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The Mexican Telecoms Sector
Mexico’s telecommunications sector competitiveness amid a changing economic landscape.
BY RYAN C. BERG, MICHAEL FERGUSON, AND HENRY ZIEMER
Mexico has emerged as one of the most viable destinations for the nearshoring of U.S. investment and supply chains, owing to its close geographical proximity, skilled workforce, and formal economic integration with its North American partners through the U.S.-Mexico-Canada Agreement (USMCA). Despite its natural position to reap the benefits of nearshoring, however, barriers to competition in the information, communications, and technology (ICT) sector hinder Mexico’s ability to reach its full potential. Mexico’s digital economy has grown increasingly prominent, with an evolving and dynamic fintech sector and increasing uptake of technology in diverse fields such as healthcare, manufacturing, and entrepreneurship, all of which depend on well-developed telecommunications infrastructure.
As the global economy becomes increasingly digitalized, Mexico’s ICT infrastructure and competition policy have come under greater scrutiny. The country must take steps to promote a competitive ICT landscape that courts private investment, bridges the connectivity gaps between urban and rural zones, and sets the country on the path to achieving its digital transformation goals. To foster this competitive environment, it is critical that Mexico strengthen and reaffirm the independence of its telecoms regulatory body—the opposite of what Mexico has appeared to be pursuing in the last month of President Andrés Manuel López Obrador (AMLO)’s administration with a constitutional reform package known as Plan C.
With over 121 million active broadband subscriptions in the country, Mexico is one of the largest telecommunications markets in Latin America and the world. Despite growth in recent years, the country’s ICT landscape is marked by significant regional disparities in access to high-speed connectivity and investment. In 2022, 76.2 percent of urban households had access to the internet, compared to only 46.2 percent of rural households. Considering nearly 20 percent of Mexico’s population lives in rural areas, roughly 11 percent of Mexico’s total population lacks connectivity to the internet and is thus effectively barred from participating in significant segments of the increasingly digital economy. Bridging this digital gap and promoting inclusion can only serve to assist Mexico in addressing its developmental disparities, increasing opportunities for participation in the formal economy, and priming the country for future investment. While the AMLO administration has tried to address the urban-rural divide through publicly funded programs like the Federal Electricity Commission (CFE)’s Internet para Todos (“Internet for All”) initiative, improvements in the competitiveness of the sector could open the floodgates for investment from private firms and lessen the burden on state resources to fill the gap.
ICT COMPETITION IN MEXICO
Since the Peña Nieto administration passed the landmark 2013 constitutional reform creating the Federal Telecommunications Institute (IFT), establishing a legally and financially independent regulatory authority for the telecommunications industry, Mexico has seen concrete improvements in the affordability and competitiveness of the sector. In 2022, the IFT reported that in the nine years since its establishment, the regulatory body contributed to lowering consumer telecoms prices by 28.7 percent, greatly increasing the accessibility of ICT services to end users. The IFT has also achieved concrete milestones in fostering competition and combatting some of the largest monopolies, reducing América Móvil’s share in fixed broadband from 73 percent to 50 percent. The IFT’s actions have also made progress in reducing the country’s overreliance on América Móvil as an investor in the sector, as the telecommunications company’s share of total investment dropped from 47.3 percent to 10.0 percent of overall investment between 2014 and 2021.
Despite the IFT’s progress in increasing competition, the ICT sector has significant room for improvement, with the Institute for Management Development ranking Mexico 54th out of 65 countries considered in its 2023 ranking of ICT sector competitiveness. Although the ranking identified Mexico as the second-most competitive ICT sector of the Latin American countries considered—behind Chile (42nd) and narrowly beating out Peru (56th), Brazil (57th), Argentina (61st), Colombia (62nd), and Venezuela (64th)—its placement in the bottom 20 percent of ICT markets globally reflects the continuous challenges that the country has faced in attracting private investment and cutting into the predominant position held by its largest market actor.
Mexico’s relatively high digital competitiveness ranking compared to its peers is largely driven by its comparatively high levels of knowledge among the digital workforce and the predominance of higher-tech exports. In terms of investment in the telecommunications industry specifically, however, Mexico ranks far behind Chile, Colombia, and Peru. Although it has decreased somewhat over time, América Móvil’s total market share continues to stand at roughly 70 percent as of 2022, granting the company significant political influence and advantages to ensure success in bidding on spectrum auctions. Furthermore, to state the obvious, the competition to earn the attention of consumers for nearshoring or friendshoring is global, not only regional.
The historical dominance of one company in Mexico’s telecoms sector is not an anomaly: like other industries heavily reliant on upfront investment of money and time into infrastructure development, such as the rail industry, the telecommunications sector lends itself to the formation of “natural monopolies” (or near-monopolies) where significant market concentration lies with a small number of firms. These tendencies toward market concentration, compounded by political corruption and clientelism, bar new actors from effectively entering the market and limit the variety of options available to consumers. The IFT possesses, and has successfully used, tools at its disposal to combat market concentration and encourage further competition. For example, the IFT can issue regulations to limit the expansion of companies that are designated as “preponderant” or occupying excessive market share. To effectively carry out these regulations, however, it is critical that the IFT maintain sufficient independence to mitigate the influence of political and corporate interests, instead issuing regulations guided by the technical expertise housed in the agency and consumer welfare. The current reforms pushed by AMLO would undercut IFT’s ability to make decisions free from political influence.
BARRIERS TO COMPETITION
Under the AMLO administration, actions to erode the integrity and independence of the IFT have limited its efficacy as a regulator of competition in the ICT sector, at times in contradiction to the president’s stated aims of reducing the digital divide in Mexico. In 2020, AMLO criticized the structure of the IFT, claiming that its operating costs outweighed its accomplishments and that it had fundamentally failed to dismantle monopolies in the sector (never mind that AMLO has close personal ties to Carlos Slim, CEO of América Móvil).
To diminish the IFT’s power, AMLO has followed a strategy of negligence to the point of impotence. Since 2019, the IFT has operated with only four commissioners. The president of Mexico is responsible for proposing commissioner appointments to the Senate, which then approves the president’s selections, but AMLO has refused to select commissioners. Because the Federal Telecommunications and Broadcasting Law requires a qualified majority of five votes to make important organizational decisions, the lack of appointments to the commission has effectively gutted the IFT’s ability to carry out its responsibilities and make decisions. Likewise, AMLO has slashed the IFT’s budget, reducing it from 2.0 billion to 1.5 billion pesos in the first year of his administration. AMLO’s latest reform, part of his constitutional amendment package, calls for the complete dissolution of the IFT and other autonomous institutions, issuing a decree that would create directorates within the Secretariat of Infrastructure, Communications, and Transport (SICT). Relegating the functions of the IFT to the SICT has prompted fears that telecommunications regulation will be increasingly influenced by the political whims of the administration, alongside making Mexico noncompliant with USMCA requirements regarding independent regulators.
Mexico’s high spectrum fees also play a major role in reducing the competitiveness of the ICT sector by discouraging new and small firms from entering the market. Mexico’s spectrum fees are assigned by the Federal Law of Public Fees, which mandates that operators pay two separate fees during IFT tenders: an upfront fee upon successfully winning a spectrum bid and a recurrent annual fee to maintain usage rights. The high costs associated give an advantage to firms with large market share and preexisting ownership of spectrum frequencies with high usership bases and discourage the participation of a larger variety of smaller operators without established revenue streams. This fee structure ultimately results in an unpurchased spectrum that reduces the overall coverage and quality of telecommunications services for Mexicans, as well as missed opportunities for telecommunications firms interested in doing business in Mexico.
When compared with regional peers, Mexico’s relatively high fees exert a clear downward pressure on attracting bids for spectrum. In 2021, the fees for spectrum bands under 1 gigahertz in tenders held in Mexico were nearly double those of Brazil and Chile. This disparity in price coincided with a disparity in bids received. While Mexico only received bids for 28 percent of spectrum offerings, Brazil, Chile, and the Dominican Republic all received bids for at least 50 percent of offerings. In May 2024, Mexico held a public consultation for a 5G spectrum auction—bidding for which is expected to take place in 2025—which attracted limited interest from operators due to the continually high spectrum fees. While the IFT has presented proposals to change the fee structure for spectrum bands, including lowering the annual fees for 5G spectrum and providing credits to companies to expand operations to underserved rural areas, such proposals have seen limited consideration by Mexico’s finance and communications ministries considering the IFT’s continued vacancies.
To address the urban-rural divide in digital access, one of AMLO’s major policy initiatives has been the creation of the CFE Telecomunicaciones e Internet para Todos (“Telecommunications and Internet for All,” or CFE TEIT), a state-supported enterprise specifically intended to provide services in rural areas that have seen limited investment from private sector telecommunications operators. In 2020, CFE TEIT signed an agreement with Altán Redes, designating it as a mobile virtual network operator to provide services using the Red Compartida, Mexico’s 4.5G wholesale broadband network. In 2024, AMLO stated that Altán Redes will be wholly managed by the CFE, ensuring that CFE TEIT will not only act as a service provider in underdeveloped regions but will also compete with and undercut the private sector in more competitive regions of the market. Alternatively, AMLO could consider strengthening the independence of the IFT and empowering it to issue regulations that encourage private sector investment in the same communities CFE TEIT was originally designed to serve, opening the door to new investment while avoiding the need to devote already thinly spread resources to address digital development goals.
ICT SECTOR ROLE IN NEARSHORING
Cultivating a competitive ICT sector and maintaining the independence of the IFT will play a critical role in ensuring Mexico is the destination of choice for nearshoring investment. Most importantly, maintaining the IFT’s independence is critical to maintaining compliance with the USMCA, the trade agreement most critical to Mexico’s comparative advantage as a nearshoring destination. Chapter 18 of the USMCA deals specifically with telecommunications and mandates that each party of the agreement establish a regulatory body that is separate from suppliers of telecommunications services and able to make regulatory decisions that are impartial and evidence based. Likewise, the chapter notes that competitive markets are valuable to “deliver a wide choice in the supply of telecommunications services and to enhance consumer welfare.” Ensuring the independence of Mexico’s telecoms regulatory bodies mitigates the risk of state-state and investor-state dispute panels under the USMCA, increasing investor confidence and preventing the occurrence of costly technical consultations and resolution panels. The suite of reforms now being pushed by AMLO in this last month proposes to dissolve the IFT.
Opening the door to greater private competition does not mean Mexico must compromise on its goals to close the digital divide and promote development in historically underserved communities. Quite the opposite: increasing opportunities for new telecommunications providers to operate at varied price points will open the door for private investment to fill the gaps in Mexico’s digital coverage environment. By empowering the IFT to make consumer welfare–centric regulations independent of political consideration, regulations can be issued that reduce the cost of market entry for firms willing to serve rural markets and provide incentives for the expansion of services to underserved communities.
Nearshoring to Mexico across all sectors has the potential to boost the country’s economy by as much as 3 percent. As digitalization becomes an increasingly important component of the nearshoring conversation, increasing competition and expanding access to telecommunications services is imperative to both driving this economic growth and ensuring more equitable distribution of the benefits of nearshoring. A study by the World Bank found that a 10.0 percent increase in fixed broadband penetration is associated with an up to 1.38 percent increase in GDP in developing countries. If complemented with policies that promote digital literacy and skills in Mexico’s education system, a more competitive ICT landscape in Mexico could have a downstream impact on Mexico’s workforce, allowing it to compete even more effectively in an increasingly technology-centric global economy.
The incoming administration under Claudia Sheinbaum, set to take office in October, will have the opportunity to shift course and prioritize the promotion of a competitive ICT landscape as a pathway to digital development. Among the Sheinbaum administration’s cabinet appointments, the most likely to influence ICT and nearshoring policy are the incoming secretary of economy, Marcelo Ebrard, and the incoming secretary of communications, Jesús Antonio Esteva Medina. Ebrard, who previously served as the head of government of Mexico City and as the secretary of foreign affairs under AMLO, is seen as somewhat business-friendly, with a track record of engaging with international investors, including spearheading the campaign to attract investment to Mexico’s Plan Sonora solar energy project. Meanwhile, Medina has held leadership roles in Mexico City’s public works and infrastructure departments during the leadership tenures of both AMLO and Sheinbaum and thus has a track record of supporting Sheinbaum’s initiatives to promote digital inclusion.
While Sheinbaum has publicly supported AMLO’s proposals to dissolve autonomous regulatory bodies and has advocated for the expansion of the CFE’s Internet para Todos initiative, she differs from her predecessor in having a demonstrated track record of developing digital transformation strategies in partnership with international investors as mayor. As head of Mexico City’s government, Sheinbaum launched the city’s Digital Agency for Public Innovation and developed the largest free public Wi-Fi network in the world. Sheinbaum has proposed ambitious initiatives to increase digital connectivity, including launching a Mexican satellite. She has acknowledged that accomplishing these proposals will require leveraging investment through Mexico’s partnerships with Canada and the United States. Reinvigorating competitiveness in the ICT sector will be especially critical to help shore up investor confidence, shaken by anticipated constitutional reforms, as President Sheinbaum takes office. To accomplish this, Sheinbaum should reinvigorate the IFT to full capacity, especially if it is dissolved as proposed by the recent reforms, and affirm its independence, paving the way for a more competitive ICT landscape that attracts the investment needed to achieve her lofty goals.
CONCLUSION
As Mexico seeks to participate in global trends to realign and nearshore supply chains, fostering a more competitive ICT sector will be critical to extracting the greatest benefit possible for the country’s entire population. The existence and function of the IFT as a telecommunications regulator are enshrined both in the constitution and in the provisions of the USMCA. Mexico should empower the organization, rather than dismantling it, to carry out its role in combatting monopoly, protecting consumers, and opening the door for the expansion of telecommunications services throughout the country.
Ryan C. Berg is director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michael Ferguson is a former intern with the CSIS Americas Program. Henry Ziemer is a research associate with the CSIS Americas Program.
This article was originally published by the Center for Strategic and International Studies on September 12, 2024.
Republished with permission.
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