The Evolution of Chips, Smart Devices, M2M and Accessories

Mexico: A complex wireless market with strong prospectsBy Roberta Prescott

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Mexico’s wireless telecommunications sector is dominated by América Móvil’s Telcel, which controls about 70% of the market. That domination by a single carrier has pushed government regula-tors to implement plans to improve the competitive landscape, though the ef-forts have so far seen few results.

Those plans have included controver-sial decisions that have been tripped up by contrasting political interests and by a tendency for operators to appeal regu-latory decisions in court, starting end-less legal disputes.

Although it seems to be a complex mar-ket, in many ways the Mexican telecom sector is very similar to the other Latin American countries. Prepaid penetration is much higher than postpaid services – Mex-ico government regulator Cofetel reported there were 83.3 million prepaid customers and 13.7 million postpaid customers in the country at the end of the third quar-ter of 2011. Despite its dominance, prepaid growth has begun to stagnate, with some predicting the segment will remain rela-tively flat in the near term.

When it comes to technology, 2G con-tinues to dominate, though increased penetration of smartphones is beginning to push customers towards 3G services. At the end of the third quarter, 3G cus-tomers totaled approximately 8.1 mil-lion of the country’s total customer base of 97 million subscribers.

Lay of the Land As with other emerging markets, Mexi-

co’s telecom sector has shown tremendous growth. According to Cofetel, the sector grew 10.7% in the third quarter of 2011, a rate that is higher than the 10.6% aver-age growth posted in 2010. By compari-son, satellite television uptake increased 39% during the third quarter of 2011, while international long-distance traffic grew 22.9% and mobile telephone traffic, which is measured in minutes, increased 13.8% compared to the same period 2010. Fixed telephony usage decreased .2%, while mobile lines grew 9.9%.

Mexico’s wireless telecommunications sector is dominated by América Móvil’s Telcel, which controls about 70% of the

market. That domination by a single carrier had pushed government regu-lators to implement plans to improve the competitive landscape, though the efforts have so far seen few results.

Those plans have included controver-sial decisions that have been tripped up by contrasting political interests and by a tendency for operators to appeal regu-latory decisions in court, starting end-less legal disputes.

Some of the industry’s biggest issues are related to government regulations, with some analysts explaining that regulation is not a strong point for the country. An example is the process re-quired to change the mobile terminal rates system, which begun when more than 20 operators asked the govern-ment to regulate the fees charged by Telcel, resulting in the establishment of new rates by Cofetel. This resulted in the country’s antitrust commission (Cofeco) fining Telcel $1 billion for mo-nopolist business practices, which Telcel has been fighting in courts.

More recently, the Mexican courts ordered the Ministry of Communica-tions and Transportation to revoke Nextel Mexico’s concession awarded in 2010, citing a violation of rules in Auc-tion 21 committed by Nextel, which is controlled by U.S.-based NII Holdings, and its partner Televisa. Cofetel noted that other carriers paid nearly 20-times more for the same frequencies compared with what Nextel-Televisa paid. Rival carriers Iusacell argued that the spec-trum caps set by the antitrust regulator allowed Nextel to obtained the spectrum unchallenged with the minimum bid.

Shortly after, Nextel and Iusacell, which is controlled by businessman Ricardo Salinas Pliego, agreed to with-draw the lawsuits and end litigation. The companies cited a response to the federal government’s call of continuing

F E A T U R E R E P O R T

Countries Average Prepaid Penetration in 2011 (%)

10% 30% 50% 90%

Mexico

Colombia

Brasil

Argentina

Costa Rica

Germany

France

Denmark

United States

Canada

Source: Pyramid Research Group

to work under the premise of promoting the convergence, competition and cover-age of the wireless telecom segment.

“The issue is related to how legislation governs the telecommunications sector … it’s the source of the slowdown. The regulations are very permissive. There-fore, there are judgments that take four or five years to resolve. The rules fail to find a resolution … in a timely manner,” explained Jose Manuel Mercado, analyst for Latin America at Pyramid Research.

Wireless operator Movistar also noted that the number of permits and paper-work that operators must meet to install a fiber-optic cable or base station makes this process slow and expensive.

While regulators in Brazil and Colom-bia release industry numbers on a regu-lar basis, neither Mexico’s transport and communications ministry nor Cofetel are as open. SCT discloses subscribers, but does not release carrier market share or adopted technologies.

Competition in a dominant player’s scenario Informa Telecoms & Media estimates

that Telcel controls just over 70% of the Mexican wireless market, followed by Movistar with 21%, Iusacell with 5% and Nextel at just under 4%. The govern-ment is attempting to enact legislation to improve competition in the mobile space, including pushing for more mobile virtual network operators, the launch of number portability and the reduction in mobile termination rates mandated by Cofetel, which according to Informa has already had a significant impact on op-erator revenues.

Cofetel mandated sharp cuts in MTRs to 3 cents per minute by May 17. Calls must also be billed on a per-second basis and not rounded to the nearest minute.

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penetration rate at the end of 2005. Informa predicts that Mexico would exceed 100 million mobile subscrip-tions by the end of 2011, and noted that the three quarters leading up to mid-2011 featured the highest net customer addition results over the previous two years.

To gain subscribers operators are tar-geting prepaid mobile broadband servic-es, launching plans that include as little as one hour of access. Nearly 61 million of Telcel’s approximately 68 million cus-tomers are prepaid subscribers.

Telefónica’s Movistar, which observ-ers note is known as a low-priced pro-vider, counts more than 21 million sub-scribers with a strong position in the prepaid voice space. Movistar told RCR Wireless News that during the first nine months of 2011, it did manage to grow its postpaid segment by 21%.

Movistar is basing its growth’s strat-egy on more affordable prices, target-ing people between 18 and 53 years old, providing a diversified portfolio of smartphones and simplifying its offers. The carrier also said that it is improv-ing its mobile broadband network, and aiming the service at customers looking for value pricing.

Domination by oneThe Mexican government has a lot of

challenges to deal with in regards to the telecom sector. The major issue is its ability to increase competition in the market that is dominated on both the wireline and wireless side by América Móvil. The operator, controlled by busi-nessman Carlos Slim, made a big move last year when it agreed to pay $4.6 billion (62.1 billion pesos) to increase its stake in Teléfonos de México from

The regulator also approved cuts in fixed-line termination rates and in transit rates.

Informa believes that in the mid- to long-term, the reduction of interconnection rates is expected to enhance the competitive posi-tion of smaller carriers. Although competi-tion needs to be reinforced, analysts forecast that there is room for new competitors.

“We should look at this market not only from Telcel’s 70% market share, but through unexplored segments and regions,” noted Pyramid Research’s Jose Manuel Mercado. “Mexico is a very diversified country with different groups, which can represent a good opportunity.” Mercado added that niche sectors as well as enterprise markets are very attractive.

Mobile penetration is another relevant factor to be considered. Mexico’s pen-etration rate was 85.2% in the middle of 2011, which was nearly double the 45.1%

Telecoms Sector’s Q3 2011 Results – Mexican telecommunication sector

grew 10.7% in the third quarter of 2011, compared with 10.6% during Q3 2010, but was lower sequentially.

– In Q3, satellite television usage increased 39%, while international long-distance traffic grew 22.9% and the mobile telephony traffic increased 13.8% compared to the same period in 2010.

– Fixed telephony usage decreased .2% compared with the previous year.

– The number of mobile lines grew 9.9% year-over-year, hitting 97.1 million subscribers at the end of the quarter.

Source: Index of Telecommunications Sector Production (Itel), Cofetel

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59.4% to 92.8%, and securing control of fixed-line carrier Telmex.

However, Mexico is not the only Lat-in American country that has a strong, dominant player. In Colombia, América Móvil’s Comcel controlled more than 66% of the market at the end of second quar-ter of 2011, while Telefónica’s Movistar held just over 21% and Millicom’s Tigo was No. 3 with just under 12% market share. Daniele Tricarico, Informa Tele-coms & Media’s senior research analyst for Latin America, notes country com-parisons make sense only to an extent.

“Several new regulatory measures, such as the reduction of MTRs and the launch of number portability, have also been introduced in Mexico, but with dif-ferent results. For example, portability, which was introduced in Mexico in 2008, has not worked out as expected, with Telcel, the dominant player, benefiting the most,” Tricarico said.

Depsite America Movil’s dominant po-sition, competitors are not lying down. In April 2011, Grupo Televisa, the world’s largest Spanish-language broadcaster, said it planned to purchase a 50% stake in mobile operator Grupo Iusacell for $1.6 billion. The deal would have provid-ed Televisa a way to offer clients mobile phone service in addition to its package of home-phone, Internet and pay TV ser-vices sold by its Mexican cable unit. The deal would also have provided Iusacell, which filed for bankruptcy protection last year, a new source of funding after struggling to gain market share against América Móvil.

However, after several months of dis-cussion, Mexican regulators narrowly shot down the deal. By a three to two vote of the five commissioners, Cofeco rejected the deal. In a statement Iusa-

cell noted that in the “company’s opin-ion the decision did not encourage com-petition in Mexico’s telephone market.” Televisa noted the costs of fixed and mobile telephony and data services in Mexico are among the highest in the developed world, and that international organizations attribute this to the lack of competition in Mexico’s telecommu-nications industry and the dominance by a single participant with an 80% share of fixed-line telephony and 70% of mobile telephony.

“Accordingly, this decision taken by Cofeco damages the potential for compe-tition in a key sector for Mexico’s devel-opment, one in which Cofeco has already declared a company to be a dominant participant,” Televisa added.

Indeed, earlier this year the Organi-zation for Economic Cooperation and Development unveiled a report noting Mexico should quickly reform the laws and regulations governing its telecom-munications sector to boost competition, investment and drive growth across the economy. In its report, OECD said Mexico should make regulatory author-ity Cofetel more powerful and indepen-

dent. This would include increasing its financial and administrative indepen-dence and its ability to impose higher sanctions than it can today to deter anti-competitive behavior.

“The double window, whereby a regu-latory process is conducted twice by two different authorities, should also be removed and the procedures lead-ing to regulatory decisions simplified,” OECD noted.

The average market share of the mobile incumbent in OECD countries is roughly 40%. OECD stressed the lack of competi-tion in Mexico has led to higher prices for consumers and businesses and slowed the uptake of new services. The institu-tion estimates the cost to the Mexican economy to be around $25 billion each year, equivalent to nearly 2% of GDP.

Looking ahead, the OECD report says that Mexico should reform the current concession system to simplify and en-courage market entry, as well as draw a clear line between policy and regula-tory functions, where the latter should be moved to Cofetel. OECD also noted Cofetel should undertake market re-views, declare that a player has mar-

Source: Cofetel

Average ownership of spectrum - national coverage Band 800 MHz+1,900 MHz+1,700/2,100 MHz

Operator Current After Auction 20 After Auction 21

Telcel 53.8 megahertz 53.8 megahertz 77.1 megahertz

Movistar 39.1 megahertz 54.7 megahertz 61.3 megahertz

Iusacell 43.8 megahertz 53.8 megahertz 53.0 megahertz

Nextel 21.9 megahertz 23.0 megahertz 52.6 megahertz

Average 39.8 megahertz 46.3 megahertz 61.3 megahertz

F E A T U R E R E P O R T

ket power and impose and effectively enforce the appropriate remedies, in-cluding asymmetric regulation. Cofetel also should be authorized to establish non-discriminatory conditions for ac-cess to bottleneck facilities including local loop un-bundling.

This was the second OECD’s report touching on the the lack of competition in Mexico. In March 2011, the organiza-tion expressed concern about the mar-ket power of Telmex that has lead to a delay in awarding a license to Telmex to offer video services over its broadband network. This has delayed its ability to offer triple play services, though the packages are available via cable in ar-eas with network coverage.

OECD noted that Mexico has not ad-opted local-loop unbundling to foster competition in the broadband market and Telmex maintains one of the high-est market shares in the entire OECD region, leading to the fear that Telmex could use its market power, combined with bundling, to limit competition.

Niche offeringsNextel Mexico said it plans to deploy

3G voice and push-to-talk services in Mexico late in the third quarter of this year. Currently the operator uses iDEN technology for voice, basic mobile data and its push-to-talk services.

Another, niche provider is fixed-line operator Axtel, which offers informa-tion and communication technology so-lutions to corporate, financial and gov-ernment sectors, including broadband services, data transmission and imple-mentation of virtual private networks. The company has also dabbled in mobile broadband using WiMAX technology.

“They have WiMAX antennas in 39 cit-

ies, which is the largest mobile WiMAX in the country,” noted Cintia Garza, market analyst for CALA region at Maravedis.

MVNOs are also looking to bolster al-ternatives in the market. In 2007, fixed-line operator Maxcom won government approval to become an MVNO.

Mexican cable operator Megacable Holdings launched an MVNO service – Megacel – last year through an agree-ment with the local unit of Spain’s Telefónica. The move allows Megacabe to offer wireless services alongside its existing package of television, Internet and fixed-line service. It aims to attract up to 50,000 mobile subscriptions in its first year of operation.

Virgin Mobile Latin America in No-vember received regulatory approval to begin operating as an MVNO. The com-pany said it will begin service in Mexico in about six months after it completes a wholesale agreement with one of Mexi-

co’s mobile network operators. Fixed-line operator Axtel is also said

to be interested in the MVNO business.However, despite the increased inter-

est in the MVNO space, analysts remain skeptical as to whether those operations will gain traction in the market.

“MVNOs are focusing in very spe-cific niche market, that’s why I do not believe that the entrance of them will make a huge change in the market share,” explained Pyramid’s Mercado.

Network evolutionTelecoms operators in Mexico face

similar challenges to other carriers across the Latin American region. They have to increase their average revenue per unit by deploying some strategy to incentive value-added services. How-ever, supporting such services requires better spectrum use and improvements in current network technologies.

Source: NII Holdings

In a key development to support such upgrades, Televisa, Telefonica and Mega-cable announced a partnership to create a nationwide fiber-optic network, giving the three operators a countrywide back-bone infrastructure to support growth in data services and offering an alternative to America Movil’s network.

In terms of wireless technology evolu-tion, carriers have said they are working to make improvements.

“The great challenge for Telcel is to ad-vance the growth of consumption of the network. We must be prepared to sup-port the demand for Internet services,” explained Marco Quatorze, VAS director at América Móvil/Telcel, adding that the carrier is expanding HSPA+ coverage and looking to deploy LTE technology.

According to Quatorze, the company plans to begin deploying LTE technology in parts of Mexico this year.

“The 4G network will allow us to have a better flow of data to mobile devices and

will facilitate the penetration of other services and applications that benefit communication services and entertain-ment of our users,” the carrier noted.

Telcel’s LTE plans will use its 2.1 GHz spectrum holdings, which will be the first in the country, though analysts think the carrier will quickly run out of capacity using the limited assets in that band.

“Telcel’s problem is that the carrier only owns 10 megahertz, which was awarded in the last bidding process, and I am not sure if it will be enough. We consider that to launch a 4G network it is necessary to have 20 megahertz [of spectrum]”, said Cintia Garza, market analyst for CALA region at Maravedis.

Last year Telcel also launched machine to machine services, offering a platform for those companies willing to develop M2M services to reduce, optimize and control their time and costs.

Movistar did not reveal when it will deploy LTE services, noting that it was

necessary for vendors to provide a road-map for devices before spending the capital on the network deployment. The carrier did note that it plans to expand HSPA+ capabilities across its network.

Iusacell has launched the first fiber-to-the-home quadruple-play service in the market, benefiting from its new HSPA+ and FTTH networks.

However, technology evolution may not be easy. Garza explained that world-wide the 2.5 GHz frequency has been set aside for mobile broadband services, while in Mexico that band is assigned to pay television services. This will require Mexican carriers to either re-farm cur-rent spectrum bands or seek additional spectrum from government regulators.

“There is a needed to make better use of the frequency band in order to offer LTE,” Garza said. “That’s why spectrum re-farming is so important. The Mexican government may evaluate 2.5 GHz and 700 MHz frequencies.”

F E A T U R E R E P O R T

Source: Index of Telecommunications Sector Production (Itel), Cofetel

Evolution of Mobile Subscribers

100,000,000

75,000,000

50,000,000

25,000,000

0

Q1 2010 Q1 2011Q2 2010 Q2 2011Q3 2010 Q3 2011Q4 2010 Q4 2011

postpaid

prepaid

Las August the Mexican Secretary of Communications and Transport said that it may allow bidding on a portion of nearly 190 megahertz of spectrum cur-rently held by the firm MVS Commu-nicaciones in the 2.5 GHz band to help promote more efficient use of spectrum. MVS was granted the spectrum to offer microwave television and Internet ser-vice. In 2008, the company asked to use the spectrum to offer mobile broadband services, and last April MVS announced a project called “2.5 GHz, Mobile Broad-band for all.” The government has not responded to MVS’s proposal.

“Mexican regulatory policies are conser-vatives, and the government does not take risks,” explained Garza. “This slowed de-cision making that would be beneficial to many players. Cofetel did not take these decisions and this is damaging the evolu-tion of telecommunications.”

A growth marketDespite regulator issues, vendors are

optimistic about the Mexican market, cit-ing the continued maturity of the broad-band Internet space.

“The Mexican market has traditionally been led by one operator, and as more operators enter the market, more inno-vation will come with more service offer-ings to triple and quadruple play,” said Mario Maldonado, regional sales director for Mexico at Juniper Networks.

“The telecommunications market in Mexico has increased its dynamism in recent years. This allowed new players to become providers of telecom services. As a result, we can see a market with many opportunities, both for infrastructure and services providers,” explained Fer-nando Montes, country director at Nokia Siemens Networks in México.

With the market growing, tower com-panies are also eyeing opportunities. In December, telecom infrastructure giant American Tower unveiled plans to pur-chase 2,500 towers from Telefónica’s Mexican subsidiary for about $500 mil-lion, excluding value-added tax. The ac-quisition will nearly double AMT’s port-folio in Mexico and provide American Tower with a highly desirable network of sites in a key market.

“Mexico is a dynamic market with a very competitive telecommunications landscape. We look forward to growing our portfolio of towers and helping our clients deploy their networks quickly and efficiently,” explained Lawrence Gleason, SVP and COO for Latin Amer-ica at AMT. “Collocation benefits the op-erators and the community and we aim to be the leading independent wireless infrastructure provider in the country.”

AMT is also expanding its presence in Latin America. In June, the compa-ny purchased more than 2,100 towers from Millicom International Cellular subsidiary Colombia Móvil for $182 million in cash.

This optimism is also boosting invest-ments. Level 3, an international pro-vider of fiber-based communications services, said it was improving its net-work capacity in the market to meet demand. Currently, Level 3’s network infrastructure in Mexico connects the cities of Guadalajara, Monterrey, Mexi-co City and Mazatlan through a ring of 3,484 kilometers.

“Our growth is based on our approach to leading carriers and service providers in Mexico, as well as corporate market customers,” said Héctor Alonso, presi-dent for Latin America at Level 3. “And now with the CDN network develop-

ment, we also focus on content provid-ers in the country.”

Oscar Tenorio Calleja, director of RAD Data Communications Mexico, noted the high demand for bandwidth, due to new services and new technologies, such as LTE, requires a robust and reli-able IP backbone. “It is a time of chal-lenges and opportunities,” he said.

Juniper’s Maldonado added that the Mexican market has an accelerated evolution for new broadband services, data center, cloud computing and vir-tualization “This evolution has opened news opportunities,” Maldonado said.

In December, NSN inaugurated a new center in Mexico to deliver remote services to operators across Latin America and around the world, pro-viding network design and planning as well as optimization and assurance for both networks and the services running over them. The new center in Mexico complements NSN’s global network operations center launched in May in Sao Paulo, Brazil. Both serve five countries where NSN has busi-ness: Brazil, Mexico, Chile, Argentina and Peru. In Mexico, the new center joins NSN’s existing global network of SDCs for optimizing networks remote-ly for operators.

Level 3 said it expects Mexico to be its second largest market in Latin Ameri-ca, while Juniper noted the country is posting double-digit percentage growth year-over-year and NSN has tripled its number of employees in Mexico since entering the country in 2007.

The Mexican telecommunications sec-tor is complex. Despite some regulatory issues, the broadband Internet market for both fixed and mobile is expected to grow in the coming years.

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