Taming a Bully

U.S. Companies Tackle Mexican Telecommunications Market.
Michelle GabrielleNovember 28, 2000

How do you compete in a market that professes to be competitive, even though it’s still dominated by a bully?

You start by negotiating with international bodies, like the World Trade Organization, as the U.S. has begun doing in the case of Mexico’s telecommunications market. You try to get the country to lower its trade barriers and to allow foreign competition in.

That sounds good, but when it comes to specifics, a local situation can get thorny. Mexico, it turns out, thinks it is acting competitively. Its own new trade rules are, indeed, an attempt to defang Telefonos de Mexico, or Telmex, the former Mexican telecommunications monopoly. But in doing so, it has set a pricing floor for Telmex—a decidedly anti-competitive move, looked at from Telmex’s perspective.

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Seeking more access for U.S. telecommunications enterprises in Mexico, the United States has entered the fray against Mexico. On November 8, U.S. Trade Representative Charlene Barshevsky, asked the World Trade Organization to form a panel to investigate U.S. claims that Mexico has failed to comply with its previous WTO commitments in the telecommunications sector.

The WTO agreement, the first multilateral telecommunications trade agreement ever reached, became fully enforceable on February 5, 1998. The 77 countries that have now made commitments comprise the world’s growing telecom service market, with 2000 revenues estimated to reach $900 billion. This agreement on basic telecommunications is particularly important because 85 percent to 90 percent of all telecom service revenues are derived from the types of basic telecom services covered in the agreement.

The approximate time it takes for a dispute settlement totals one year and three months, which includes an appeal.

Mexico says that its telecommunications rules, which seek to level the playing field between Telmex and smaller competitors, encourage competition. They prohibit giant companies like Telmex from reducing their service rates unless their competitors have previously established lower rates.

“But rules don’t mean anything if they are not being enforced,” says Paul Aron, an analyst at Lehman Brothers, in New York City.

For its part, the U.S. alleges in its WTO complaint that Mexico has failed to ensure “timely, non-discriminatory interconnection for local competitors, cost- oriented interconnection calls into and within Mexico, including calls to remote regions where competitive suppliers lack facilities, and competitive alternatives for terminating international calls into Mexico, currently set at a rate of nineteen cents per minute, or up to fifteen cents per minute higher than cost.”

But the U.S. may have a hard time getting Mexico to move on the issue. “Any time you are trying to get a foreign government to do something, it is more difficult,” says Aron, adding however, that “the complaint should help ensure reasonable implementation of the new rules.”

“A competitive framework must be put into place that allows for continuous investment in Mexico, as well as enabling the people of Mexico to consistently enjoy greater affordability or access to telecommunication services,” the analyst says.

Although Mexico’s government may profess to be pro-competition, its regulatory agency, Cofetel, appears powerless against Telmex. It has given the company the run of the telecom mill, not only getting away with ignoring the rules but profiting from their non-compliance, as well.

Telmex Copies MCI

In its attempt to maintain its market dominance, however, Telmex may be no different than its competitors, says Aron. “Telmex is, in a sense, copying what MCI did in the past, using the regulatory arena as an opportunity to protect itself in the telecom industry.”

Based in Mexico City, Telmex was formerly owned by the Mexican government and then privatized in 1990 to foster competition and lessen anti-competitive behavior. Since then, it has been wreaking havoc in the Mexican courts, filing legal complaints, protesting the new rules imposed by Cofetel.

“If Telmex is not happy, says Rowena Dasgupta, senior writer for specializing in Latin America, “the [Mexican]Supreme Court can override any decision made by Cofetel.”

In an October 4 press release, Telmex argued that the new telecommunication rules “require [Telmex] to establish a price floor, which limits the company’s ability to pass on savings and will result in higher prices for consumers.” As a result, Telmex believes, its competitors will experience undeserved higher profit margins through an unjustified market advantage, and Mexican consumers will be the ones to suffer.

The regulations also state that “the tariffs associated with, among others, billing and collection, emergency calls, operator calls, directory inquiries, directory listings, collect calls and installation of leasing of long-distance circuits must be provided by Telmex to other license holders, and Telmex is limited only to recovering its direct costs including the cost of capital.” Telmex insists that the regulations benefit their competitors “via additional subsidies and require the company to offer services to its competitors below its costs,” according to a company press release.

Telmex fears that Mexico’s new rules will hinder its growth. But Dasgupta, the writer, says: “Telmex’s dominance is not about to disappear overnight. They have the advantage of branding.” Many consumers–old and new– will continue to use the services of the telecommunication services company that they know best.

“Mexico is becoming more and more dominant in the global economy,” says Dasgupta. “Telmex is expanding. If Mexico, indeed, wants to be a part of the Internet global communications network as we know it today, it is only a matter of time before Telmex will have to cooperate. Being a fully invested player in the global economy means you have to comply by some principles.”

However, it appears that Telmex is taking advantage of its dominance over the Mexican telecom market to put out to pasture any Internet service provider that may pose a threat to the success of Prodigy, which is owned by Telmex’s president, Carlos Slim. Telmex has refused to provide to competing ISPs the lines that are vital to managing Internet connections, thus limiting these ISPs’ ability to expand their customer bases. Meanwhile, Prodigy, one of the biggest ISPs, apparently obtains these lines with ease, allowing it to expand rapidly at the expense of the competition. While competing ISPs are being forced to suspend their market-expansion efforts, Prodigy is adding 30,000 customers per month.

Further, in a Telmex earnings conference call on April 26, Adolfo Cerezo, Telmex’s CFO, boasted, for example, about the company’s progress in Guatemala, where Telmex continues to work toward a rapid expansion and modernization of the telecommunications infrastructure.

Telcel, Telmex’s Mexican cellular subsidiary, “continues to add customers,” says Cerezo. “At March 31, the total customer base was almost six and half million.”

In addition, for the first quarter, Telmex’s total revenues reached 26.4 billion pesos ($2.8 billion), 23.7 percent higher than in the same period of 1999.

It’s easy to see why Telmex is putting up such a stink about Mexico’s new rules. They’re scared that if the pricing floor is enforced, they’ll lose customers, market share and profitability, and their throne in the telecommunications industry. But Mexico’s agreement with the WTO still binds Telmex to the rules.

U.S.-based WorldCom, one of the major non- Mexican players in telecommunications, owns 45 percent of a telecommunications joint venture, Avantel, in Mexico. The remaining percentage is owned by Grupo Financiero Banamex-Accival (Banacci), one of Mexico’s largest financial institutions. The company is actively supporting the U.S. request.

John Stupka, president of WorldCom Ventures and Alliances, says, “We are hopeful that this action will lead to a predictable and equitable competitive playing field, delivering the full benefits of competition to Mexican consumers and businesses.”

“Without vibrant competition in Mexico’s communication industry,” warns Stupka, “the growth of the Internet and the tremendous benefits of the digital revolution will not be fully realized by its citizens.”

AT&T also owns 49 percent of a joint venture in Mexico, called Alestra. The remaining 51 percent is owned by Alfa, a Mexican business consortium, and Visa-Bancomer, a Mexican banking services organization.

Dan Lawler, a spokesperson for AT&T, says that Telmex is just not playing fair. He says that Telmex’s reluctance to comply with the WTO agreement “makes it almost economically impossible, for new companies especially, to get in and compete in the telecom market.”