Recent legislation, liberalisation boost growth in Mexico's telecoms sector

The Mexican telecoms sector is one of the largest and most dynamic in Latin America. It is also undergoing a process of significant change. The government of President Enrique Peña Nieto, who took office in late 2012 at the start of a six-year term, made reform of the telecoms industry one of its signature policies. In the three years since the reform process was initiated, there has been tangible evidence of movement towards some of the ultimate goals of the reform: to make the industry more competitive, to reduce communication costs and by doing so help to modernise the wider Mexican economy. One sign of this is the contribution of the telecoms sector to GDP, which increased to around 3.6% in 2016, up from 2.6% five years earlier.

Success Story

The government’s telecoms and broadcasting reforms, introduced through new legislation and a constitutional amendment in June 2013, are widely seen as some of the most successful changes made by the administration of President Peña Nieto. A key aspect of the reform was the introduction of a stronger regulatory body, the Federal Institute for Telecommunications ( Instituto Federal de Telecomunicaciones, IFT), which replaced the previous agency, known as the Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones, Cofetel). The IFT was given a mandate to promote competition in the sector and to reduce what were seen as oligopolistic pricing policies implemented by dominant operators.

Aldo Sánchez Ortega, general coordinator for strategic planning at IFT, told OBG that various factors had come together to give the new regulator a The Mexican telecoms sector is one of the largest and most dynamic in Latin America greater chance of success. First, the IFT was given statutory independence. This was in contrast to previous arrangements where Cofetel reported directly to the Ministry of Communications and Transport (Secretaría de Comunicaciones y Transporte, SCT). While Cofetel would successfully detect violations of existing regulations — such as, for example, radio broadcasts on unauthorised frequencies — its reports were lodged with the SCT, where they frequently did not progress much further.

In its entire history, not one of Cofetel’s reports on regulatory violations led to any fines being levied against a telecoms operator or an electronic media broadcaster. Sánchez Ortega said this reflected a situation where, over a number of years, the dominant operators lobbied very effectively at a ministerial level to deflect any sanctions.

Second, the IFT was given greater resources. In 2012, the year before the reform was introduced, Cofetel had a budget of MX600m ($36.2m) and 650 employees. The budget for the IFT, in contrast, was more than tripled to MX2bn ($120.5m) and the watchdog’s staffing levels rose to 1250. Third, the reforms created specialised courts, known as cortes especializadas de competencia económica, telecomunicaciones y radiodifusión, that are trained to deal with matters of economic competition in the telecoms and broadcasting industry.

Fourth, fines and sanctions became more substantial. Cofetel only had power to set nominal amounts of fines, irrespective of the size of the company involved. By contrast, the IFT was given the power to apply much larger fines, calculated as a percentage of an operator’s annual revenue.

Lastly, and perhaps most crucially, the law governing the right to appeal regulatory decisions was changed. Under Cofetel, if there was an appeal, all fines or sanctions would be put on hold pending its outcome, and appeals cases could take two, five or even 10 years to be resolved. Under the IFT, however, sanctions are immediately applied and remain in place until such time as an appeals case is successful. “Everything happens much faster now. If an appeal is successful, of course the IFT has to refund or compensate, but it all gets decided in a timely fashion. Before, there was an incentive to delay every appeals case for as long as possible. Now we have moved from a vicious to a virtuous circle,” Sánchez Ortega told OBG.

At the core of the reforms was the mandate given to the IFT to determine whether an operator is “preponderant” — controlling more than 50% of the audience, market, infrastructure or revenues in a particular segment of the business. Using these criteria, in March 2014 the regulator ruled that América Móvil, the company controlled by Carlos Slim, was the preponderant player in the telecoms market, while Televisa, controlled by the Azcárraga family, was the dominant player in television.

A company that is declared preponderant becomes liable to the application of special “asymmetric” measures, or charges designed to create a more level playing field for its competitors. Among other measures, América Móvil subsidiaries Telmex (fixed line) and Telcel (mobile) were forced to allow competitors to use their networks at a zero-cost interconnection charge. In a similar fashion, Televisa was forced to comply with must carry-must offer (MC/MO) rules. These made it impossible for the company to deny broadcast rights for its popular free-to-air programmes to pay-TV operators, or to charge premium rates for the privilege of carrying them. Televisa also has to provide competitors with access to its network of transmitters.

Falling Prices

A report issued by the IFT summarising its first three years of operation running to mid-2016, stresses seven initial achievements. They were listed as increased competition, reduced prices, broader service offerings, more investment in infrastructure, more foreign investment, technological improvements and better quality of service. Particularly significant was the reduction in prices, since an earlier report by the OECD in 2012 had argued that excessively high telecoms prices, a product of an oligopolistic industry structure, had reduced Mexico’s competitiveness and generated additional costs to the country, equivalent to as much as $25bn per annum, though the accuracy of the report was contested by América Móvil. IFT data shows that between June 2013 and December 2015, when headline inflation was 9.1%, average telecoms prices fell by 23.2%. By category, long-distance charges eased by 100%, as one of the IFT’s early decisions was to eliminate national long-distance call fees entirely. Mobile phone tariffs came down by an average of 32.5%, with fixed-line charges 4.3% lower. International long-distance charges were down 40.3%; however, there were small gains for pay-TV fees (1.9%) and internet connection charges (0.9%). Among other changes highlighted by the IFT, the number of households with pay-TV services rose to 59%, up from 45% at the beginning of the reforms – an increase in part attributed to the MC/MO rule.

The number of homes with fixed broadband connections rose to 47%. Internet connection speeds also improved, with 75% of connected households enjoying speeds of more than 10 Mbps in late 2015, compared to less than 15% at the start of the year. Mobile internet connections, meanwhile, surged to 54% of the population, up from 23% in mid-2013. Through a series of auctions the IFT had increased the radio spectrum available for mobile communications by more than 40% to 604 MHz.

Generational Shift

This uptake in mobile internet connections can partially be attributed to a generational shift in Mexico, as the younger generation is viewed as more tech-savvy. Across the world, interest in and adoption of new technology tends to be higher among the young, often described as millennials, and loosely defined as people born in the 1980s and 1990s.

One of the identifying traits of millennials, also known as Generation Y, is their familiarity and use of communications, media and digital technologies. The same is said of the next contingent, Generation Z, defined as those born in the mid-1990s through to the early 2000s. According to the World Bank, in 2015, 65.9% of the Mexican population was aged between 15 and 64. The median age was 28 years, compared to a median age of 37.9 in the US. This demographic profile encourages and supports the take-up of new technology.

A second significant factor is the significant supply of well-educated Mexican graduates from the country’s universities, providing the kind of human capital that the industry needs to develop. “We are producing around 100,000 graduates every year with the ability to work in the technology sector, and I don’t just mean engineers,” Javier Allard, director-general of industry lobby group, the Mexican Association for the IT Industry, told OBG.

In addition to industry fuelling demand for more qualified workers, ongoing investment in education and research is a key growth driver. Indeed, sizeable government investment in both education and research and development is seen as crucial to maintaining an innovative environment across a wide variety of economic sectors.

Digital Transformation

The country became the first in Latin America to successfully switch off its analogue TV signal, turning instead to digital terrestrial television (DTT); the switchover allows a reallocation of scarce spectrum to mobile and data services. The new DTT system has increased channel capacity to 676, up from 311 channels previously.

The reform has also boosted the contribution of the telecoms sector to GDP. Before the reform, telecoms GDP had been growing at an average annual rate of 4%, but after the reforms this accelerated to 11%, three times faster than the pace of growth in the wider economy. Private investment in the telecoms sector had increased to approximately MXN66bn ($3.2bn) in 2015, 34.7% higher than in 2013. Foreign investment in telecoms, meanwhile, surged from $219m in 2013 to $2.7bn.

Preponderant Players

The reform has not been without its critics. One issue is that despite the application of asymmetric measures, both the telecommunications and television markets remain under the control of dominant players. Ignacio Perrone of consultancy firm Frost & Sullivan has commented that the IFT has had only “limited success” in opening up these markets. Perrone did acknowledge, however, that the entry of US-based AT&T into the mobile segment in 2014 and the 2015 merger of Axtel (fixed line) and Alestra (data) indicated that the competitive landscape was being revitalised.

For his part, Sánchez Ortega told OBG that the IFT was reviewing the sanctions it had previously put in place. The regulator’s review would consider three main courses of action in pursuit of that goal: the measures taken against preponderant players could be fully or partially lifted; they could be reduced; or they could be intensified further.

As amended by the telecoms laws, the Mexican constitution requires the regulator take action to ensure “effective economic competition”. Defining whether particular market segments are competitive or oligopolistic may involve further legal moves. In January 2017 a court upheld a legal challenge to a 2015 IFT ruling that the pay-TV segment was competitive. At the time the IFT had argued that Televisa, despite holding the largest market share in the country, was not dominant because competitors such as Dish, Megacable and Axtel were starting to gain ground. Total Play, a rival operator that forms part of Grupo Salinas, then challenged the court’s ruling. As a result of the court’s decision, the IFT will have to reassess the level of competition in the segment and issue a new finding.

2016 Performance

Telecoms and broadcasting markets performed strongly in 2016. Full year data was not yet available at the time of writing, but in the first three quarters of the year the sector’s annualised GDP totalled MXN485bn ($29.2bn), up by more than 13% on the comparable period of the previous year, and making the sector the eighth-largest contributor to overall GDP, at 3.6%.

Average telecoms and broadcasting prices were down 15.4% year-on-year (y-o-y) in the third quarter of 2016 compared to the same period in 2015. Around 275,000 people were employed in telecoms and broadcasting. Total telecoms operator revenue reached MXN112.3bn ($6.8bn) in the third quarter, up 4.6% y-o-y. Fixed-line revenue, meanwhile, rose by nearly 9%. Mobile phone revenue represented 54% of the sector total, while telecoms operator profits were close to 20% of the industry’s total sales.

In the third quarter of 2016 fixed-line telephony penetration remained broadly stable at 58 lines per 100 homes. There were a total of 19.1m fixed telephone lines in operation across the country, with two companies, Telmex-Telnor and Televisa, operating more than 80% of all fixed lines. Fixed broadband connections grew by 9.1% y-o-y to reach 47 connections per 100 homes, or roughly 15.7m subscriptions in total. The vast majority of these fixed broadband connections (87%) were for residential use, and three-quarters were high-speed connections (more than 10 Mbps).

The number of mobile phone subscriptions rose to 110m, or 90 for every 100 members of the population. This represented y-o-y growth of 4.7%. Of the total, 84% were pre-paid, while the remaining 16% were post-paid. This ratio showed no change on the previous year. The market continued to be dominated by Telcel, with 65.7% of total subscriptions, followed by Telefónica of Spain, with 23.6%, and by new entrant AT&T, with 9.7%. Monthly minutes of use per subscription averaged 193, with AT&T registering the highest at 250 minutes, followed by Telcel at 215. AT&T reported average revenue per user (ARPU) of MXN365 ($22) per month, ahead of Telcel with an ARPU of MXN197 ($11.85).

Small mobile virtual network operators (MVNOs) continued to grow, totalling more than 1m subscribers among them, or 0.9% of the total. The largest MVNO was Virgin Mobile with a 0.7% share. There was strong growth in mobile broadband subscriptions, up 24% y-o-y, to reach a penetration rate of 58 subscriptions for every 100 members of the population. In the pay-TV segment, subscriptions rose by 17.6% to 20.5m, or approximately 62 subscriptions for every 100 homes. Three companies dominated Pay-TV subscriptions: Televisa (57.1% of the total), Dish-MVS (20.8%) and Megacable-MCM (14.8%). More than half (58%) of pay-TV subscribers had satellite connections, while the remainder (42%) had cable connections. In terms of what is popular on national television channels, the genres with the highest ratings were drama, soap operas and reality shows. On average, 13.4% of the population was watching TV at any given moment, while around 7.3% was listening to the radio.

Shared Wholesale Network

In 2016 the government awarded a competitive tender to build a nationwide 4G telecoms network, intended as a wholesale platform that will offer connection services to retail operators. The network was envisaged as part of the 2013 telecoms reforms, so as to provide a competitive alternative to the national infrastructure built by Telcel, the dominant mobile operator. It has been allocated an exclusive use of 90-MHz block of spectrum in the 700-MHz band. In January 2017 Gerardo Ruiz Esparza, minister of communications and transport, confirmed that works on the $7bn project, which had been awarded under a public-private partnership (PPP) formula, would start in the spring (see analysis). Tender winner Grupo Altán said it planned an accelerated build-out over one year, with seven or eight transmission towers being erected per day; an estimated 12,000 towers need to be built across the country. Marapendi Holding, which is controlled by Morgan Stanley Infrastructure, and the China Mexico Fund are the largest shareholders in Altán, which also has support from the International Finance Corporation.

Existing telecoms operators such at Axtel and Megacable hold small, non-voting equity stakes in the consortium. The service is expected to be run on a 20-year concession basis by the Agency for the Promotion of Investment in Telecommunications. National coverage is scheduled to reach 30% of the population by end-March 2018, eventually rising to 92.2%. “The shared network is the most important telecommunications policy enacted in our country and will help reach the most important goals of sector reform,” Ruiz said at a local press conference.

New Tv Channel For The Us

Carlos Slim, who has a dominant role in the Mexican telephony market through América Móvil, was reported to be planning a new Spanish-language television channel for the US. Slim has invested heavily in television elsewhere in Latin America, but for regulatory reasons has been prevented from doing so in Mexico itself.

The new channel is to be called Nuestra Visión, and according to an América Móvil statement, would be “focused on Mexico, made by Mexicans and transmitted from Mexico”. Launching it would put Slim in competition with existing Spanish-language broadcasters in the US such as Univisión and Telemundo. Univisión is a close ally of Televisa, which is already competing with América Móvil through triple-play services such as izzi Telecom, which offers pay-TV, telephony and internet access in one bundle. “The main challenges for companies in media and marketing centre around differentiating their companies from their competitors, and communicating their message to the public in a fresh and innovative way,” Pedro Egea, CEO of Grey Advertising, told OBG. “Nothing in this economy is static, so creating a powerful yet concise message and gaining the attention of the consumer are both absolutely fundamental to being successful,” he added.

Sponsorship & Advertising Rules

In early 2017 there were signs of disagreement between the government and the IFT over the interpretation of sponsorship rules and related issues. President Peña Nieto said the IFT was overstepping its powers by requiring broadcasters such as Televisa and TV Azteca to state whether corporate or political groups had sponsored programmes.

In a statement, the IFT responded that existing legislation “advocates the right for audiences to be able to distinguish between adverts and content of a programme under the viewers’ rights law and the ethics codes”. The presidency subsequently filed a case with the Supreme Court, asking for guidance on the interpretation of eight articles in the Federal Telecommunications and Broadcasting Act.

These articles regulate what are known as “audience rights”, which refer to issues such as the division between advertising and editorial content, the difference between fact and opinion, and non-discrimination requirements. Humberto Castillejos, the president’s legal counsel, said the executive power, not the IFT, should have authority to regulate these matters. The Supreme Court was expected to take a number of months before issuing a ruling.

In 2016 the government awarded a competitive tender to build a nationwide 4G telecoms network OUTLOOK: By late 2016 and early 2017 it was becoming increasingly clear that Mexico’s macroeconomic situation was likely to become less certain in 2017. Sánchez Ortega at the IFT noted the results of the Mexican central bank’s regular survey of economic experts both before and after the US elections held in November 2016. Before the election the October 2016 survey pointed to a 2017 consensus for inflation of 3.6%, GDP growth of 2.3%, average bank interest rates of 5.55% and an exchange rate of MXN18.65:$1.

After the US elections, in the December 2016 survey, the consensus view had shifted substantially: it was now suggested that inflation would be higher, at 4.1%; GDP growth would be lower, at 1.6%; bank interest rates would be higher, at 6.46%; and the Mexican peso would slip further against the US dollar to MXN21.21:$1. Sánchez Ortega took the view that in these more adverse circumstances the telecoms sector would most probably continue growing in 2017, but at a somewhat slower rate. The sharp fall in mobile phone tariffs that has occurred over the last few years would stabilise and potentially bottom out, while the proportion of the tariff reflecting the cost of handsets would likely edge up because of the exchange rate.

ARPUs across the sector would likely face further downward pressure, while pay-TV rates were expected to trend upward as the weaker exchange rate pushes up the cost of imported content. If macroeconomic conditions became particularly difficult, the long-term trend to migrate from prepaid to post-paid mobile phone contracts might stop or even experience a reversal. However, Sánchez Ortega stressed that increased investment and competition in the sector would continue to be an important driving force. “The operators are going to continue investing and growing their markets, but at a somewhat slower rate than before,” he said.

 

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The Report: Mexico 2017

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