In Is It the End of the Mexican Telecom Monopoly? David Floyd reveals the history of the telecommunications market in Mexico from late 1800 until the present. A little of Carlos Slim biography is also disclosed in the article to fully understand what this telecom monopoly really is about. Next, the article states the impact the new reforms, known as the Pact for Mexico, may have on this monopoly. And lastly, the changes that the Mexican telecommunications market is expected to see.
The Mexican Telephone and Telegraph Company abbreviated Mexicana or Mextelco was established in 1882 and then acquired by an AT&T subsidiary in 1905. In that same year, Ericsson acquired a concession to function in Mexico, which created the subsidiary Mexeric, in 1909. The Mexican Revolution tore the country apart two years later. But Mexeric more than tripled its subscriber base in the chaotic 1910s, turned a profit and managed not to lose it all to the peso's devaluation. Mexicana was not all that fortunate. The government nationalized the firm amid the revolution, by 1920 it had a smaller subscriber base than the upstart Mexeric and in 1926, ITT bought the firm. The two networks weren’t integrated, so consumers had to pay both companies if they wanted access to the whole. However, the firms' relationship was not one of fierce rivalry but coordinated price gouging.
Things became genuinely complicated when ITT acquired a significant stake in Ericsson, and Ericsson's Mexeric acquired a portion of ITT's Mexicana. In 1947, Teléfonos de México, Telmex, was founded to take over both companies' networks. In 1958, Mexican companies bought out Ericsson and AT&T's shares in Telmex with government support. In 1972, the Echeverría administration nationalized the company, but Telmex was re-privatized in 1990 when 20 percent of its shares went up for public auction. The largest buyers, France Télécom (now Orange), Southwestern Bell (now AT&T) and Carlos Slim's Grupo Carso.
Carlos Slim
Carlos Slim is a man who has never lacked ambition. He invested in bonds at 11, bought shares in Banco Nacional de México at age 15, became a stockbroker in his twenties and was sitting on $40 million before he turned 27. During Mexico's 1982 financial crisis, he bought weak companies and turned them profitable. Slim one of the two richest people in the world, yet very modest. Slim owns or has owned businesses in manufacturing, chemicals, construction, transportation, telecom, and retail. These include Sears in Mexico and ProdigyMSN, the Spanish-language internet portal that he co-founded with Microsoft's Bill Gates in 2000. He has sat on the board of Phillip Morris and is now the largest individual shareholder in the New York Times Company. But for over 20 years, the foundation of Slim’s empire has been the Mexican telecom monopoly, comprised of Telmex and Telcel, the country's dominant mobile service provider. He took control of Telmex in 2011, buying out AT&T's 40 percent stake. Telmex controls around 80 percent of the country's landlines, while Telcel controls around 70 percent of mobile subscriptions. América Móvil, of which Telmex and Telcel are shareholders operates in 16 other Latin American countries and the U.S., not to mention the firm’s significant holdings in Dutch and Austrian companies.
The End of Mexico's Telecom Monopoly?
At the end of 2012, Mexico's three main parties agreed to a push of cross-sector reforms known as the Pact for Mexico. The law handicaps dominant companies, those that control more than 50 percent of the market in a given sector, requiring them to pay different rates from their competitors. A dominant company cannot charge competitors for calls to its network, must share its infrastructure and is prevented from charging roaming fees. The reforms also eliminate long-distance charges for all providers. The new rules are already beginning to chip away at América Móvil's revenues in Mexico. Wireless service revenues fell 6 percent in the first quarter of 2015. Wireless subscribers fell by 1.7 percent. The company's net income tumbled 42 percent, but América Móvil can't lose market share fast enough. An initial step will be spinning off América Móvil's towers into another company, but the company may have to sell assets as well.
América Móvil's competitors in Mexico are happy to help the company lose market share. Spain's Telefónica is currently Mexico's second largest wireless provider through its subsidiary Movistar. Between the third quarter of 2013 and the third quarter of 2014, the company edged up from 18.7 percent of Mexico's wireless subscriptions to 20.1 percent. AT&T purchased Iusacell in November and also acquired Nextel Mexico and is poised to make a big re-entry into the Mexican market. By 2017, both brands will be subsumed under the AT&T name and logo.
Telmex and Telcel have been the only game in town for decades, and Carlos Slim has always been the man behind the curtain. AT&T has dabbled in the country under various guises since the 1880s, but now it wants to ramp up its presence under its own recognizable, long-established brand. The next era in Mexican telecommunications is shaping up to be one of stiff competition between three international rivals: América Móvil, Telefónica, and AT&T.
Economic Principle Applied
The article discusses the transition of the Mexican telecommunication market from a monopoly to an oligopoly, which was the purpose of the Pact for Mexico. Although Slim was not the sole supplier of telecommunications in Mexico:
1. His companies held a very large amount of the total market. In many regions of Mexico, Telcel and Telmex and the industry were synonymous, which meant that whoever chose not to get the service from them, couldn’t get the service at all.
2. Telmex and Telcel had control over the price because consumers had no choice, but to pay the price set by them.
3. They made it very hard for other companies to enter because their network coverage was almost impossible to compete with.
An oligopoly is characterized by:
• A few large producers, in this case América Móvil, Telefónica, and AT&T.
• Homogeneous or differentiated products. In this case being differentiated with nonprice competition and supported by heavy advertising.
• Control over price but mutual interdependence meaning each one of the firms must consider how its rivals will react to any change in its price.
Opinion
As the article mentions, Slim has always been the man behind the curtain when it comes to telecommunications in Mexico. This new reform is making it hard for him to control the market as he had been for the past decades. The raising oligopoly market structure where América Móvil, Telefónica, and AT&T share the country's telecommunication will give people more options and hopefully lower the prices as well. In my personal experience, in the past few years, the telecommunication market has changed drastically. People complained a lot because Slim was doing whatever he wanted with the prices, the service and network coverage since he had no close competitors. But it was either the mediocre service he offered or nothing. Hopefully, this reform will help shape the telecommunications in Mexico in a different way, unblock the entry to new companies and offer better service to the people.