Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
As the second largest telecommunications market in Latin America, Mexico commands great interest from foreign companies. Nevertheless, over the last decade most of the attention has originated from equipment and application vendors hoping to become the main providers for local telecom operators. Thus far, the mobile sector has been the most attractive market segment for vendors for two main reasons: first, the aggressive investment in maintenance, expansion and modernization of networks by the two main market operators—Movistar (Telefonica) and Telcel (America Movil). Second, the lack of restrictions on the share of foreign ownership allowed in mobile service providers which has expanded the funding possibilities for local operators.
On the other side of the spectrum, Mexico keeps foreign ownership restrictions for other segments of the telecom industry, ranging from any wired service provision to the pay-TV industry. This protective measure has hindered the local telecom market development by limiting the number of companies willing to invest in the provision of non-mobile telecom services in Mexico and by increasing the operating cost of foreign-owned mobile players such as Nextel (NII Holdings) and Movistar.
Signals Telecom Consulting has identified some of the major market requirements needed to attract foreign investment in telecoms: transparency in the country’s regulatory framework; large population; presence of competition; elimination of protectionist measures (e.g., foreign investment caps) and creation of public-private partnerships.
In Mexico, the incredible number of lawsuits (e.g., the infamous “amparos”) in the telecom sector doesn’t help project transparency in a market that desperately needs to modernize its current regulatory framework. Foreign investment restrictions alleviate operators’ need to launch new services as they curb the intensity of competition. Furthermore, the historical lack of public-private initiatives—although this is supposed to change under the administration of Mexico’s president Enrique Peña Nieto—reduces the possibility of investment in rural/remote areas that currently lack infrastructure.
One of the paradigmatic cases of investment restriction in Mexico is the government’s decision not to grant Telmex a license to offer pay-TV services. Hence, the operator has little incentive to invest aggressively in modernizing its wired networks beyond those areas where it faces increased competition from other broadband providers, basically Mexico’s major metropolitan areas.
On the other hand, companies such as Movistar and Nextel aren’t allowed to increase their investment in the local market because of the foreign cap limitation on ownership, which, if lifted, may lead these two companies to acquire one of the local backbone providers (most of which are experiencing financial difficulties) to decrease their operating costs by not having to resort to a third party for their transport/backhaul services. Such acquisitions would also help diversify their service portfolio and strengthen their position as integrated service providers in some of the most highly-desired vertical markets of the economy. The obstacles faced by the three aforementioned companies act as a subsidy to local carriers that have “captive clients” on the transport business and don’t have to face increased competition on their traditional mass market business segments, which hinders them from aggressively investing on innovation and coverage expansion in the short term.
Signals Telecom Consulting considers that the elimination of the investment obstacles currently present in Mexico’s telecommunications market would:
- Accelerate market consolidation, especially in the CATV sector. It should be highlighted that this may not necessarily lead to a decrease in the number of service providers that offer services to a household since the merger of CATV companies would occur between operators that don’t have overlapping networks. The creation of larger, new CATV operators may help counterbalance the expansion of the existing, large service providers in the broadband and pay-TV segments.
- Open the possibility for Movistar and Nextel to make acquisitions that would help strengthen their market position as well as enter into new business segments. It shouldn’t be a surprise that once foreign cap restrictions are lifted in Mexico, these two companies start looking at potential acquisition targets that not only include some of the usual suspects—Alestra, Axtel, Maxcom, Megacable, etc.—but also smaller CATV operators. In addition, any company that decides to start consolidating CATV operators in Mexico will most likely invest in the deployment of infrastructure (e.g., overbuilders) in the regions where only Cablevision, Cablemas and Megacable are the sole triple play providers.
- Increase pressure on the provision of broadband and pay-TV services. Foreign investors willing to enter Mexico’s non-mobile markets will focus most of their investment on the provision of these two services. In other words, an escalation of investment to improve quality of service, increase broadband speeds, and reduce rates is very plausible. Furthermore, the inevitable increase of convergent offers may trigger a proliferation of companies interested in complementing their current service offering via the launch of a mobile virtual network operator or MVNO.
Finally, it should be mentioned that the elimination of foreign investment restrictions in Mexico will not immediately translate into drastic changes in the market’s competitive environment. This is mostly due to the current financial situation of many companies that in the past expressed interest in investing in non-mobile telecom assets. In other words, although there are many positive consequences of lifting investment restrictions in Mexico, the government must be cautious in its expectations. It shouldn’t expect a tsunami of new investors, since the prime candidates to expand the market are the companies that already have a presence in the market.
Jose F. Otero is president of Signals Telecom Group. His Twitter is Jose_F_Otero and he can be contacted at [email protected]