Nearshore ICT: Regulatory Pressures Trigger Change for Mexico’s Telecoms

Mexico’s telecoms sector has gained a bad reputation for under investment, poor quality and high costs. Fixed line and mobile telephony rates are among the most expensive across the OECD and bandwidth is subpar compared to download speeds in other LATAM markets.  While government initiatives poised to foster competition continue to hit roadblocks, America Movil is feeling the heat and things are slowly changing.  New carriers like Nextel are building stronger brand loyalty especially within the enterprise market.  Pressure from the Federal Competition Commission has also pushed telecoms czar Carlos Slim to pledge greater investment in ICT infrastructure and more fair pricing strategies.  We spoke with Ernesto Piedras the CEO of CIU – a Mexico-based telecommunications industry consulting firm to give us a breakout of the current landscape and how things might play out over the next two-three years.

 NSAM:  Can you give us an overview of Mexico’s current telecoms landscape?

Piedras:  Mexico is a very dynamic market especially in the mobile sector where we have 98.7 million open lines and see 10 percent annual growth.  Last year’s revenues for mobile services were 17.7 billion dollars – out of 35 billion for the entire sector including fixed lines and internet.  Seventy percent of the mobile market is held by Telcel.  Movistar controls 35 percent and Nextel holds 3.9 percent of total lines. Nextel is a growing competitor as it has become the image of good service particularly with the business community.  Nextel actually accounts for 12 percent of total mobility revenues. Virgin Mobile America is also set to enter the market this year.

NSAM:  What about fixed lines?

Piedras:  The fixed line segment is 19.5 million lines which is very little under any standards considering the country’s large population.  What’s interesting is that traditional fixed line players including Telmex are losing customers to the cable companies that offer bundled phone services to their 11 million paid TV subscribers.  Cost for a dedicated fixed line tends to be high and doesn’t make much sense to consumers that have mobile phone options, but people are willing to pay for premium television which also offers telephone services.

 NSAM:  How does quality and bandwidth in Mexico measure up?

Piedras:  Mexico is 2.5G as a whole with major cities well covered, but rural areas and small towns have virtually no service.  Until recently infrastructure investments have focused on coverage expansion and not so much on increasing bandwidth.  Telcel recently announced a very important investment for 3G services and Nextel will be launching 3G as well.  When you talk about broadband internet you also have to distinguish between what is considered broadband in the world and what is broadband in Mexico.  The OECD says that you cannot call it ‘broadband’ unless download speeds are at least 2megs per second.  In Mexico download speeds are much lower.  When I travel it’s always a shock to come back to Mexico compared to download speeds in places like London.   Essentially you are paying top dollar for minimal service.

NSAM:  Are Mexico’s telecoms costs as expensive as experts claim?

Piedras:  Mexico has the highest telecoms costs across the OECD.  Also remember that Mexico has a relatively low GDP/capita compared to other OECD countries [10 thousand USD] so mobile services are very expensive for the Mexican consumer.   Out of 98 million lines only 16 percent are contract while 84 percent is prepaid services.  However, the smart phone market is growing rapidly and people are willing to pay top dollar for the latest technology.

NSAM:  Will government be able to bring additional competition into the market?   

Piedras:  Overall I am optimistic about the future and what’s coming in terms of competition and alternatives for customers.  In the past we had absolute regulatory capture with government authorities controlled by the main telecoms companies.  In the current administration there has been more independence of the regulators but government still lacks ‘teeth’ when it comes to antitrust regulation.  Last week’s decision to drop the $1 billion dollar fine against America Movil for unfair pricing practices demonstrates the limited power of the Federal Competition Commission, the main regulatory body in Mexico.  Lack of competition is also negatively impacting infrastructure investments.  Although the main companies [America Movil & Movistar] comprise 90 percent of the market, they only invest about 40 percent of total investment.  Every year they come out with generous announcements but when you look at actual investments they don’t commit.