|
BUSINESS OPPORTINITIES IN
TELECOMMUNICATIONS
 INTRODUCTION
Mexico started the 1990s with one
telephone monopoly, Telmex (Teléfonos de
México) and a telephone penetration, or
teledensity, of only 6 lines per 100
inhabitants. Consistent with the market
opening begun in the mid-1980s and
pushed by young engineers in government,
Mexico in 1990 initiated regulatory
reforms and began a process of
privatizing Telmex. It provided the new
private sector company seven years to
modernize and expand the network before
facing both long distance competition in
late 1996 and local competition in 1999.
At the end of the decade, Mexico has
seventeen long distance carriers (five
which have U.S. partners), seven
companies entering the local telephone
market, and a regulatory system (Federal
Telecommunication Commission, or Cofetel)
modeled after the Federal Communication
Commission in the United States. While
the number of telephone lines has
doubled over the decade, the teledensity
of about 11 per 100 is still one of the
lowest among Latin America’s major
economies.
REGULATORY
FRAMEWORK
The Federal Telecommunications Law of
1995 sets out comprehensive rules for
competition in all aspects of
communications including the use and
operation of radio frequencies,
telecommunications networks and
satellite communications within Mexico.
It requires the creation of a
telecommunications regulatory authority
separate from the Secretariat of
Communications and Transportation (SCT).
It establishes two broad service
categories: public and private networks.
Public networks include all local or
long distance networks over which
commercial telecommunications services
are offered. Public networks are
authorized by concession from SCT for a
term of up to 30 years upon the
recommendation of Cofetel.
MODERNIZATION
OF TELMEX
Telmex has invested US $14 billion in
network expansion and modernization,
including over 55,000 kilometers of
fiber optic network since 1990. By mid-1999
there were 10.2 million lines in place
resulting in 10.6 lines per 100
inhabitants, compared to 6.4 in 1990.
The waiting period for installation is
down from 2 years in 1990 to 27 days in
1998 and the network digitalization near
100 percent, up from 29 percent in 1990.
FOREIGN
INVESTMENT
Prior to 1993, foreign ownership of
Mexican companies was limited to a 49
percent share. The 1993 Foreign
Investment Law permitted up to 100
percent foreign ownership of many
telecommunications operations, including
cellular telephony and value added
services (access to Internet, audiotext,
remote data processing, electronic data
exchange, remote data base access, voice
mail and facsimile). Certain other
telecommunications operations, including
basic telephone service, videotext,
packet-switched data service and cable
television remain limited to 49 percent.
Mexico modified its constitution in 1995
to allow for private participation and
equity in Mexican telecommunication
satellites, including ownership of
transponders. The government’s satellite
assets were privatized in late 1997, and
with the launch of "Satmex 5" in
late1998, Mexico increased its satellite
capacity 10-fold and now has continental
coverage. Radio and television
broadcasting services are reserved for
Mexican nationals. The National
Commission on Foreign Investment must
approve foreign ownership of more than
49 percent of cellular telephone systems.
LONG DISTANCE
SERVICES
The "Rules for Long Distance Service"
were issued by SCT in 1996. While these
rules called for customers in Mexico to
select the long distance carrier of
their preference either on a per-call
basis or by pre-subscription, only the
pre-subscription mechanism has been
implemented. The rules outline
procedures for billing and collection,
and for coordination among carriers for
database administration and technical
network modifications.
The government authorized nine carriers
for long distance to begin service in
1997. These include Alestra (AT&T, Grupo
Alfa, Bancomer), Avantel (MCI, Banamex),
Iusater (Grup Iusa and Bell Atlantic),
Amaritel (US Global Telecommunications),
Cableados y Sistemas (now know as Bestel),
Investcom, MarcaTel, Unicorn, and
Miditel. Both AT&T and MCI invested
about $1 billion each in their
respective companies. Both were
expecting to rapidly take a significant
market share from Telmex. While
competitors quickly grabbed a
significant market share from the former
monopoly, one of the main obstacles to
profitable activity has been the high
international settlement connection
rates to the Telmex local phone system.
This is the rate international long-distance
carriers pay Telmex to transmit calls
over its system.
More calls are made from the United
States to Mexico than from Mexico to the
United States. Companies pay for the net
number of calls completed. Long distance
companies had been negotiating with
Telmex on the international settlement
rate. Since there had been no agreement,
Cofetel announced rates in 1998 of 37
cents per connection.
The U.S. Federal Communication
Commission’s analysis concluded that the
international settlement rate for
connection to the Telmex local system
should be reduced to 19 cents per minute
by the end of 1999.
In June 1999, AT&T finally came to
agreement with Telmex for the 19 cent
rate to take effect as of July 1, 1999.
AT&T agreed to pay Telmex 37 cents per
minute for 1998 and 32 cents for the
first half of 1999. Since AT&T had been
paying at the 19 cent rate for 1998, it
agreed in June to make a $107 million
payment to Telmex to settle the
difference. MCI also settled with
similar rates.
Telmex estimates that one third of all
long distance calls into or out of
Mexico do not go on their network. They
believe that the lower connection costs
will reduce what they see as illegal
circumvention of their system.
Telmex has been trying to maintain its
share of the long distance market by
reaching out to those in the United
States who have relatives in Mexico.
Telmex has offered to put a phone into
the Mexican home to be paid for by the
U.S. resident relative. The authority
for Telmex to operate in the U.S. is
being challenged by AT&T and MCI
WorldCom for what they argue are anti-competitive
practices in Mexico.
WIRELESS LOCAL
LOOP
Mexico is the first country in the world
to move away from wire connections and
in a new direction for local telephone
service. Rather than connect to a
central office by wire or cable, this
system uses radio waves to send signals
from homes and business. Unlike cellular
systems, the home or business phone is
always in the same general area. This
new technology is called wireless local
loop. This technology has been hailed as
the answer to developing countries which
cannot lay cable fast enough to meet
growing demand for telephone service.
This technology permits high speed data
transmission as well as voice, which
will open up the potential for high
speed internet access for much of
Mexico’s urban population.
Last year, Mexico auctioned off four
frequencies throughout the country. This
technology has not been cost effective
in the past because it had to compete
with existing wire connections and had
to face low prices for basic telephone
service. Technology has now driven down
the costs for wireless local loop.
Four companies are taking on Telmex for
local telephone service with service
beginning either this and next year.
They are trying to capture part of the
existing $5 billion in local revenues
and they see a demand for 9 million new
lines.
One of the first companies to get off
the ground is Pegaso, which is
completing tests on a wireless local
loop system in Tijuana. With permits to
operate in the entire country, and an
initial investment of $1.3 billion,
Pegaso hopes to attract 100,000 clients
to its wireless system by late 1999.
Pegaso is owned by the broadcaster Grupo
Televisa, Leap Wireless International,
and equipment vendor Qualcomm.
Axtel, a subsidiary of Bell Canada
International, has associated with
Canadian provider Northern Telcom (Nortel)
and launched fixed wireless service in
Monterrey in June 1999. Axtel plans to
cover 85 percent of the population, with
two million lines in the larger cities
of the country, within five years.
Another important competitor is the
second largest cellular telephone
company in Mexico, Iusacell, which plans
to bring fixed wireless service to homes
in 22 cities beginning in January, 2000.
Mexico’s second largest broadcaster TV
Azteca recently purchased Unefon and has
a very ambitious plan to have two
million clients within five years
starting in January 2000. Azteca
president Ricardo Salinas Pliego said he
will be able to lower costs by using and
his chain of Elektra retail stores as
sales points and by using the Azteca
television stations to advertise.
Even Telmex has purchased certain
frequencies to make sure it can compete
with these new enterprises. These new
companies will be trying to attract
users who make more than the basic 100
phone calls per month provided at a low
cost by Telmex. With the investment per
line of about $6,000, these companies
will need to aim at the higher income
person in Mexico. While wireless local
loop would be excellent for the unwired
rural poor, the costs would be much
higher and these companies will need to
make money in the urban areas first.
LOCAL TELEPHONE
COMPETITION
Competition in the local market will
grow rapidly. At least eight companies
are expected to be competing with Telmex
by the end of 1999 in providing local
telephone service, some using wire and
some using wireless local loop.
One of the greatest barriers to local
service is the installation charge, now
about $200 from Telmex. This fee is
expected to drop as new companies
compete to offer local telephone service.
All local networks, including Telmex’s
local network, will be charging 2.9
cents per minute interconnection rate
for other local or long distance calls.
This rate is down from 5.6.cents in 1998
and, while moving closer to the rate of
2.35 cents per minute for connecting to
networks in the United States, does not
contain the universal subsidy contained
in the U.S. rate.
By introducing local competition in
1999, Mexico is temporarily ahead of the
United States in allowing competition in
this important area.
CELLULAR
Since most of the country is not wired,
Mexico has auctioned much of the
spectrum and rights of way for antennas.
Cellular subscribers exploded from 3.3
million at the end of 1998 to 5.4
million at the end of July, a 64 percent
increase in seven months. Two companies
have been licensed in each region to
provide cellular competition. In May
1999, Cofetel adopted a "calling-party-pays''
system in Mexico, under which cellular
phone subscribers no longer have to pay
for calls they receive. This has
increased an already exploding cellular
market. Cell phone companies simply have
not had enough capacity on their
computer systems, antennas and radio
bases to handle all the new traffic and
the quality of service has fallen. There
is significant pressure from the
government to improve service rapidly or
the regulatory authority will not
approve new telephone numbers.
The biggest cellular operator, Telcel, a
unit of dominant Mexican phone company
Telmex, had 3.2 million customers and
the second biggest provider Iusacell had
one million subscribers as of mid-1999.
Bell Atlantic is the controlling partner
of the Mexican cellular company Incacel.
One innovation introduced into Mexico’s
cellular system is Pre-Pay. Customers
pay in advance for a specific amount of
service. While this was introduced after
the peso crisis due to increasing
problems collecting fees, pre-pay has
been exceptionally popular with Mexican
consumers. Begun in 1996, pre-pay
captured 38 percent of the market by the
end of that year, 60 percent by the end
of 1997, and about 70 percent by the end
of 1998.
While the number of cellular customers
has risen dramatically, the revenues per
customer have fallen equally as
dramatically, from a peak of $86 per
month in 1994 to $30 currently.
ROLE OF NAFTA
Chapter 13 of the NAFTA lays out the
agreement in telecommunications. This
Chapter principally deals with non-discrimination
in the provision of telecommunications
services. NAFTA’s primary impact on
telecommunications in Mexico is indirect.
What NAFTA has done is increase the
demand for modern telephone service due
to the success of the clients of
telephone companies, and the subsequent
high demand for modern, efficient
telecommunications services.
REGULATORY
ISSUES
Mexico signed on to the World Trade
Organization’s (WTO) Group on Basic
Telecommunications (GBT) which requires
Mexico to offer unrestricted cross-border
resale. This would effectively end the
international settlement fees now being
received by Mexico. Mexico has committed
to cross-border resale once it adopts
implementing regulations. The GBT is now
over one year old and Mexico has yet to
issue its implementing regulations. The
U.S. government believes Mexico is
committed to act quickly while the
government of Mexico believes that there
are no timetables and that the fees
collected on international calls are
essential to support its goal of
universal access to telephone service in
Mexico. In any case, Mexico should adopt
a specific universal access program with
specific requirements on Telmex and the
other carriers.
Under the WTO agreement, a "dominant
carrier" must carry out certain of its
activities in a transparent manner.
Telmex has been identified by Mexico’s
Competition Commission as a "dominant
carrier". While Telmex won a court case
against certain restrictions, Cofetel
claims to be developing new regulations
under the 1995 Federal
Telecommunications Law. Issuing these
new regulations should not be delayed.
The current regulatory environment in
Mexico has had some success in
introducing competition to the market.
With the two-year experience in long
distance competition, domestic long
distance charges have fallen 50 percent
in real terms since 1996 and
international long distance charges have
fallen 40 percent. Quality of service
has risen under the new environment
established in 1990.
However, both the OECD and international
investors would like to enhance the
independence of Cofetel by appointing
Commissioners to overlapping fixed terms
and making their removal from office
difficult. They would also like the SCT
to delegate the power to issue, enforce
and revoke concessions to Cofetel. One
weakness in the current regulatory
environment is the lack of transparency
in decision making. The government
should establish formal consultation and
transparency procedures for Cofetel. The
current requirement that even non-dominant
carriers must register and publicize
prices can lead to collusion and reduce
competition.
COOPERATION
BETWEEN THE U.S. AND MEXICO
Because radio waves easily cross borders
and it is easy for one country to jam
another countries broadcasts, agreement
on the radio spectrum between
neighboring countries is very important.
Today, the broadcast relationship
between the U.S. and Mexico is excellent
although this has not always been the
case. Indeed, Mexico has been supportive
of U.S. positions on international
airwaves use.
INTERNET IN
MEXICO
In December 1995, Mexico created a
government organization Centro de
Information de Redes de Mexico to
coordinate and administer Internet
resources, including assigning domain
names that end in ".mx".
By the end of 1996, long distance
telephone carriers such as Avantel and
Alestra started competing with Telmex
for Internet business. By mid-1999 there
were more than 170 internet service
providers around Mexico, primarily in
urban areas, up from 23 in 1995. The
business sector in Mexico should be the
strongest force for increasing Internet
usage. E-commerce has been slow to get
started in Mexico due to fears of lack
of computer security.
CONCLUSION
The reform of Mexico’s
telecommunications system over the past
decade has been extraordinary. Due to
NAFTA, Mexico is being held to a high
standard. The forecast for fast growth
in all forms of electronic
communications will provide exceptional
growth opportunity for
telecommunications service companies as
well as manufacturers of
telecommunication equipment.
¾ October 1999
The preceding paper is part of the
United State-Mexico Chamber of
Commerce's NAFTA Forum series, which
considers general trade issues and
sector-specific concerns between the two
nations. The information contained
herein is for informational and
educational purposes only.
CONTACT
INFORMATION:
Albert C. Zapanta, President
John Harrington, Senior Economist and
author of NAFTA Forum series
Jeff Sparshott, Director of
Communications
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite 270
Washington, DC 20004-3021
Tel: 202-371-8680 Fax: 202-371-8686
[
Back to top ] |
