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Telmex: Deregulating the Demon
Mexico Business / July 1995

By Larry Luxner

On Dec. 10, 1990 -- after years of state-sanctioned inefficiency and neglect -- the government sold its unwieldy Teléfonos de México to Carlos Slim's Grupo Carso and other investors for $1.76 billion.

But historians may come to view May 18, 1995, as the day Mexico's telecom sector really took off.

On that day, the nation's Congress passed a long-awaited telecommunications law that effectively ends the Telmex stranglehold on long-distance phone service and for the first time opens up the domestic satellite industry to private investment. It also establishes the legal basis for transforming Mexico's Secretaria de Comunicaciones y Transportes (SCT) into a regulatory entity not unlike the Federal Communications Commission.

Rafael del Villar, the SCT's director-general for telecom policy and international negotiations, says the 1995 law replaces a regulatory framework that had become woefully obsolete.

"The law's purpose is to promote the development of telecom and the efficient use of technology by increased flexibility to carriers," he said. "It will guarantee the state's authority over telecom for national security or sovereign reasons, and strives to develop fair and strong competition between different telecom vendors."

That may be an understatement. No less than 30 companies -- and possibly 40 -- are angling for a slice of Mexico's $8 billion market in local, domestic and international long-distance service (worth $3 billion, $2.4 billion and $1.5 billion respectively). Many of those companies are household names in the United States -- AT&T, MCI, Sprint -- that see an enormous potential revenues in a country that still has only 9 phone lines for every 100 inhabitants.

"I think telecom will explode here," said Jorge Escalona, president of AT&T Mexico, which has 10,000 employees throughout the country. "All the major worldwide players will soon be in Mexico, thanks to the foresight of [former President Carlos] Salinas, who took the steps to open this market to competition."

Adds Sprint spokesman Vince Hovanec, whose company recently teamed up with Telmex to offer "seamless cross-border services" between the United States and Mexico: "This is a very positive step forward. Mexico is one of this hemisphere's leaders in opening up the telecom sector, in ways large and small. The law will give Mexican consumers more options and will introduce more competition into the Mexican market."

That should make millions of Mexicans happy. For years, the country had no choice when it came to basic telephone service. And although Telmex has made great strides since its privatization -- adding 3.3 million lines to its network in the last four years -- customers still complain about noisy circuits, inexplicable cutoffs and the $500 price tag for new residential lines.

Although actual competition in the long-distance market won't commence until 1997, there's no shortage of other developments leading up to the main event. Villar, speaking at a recent Washington seminar on the new telecom law, said he expects auctions for paging and trunking services to take place this August, for spectrum allocations (for local wireless applications) in September and for personal communications services (PCS) in January 1996. In August 1996, carriers competing against Telmex will begin operating; their networks will be interconnected with that of Telmex by Jan. 1, 1997, the date real competition begins.

The law itself doesn't charge for concessions on offering long-distance or basic services -- a relief to many smaller companies vying for a piece of the market -- but instead seeks to generate revenue from auctioning off the radio spectrum to the highest bidder. It also limits foreign participation for basic and long-distance telephony to 49%, except for cellular phone service, where the 49% limit may be exceeded with special authorization from the national foreign investment committee.

In addition, the law amends Article 28 of the Constitution by allowing private participation in the Mexican satellite industry -- which up until now had always been off-limits.

Carlos Mier y Teran, director-general of Telecomunicaciones de México -- the Mexican satellite and public telegraph system -- says the state no longer considers satellite communications a vital strategic asset, hence the change. Under the new law, the state keeps control over the spectrum and orbital positions assigned to Mexico, though companies no longer need licenses or concessions to operate earth stations. In addition, companies must establish their base of operations in Mexico (though they can have up to 49% foreign ownership) and must launch their satellites within five years after winning the concession.

"Nafta's passage has led us to establish private networks that use Mexican or U.S. satellites. These networks have been growing," he said. "Footprints of U.S. satellites have incidental coverage over Mexico, and the industry of home receivers has grown in Mexico. There are now more than 1 million satellite dishes. We're already the biggest market for satellite dishes in Latin America."

Mexico's satellite infrastructure -- built around its Morelos and Solidaridad satellites -- already encompasses 328 networks and four teleports with 4,500 earth stations. An educational satellite network now under construction will serve 10,000 rural schools.

Mier y Teran said the SCT will work with the FCC on reciprocity issues to permit U.S. satellites to send their signals to Mexico, and vice-versa. Nevertheless, the agency hasn't yet decided whether to sell its satellites as a package or individually.

"We will work with investor banks in order to define our strategy," he said. "Any potential investor would want flexibility."

As for the SCT itself, Villar said its powers will undoubtedly decrease as Mexico's new FCC-like regulatory agency comes into being. When that will be, or even what the new agency will be called, isn't known yet. Nor is the extent of its regulatory functions, such as the right to grant new concessions or prosecute violations of the law's anti-monopolistic decrees -- particularly as it regards Telmex.

"This is a hotly debated topic, with many players," Villar says. "Naturally we want to give birth to a very solid institution. However, that will depend on politics and other factors out of our control."

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