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With the new law, America Móvil is forced to grant consumers tangible reductions in costs. Here a consumer in Oaxaca. (Photo: Mexico Government)
Wednesday, August 6, 2014

Mexico Telecom Reform: Investors, Consumers Benefit

Mexico’s telecom reform
will attract investment and provide higher quality and less-expensive services for consumers, experts say.


Inter-American Dialogue 


Mexican President Enrique Peña Nieto on July 14 approved an overhaul of the country's broadcast and telecommunications sectors. The reforms include tough new restrictions on companies deemed to be dominant. Did the final legislation meet the expectations of reform advocates? Which companies stand to gain or lose the most? Will the reforms lead to more competition, and will consumers see a difference? Will Mexico's economy grow as much as Peña Nieto has suggested as a result of these changes?


Rogelio Ramírez de la O, president of Ecanal in Mexico City: The telecommunications reform fulfilled some, but not all, of the expectations roused when President Peña Nieto announced the effort to limit monopoly powers and open this important sector to competition. The constitutional reform of 2013 left no doubt that dominant firms would be forced to abide by asymmetrical rules to foster competition. The secondary legislation is the one that really counts because it interprets, according to legislators, the letter and spirit of the constitutional reform. It delivered on those promises with regard to telephones and Internet, but not with regard to television. With the new law, America Móvil is forced to grant consumers tangible reductions in costs. Consumers will no longer have to pay domestic long-distance charges. Excessive charges and bad practices that limited consumers' choices have been eliminated. The asymmetric rule applied on America Móvil as a dominant player having more than 50 percent of the market compels it to provide interconnection free of charge to competitors. This will encourage new entrants and lead to an overdue reduction in tariffs. But the secondary legislation does not consider Televisa, which controls more than half of the pay TV market, as dominant by a deceiving use of wording by legislators. They considered it not dominant in the TV sector, though dominant in pay TV services, that is the market that matters for economic rents. This limits the reform gains mainly to what is pulled out of America Móvil. Television companies are also allowed to increase advertising time from 5 percent (which is expandable if they have national independent production) by an additional 2 percent.


James R. Jones, member of the Advisor board and co-chair of Manatt Jones Global Strategies: Most promising about the telecom and broadcasting reforms is the clear indication that the Mexican government intends to enforce these anti-trust statutes without delay. Otherwise, a very savvy business leader like Carlos Slim would not have taken the lead to divest some of his telecom holdings to meet the law's requirements. Mexico and other developing countries have been known to pass comprehensive laws without adequate enforcement. Mexico's actions to disallow any one business entity from dominating more than 50 percent of the market should indeed bring about more competition, and more competition should result in lower costs and better service for customers. That will indeed increase Mexico's economic competitiveness and growth. But more clarity is needed on the scope and specifics of America Móvil's divestments. Certainly global telecom companies will be interested in buying the divested assets including Telefónica which has been trying to increase market share for 20 years as well as Virgin Mobile, Vodafone, AT&T and possibly Verizon, which has had a couple of unsuccessful experiences of trying to penetrate Mexico's market. One thing is certain. Carlos Slim will come out a winner. It will be interesting to see where he deploys the billions from the America Móvil divestment. Wherever it is, his horizons will be limited by the law of economic dominance. Mexico will also be the winner.


Amy Glover, director at McLarty Associates: The reform is a step in the right direction and will increase competition in a highly concentrated sector. President Enrique Peña Nieto has said it will provide the public greater access to telephone and Internet services. A poll conducted by Imagen shows that 81 percent of the population approves of the measure, making it one of the more popular issues on Peña Nieto's reform agenda. The entity to watch will be the Federal Telecommunications Institute (IFT), the new regulatory body that will be responsible for implementing the law and devising further regulations. In March, both America Móvil and Televisa were deemed economically dominant actors and will be required to take specific actions as a consequence of that ruling. Carlos Slim has already announced that his company will study how to comply and will take actions to divest within the next six months. The need to invest more in the physical telecom infrastructure presents very interesting opportunities for foreign investors, who can own as much as 100 percent, whereas investments in radio and television broadcasting are limited to 49 percent. Experts believe the details related to broadcasting are less clear and give Televisa wiggle room to legally challenge the assertion that it is a dominant player. Televisa can be expected to push back on these regulatory measures, but regardless, a public bid for two new television channels will go forward soon and will inevitably create more competition over time. While ensuring greater competition in the telecommunications sector in Mexico will remain a challenge and require continual vigilance, there is no doubt that this overhaul is an important advance that will attract investment and eventually provide higher quality and less-expensive services to the consumer. As with the other reforms, however, we should not expect an immediate impact on economic growth, as most of these investments will take time to consolidate.

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

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