BUSINESS OPPORTUNITIES 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.
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
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