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America Movil's stocks plunged March 25 after the telecom reform was sent to Congress. (Photo: Cofemer)
Wednesday, March 26, 2014
Perspectives

Mexico Telecom Reform: Mixed Reaction


Experts disagree on the effect of Mexico’s planned telecommunications reform.

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

 

A draft bill in the Mexican Congress that builds on last year's reform of the telecommunications industry reportedly gives the sector's new regulator broad powers over telecommunication, TV and radio companies deemed dominant, including the ability to sell assets, revoke concessions and share networks and infrastructure. América Móvil and Televisa announced March 7 that the Federal Telecommunications Institute deemed them dominant players in the industry and ordered them to share infrastructure with their competitors. How competitive is Mexico's communications sector today, and what factors are behind the new legislation? How would the proposed legislation affect companies deemed dominant and their competitors? How much would the proposed changes affect Mexican consumers?

 

Calvin Monson, senior vice president of telecommunications at Castalia Strategic Advisors: The danger with the kind of regulation in the draft legislation under consideration is that it promotes the interests of competitors against the interests of consumers and competition. The new Mexican telecommunications regulator IFT was required by the recent constitutional reform to make a determination within a relatively short timeframe regarding the dominance of América Móvil and Televisa. IFT has now found both firms dominant, basing its determinations principally on market share measures. What matters more than a determination of dominance are the kinds of measures that will be imposed only on the dominant firms. For example, some of the provisions in the draft legislation now being considered would impose some heavy-handed regulatory measures only on the dominant firms, forcing price changes and promotions and discounts to undergo lengthy review. Discounts and promotions will take longer to come into effect, giving competitors a considerable head start. This would be good news for the competitors because it takes the pressure off but would be bad news for consumers. The unintended result of this kind of regulation is less competition and more gains in market share for the non-dominant firms. This kind of regulation has already been tried in the United States with poor results. The FCC regulated AT&T as a dominant firm, looking almost exclusively at market share measures, and indicated it would continue to do so until market share dropped below a predetermined level. The result was that AT&T simply stopped competing until it lost the requisite amount of market share. This giveaway of market share to competitors without them really having to compete for it was bad for consumers and bad for competition. Mexico should not repeat this unfortunate mistake."

 

Cresencio Arcos, adjunct professor of international relations at St. Mary's University in San Antonio and former managing director for international public affairs for Latin America and Canada at AT&T: Mexico for a significant period--before 2000 when political electoral democracy became a reality--breezily regarded itself 'a guided democracy.' It had the trappings of a functioning democracy, but the amalgamation of power under a single tent, the PRI, rendered a monopoly of political power. The economic arrangements were equally monopolistic. Competition in the economy was not the norm in many key sectors like energy and telecommunications. Many point to the Salinas period as the 'enlightened' phase of economic modernization but not a truly open economy. The emergence of NAFTA greatly aided the Mexican march toward economic efficiencies. Membership in the OECD forced Mexico to begin to behave even more like an open economy. The OECD in the last twenty years has criticized Mexico's 'managed' approached to a real and effective competition policy which has continued especially in telecommunications and TV. Telmex and Televisa became the two private-sector giants. The regulatory mechanisms created to guide and regulate the sectors readily became industry 'captured.' Token market share to competitors has been the regulatory/industry scheme. The new proposed legislation, in mandating asset or infrastructure sharing, will stimulate growth by reducing market entry costs. Thus, better consumer prices based on actual cost will result. What remains to be seen is if there is truly a political will to make the economy more competitive and effective this time and move away from protectionism.

 

Ramiro Tovar Landa, senior advisor at the Brattle Group in Mexico City and economics professor at the Instituto Tecnologico Autonomo de México: Mexico's telecommunications industry was immersed in a transition to facilities-based competition, but a long trail of regulatory measures, including the new ones issued recently, have the objective of changing the market to service-based competition by unbundling the América Móvil network in order to be accessed by all current and potential competitors. The policy choice is clear: to maximize the number of competitors and improve the costs of the current alternative competitors by avoiding investment in their own infrastructure and using mandatory unbundling of the incumbent facilities. The international experience in such a regulatory approach is far from a desirable one. The new regulatory measures go too far beyond mandatory unbundling. In fact, they impose so many investments and duties, with the sole objective of being able and ready to serve the competitors without a return, that the whole investment risk is borne by America Móvil and Telmex. The European and U.S. experience with cost-based access regulation was ignored. One of the most controversial regulatory issues in Europe (and elsewhere) is whether the emerging Next Generation Networks should be subjected to cost-based access regulation or whether at least a temporary removal of obligations should be granted. Mandatory unbundling with cost-based regulation is not consistent with investment in sunken assets such as those involved in NGN. The empirical literature concludes that cost-based access regulation discourages both incumbents and alternative operators from investing in networks. Mexico needs investment in inter-platform competition and away from relying on only one network. The new regulations imposed on América Móvil and Telmex have a benefits flow to their competitors, but which kind of benefits users will see is a question only time will answer.

 

Gustavo Pupo-Mayo, chairman of the Television Association of Programmers (TAP) Latin America: We have understood for months that the intent and purpose of the Peña Nieto administration's reform agenda, in particular as it pertains to the telecommunications industry, was meant to: 1) create a more equitable and competitive market environment, 2) strengthen the rule of law, 3) attract more foreign investments and 4) lower the cost of products and services for the Mexican consumer. As a matter of principle we have been fully supportive of such noble goals. Nonetheless, we have uncovered language in the draft of the secondary laws proposal that is at odds with both the intent and purpose of the Mexican government. In fact, the proposal will confiscate half of our advertising revenues and transfer these monies to the pay-TV companies, which are also controlled by dominant market players. As a result of this, there seems to be an inconsistency between the expressed objectives of the reform and the actual provisions of the legislation. Therefore, if left as currently proposed, the new law will have a chilling effect on any new investment considerations and significantly affect the cost of pay TV to the Mexican consumer. In order to recuperate their confiscated revenues, the programming companies will have no other recourse but to raise their prices to the pay-TV companies. These in turn, will be forced to raise subscription rates. We remain confident that this draft language will be amended in order for it to be true to the intent and objectives of President Peña Nieto's reform agenda.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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