Game changer: Sector reform is already opening up new opportunities

With the initial signs of effective reform now reaching the market, the telecommunications sector in Mexico is seeing the competitive progress that has eluded it for several years. The application of the telecommunications reform has translated into clear legislative steps to reduce the market power of long-time dominant player América Móvil. Although the company remains the undisputed industry leader, the asymmetric laws implemented by the government are slowly opening the market to more effective competition. This is galvanising market players and reducing prices for consumers, as well as spurring interest among foreign investors.

Despite improvements, the changes begun under the telecoms reform will take time to fully materialise. “The transformation will be achieved in the medium term, maybe in three to four years,” said Gonzalo Rojon, director and senior partner at The Competitive Intelligence Unit, a telecoms consultancy based in Mexico City, told OBG. In the meantime, the authorities are hoping that as the new regulation starts to shape the sector, more private investment in infrastructure will lead to improvements in capacity and service quality.

The Figures

In 2014 the market’s value decreased by 2.6% to $32.4bn, compared to $33.3bn in 2013, according to figures from The Competitive Intelligence Unit. Contrary to its usual performance, which had seen 6-9% increases per year, the mobile communications market posted very weak growth of 0.06% in terms of the number of users, which reached 105m by the end of 2014. This had a substantial impact on the industry, as mobile communications account for 65% of the sector’s total revenues. Part of the reason for the decrease in the number of mobile lines was internal restructuring by some of the country’s operators.

This decline marked an atypical year for the mobile segment, which had been showing single- or double-digit growth since the first licence was awarded in 1988. Major expansion was not expected from fixed line, which represents 15% of the telecoms sector in terms of revenues and expanded by around 1.6% in 2014. Slower growth in the overall sector was also partly caused by a steep drop in the paid television segment, which provides 20% of the market’s value. According to The Competitive Intelligence Unit, the paid television segment had been expanding at a rate of 20-40% per year until 2012, when growth rates started to slacken. In 2014 the segment grew by some 11%.

Implementing Report

The sector is undergoing a profound transformation. Restructuring was first implemented under President Enrique Peña Nieto’s administration in 2012. Among several reforms targeting key sectors, the aim of the telecommunications reform was to make the market more competitive. In a 2012 report titled “OECD Review of Telecommunication Policy and Regulation in Mexico” the OECD described the domestic telecoms market as being marred by too much concentration and a lack of effective competition, which resulted in high prices for consumers and low levels of investment in infrastructure.

The changes to the sector’s governing legislation are designed to address these concerns. “The reform is increasing competition and facilitating access to information and communications technologies at a lower cost, fostering economic efficiency and social welfare,” Angel Gurria, the OECD’s director-general, told OBG.

According to sector players, the changes are having an impact. “The telecoms and energy reforms are visionary developments that will improve the productivity of the economy. The telecoms reform has already produced some results, such as the fall of long-distance rates and other charges to customers, including the cost of international and local calls,” Francisco Gil Diaz, managing director of Telefonica Movistar, told OBG.

Making of a Monopoly

The shape of the sector prior to the reform was related to earlier moves towards liberalisation. In 1990 the state telecommunications company Telmex was privatised by the government, and Mexican billionaire Carlos Slim acquired a majority stake through his Grupo Carso conglomerate, creating Amé rica Móvil, which remains Latin America’s largest telecoms company. The move proved to be the privatisation of a monopoly, and over the years no effective means of competition enforcement was achieved through regulatory bodies to counteract this.

Secondary Laws, First Steps

This started to change with the telecoms reform and the constitutional amendment signed by President Peña Nieto in June 2013. After months of delays, the secondary laws needed to implement the reform were approved in July 2014. This opened the door for the Federal Institute for Telecommunications (Instituto Federal de Telecomunicaciones, IFT), Mexico’s new sector watchdog, to start implementing legislation to curb América Móvil’s domination. The first step was to declare its parent company, Grupo Carso, a dominant player for having over 50% of the telecoms market.

A periodic evaluation will now be conducted every two years by the regulator to assess if the measures are effectively reducing market dominance, or if bolder action will be required. In the meantime, asymmetric regulations targeting the dominant player have included the elimination of interconnection fees for all its competitors and the abolishment of long-distance charges. These are already affecting consumer prices and bringing on more competition (see analysis).

New Dynamics

As the initial steps of the telecoms reform are being implemented, the market has certainly been galvanised. New operators are entering and existing players are moving into new businesses and expanding their offers. In March 2015 Gerardo Ruiz Esparza, minister for transport and communications, oversaw an assessment of how the initial period of regulatory changes had affected the sector. According to Ruiz Esparza, the telecoms sector has been able to attract $6bn in capital investment from international firms interested in securing a foothold in the local industry. The acquisitions of two of the top four mobile providers by US-based telecoms operator AT&T has been one of the market’s biggest shake-ups.

Other investors have also been eying opportunities in the sector. In early 2014 European satellite operator Eutelsat Communications bought Mexican counterpart Satélites Mexicanos for $831m in an effort to get a foothold in the Americas. Virgin Mobile has also gone ahead with its long-awaited entry to the Mexican market as a mobile virtual network operator (MVNO), announcing an investment of $45m. Megacable – which already offers cable television services, fixed communications and internet services – announced a $200m investment in 2015. The money will be used to improve its networks, but also to move into the mobile communications market by becoming an MVNO. In April 2015 the company reportedly entered into discussions with operators América Móvil and Telefónica to examine their offers for use of their mobile networks.

AT&T’s decision to buy both Iusacell and Nextel will certainly have an impact on the Mexican market. However, some analysts point out that this does not necessarily translate to new investment. “In Mexico we have the same capital as before, and the acquisitions themselves represent a mere change of ownership and branding. So we will see what comes out of it in terms of new capital addition,” Ernesto Piedras, general manager of The Competitive Intelligence Unit, told OBG.

Market Giant

The Mexican telecoms market has been characterised by long-standing dominant player América Móvil. In 2014 the company accounted for 80% of the fixed-line communications market through its Telmex brand, 70% of mobile subscriptions under its Telcel brand and 60% of the broadband internet segment. It was because of this considerable market leverage that the national telecommunications regulator started to implement asymmetric legislation in 2014.

The measures are starting to bear fruit. América Móvil saw a 2% decline in performance in its Mexican operations over the first quarter of 2015, though the firm stated that the impact of asymmetric regulations, such as the payment of interconnection rates to its competitors and the abolishment of long-distance rates, were partly balanced by growth in its data services. As it faces regulatory measures due to its status as the dominant player, the company is reviewing options that would allow it to avoid further targeted regulations.

One possibility is to sell off its Mexican assets to reduce market share. The only move announced so far is the spin-off of part of its communications tower infrastructure into an autonomous company called Telesites. This will not impact the operator’s status as the dominant market player, but it may help fulfil another of its regulatory obligations, which is to share its infrastructure with its competitors. AT&T’s entry and the competition it should introduce will also affect América Móvil’s strategy to reduce its market share.

Other Players

Telefónica, which operates in Mexico’s mobile market through its Movistar brand. The company also offers fixed communications and internet services. In 2014 Telefónica started to share excess infrastructure capacity with MVNOs entering the market. Movistar had 20.5m mobile customers in early 2015.

Third-largest Iusacell, recently acquired by AT&T, has two mobile telephone brands: Unefón, which serves low-income customers; and Iusacell, which focuses on high-income earners. The latter had a quarter of subscribers in the more profitable post-paid segment as of September 2014. According to third-quarter 2014 figures from the IFT, Unefón accounted for 4.9% of mobile subscriptions and Iusacell for 3.6% of mobile lines.

The fourth-largest mobile telephony operator, Nextel, had been owned by NII Holdings, but was also acquired by AT&T. Nextel had previously been expanding its business post-paid offerings and held 1.8% of mobile subscriptions, according to September 2014 figures from the IFT. By acquiring the sector’s third- and fourth-largest competitors, AT&T will jump directly into third position in the market. “It took a long time for a foreign investor to become interested in Mexico, and AT&T’s decision to come into our market is undoubtedly a result of the reform process,” Francisco Gil Díaz, managing director at Telefónica, told OBG.

AT&T has already announced that it will invest in integrating both companies and improving their networks. “AT&T bought two companies that have a very good post-paid customer base,” Luis Martínez Del Barrio, partner for technology, entertainment and media at PwC Mexico, told OBG. “The average revenue per user [ARPU] in the post-paid segment for those two operators is very interesting.” As of the third quarter of 2014 Nextel and Iusacell had 11.3% and 12.3%, respectively, of the post-paid segment, according to the IFT.

According to third-quarter 2014 figures from The Competitive Intelligence Unit, Telcel held 68.8% of mobile market share, followed by Movistar at 20.1% and Iusacell with 8.4%. Despite being the fourth-largest firm in terms of subscribers, Nextel had the highest ARPU at MXN469 ($31.56), followed by Iusacell at MXN236 ($15.88) per month, Telcel at MXN196 ($13.19) and Movistar at MXN112 ($7.54).

Moblie Movements

By the end of 2014 there were a total of 105m mobile phone lines in Mexico. The segment has been expanding over the last decade and more growth is expected due to the rising number of competitors, not only with the entrance of AT&T, but also through the more inviting environment for MVNOs to offer services using the networks of existing operators.

Expansion of the Mexican mobile market has been driven to a large extent by the growth in smartphone users. This has been helped by recently passed regulations, which abolished exclusivity contracts between phone providers and operators, and by rising demand for broadband internet access and data services. In the first quarter of 2015 59% of mobile lines in the country were accessed using a smartphone. The segment’s growth is increasingly expected to depend on the expansion of data services. According to the IFT, mobile broadband services penetration reached 39.9% over the third quarter of 2014 at 47.2m users. This figure, however, was largely due to a change in methodology, which included pre-paid data subscribers who typically have very low consumption levels of broadband services.

Pre-Paid Driven

Mexico remains fundamentally a pre-paid market, with the post-paid segment accounting for roughly 15% of the market, according to The Competitive Intelligence Unit. “The post-paid market is interesting, but the pre-paid segment is what gives the business volume and coverage,” said Del Barrio. The regulatory changes are affecting prices for consumers, and this is marginally increasing the number of people opting for post-paid offers. However, the number is still small, and there remain other factors in the Mexican economy that shape the post-paid and pre-paid balance in the telecoms sector.

The still relatively low number of credit cards in the country is another barrier of entry into the post-paid segment. Operators have been making efforts to adapt and reach out to potential new post-paid users. In some cases, the option of a money deposit will be available for customers without credit cards. Big department stores sometimes offer access to mobile post-paid services through their own cards, which generally have more flexible conditions than those offered by banks.

Despite these solutions, the post-paid/pre-paid balance is expected remain static over the coming years. “We do not see this changing substantially in the near future,” Rojon told OBG. “There might be a 1% increase in the post-paid segment in a year or two. The big barrier is credit conditions, not so much the post-paid offers coming from the operators, which have become much better as the market opens up.”

Fixed Lines

Similarly to what global trends have been dictating in other markets, the expansion of fixed lines in the country has been stagnating. IFT third-quarter 2014 statistics point to 20.6m fixed lines in operation in Mexico, a small rise over the 2012 figure of 20.5m lines. However, several years of insufficient competition in the market prevented the sector from expanding fixed-line penetration levels by keeping prices high. As of September 2014 Mexico had 17 fixed lines per 100 inhabitants, compared to 14 in Colombia, 20 in Brazil and 21 in Chile. The market remains dominated by Telmex, with a 71% market share, followed by Grupo Televisa with 11.8% and GTM/Telefónica at 6.8%. Axtel and Megacable account for 4.5% and 3.3% of the market, respectively, according to IFT.

Paid Television

Paid television services remain an important component of Mexico’s telecoms market and the fastest-growing segment in the industry. Between 2013 and early 2015 the number of subscribers rose from 14.5m to 16m, according to The Competitive Intelligence Unit. The segment has been posting double-digit growth for several years, expanding coverage from 32% in 2010 to 48% in 2015. Grupo Televisa, the first private television broadcaster in the country, also leads the paid television segment, accounting for 60.1% of the total market, through its different brands of satellite and cable television services, the biggest of which, Sky, held 39.2% of the total paid television market as of September 2014, according to the IFT. In 2014 the company solidified its market presence by the acquisition of regional cable television provider Cablecom, present in 16 states across Mexico.

Falling a distant second after Televisa is Dish Mexico, a joint venture between Mexican firm MVS Comunicaciones and US-based EchoStar, which provides satellite television and had 15.5% of the market in the third quarter of 2014. Megacable and Cablevisión Red are the third- and fourth-largest providers, with 14.6% and 3.9% of the market, respectively.

Opening Up Spaces

As with the mobile and fixed communications segments, paid television has faced increased regulatory scrutiny. After being declared a dominant player in the broadcast television market by the IFT in 2014, Grupo Televisa’s paid television business was also acknowledged to have an excessively prominent market position in March 2015. The IFT has said asymmetric regulations will be implemented.

In January 2015 the regulator fined two other sector players, Dish Mexico and América Móvil’s fixed communications company Telmex, for failing to inform it about a deal to offer a merged bill for their services. The fine was a result of complaints from other operators that the deal went against regulations prohibiting Telmex from offering television services.

Although paid television in Mexico remains a relatively niche product, with 98% of the population watching broadcast television, the market dynamics brought about by the reforms have strengthened the role that paid television can play as part of a larger offering, laying a foundation for longer-term broadening of choice. “The telecoms reform will lead to increased investment in technology, which will foster competition and be beneficial for the entertainment industry, though we do not expect to see any real impact in the near future,” Allan Navarrete, vice-president and managing director of Discovery Channel’s Hispanic division, told OBG.

Furthermore, the infrastructure sharing rules now in place give operators in one segment access to others, which creates new opportunities. “There are cable television companies that already have a triple-play offer and that might want to compliment it with a mobile offer. They can establish a deal with an MVNO, or themselves become an MVNO,” said Del Barrio.

Regulating The Sector

The IFT, Mexico’s new telecoms watchdog, was set up in September 2013 as part of the sector reforms. The establishment of a new regulator was a much-needed change. Part of the market’s stagnation over the years was caused by the lack of power of its predecessor, the Federal Communications Commission. Without the necessary legislative powers and independence, the commission’s decisions were frequently blocked by court injunctions.

To avoid a similar path, the IFT was given a stronger mandate, based on its constitutional status. Instead of placing it under the purview of the Ministry of Communications and Transport, the new regulator has been given full autonomy. Furthermore, the IFT can now apply asymmetric legislation, award and annul the attribution of market concessions, and even has a mandate to command the breaking up of company assets. These new regulatory powers have already started to be implemented in the market (see analysis).

Besides working to improve competition, the IFT is dealing with a number of important issues that will impact the sector in the long run. One of them is number portability, which has been reduced to 24 hours, as opposed to the three to five days the process previously took. The process was previously encumbered by excessive requirements and bureaucracy, but the adjustments introduced by the IFT in late June 2015 have helped expedite the process for the benefit of consumers and competition. Also important will be the shift to digital terrestrial television, which needs to be completed by the end of 2015, and has seen operational hurdles as the government faces the prospect of financing the necessary access to technology for sections of the population.

Wholesale Network

Freeing up the sector will also depend on access to infrastructure. Included in the reform is a plan to set up a wholesale mobile broadband network to be made accessible to all competitors. This will allow operators to increase coverage and help the market to sustain the level of capacity needed to withstand the increase in data services. Total investment in this infrastructure is expected to reach $7bn, and a tendering process is currently under way to select the company that will build and operate the network through a public-private partnership that will be assigned the whole digital dividend of 90 MHz in the 700 MHz band. There is no precedent for this kind of wholesale mobile network, and the biggest challenge will be to increase coverage and competition without distorting the market, as the network will be subject to competitive neutrality obligations.

Outlook

Sparked by constitutional reforms, changes to create a more competitive sector are beginning to bring benefits to consumers. The rising level of interest from new investors is a healthy sign, and one that promises to translate into regained vitality and a faster rate of change over the medium term. Consumers are already enjoying easier access to services, and the reform is set to support economic development by facilitating business activity. The increased pace of change will bring its own challenges, especially for the new regulator, but its stronger constitutional status should help it to regulate the market more efficiently.