Why Mexican phones cost a bundle

"Para crecer hay que competir," says Eduardo Perez Motta enthusiastically. "To grow it is necessary to compete."

As President of Mexico's Comision Federal de Competencia (CFC), it's Perez's job to promote a fair and competitive marketplace.

Ask him about telecommunications, however, and his enthusiasm begins to wane. New entrants to the market, the CFC says, have "no real possibilities to compete".

The reason? One company dominates the telecommunications landscape in Mexico: Telefonos de Mexico.

Privatised in 1990, Telmex controls 94 per cent of landlines, 80 per cent of mobile revenues through sister company America Movil, and more than half the internet service provider market via subsidiary Prodigy.

As a result, it pockets more than three-quarters of the country's US$20 billion ($32 billion) telecommunications market, revenue that rose by 12.6 per cent last year alone.

The Economist Intelligence Unit agrees with Perez's assessment and says "Telmex continues to wield considerable market power and has been accused frequently of abusing its position".

For its part, Telmex purposely aims to dominate the various segments and sees nothing wrong with the competitive situation. It has, in fact, been so profitable it was dubbed the number one telecoms company in the world by Forbes magazine a few years ago.

"As a company, our intention is to invest in diversifying our services, so as to increase our customer base and capture a larger market share," says Telmex chief executive Jaime Chico Pardo. "We have every intention of maintaining our lead in the market."

Mexico's constitution bans monopolies, but Perez says Telmex has been "allowed" to get away with it.

"Mexico's telecommunications regulatory framework and regulator remain weak and have failed, to some extent, to foster access and competition," he says.

"Telmex has challenged CFC and [Comision Federal de Telecomunicaciones, or Cofetel] decisions before the courts and has been successful in delaying enforcement."

Perez says Telmex has managed to impede the actual collection of up to 40 per cent of the fines levied against it by the CFC and ordered by judicial actions.

"All these circumstances have allowed it to maintain and exercise its market power through relative monopolistic practices."

Cofetel is responsible for monitoring and assuring the performance of telecommunications carriers and serves as the regulatory body for all tariff and quality issues.

In June 2004, after a ruling by the World Trade Organisation, Cofetel was given greater regulatory powers by the Mexican Government to boost competition, but observers have been sceptical of the results.

Researchers at Syracuse University were scathing of the organisation, saying that "since its creation, Cofetel has assumed what can only be described as a pro-Telmex role in implementing its regulatory duties. As a result, the incumbent enjoys a monopoly over local, long distance, cellular and internet services in Mexico.

Its highly dominant position is largely because regulators have failed miserably."

The results have painted a chilling picture for the average Mexican as far as telecommunications go - only 18 per cent have a phone line, phone calls costs 50 per cent more than the OECD average, and only two in 100 have broadband, which puts the Latin American country second to last in the OECD rankings.

Telmex blames the socio-economic vagaries of the Mexican market. It says 65 per cent of customers aren't profitable and live in areas where competitors don't invest.

"The challenge we have is that the number of customers who can pay for telecommunications services in Mexico is limited," Chico told a Mexican business magazine.

"There are 10 million people registered with social security and two million more who don't have a permanent job. So the market is very small in terms of the ability of people to pay for services today."

With the average monthly wage in Mexico around US$310, the 349 pesos (US$31.50) a month for a broadband connection - 512 kilobits a second on Prodigy's Infinitum plan - is well beyond the reach of many.

But relative poverty is only part of the reason for poor broadband uptake. The CFC also apportions blame elsewhere.

Continents and cultures apart, New Zealand and Mexico share a dubious distinction - they are the only OECD countries that have failed to order the unbundling of their local loops, or the final link between the service provider's exchange and the customer.

"The lack of local loop unbundling and delays in solving access controversies in telecommunications means, among other things, that Mexico lags behind all OECD countries and many Latin American countries in terms of penetration of telephone and broadband services and infrastructure," Perez says.

Ironically, Mexican law does mandate all carriers to provide unbundled services, but adds the condition "where technically possible". Telmex has managed to persuade Cofetel that such a thing is not possible for the local loop, which means the "commercial viability of the first-movers in these markets has been seriously challenged", Perez says.

"Telmex has the ability and incentive to restrict competition in downstream markets by denying, delaying or discriminating against its downstream competitors in the retail markets, which need to obtain wholesale access, by treating its own downstream business more favourably," he says.

"This situation severely compromises Mexico's competitiveness and opportunities to take advantage from convergence to reduce the digital divide."

It's a view shared by Mexico's Central Bank President Guillermo Ortiz Martinez, who believes Telmex's resistance to regulation is hurting Mexico's competitiveness.

"This dominant position implies difficulties for promoting more competition and, as a result, for lowering prices," he said this year.

Indeed, Mexico has the highest costs for long-distance calling and broadband for business in the OECD. Yet the demand for high-speed internet is clearly there. There are 17 million web users, which is the world's largest single online Hispanic audience. Broadband, especially ADSL, is one of the fastest growing telecommunications markets - up 122 per cent last year, while dial-up numbers were down for the first time. The country's inaugural triple play service, combining cable TV, internet and telephony, was launched in March last year, and a second offering appeared in September.

Over all, Mexico has the second-largest information technology market in Latin America, after Brazil.

Nevertheless, despite 10 years of gradual liberalisation, its telecommunications market has remained a de facto monopoly.

The Government is considering reforms that will give regulators more power to tackle monopolistic practices - among them local loop unbundling.

With less than 20 per cent teledensity - the number of phones to 100 people - the issue of infrastructure deployment plays a strong role in regulatory decisions.

Attacking the incumbent - and by default Mexican billionaire Carlos Slim Helu, the world's fourth richest man, whose 43 per cent of shares gives him a controlling stake in Telmex - remains politically risky.

Whether or not change comes, Telmex is unlikely to take it lying down.

Last month Slim came out fighting, describing the criticisms of the company as a "smokescreen for state monopolies that increase prices without guaranteeing good quality" and blaming the state of the market on "20 years of bad economic policies" from the Government.

Perez admits change won't happen overnight or even in the foreseeable future. Even so, he is still hoping for a better manana, with the CFC "strongly recommending" de facto unbundling and more autonomy for Cofetel.

"The best solution is competition between services and alternative networks and facilities," he says. "This can be achieved through stronger policies and regulations to effectively protect and promote competition in telecommunications and improve connectivity for the Mexican society. Para crecer hay que competir."

MEXICO STATS 2005  
Population: 106.2 million
GDP: US$754.5 billion
GDP per capita: US$7105
Fixed lines: 19.52 million
Internet users: 17 million
Broadband subscribers: (overall): 2.3 million
DSL subscribers: 1.6 million
Mobile subscribers: 47.5 million*

*(overtaking fixed lines in 2000).  Sources: Cofetel, OECD and BuddeComm