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Mexico's Bold Telecom Reform Offers Lessons for North of the Border

Friday, May 17, 2013

By Martyn Roetter, D. Phil.

On March 11, 2013, Mexico's new president announced a fundamental and sweeping set of reforms in the telecommunications and broadcasting sectors. The reforms are aimed at transforming the dynamics of and introducing effective competition into these key sectors of the economy. Until now, in Mexico these markets have been dominated by a combination of a quasi-monopoly in telecommunications and a duopoly in broadcasting, although the sector ostensibly has been liberalized.

The reforms would not be possible without strong leadership from the president and broad agreement among all major political parties on the imperative for transformation. The proposed reforms are impressive in terms of their breadth and depth and the comprehensiveness and interlocking nature of the measures that are proposed. They provide an example of the kinds of changes—and the types of cooperation and will at the political level—that are required to have an impact on powerful entrenched interests motivated to protect and perpetuate a status quo.

Today other countries, including the United States, need comparable pro-competitive initiatives in their telecommunications and media sectors. Otherwise they will not keep up with best-in-class nations that have been pursuing more productive public policies and creating regulatory environments for broadband that are more sensitive to the interests of customers than are the current market leaders on the supply side of network services.

Entrenched Interests Face Broad Challenge

Mexico recently announced a sweeping and fundamental set of reforms for its telecommunications and broadcasting sectors. This country now provides more relevant and instructive insights for policymakers and regulators everywhere than does its giant northern neighbor, the United States, which was the inspiration and pioneer in market liberalization in the last decades of the 20th century. Unfortunately today the United States is moving towards a “back to the future” uncompetitive or oligopolistic broadband market structure, particularly since the approval in August 2012 by the Federal Communications Commission and the Department of Justice of the cartel of Verizon/Comcast/Time Warner Cable. In contrast, Mexico is moving actively in the opposite direction to break open its telecommunications and video services markets to greater competition. The Gordian knot with which the telecommunications empire of Carlos Slim has long tied up the Mexican telecommunications market is finally beginning to be loosened, if not severed entirely.

An Unusual Cross-party Consensus

The new Mexican President Enrique Peña Nieto (in office since Dec. 1, 2012) has fostered an unusual cross-party consensus about the need to transform the Mexican economy and society into a 21st century leader in Latin America and even on the global stage. He successfully built bridges between the main political parties. First, he made a series of cross-party appointments to his cabinet to overcome the obstacle of their traditional divisions or gridlock that would make reform impossible. Then came the Pact for Mexico (Pacto por México), a manifesto laying out a reform timetable on subjects ranging from social security to education, taxation and energy as well as broadcasting and telecommunications. The pact was signed by all the major party leaders. It is impossible to imagine such a step in the United States today, even though this country too is faced with the most obvious and basic need for reforms in important areas such as health care and the tax code.

Reforms that would not have been possible in Mexico without this groundwork are challenging the entrenched reform-resistant interests that have traditionally dominated key sectors in the country’s economy and society, including in particular telecommunications, broadcasting, the oil industry and education.

A HISTORY OF QUASI-MONOPOLY AND STAGNATION

The origins of a quasi-monopoly in Mexican telecommunications despite formal market liberalization lie in the acquisition by Carlos Slim (today the world’s wealthiest individual) of the state telecommunications monopoly Telmex some 25 years ago upon its privatization. In making this acquisition he was aided by the U.S. operator SBC Communications (predecessor of today’s AT&T). There are some eerie partial parallels in this history with the circumstances (the role of SBC Communications) and consequences of Telkom’s privatization in South Africa after which Telkom in effect became a private instead of a state-owned monopoly. During the period of SBC’s stewardship of Telkom it generated large financial returns for SBC while the country fell behind in the development of improved and more affordable telecommunications services.1

However, the market power and resistance to change of América Móvil (as the Slim telecommunications empire is now branded) have been even broader and more substantial than Telkom’s during its management by SBC. América Móvil controls 70 percent of Mexico’s 100 million mobile phone subscribers and 80 percent of its landlines.

In another contrast, unlike Telkom’s failures in Africa, América Móvil’s intra-continental foreign ventures have been very successful. About one-half of its revenues come from elsewhere in the Americas. These operations include an MVNO (Mobile Virtual Network Operator) in the United States, namely Tracfone which has about 20 million subscribers, and mobile market shares of some 25 percent in Brazil and two-thirds in Colombia among other South American businesses. More recently America Movil’s forays into Europe (e.g. a stake in the Dutch former incumbent KPN) have so far been generating losses, at least on paper as the value of KPN’s shares has fallen.

Until now Slim has successfully stymied attempts to restrain or penalize him or his businesses or to strengthen effective competition in Mexico against his quasi-monopoly. His companies’ size and influence and their weight (including other businesses not only telecommunications) in the index of the Mexican stock market (Bolsa) also made them appear “untouchable.”

In an interview with the Financial Times in 2007, Luis Téllez, then Mexican telecommunications minister, accused the regulator (Comisión Federal de Telecomunicaciones (Cofetel )) of playing more to the interests of corporate giants than consumers. “The regulators have been captured by the regulatees,” he said. “They do not always respond to the public interest. I’m having a huge problem.”

HIGH PRICES, LOW PENETRATION SAP ECONOMY

A study released in 2012 by the Organization for Economic Cooperation and Development 2—“Telecoms reform would boost competition and growth in Mexico”—estimated that the lack of competition in telecommunications was costing the Mexican economy about $25 billion a year or 1.8 percent of gross domestic product, based on a welfare loss associated with the inefficiencies in the telecommunications market at $129.2 billion over the period 2005-09. Consumer overcharges accounted for 52 percent of this welfare loss, the remainder being the consequence of unrealized subscriptions.

The study found that Mexico was at the bottom of the rankings among OECD countries in penetration for fixed, mobile and broadband markets. It also noted that profit margins for América Móvil were much higher than the OECD average, and the company was investing less per person than companies in any other country. The prices for mobile and broadband services were 26 percent and 31 percent higher, respectively, than the OECD average, hindering progress toward universal service, especially among the poorest segment of the population, concentrated in rural areas. Mexico has one of the lowest telecommunications penetration rates in the OECD with estimated mobile telephony and broadband services penetration rates at 88.9 and 12.8 percent in 2012, respectively, and a significant digital divide.

According to the minister of finance, Luis Videgaray, the telecommunications reforms, once implemented, could lead to an increase of up to 1 percentage point in annual GDP growth. At long last, Mexico seems to be coming to grips with the challenge of how to transform the dynamics of its telecommunications sector so that it can contribute fully as it should and can to the overall economic and social development of the country and to narrowing the “digital divide.”

COMPREHENSIVE, INTERLOCKING REFORMS

The fundamental and sweeping nature of the reforms now being launched in Mexico as announced on March 11 is evident in their title: Iniciativa de Reformas a la Constitución en materia de Telecomunicaciones y Competencia Económica or “Initiatives for Constitutional Reforms in the matter of Telecommunications and Competition in the Economy.”

These proposed reforms include several major elements and will have profound consequences for customers and competitors when implemented. While the following list is not a complete one in terms of the measures being proposed it does give an idea of their comprehensive and interlocking nature, or the multiple dots that are being connected. In these Constitutional reforms both telecommunications and broadcasting are defined as services of general public interest. They therefore have to be offered in conditions of competition, quality, diversity, universal coverage and interconnection. Examples of the most important reforms include:

  • A strong industry regulator will be created (the Instituto Federal de Telecomunicaciones (IFT) or Federal Institute of Telecommunications) replacing the current Cofetel (Comisión Federal de Comunicaciones) to curb dominant companies that have more than 50 percent of the market, and to open up space for new entrants.
  • The new regulator will be able to apply sanctions, ranging from so-called asymmetric regulation on pricing, to fines and even forced asset sales; so far the criteria to be applied for determining whether a company is dominant have only been outlined for the telecommunications and not for the broadcasting sector;
  • The independence of the regulator will be protected with the help of conditions on the Commissioners who can serve on it, including the procedures for and terms of their appointments and limits on their relationships with the companies they are regulating;
  • IFT will be in charge of granting and revoking telecommunications and media concessions, which is currently the responsibility of the Ministry of Communications and Transport.
  • Existing television networks will be required to offer their free-to-air programming at no cost to cable operators.
  • New entrants will be facilitated by creating two new free-to-air television channels that neither member of the current broadcaster duopoly Televisa (70 percent market share of free-to-air broadcasting)) nor TV Azteca (30 percent market share) can acquire. Each of the broadcasters is controlled by another billionaire, Emilio Azcárraga and Ricardo Salinas Pliego, respectively.
  • More broadly, competition between these three largely separate businesses (América Móvil, Televisa, and TV Azteca) on the others’ home turfs should become more intense (e.g. the way will be opened for Televisa and TV Azteca to grow the current small share (5 percent) of their jointly owned company Iusacell in the mobile market and for América Móvil to offer video programming over its access networks).
  • Caps on foreign ownership of broadcasting companies will be raised to 49 percent, and in the case of telecommunications, including satellite, to 100 percent.
  • A specialized court system will be created to oversee all competition, telecommunications and media rulings. Until now Mexico’s complex legal system has allowed companies like America Movil and Televisa to circumvent or indefinitely delay paying fines or implementing rulings from regulators by using court injunctions (amparos), just as Verizon uses litigation in the United States to challenge the FCC’s right or authority to impose regulatory conditions on its activities. Of course the details of how this new court system is structured will be key to whether it will constitute a significant change.
  • Increased powers will be given to a new Comisión Federal de Competencia Económica (Federal Commission for Economic Competition)—the current Cofeco, or Comisión Federal de Competencia has struggled to impose fines on América Móvil and tried unsuccessfully to force broadcasters to provide their free channels to pay TV competitors.
  • A new wholesale-only network will be put in place by 2018 by the state-owned Telecommunicaciones de México building on the physical infrastructure (e.g. fiber optic links etc.) installed by the state-owned electric utility Comisión Federal de Electricidad (Federal Electricity Commission), and eventually exploiting the 700 MHz “digital dividend” spectrum structured, thanks to a wise decision by Cofetel, as 2×45 MHz in accordance with the Asian plan for this band, rejecting the less efficient and idiosyncratic U.S. 700 MHz band plan3. This network will be available on an open access basis to services providers under non-discriminatory conditions. Its purpose is to help reach the goal of universal affordable access to broadband.
  • However, there is no example anywhere of a successful wholesale-only wireless network. Such a network cannot be commercially viable without the participation of the major mobile operators and their customers. This element of the reform package is therefore one that is most uncertain. It is already subject to much controversy. If it is to be realized it will very probably not be operated by the Government. It may take the form of a Private Public Partnership to spread the investment burden and ensure that the retail services providers have “skin in the game.”
THE POLITICAL PROCESS IS MOVING FAST

The reforms outlined above must clear a series of legislative hurdles before the transformation of Mexico’s broadband and related markets can begin in earnest. The first step is for Congress and then the State assemblies to approve the Constitutional reforms. Because the changes were negotiated among President Peña Nieto’s top aides and leaders of the three main political parties, they are expected to pass. As of end-April 2013 both Houses of Congress, i.e. the Lower Chamber of Deputies and the Senate, had approved the reforms (easily exceeding the two-thirds majorities required) with some modifications, notably with respect to litigation.

The legality of decisions reached by the Commission for Economic Competition in matters such as fines and the divestment of assets will be subject to challenges as before. However the companies subject to the new industry regulator IFT will not be able to delay the implementation of its decisions as they have been able to do until now with IFT’s predecessor.

The final step in passage of the reforms before they come into effect is for the Constitutional changes to be approved by the legislatures of a majority of the 31 Mexican states and the Federal District. This process may take a further two months or so, although as of mid-May Mexican newspapers reported that 14 states had already approved them.

NEW RISKS, REWARDS FOR COMPANIES IN MEXICAN MARKETS

The ultimate effects of these reforms on América Móvil, Televisa, and TV Azteca are not clear-cut. On one hand América Móvil still derives around two-thirds of its profits from Mexico, and its profitability in its home base in telecommunications may shrink. On the other hand it may be able to exploit new video services opportunities in Mexico and offer triple or even quad-play packages to customers. Furthermore it may be able to grow by building on its already very significant foreign investments.

Among the open questions that remain are the nature of the asymmetric regulation that could be applied to América Móvil, and the conditions that might prompt the new regulator to force it to divest assets. These questions should be answered more definitively over the next 6 months.

América Móvil has made known its belief that it will be significantly affected by the reforms. In an April 30, 2013, filing with the SEC (Securities and Exchange Commission) the company stated4:

“The telecommunications and broadcasting bill is likely to become effective in substantially its current form, but its impact will depend on how it is implemented by further legislation and by the new Federal Telecommunications Institute. It would therefore be premature to predict the long-term effects of the bill and the new framework it contemplates, but these effects could be adverse to our interests in significant respects.…We expect that the effects of this legislation on our business and operations in Mexico will be material.”

No quantitative value was attached to “material.”

As for the two broadcasters they will lose revenues by being obliged to offer their free-to-air programming to cable companies. On the other hand, as noted, they will gain easier access to the telecommunications market, which is much larger than their broadcasting operations.

It is also unclear what the consequences of the telecommunications reforms will be for other market participants such as Spain’s Telefonica that is a distant #2 in the Mexican mobile market and is América Móvil’s main competitor throughout most of Latin America. The deteriorating economic environment in Telefonica’s home market of Spain is limiting its ability to make large investments. A much smaller operator Nextel International that is rolling out a 3G (HSPA) network in AWS (1.7/2.1 GHz) spectrum acquired in a national license in 2010 is another operator whose fate will be influenced by the reforms.

It is possible that new foreign investors heretofore discouraged by the seemingly unbreakable hold of América Móvil on Mexican telecommunications will be tempted to enter the Mexican market, in which case they may decide to partner with or even acquire one of these smaller competitors.

AN EMERGING BEACON OF REFORM

Many conditions of the Mexican market and economy and its institutional traditions and culture are very specific to Mexico or in some respects more broadly to Latin America. Nevertheless, the core challenge faced by Mexico and several other countries in Latin America and on other continents is instructive. The challenge is how to inject and sustain a different dynamic into broadband and related markets on the supply side to overcome relatively high prices, poor service and uncompetitive performance of the services available to a country’s residents, businesses and institutions compared to its peers. Improvements and a different market dynamic are needed to meet the targets inherent in countries’ national and regional and in some instances even global economic and social aspirations. Several other countries from Africa to Asia would do well to take selected pages out of the book of initiatives and processes now being launched in Mexico to build broad and effective stakeholder support against powerful entrenched resistance to change, and to develop a better understanding of the scope and content of the measures that are required to make a real impact.

Mexico may even hold some lessons for its much wealthier neighbors in North America. In the eyes of Americans or Canadians, Mexico has not traditionally loomed as an example to emulate. English speaking perspectives have largely been colored by the evidence of huge economic inequalities among Mexicans, the roles of corrupt elites in the country and the menial jobs filled by many Mexican immigrants to the United States. Perceptions of Mexico are further damaged by the widespread brutality of Mexican drug cartels, whose firepower is reinforced by the ease with which they can acquire weapons in the United States. These foreign perspectives have also defined Mexico’s positive attributes (at least in areas of the country relatively unaffected by the activities of the cartels) as lying principally in terms of the country as an affordable or cost-competitive (given the link of the peso to the U.S. dollar) destination for vacations and retirement living, and as a near-shore outsourced manufacturing location. Mexico has become increasingly cost-competitive with China in terms of total cost of delivery of many products to the U.S. market, while also offering the benefit of more timely responsiveness of supply to fluctuating market demand in the U.S. thanks to its proximity.

Until now Mexico has not seemed to be a place to emulate in terms of its public policies with regard to economic sectors such as telecommunications or the prices and performance of its network services. However, if the policies for Telecommunications Reform outlined above are implemented and enforced effectively over the next few years then it may be time to think seriously about what can and should be learned from Mexico and even applied to the United States, as well as to developing economies.

Mexico’s bold attempt to break free of stultifying economic imbalances should serve as a wake-up call to U.S. telecommunications policy makers and analysts. They need to address much more directly the economic imbalances and retrograde economic ideology that are hobbling the U.S. telecommunications and media sectors, where support from the largest companies for “free markets” is in practice their endeavor to legalize unfettered corporate behavior. Their goal is camouflaged under the battle cry that “deregulation” is key to removing the allegedly inherently destructive and incompetent hand of Government from their legitimate and valuable business initiatives that deliver enormous value to the economy and to their customers. Their argument is that all Government regulations are inevitably bound to be burdensome and stifle innovation as well as entail higher and unnecessary costs that will have to be passed on to their customers.

While some existing regulations are damaging economically with no compensating benefit for consumers and inhibit entrepreneurial initiatives, not all of them are, and future ones need not be. There are notable instances where only regulatory action has enabled the flourishing of innovations that often originate as is inherent in their nature from unpredictable sources, and the emergence of new, value-creating business models. The opening of telecommunications markets in the United States in the last few decades of the last century and limiting the power of the then AT&T is a most striking example of the benefits of and need for intelligent regulation. The flourishing of internet-based services and applications would have been severely inhibited if they had been left up to unrestricted and unchallengeable decisions and the tender mercies of the incumbent large network operators of that time.

There can be no effective competition without intelligent and effective regulation in markets that are natural oligopolies such as broadband today. In the broadband market large players can exploit competition-blocking bottleneck facilities solely for their own benefit, in response to the incentives under which their executive leaderships operate, and in ways that reduce customers’ freedom of choice.

We should all wish Mexico success in its efforts to transform its markets in the telecommunications and media sectors, as well as in energy and other economic and social areas that have long been dominated and manipulated by the few to the detriment of the many. Mexico is trying to implement the principle just enunciated of “No Effective Competition without Intelligent Regulation.”

MEASURES OF SUCCESS

Proof of success will not become evident overnight. In the telecommunications and media sectors progress will become unmistakable if or when Mexico, a laggard today, joins more than a dozen members of the OECD that are already ahead of the United States in the international league table of the performance levels and affordable prices of the broadband services offered to a their residents. This outcome is within the realm of possibility unless the United States itself moves onto a new trajectory of effective competition in broadband5.

Martyn Roetter, D.Phil. (mroetter@gmail.com), an independent technology and management consultant has extensive experience in North and South America, Europe, and Asia. He assists public- and private-sector clients reach decisions regarding technology investments, spectrum management, business plans, and public policies.  

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