IFT to review market reforms amid changing competitive landscape

Mexican regulator IFT will, in March, review the impact of the country’s ground-breaking reforms to the telecoms sector two years ago, to determine whether its measures to curb the dominance of América Móvil-owned Telmex and Telcel, and media conglomerate Grupo Televisa have been successful.

Mexican regulator IFT will, in March, review the impact of the country’s ground-breaking reforms to the telecoms sector two years ago, to determine whether its measures to curb the dominance of América Móvil (BMV:AMXL)-owned Telmex and Telcel, and media conglomerate Grupo Televisa have been successful.

In 2014, Telmex had 80% of the fixed-line market and Telcel 70% of the mobile market. Televisa had 70% of the broadcast TV market and 65% of the cable and satellite market. At the time, a 50% market share was deemed to be dominant.

In the intervening two years, the mobile sector has seen the appearance a new and powerful competitor, AT&T (NYSE:T), which entered the market by acquiring Iusacell and Nextel Mexico after the country removed the 49% stake limit on foreign direct investments. Following its acquisition of DirecTV, the US giant also has an indirect 41% stake in leading pay-TV provider Sky Mexico, which is 59% owned by Televisa.

AT&T Mexico CEO Thaddeus Arroyo, who has previously praised the IFT for opening up the sector, is now urging further reforms, telling a newswire: “Even with our arrival bringing competition and beginning the ultimate transformation of the market, the share is still disproportionately unbalanced.” He said he expected it would take “years” to even out the market.

The fixed-line sector has seen some movement following the merger of Axtel and Alestra, completed on 15 February.

Telefónica (BMAD:TEF) is, in the meantime, considering an IPO of its local business, which according to the IFT was the number two player with 21.9% of the mobile market as of September 2015.

Some in the market see the Spanish company’s decisions to sell towers to American Tower, swap contiguous spectrum with AT&T and not participate in the AWS auction as an indication that they may be allocating resources away from the market.

In the meantime, América Móvil CEO Daniel Hajj told analysts he was confident that the IFT’s review would reflect positively on his company. Given the current “energetic market, I think there will be market share for everyone, especially since penetration stands at 90%”, he said.

In its official statement, the company outlined its market position: “With the entrance of a new international competitor, [AT&T], in Mexico more than a year ago, competition has intensified between the three carriers and several MVNOs.  At a global level, América Móvil is smaller than these competitors [AT&T and Telefónica] in terms of revenues, profits and enterprise value. Still, these two large enterprises are subsidised by América Móvil with asymmetric regulation. We have now very intense competition in Mexico that benefits our consumers.”

Doubt cast on Red Compartida 
On 29 January, the IFT and Ministry of Communications and Transport (SCT) launched the tender for the country’s “Red Compartida” shared wholesale 4G network. The network will use 90 MHz of 700 MHz spectrum freed up in the 31 December digital switchover. A projected investment of US$7bn will cover the construction of some 7,000 towers, with a view to enabling the entry of low-cost MVNOs. 
Those that have already shown interest in the public-private partnership reportedly include China Telecom, Cisco, Ericsson, Huawei and Nokia, with a winner due to be announced no later than on 7 September. Participants must pay a deposit of Ps1bn (US$52m) to join the tender process. 

But success is not assured, warned Luis Rubio, partner at Jones Day in Mexico City.

“I don’t think there will be many interested players because of ambitious deployment targets, rural deployment requirements and the low subsidy offered. Furthermore, the winner may not sublease spectrum, the government will take 1% of profits at the end of the year and the business model is very weak. And, there is no commitment by the government or its agencies to use the network, so the winner will need to attract their own customers – in competition with América Móvil, Telefónica, and AT&T.” 

According to the SCT’s calculations, to meet the minimum coverage requirement of 85% of the total population in Mexico, the winner will have to invest around US$3.5bn during the first five years of the project. 
If the process is abandoned, the government would have to declare a ‘licitación desierta’, or voided tender. Being forced to tender it out again, noted Octavio Lecona, partner at Jones Day, would be a “public policy disaster.” 
In 2014, the IFT tendered two orbital positions – at 113.0W and 116.8W – but set in kind duties that were too onerous, so no one bid, pointed out Rubio.

“The ministry didn’t engage enough with potential bidders and didn’t solicit feedback, so they are still considering how to resolve this.
“There is a political impetus to get this done during the remaining three years of Enrique Peña Nieto’s presidency, but it has to make business sense,” emphasised Rubio. “And it must also make sense for other mobile operators – which are still deploying 3G – to buy space on the Red Compartida.” 
Pointing out that only 30% of the population owns a smartphone, Lecona suggested that the “timing might be better in five years, but that the shared network needs to begin service in two years, or risk big penalties for failing to meet deadlines or coverage targets”. 

Pay-TV opportunity for telcos

Given the ongoing dominance of América Móvil’s subsidiaries in fixed and mobile, rivals could arguably achieve more by focusing on triple-play, said Rubio. This is because while it remains dominant, Telmex is prohibited from offering TV services, while Televisa must provide signals to other players at no cost.

As such, challengers can benefit both from being able to sell these signals to their own customers at a profit, and from receiving free-to-air signals for free. Furthermore, any player wishing to offer content as an OTT provider may do so. This means, pointed out Rubio, that fixed-line challenger Maxcom for example could become an OTT offering TV services.