Mexico focuses on breaking up market monopoly and boosting sector performance

Mexico’s telecoms sector is the second largest in Latin America after Brazil in terms of subscriber numbers, contributing approximately 2.4% to GDP in the third quarter of 2017. Between June 2013, when significant telecoms reforms were introduced by the government, and September 2017, sector revenues swelled by 66.7%, or MXN451m ($24.7m), according to a third-quarter 2017 report from sector watchdog the Federal Institute for Telecommunications (Instituto Federal de Telecomunicaciones, IFT), the most recent period for which statistics are available.

Penetration of products and services, such as mobile phones, broadband internet and pay-TV, are also on the rise, having ranked well below the global average until 2015. Mobile fees, meanwhile, have dropped 45% since the reform came into effect, and costs for fixed-line calls have dipped by 5.5%, making communication much more accessible for lower-income households, while internet connectivity costs have risen by just 0.9%. Pay-TV costs, however, have risen by 9.8%.

Fixed-line Fortunes

As a result of technological convergence, fixed-lined telephony continues to play a fundamental role in Mexico, as it encompasses fixed broadband and TV services. Contrary to predicted outcomes, the increasing penetration of smartphones and mobile data services have not caused a decline in fixedline installation, according to a March 2018 report from local think tank the Competitive Intelligence Unit (CIU). As of September 2017, 43 out of every 100 households in Mexico boasted a fixed-line telephone, a figure that has remained unchanged since late 2014.

Access to fixed-line broadband increased by 37% between June 2013 and September 2017, when fixedline broadband was enjoyed by 43.6% of households, with the pay-TV penetration rate even higher at 65.6%. Growth in fixed-line broadband penetration is partly explained by the entry of new competitors, such as Megacable and Total Play, which offer bundled services and have proved strong competitors to Grupo Televisa. The latter has long been the industry leader and incorporates Cablemás and Cablevisión, while América Móvil, the parent company of fixed-line operators Telmex and Telnor, has long dominated the fixed-line market.

As of September 2017 landlines totalled 19.3m, with market leader Telmex holding a 65.5% share, down from 89.3% in 2007, which can be attributed to the market entry of competitors. Landlines remain vital for businesses, where average penetration is 99 per 100 firms.

Regulatory Change

Mexico’s telecoms sector has undergone major changes during the current federal administration, with the 2013 reforms widely considered the most effective carried out this term in any sector, opening up the sector to more competition and, most significantly, lowering prices to consumers. The reform was also responsible for allowing 100% foreign investment in the telecoms sector and up to 49% in the pay-TV sector. Additionally, it created sector watchdog IFT, which replaced the Federal Telecommunications Commission and whose role it is to promote competition in the sector and reduce monopoly practices.

However, two years after the framework came into force, the CIU stated that there was room for improvement to make the sector a more level playing field for all participants and that effective competition had not materialised, with an insufficient reduction in the market share of dominant player América Móvil in fixedline, mobile and broadband operations.

Results of Reform

More recently though, the OECD’s “Telecommunication and Broadcasting Review of Mexico 2017” stated that the 2013 reforms can be credited with helping create price reductions of up to 80% on mobile broadband packages, over a three-year period up to May 2016, better quality services and the addition of 50m mobile broadband subscriptions from 2012 to 2016. Additionally, the country implemented 28 of the 31 recommendations the OECD made in its 2012 review of telecoms policy and regulation, which formed the basis of the reforms enacted the following year.

Despite that, further modifications are necessary to continue to increase competition, choice and quality, ensure optimal market conditions, and provide incentives for mobile operators to expand services and innovate, the report stated. It also flagged a need to ensure that the regulator maintains its independence and powers to comply with its mandate.

The most important result of the reforms has been the drop in consumer prices, pushing them below the OECD country average. Between May 2013 and May 2016 the price for a low-usage bundled mobile service (100 calls and 500 MB data) dropped by 65%, while medium-use package costs dropped by 61%. Consumers have benefitted greatly from the elimination of charges on long-distance calls as part of the reform, but equally popular has been the reduction in market share of once-dominant player América Móvil, with customers having long bemoaned its high prices and deficient services, both in mobile and fixed-line telephony.

“Before the reform, many Mexicans struggled to pay for long-distance calls to relatives and could not afford mobile internet services that other countries took for granted. Today, communication services are much more affordable and millions more people are online,” Gabriela Ramos, OECD chief of staff, said in a press release in August 2017, expressing her confidence that Mexico will follow through with implementing and building on the changes so far to catch up with leading economies and build a solid base for a digital future.

Wireless telecoms firm and subsidiary of América Móvil, Telcel’s share in the mobile broadband market has dropped since the reform, from 83.3% in 2012 to 71.8% in 2016, and is forecast to fall further following the March 2018 launch of Red Compartida, or Shared Network project, a 4.5G, 700-MHz wholesale network operated as a public-private partnership between state telegraph and telecoms operator Telecomm and private firm Altán Redes, which was awarded the concession in 2016. In the same month América Móvil announced that it would roll out its own 4.5G network in 76 cities by the year’s end, promising to increase speed three-fold across its LTE network, which will additionally allow for the development of the internet of things. RECOMMENDATIONS: Among the OECD’s recommendations for the sector in its 2017 review is to lower barriers to further foreign investment in the sector, which it says can be achieved in a number of ways. First, by abolishing altogether the threshold on foreign ownership of broadcasters, which was raised from 0% to 49%, and easing requisites for investment in satellite communication services. Second, by assessing ways to moderate regulatory restrictions for América Móvil, which also owns mobile operator Telcel, following the group’s separation of fixed-line retail and wholesale divisions. Lastly, by reducing obstacles to infrastructure deployment to address uneven levels of internet access and quality across the country.

In addition, the OECD called for the removal of the Special Tax on Production and Services currently levied on fixed and mobile telephone and pay-TV to increase access and usage, as well as to encourage more competition in the pay-TV sector through the elimination of the fast-track legal mechanism for mergers and acquisitions among smaller players.

Increasing Competition

In a bid to further reduce América Móvil’s dominance in the telecoms market, in March 2018 the sector regulator ruled that it had to work towards a functional separation of the retail and wholesale businesses of Telmex and Telnor. This decision came on the back of a long-running dispute that began in 2014, when the IFT had determined the parent company be a preponderant actor in the sector and imposed uneven tariffs on the firm, which included obligating América Móvil to charge its competitors a smaller fee for the use of its physical infrastructure, known as an interconnection termination tariff. A communications law passed by Congress in mid-2014, however, stipulated that América Móvil could not charge its competitors for said interconnection, while adjudicating that other companies could charge América Móvil and its affiliates.

Telcel subsequently filed a lawsuit requesting an injunction against the tariff and sued retroactively companies that used its infrastructure, such as AT&T, in a bid to recoup fees. The supreme court granted Telcel the injunction in a ruling in August 2017, nullifying the tariff and allowing the company to impose the charges, but denying the retroactive recovery of such tariffs.

Following that, América Móvil argued in a press release that the IFT’s March 2018 approval of the separation plan differed substantially from the plan proposed in 2017. The approved separation plan calls for the establishment of a wholesale business unit within Telmex and Telnor to provide particular wholesale services to other recipients of the “concessions”, including the resale of telephone and broadband lines.

Telmex and Telnor were given until 2020 to implement the separation ordered by the IFT. The decision to conform is in contrast to claims that the company’s years of investment in telecoms infrastructure was being “penalised”, and that opening up the market to other companies brought “adverse” results.

Challenges

The IFT’s decision potentially dampens the attractiveness of Mexico’s telecoms sector for investors, as it appears to contradict the reform’s aim to end monopoly practices in the sector. In addition, the decision also overrides that of the body’s own authority as sector regulator, and represents a shift in industry structure. AT&T, for example, entered the Mexican market post-reform in 2015 with the acquisition of Nextel and Unefón, spurred by the law determining that it would not have to pay tariffs to use Telcel infrastructure, and it will now have to adjust its business model to allow for the new conditions. In April 2018 AT&T received another blow, when the Federal Consumer Protection Agency won a class action lawsuit against the company for unwarranted tariffs charged by Nextel between 2012 and 2014 against its customers. AT&T, as the firm’s new owner, is liable to pay compensation to those affected in the form of 20% of the charges made.

Red Compartida

In March 2018 the country launched a wholesale network as a public-private partnership with China’s Huawei and Finland’s Nokia, the first OECD member to do so. The shared network initially launched with 32.2% 4G coverage, and aims to extend coverage to 92% of the population by 2024, bringing broadband to many rural communities, with Mexico’s average broadband penetration and speed both below the OECD average. Initial coverage of the Red Compartida will include 29 of Mexico’s so-called Pueblos Mágicos, or Magical Towns, which are specially promoted tourist destinations in a number of states.

According to a statement at the network’s launch event by Eugenio Galdón, executive vice president of Altán Redes, a consortium created to oversee the Red Compartida project, the firm will also participate in an auction for six blocks in the 2.5 GHz wireless spectrum, though this was yet to be confirmed at the time of press. Five companies signed up to participate in the auction, which will offer up 120 MHz spectrum of 2.5 GHz bandwidth for wireless and high-speed mobile broadband for a 20-year concession. Companies such as Televisa and Telefónica have expressed an interest in using Altán Redes’ network to improve their services, and for internet of things provision.

Mobile Performance

According to wireless coverage mapping company OpenSignal’s “State of Mobile Networks: Mexico” report from October 2017, 4G network speeds in the country are among the fastest in Latin America, and provide faster 4G download speeds than the US, with competitors Telcel and AT&T recording equal speeds. AT&T emerged as a significant challenger to Telcel across a number of the reports metrics, tied with Telcel for fastest 4G speeds, and placed first in the overall download speed and 3G speed categories. Telcel tipped the scales into balance, however, with wins across three categories: lowest 3G and 4G latency, and highest frequency of users able to access its LTE service, at 76.4% of the time. As a whole, Mexico ranked 37th out of 77 countries for 4G download speeds, at 22 Mbps, and 38th in LTE availability, registering 73.05%, which put it third regionally behind Uruguay and Peru.

Following the outcomes of the report, in September 2017 AT&T announced it had begun deploying pilot LTE-M technology – a variant of LTE adapted to support internet-of-things devices – in the cities of Tijuana and Puebla, which allows for better coverage inside buildings and underground. “The possibilities for business customers... are endless,” Carlos Sánchez, chief technology officer for AT&T Mexico, told local media.

5G & Free Wi-Fi

In March 2018 the IFT announced that Mexico will become the first country to make the 600 MHz bandwidth available for 5G. “We expect 5G to start rolling out in Mexico from the end of 2018,” Elie Hanna, president of Ericsson Mexico, told OBG. “Although the full infrastructural transformation will take three to four years, most of the country already has the intermediate LTE-M network capabilities as stepping stones connecting not only people and places, but also objects and their processes with people.”

This followed the approval of the migration of 48 digital TV channels to 614 MHz and up to 698 MHz frequencies, previously used for broadcasting, allowing for the spectrum to be used for 5G mobile bandwidth. Since the analogue switch-off in 2015, 151 channels still operated on the 600 MHz spectrum, 103 of which have now migrated or are in the process of doing so.

Then in May 2018 Google announced it will install Google Station, a network of free Wi-Fi hotspots across 56 high-traffic locations in Mexico, its third such network in the world, and the first in Latin America.

Pay-TV

Compared with fixed broadband and mobile internet, pay-tv expansion has been slower. While the 2013 reform raised the threshold for foreign ownership in broadcasters from zero to 49%, removing this restriction would foster more competition and better quality service, according to the OECD’s recommendations.

The organisation has also suggested that Telmex be granted entrance into the pay-TV market once the company and Telnor have separated their retail and wholesale businesses, potentially providing a strong competitor to Televisa and also giving Telmex an incentive to upgrade its fixed broadband infrastructure.

Outlook

Though reforms have paved the way for more competition, América Móvil’s market dominance continues. With an almost two-thirds market share, its subscriber base in Mexico grew 1.2% in 2017 to 73.9m. Although AT&T’s coverage is expanding, recording a 26% increase in wireless subscribers in 2017 to 15.1m, Telefónica reported a 5.6% subscriber decline to 25m.

While the launch of the Red Compartida bodes well for connectivity, neither Telcel, AT&T or Telefónica form part of the network, and the shared network will be deployed in areas where coverage already exists. However, the Red Compartida may be attractive to virtual mobile operators that do not have their own infrastructure. But whether the wholesale network reaches as yet off-network, rural locations of populations below 10,000, which the government pledged to connect, remains to be seen.

The rollout of a 5G network demonstrates Mexico’s expanding wireless and mobile data market, though it may take some time before 5G can be effectively monetised in a segment with little room for new subscriber growth. In the meantime, 5G technology will be a niche product for internet of things and augmented reality applications, with greater use in dense urban areas given 4G’s sufficient speed for mobile data use.