to
competition for quite some time now. Under the jurisdiction of Mexico’s Federal
Institute of Telecommunications (IFETEL) and Communication and Transportation
Ministry, however, real competition in the country is generally pretty rare.

Over the years, America Movil’s Telmex subsidiary has been regarded as the
top player in the market, owning a share-hold of 60.8% (2016 Q3).¹ At
the same time, US carrier AT&T made headlines in 2015 with the acquisitions of
two of Telmex’s top rivals in Mexico, in Iusacell and Nextel Mexico. This
presence, it has been noted, gives AT&T a 13.5% market presence.²
With AT&T’s acquisitions now in the books, it has been able to expand its overall North American
presence and create a more competitive environment in Mexico.

Consensus #2 telecom services provider, Telefonica, meanwhile, is generally
estimated at having an approximately 24% market share (2016)³.

Another reason for optimism is
the election of a new government under President Pena Nieto in December
2012.
Nieto rode in with
an agenda for aggressive reform, particularly in the telecommunications
sector.
In mid-2013, the government passed legislation to form an independent
regulatory body: the Federal Telecommunications Institute (IFT). It is
believed that the local loop might finally be unbundled and that
competition
may be on the horizon.

So far, with growing interest from global telecom
giants
like AT&T emerging, this goal looks promising.

Market
Dynamics

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Mexico is located in
southern North America, bordering the United States to the north and Guatemala
and Belize to the south. The country covers approximately two million square
miles and has an estimated total population of 130.3 million people (2017)⁴,
which makes it the 10th largest country in the world in terms of population.⁵
Figure 1 provides a map of Mexico.

Figure 1. Mexico

Source:
CIA World Fact
Book

Mexico has a rich cultural
history dating back more than 3,000 years, when the country was home to several
different civilizations including the Aztecs, the Mayans, the Olmecs, and
others. Like many other countries in the region, the country was settled
by Spain in the 1500s and called New Spain. Mexico declared its independence in
1810, which it finally won in 1821 after almost a dozen years of war. Mexico’s
modern history is marked with a series of military occupations and revolution,
although the country experienced some political stability after the election of
Vincente Fox as President in 2000, the first time in more than 70 years that the
National Action Party defeated the Institutional Revolutionary Party (PRI). In
2006, Felipe Calderon, who is also a member of the National Action Party, was
elected to succeed Fox. Calderon’s six-year term ended in 2012 and, despite
allegations of voter fraud, the PRI returned to power with Enrique Pena Nieto
being elected to the office of President, beginning in December 2012. Pena Nieto
campaigned on allowing privatization of the energy sector and building a robust
police presence to combat the drug cartels and other organized crime, such as
kidnappings, which have increased dramatically over the years. After just two
weeks in office, he announced an increase in the police force for the Interior
Ministry by 10,000 members.

Mexico has enjoyed a
relatively low unemployment rate, dropping from 5% (2013) to now around
4% (2016).

History of the Mexican
Telecom Market

The Mexican
telecommunications market was a government-owned monopoly until 1990 when
president Carlos Salinas de Gortari pushed to sell the government’s stake in
Telefonos de Mexico (Telmex), which has been the dominant player since the
Mexican government acquired it from a group of investors in 1972. As a
state-owned monopoly, Telmex had a terrible reputation for service delivery.
The company had invested very little in keeping its infrastructure up-to-date,
and there were reports of cables being laid across open ground instead of being
properly buried. Businesses and consumers who tried to get a telephone line
installed had to wait for months, if they even got connected at all. 

The Mexican government sold
20.4% of Telmex – as well as 50.1% of the voting shares – to SBC
Communications, France Telecom, and Mexican entrepreneur Carlos Slim, who also
owns a significant stake in American Movil. This deal came under some scrutiny
because the new group of investors was allowed to pay the Mexican government in
yearly installments, which were generated from Telmex revenues. In 1991, the
government divested the rest of its stake in Telmex, but the company was issued
a six-year monopoly with the hope that the new ownership would help improve
service and upgrade the poor infrastructure. Telmex began facing competition in
1997 when its monopoly expired. The company was forced to interconnect with
other long-distance providers, and other local carriers were allowed to enter
the market. 

Throughout the 1990s,
Iusacell was the leading mobile phone service provider. Telmex then launched a mobile
communications subsidiary under the Telcel brand name. In 2000, Telmex spun off
the unit, creating America Movil (with Carlos Slim as owner). During this time,
Telmex grew its ISP business by acquiring Prodigy Communications, which it
subsequently sold to SBC in 2001. In an interesting twist, Telmex’s former
subsidiary America Movil, which had grown significantly since the spin-off from
Telmex, made an acquisition offer for Telmex that was approved by the Mexican
antitrust office in early 2010.

In 2008, it was ruled
that Telmex would be allowed to offer cable TV services within the year, as
soon as the company fulfilled its requirement to improve conditions for
competition within the market. In 2011, Telmex was denied approval to enter the
pay-TV segment. However, after an appeal in November of 2011, a judge ruled
that the government must review the request again and file a new decision based
on that review. The appeal failed and Telmex sought to have the case heard by
the Mexican Supreme Court, but in 2012 the Supreme Court denied to hear the
case, referring it back to the appeals court, whose original decision was
upheld. Nevertheless, talks resurfaced in early 2013 that Telmex might now be
allowed the concession if willing to pay a fee.

State of the Marketplace

Until recently, the Mexican
telecommunications market was overseen by two organizations:

• Secretariat of
  Communications and Transport (SCT) – Grants concessions and permits,
  allocates radio spectrum frequencies, establishes network and equipment
  standards, monitors Telmex’s performance, and approves Telmex’s
  tariffs and facility investments.
• Comision Federal de Telecomunicaciones
  (COFETEL) – Independent regulatory organization launched in 1995. Oversees
  tariffs, manages spectrum issues and broadcast regulation, promotes
  universal coverage, enforces interconnection issues, and certifies equipment.
  Also advises other government departments on telecom
  policy.

The COFETEL eventually gave way, however, to Mexico’s Federal Institute of
Telecommunications (IFETEL).

The group, initially, was structured
similarly to the United States Federal Communications Commission; it was made
up of one president and four commissioners, but the comparison stopped there.
COFETEL faced harsh criticism for unfairly favoring Telmex. For example, Telmex
prevented a mandate from being issued that would require it to unbundle its
local loop, pointing to a clause stating that it is required “whenever
possible.” Telmex convinced COFETEL that it is not technically feasible to do
so; as a result, it continues to hold its monopoly status on the local telecom
market. In April 2006, Telmex successfully lobbied against the approval of a
law brought forth by the Comision Federal de Competencia (CFC), which is a
federal anti-monopoly commission, stating that such a law was unnecessary
because the telecom industry was already deregulated. In fact, this action by
Telmex now leaves Mexico as the only country listed as a member of the
Organization for Economic Cooperation and Development (OECD) that has not yet
unbundled its local loop.

In an attempt to expand
overall telecom investment in the Mexican market, increase competition, and
drive teledensity, a national telecommunications association was formed – Asociacion
Nacional de Telecomunicaciones (ANATEL) – in 2002 as a joint initiative of
industry leaders such as Alcatel, Motorola, Ericsson, Nextel, and Qualcomm.

Nevertheless, attempts so
far to increase investments and teledensity have been undermined by the
confusing and inept regulatory framework currently in place. As an example, in
2012, the Mexican government elected to deregulate fiber networks in an attempt
to stimulate private and foreign investment into the build-out of a national,
fiber-based telecommunications infrastructure. But an early 2012 ruling by the
Mexican Supreme Court gave sole authority to COFETEL, and not the
Communications Ministry, to establish interconnection rates.

Many are hoping, however,
that change is finally now on the way. When the new government took office in
December 2012, it vowed to establish an independent regulator for the telecom
sector, the Federal Telecommunications Institute (IFT), and in mid-2013, a new
law was passed to replace the old regulators with IFT. IFT is expected to
customize regulations based on the market share percentage of each player in
the market. It is hoped that competition in the sector will increase as a
result of enabling operators to offer different services under one license.
Cable-TV operators could provide broadband, for instance, and broadband
operators could provide audiovisual content. In theory, the IFT plans to limit
market share for providers at 50%.

The new government has also
proposed to create public fiber networks that will allow at least 70% of
households and 85% of SMBs to
access broadband for “reasonable” rates and at speeds comparable with worldwide
standards. As a result of proposals like this, analysts cautiously predict that
the new IFT will improve the environment to align with international best
practices.

Fixed-Line Services. According to information
compiled by
the ITU, the number of fixed lines dropped from a high of nearly 20.5
million
(2008) to 19.89 million (2015). However, with a growing population,
teledensity has steadily dropped the
last couple years. Teledensity statistics are not evenly distributed
throughout
the country, as urban areas such as the Federal District have strong
penetration whereas rural areas like Chiapas and Oaxaca have
much lower rates.

Table 1 depicts the
movement of the fixed-line market since 2000.⁶

Wireless Services. The wireless market is much more dynamic
than the fixed-line service market. Wireless services were introduced in Mexico
in 1990 when two operators were allowed to provide service across the country.
Since then, the number of wireless customers has exploded. Mexico has had more
than 100 million wireless customers since 2014.
The wireless market has gone through a wave of consolidation, including AT&T’s
acquisitions of Iusacell and Nextel Mexico, as well as, prior to that, the
purchase of Unefon by the Iusacell brand.

Table 2 depicts the increase in mobile penetration rates since 2000.⁷

Market
Leaders

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At one time, the Mexican
telecommunications market was considered a hot investment opportunity, with
companies such as AT&T and MCI investing heavily in firms that sought to
compete directly with Telmex.

These organizations, however, found it difficult
to operate in an unstable and unpredictable regulatory environment, and they
wound up filing several complaints with any US, Mexican, or international
institution having anything to do with telecommunications oversight because of
the high interconnection rates they were being charged by Telmex. These
extraordinarily high interconnection rates and the costs associated with
building out infrastructure to compete with Telmex forced these competitors to
rack up huge debt loads. As a result, these financial issues became even more
complicated when the bottom fell out of the US telecommunications market. AT&T
and MCI, which once had deep pockets and saw Mexico as a key strategic
market, were now struggling with severe financial issues of their own.
Therefore, Telmex remained the dominant service provider across all sectors of
Mexico’s telecommunications market.

AT&T, despite all its problems in the
market, forged and maintained a strategic partnership with Telmex. AT&T
deepened this relationship by signing a Memoranda of Understanding with mobile
leader America Movil in November 2011. This joint initiative helped Telmex to
exert its dominance in the fixed-line market by adding the AT&T global
infrastructure to improve VPN connectivity and services to commercial clients
operating in Mexico and other countries in Latin America.

Now, with the recent
shakeup to the Mexican regulatory environment, AT&T is showing good faith
in the newly formed regulator IFT and has made significant strides to position
itself to become a major competitor in the market. The next five years in the wireless, Internet, and TV sectors will be interesting
to watch.

Fixed-Line Services

The fixed-line market has
been open to competition since 1996, but competitors have made little headway
against Telmex since that time. As of 2016, it totals 19.6 million. Starting in 2012, however, the market has seen little
movement. Top competitors include:

• Telmex – Telmex is the largest publicly traded company in Latin
  America and a telecommunications powerhouse in Mexico.
• Alestra – Alestra is a joint venture formed by
  AT&T, Mexico’s Alfa Group, and Bancomer (Mexico’s second-largest bank). It
  is currently owned by Alfa (49%), which acquired AT&T’s shares in 2011.
• Axtel – Axtel was founded in 1993 as a
  company called Teleinor, and it began operating under its current name in 1999.

Wireless Services

The Mexican wireless market
has gone through a wave of consolidation, and for the moment, three major
companies are active within the market. Overall, Mexico nearly 112
million wireless subscribers, which translates – according to most sources – to an 88% teledensity
rate. The number of minutes of wireless telephony traffic is steadily increasing
each year.

Figure 2 depicts the wireless industry in Mexico.

Figure 2. Mexico’s Wireless Market Share (2016)

Source: Competitive
Intelligence Unit

Market
Trends

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The future of Mexico’s
telecommunications industry now rests with its new regulatory agency, IFT.
Regulatory enforcement is necessary to break up Telmex’s stronghold, especially
in the local loop, and promote competition and reduced pricing. The problem is,
however, that until now Telmex has so far been successful in blocking all
attempts. AT&T’s push over the past year to take on a larger presence in
the market, however, could be promising.

Nevertheless, the overall
direction of the market suggests that Telmex will continue its dominance at
least for a while to come. Some analysts are even questioning whether
unbundling the local loop would be the best thing at this time. Despite
creating more competition in the market, it might also hinder development of
next-generation access, slowing deployment of fiber.

Strategic
Planning Implications

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The Mexican economy is
strongly tied to the economy of the United States because of its geographic
proximity and the close ties the two countries share. As a result, the United States has a strong interest in pressuring
the Mexican government to improve the telecommunications industry. Despite this
pressure from the United States through the WTO, however, effective
competition, especially in local and long-distance services, continues to be hindered
by:

• High interconnection rates.
• Anti-competitive behavior by Telmex.
• A
  failure to permit carriers to engage in unrestricted resale of telecom
  services.

In general, the Mexican
telecommunications sector has slowed, no longer surpassing previous record
levels. There are enormous opportunities in Mexican telecommunications,
particularly for US companies that benefit from proximity and existing trade
relationships. But the barriers to realizing those opportunities continue to be
a hindrance in this market. The Mexican government has repeatedly demanded that Telmex provide network access to other operators at fair interconnection
rates. For many years, no teeth were evident behind this demand.

Now, with AT&T functioning as one of Telmex’s top competitors, it will be interesting to see where the
market heads.

Web Links

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• Alestra: http://www.alestra.com.mx/
• America Movil: http://www.americamovil.com/
• ANATEL: http://www.anatel.org.mx/
• AT&T: http://www.att.com/
• OECD: http://www.oecd.org/
• Telefonica Movistar Mexico: http://www.telefonicamovistar.com.mx/
• Telmex: http://www.telmex.com.mx/

References

• ¹ Estevez, Dolia. "Mexico’s Anti-Monopoly Telecom Reform Has Done
  Little to End Tycoon Carlos Slim’s Market Dominance."
  Forbes
  . April 10,
  2017.
• ² Ibid.
• ³ "Mobile market share of Telefonica’s by country 2012-2016."

  Statistica
  . 2017.

• ⁴ "Mexico Population (LIVE)."
  Worldometers
  . 2017.
• ⁵ "Countries in the world by population (2017)."
  Worldometers
  .
  2017.
• ⁶ “Fixed-telephone Subscriptions.” International
  Telecommunications Union. 2016.
• ⁷ “Mobile-cellular Subscriptions.” International Telecommunications
  Union. 2016.

About
the Author

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Brady Hicks is an
editor with Faulkner Information Services. He writes about computer and
networking hardware, software, communications networks and equipment, and the
Internet.

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