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Mexico 2014 | TELECOMS & IT | REVIEW: TELECOMS & IT

Telecoms sector reforms removing barriers to entry herald a more vibrant industry, which in turn should expedite Mexico's uptake of online and mobile services.

The telecommunications market in Mexico has been undergoing radical change ever since the passage of a new law restricting telecom giants from dominating a majority of the market. As the law goes into effect, telecom conglomerates and new local and foreign companies will begin to reshape the market, offering customers more competitive prices and improved services.

In July 2014, newly inaugurated President Peña Nieto delivered on his promise of bringing reform, in this case legislation for Mexico's telecommunications sector. According to the new law, dominant telecommunications and television companies will face strict limitations–companies controlling more than 50% of the market in certain sectors will be forced to sell off assets and parts of their businesses. The Organization for Economic Co-operation and Development (OECD) said in a 2012 report that Mexico had a “dysfunctional" telecommunications sector and was costing its customers more than $25 billion from 2005 to 2009. While this measure is for the most part welcomed by up-and-coming local and international SMEs in the telecommunications sector and citizens alike, telecom giants that once enjoyed virtual monopolies are set to bear losses.

REFORM LONG UNDERWAY

For the greater part of the 20th century, Mexico's telecommunications industry was controlled by its state-owned and operated telecom services firm Telefonos de Mexico (Telmex). Over time, however, Telmex had fallen behind in its duties, failing to provide services to remote territories and accumulating an excess of 1.5 million service applications. Mexico privatized Telmex under the Telecommunications Act of 1990 to improve its efficiency and with the hope that doing so would one day open the telecom market to competition. This measure resulted in an increase in the telecom sector's portion of the GNP – from 1.7% to 2.5% from 1990 to 1994, respectively. Still, much of the population was without service, prices remained high, and Telmex, albeit private, continued to monopolize the market.

The Telecommunication Act of 1995 sought to reduce these inefficiencies and open the door to market liberalization. Under this act, entering into force in January 1997, Telmex would no longer be the sole operator in the long-distance market and foreign entrants would be able to negotiate interconnectivity terms with the firm. Following this legislation, many new players entered the market, but again, Telmex and its subsidiaries led the bandwagon.

In 2010, telecommunications company América Móvil offered to purchase Telmex in order to better compete with its largest competitor, Spain's Telefonica. América Móvil had once been a wireless subsidiary of Telmex, but broke off in 2001 and had since outgrown its former parent company. It is one of the leading wireless services providers in Latin America and the fourth-largest in the world with regard to the number of equity subscribers. Today, América Móvil dominates the market and its owner Carlos Slim Helu ranked as the richest man in the world from 2010 to 2013.

MARKET SHIFT

According to the CIA Factbook, as of 2012 there were more than 20 million fixed-line and nearly 101 million mobile-cellular phones in use. Fixed-line teledensity was at 20% and mobile-cellular teledensity at approximately 80%. América Móvil owns 80% of the fixed-line business and 70% of the wireless market, according to data cited in the Wall Street Journal. Grupo Televisa controls 70% of the broadcast TV market and makes up 56% of cable and satellite TV subscribers.

In 2013, as part of larger reforms to promote competition and do away with the old telecommunications structure, President Peña Nieto set up the Federal Telecommunications Institute (IFT) to replace the Federal Commission of Telecommunications. The IFT regulates the utilization of spectrum, telecommunications and broadcasting. It will also regulate access to infrastructure and award concessions and permits to broadcast stations.

With a regulatory agency in place, provisions of the new law are expected to affect customers as early as within 60 days of taking effect. And, as of January 2015, subscribers will no longer be required to pay additional costs for domestic long-distance service. According to Teletech, it is estimated that the new law will save Mexican customers some $1.7 million per year.

REGULATION TO RESTRUCTURE

The new legislation is restructuring large telecommunications firms, which once enjoyed a large share of the Mexican market and, thus, unchecked pricing power. High prices have meant that a mere 26% of Mexican households had access to the internet in 2012, where Brazil had 45% access according to the New York Times. These reforms are bound to affect dominant players the most, and not so positively in the short term.

Mexico's Grupo Televisa is the largest broadcasting firm in Mexico and the first in the Spanish-speaking world. It reaches 60% to 85% of all Mexican households and exports its telenovelas to over 70 countries worldwide. Televisa and its main competitor TV Azteca, hold 90% of the commercial broadcasting concession. According to Bloomberg, under the new law, Televisa will be required to allow competitors to use its towers for a fixed cost, as well as make its advertising prices public knowledge.

Meanwhile, América Móvil will have its phone prices regulated and parts of its network shared. Through Telmex, América Móvil operates wireless provider Telcel, which holds a 73% share of Mexican wireless users, having also expanded its operations into other parts of Latin America, such as Brazil and Colombia—it currently operates in 26 countries and has 292 million wireless subscribers according to Forbes. Before this latest legislation, América Móvil's lack of competition meant that it was harnessed with pricing power in Mexico, thereby deriving most of its revenues from the country. América Móvil makes some 35% more in Mexico per customer than in Brazil due to the latter country's more competitive market.

Also, with an increasing rise in the overlapping of television, phone, and internet, Televisa is no longer solely in competition with TV Azteca, but also with América Móvil. And now, these conglomerates all face a similar fate with the passage of the new law, which rolls back their former privileges and puts them up against more telecommunication firms, local and global.

Up until now, power has been held in the hands of a few billionaires, particularly Carlos Slim of América Móvil and Televisa's CEO Emilio Azcárraga Jean. How the new law will shape their revenues and the overall market balance remains to be seen as it goes into effect.

HOPE AND SPECULATION

Reaction to the new law has been varied. While companies with a relative monopoly will have to cut back on market share and ease their hold on pricing power, critics still argue that the law doesn't go far enough to encourage competition. According to the new system, the government can only stop acquisitions and takeovers that lead to one company controlling more than 50% of the market. Detractors argue that this leaves room for a duopoly, namely a market dominated by not one, but two companies, each owning just under half of the market. This structure doesn't do much to change the current system, and nor does it further encourage smaller players to operate in the market.

On the other hand, the new law may make more room for smaller enterprises, either on their own, or through mergers and acquisitions that allow larger companies in direct competition with current market leaders to gain more clout. For example, Telefonica is the second-largest mobile operator in Mexico and through a merger with smaller players, such as Axtel or Nextel, may become more competitive.

Meanwhile, Telmex is barred from acting in the television market over the 18 months or longer until it complies with all of the sector's antitrust requirements and Televisa will also be forced to share its infrastructure with new players. The country's second-largest television broadcaster in Mexico after Televisa, TV Azteca, cannot bid for new channels, which means new, smaller players, will have access to TV channels.

However, the telecommunications sector is capital intense and will likely be less inviting to smaller enterprises. If the critics are proven right, the law will provide for little more diversity in the market.

The new law further pushes the Mexican telecommunications market toward a more competitive direction. Ultimately, Mexican citizens are set to benefit the most from cheaper, higher quality services, and the option to switch among providers based on their satisfaction levels. Telecommunications giants will also be required to check themselves and their power.