Share Square: Mexico

Mexico has a population of 116.2m and had 103.7 million mobile subscribers in Q2 2013, giving mobile penetration of 89% - up from around 85% a year previously. 83% of mobile subscribers had a pre-paid account.

There are five mobile operators serving the market, with Telcel (America Móvil) enjoying a dominant position with 69% market share, significantly ahead of ahead of Movistar (Telefónica) with 19%.

At the end of Q2 2013 there were 31.3m 3G subscriptions in Mexico (30% of subscribers) and around 495,000 4G subscriptions. Axtel has been offering 4G services since 2009 – using WiMAX to serve voice and broadband subscribers – and had 347,000 subscribers (70% of the 4G market).

In terms of LTE, Telcel had 122,000 subscribers with the remaining 25,000 pertaining to Movistar. Telcel launched LTE services in 9 cities in November 2012 – and planned to spend US$3.95bn on network upgrades between 2012 and 2014 - with least US$1bn of this on 4G equipment, enabling coverage expansion to 26 cities covering 65% of the population by April 2013. Movistar launched around the same time in three cities, planning to spend over US$234m on its LTE rollout by year-end 2013. According to newspaper El Universal, Nextel plans to launch LTE services in mid-2014. The report cites Gustavo Cantu, Nextel de Mexico COO, as saying that the 4G network will be available in Monterrey, Guadalajara and the Federal District initially, before later being expanded nationwide.

Telcel’s large market share of 69% is a highly significant factor when considering the dynamics of the Mexican mobile market – being particularly high for a market with such a large number of subscribers. This has implications both for competition in general and the tower sharing market.

Former telecoms regulator Cofetel’s attempts to attract a new international player into the market were not successful, perhaps owing to the very dominance of that player and a perception that attempts to counter it have so far failed. However, other market players are making notable efforts to make gains. For example, in November 2013 Bloomberg claimed Telefónica had approached potential acquisition targets and partners in Mexico – and it is understood that Telefónica may have held discussions with companies including Grupo Iusacell, Grupo Televisa and Megacable. According to Reuters, Telefónica has also said that its Mexican subsidiary aims to ink deals with between five and ten MVNOs by the end of 2014 – on the back of MVNO deals signed in 2013 with Virgin Mobile and supermarket retailer Coppel.

It was also reported in January 2014 that Telefónica and NII Holdings have signed an agreement under which the former will provide wholesale nationwide voice and data coverage services to the latter’s Nextel-branded units in Mexico (as well as Brazil). NII Holdings has commented that this will expand the areas in which Nextel customers using 3G services can access voice and data services. It was noted, however, that the two companies will continue to manage their spectrum and network assets separately in order to provide competing services.

On the downside, NII announced that it has recently modified its customer disconnection policy for inactive pre-paid subscribers, and as a result now expects a net subscriber loss of approximately 400,000 in Mexico for the fourth quarter of 2013 (thus reducing its market share).

The government has also taken steps which may result in Telcel’s dominance being reduced, although historically its efforts have had limited effect. Most recently, in June 2013 Mexican President Enrique Pena Nieto signed legislation designed to enhance competition, as part of which a new regulatory agency, Instituto Federal de Telecomunicaciones (Ifetel), was created – replacing former regulator Cofetel.

In the past Cofetel also used spectrum auctions as an opportunity to help adjust market imbalance. This is particularly important given the fact that data traffic is predicted to grow exponentially and that the incomplete coverage of fixed networks means wireless technologies will have a critical role to play in the delivery of broadband. The straightforward release of spectrum to existing players thus risks shoring up Telcel’s position. In this regard, past spectrum tenders have produced some positive results, with Tenders 20 and 21 in 2010 leading to Telefónica and in particular Nextel gaining significant holdings in MHz.

Ifetel is also reportedly examining a number of different options for the creation of an independent operator that would use the 700MHz band to provide wholesale broadband services. According to BNamericas, which cites Ifetel’s head of regulatory policy Luis Lucatero, it is understood that the new operator could offer services using 700MHz spectrum as well as the dark fibre infrastructure belonging to state-owned power company Comision Federal de Electricidad (CFE). It remains unclear whether 2.5GHz spectrum would be incorporated in plans for the shared network. TeleGeography notes that as part of telecoms reforms approved in April 2013 it was revealed that a 90MHz block of 700MHz spectrum would be handed to state-owned Telecomunicaciones de Mexico (Telecomm Telegrafos). The company is expected to use the frequencies to deploy a wholesale network once the spectrum in question is freed up after the analogue switch-off, planned for 2016.

In October 2013, Mexico’s government was reported to have agreed to a deal with those companies holding spectrum in the 2.5GHz band under which it will recover a significant portion of such frequencies. According to Reuters, the state has struck an agreement with concession holders, including MVS Comunicaciones, which holds a significant portion of the disputed spectrum, to reclaim 68% of the available space in the 2.5GHz band. The intention is to allow the frequencies to be refarmed for the deployment of 4G. At that time it was said that nine of the eleven licence holders had voluntarily given up at least a portion of their spectrum holdings, while the Secretario de Comunicaciones y Transportes (SCT) was said to have confirmed that the concessions for the remaining 60MHz of spectrum that was not being returned had been extended for 15 years.

However, subsequently cable operator Megacable has reportedly called for ‘just compensation’ in return for surrendering a portion of the spectrum it holds in the 2.5GHz band – stating, according to BNAmericas, that the government ‘can’t just come along and take the band without some sort of compensation’. Such a position comes as the operator has said it has invested money in using the disputed spectrum to offer pay-TV services. In addition, Iusacell is said to have also filed a lawsuit against the SCT for its decision to renew licences for the 2.5GHz spectrum that are not being returned. The operator is said to have argued that the extension of the concessions violates a number of constitutional articles.

Another way in which the government has sought to stimulate competition has been through encouraging infrastructure sharing. Whilst tower sharing has not been directly mandated, there some are legal provisions designed – albeit unsuccessfully – to promote the sharing of infrastructure. For example, the 1995 Federal Telecommunications Law (FTL) requires that public rights of way are made available to a licensee on a non-discriminatory basis – including ducts and poles on which public networks are installed. The FTL also requires dominant carriers to meet requests for sharing such facilities. However, this requires the designation of a carrier as being “dominant” – something which it has not been possible to achieve to date. 2009’s Technical Plan on Interconnection and Interoperability put forward proposals for sharing ducts, poles and towers – but these proposals were suspended as a result of legal action taken by Telcel, Telefónica and Telmex.

As it stands, there is currently no requirement for operators to share passive infrastructure. This is particularly pertinent, given the labyrinthine and time-consuming procedures for securing the permits and rights-of-way required to deploy masts and towers. A 2012 report by the OECD implies, for example, that there are several issues Mexico could address to make it easier to secure rights of way, including: a) reducing the high number of procedures and permits required; b) tackling the differences in written and unwritten rules and the variation in these rules from county to county; and c) reducing the incidence of extortion / corruption in application processes. The difficulty in obtaining the permissions required in a timely manner has historically played into the hands of Telcel, which already owns a national network of facilities, as the incumbent, and has thus needed to apply for fewer permits for rights of way. This has helped Telcel to expand its coverage more quickly that its rivals.

Ifitel announced in December 2013 that it had started fresh proceedings to determine whether America Móvil (via subsidiaries Telcel and Telmex) and Televisa are dominant players. In time this may lead to structural changes; nevertheless, in the short term the status quo is likely to continue regarding the imbalance of the market.

Whilst tower sharing has not been effectively mandated, tower companies are active in Mexico. Indeed there are three main towercos in operation: American Tower Corporation (ATC), Inversiones e Infraestructura Mexicana en Telecommunicaciones (IIMT), and Mexico Tower Partners.

ATC established American Tower de Mexico in 1999 and its site database for Mexico lists 7,559 sites. In November 2013, NII Holdings announced completion of the sale of a number of communications sites in Mexico to ATC – with 1,483 towers divested for MXN4.95 billion (US$374.3m). Under the terms of the deal, Nextel de Mexico is understood to have agreed to lease back the sites from ATC for a minimum twelve-year initial lease term, while it also has the option to extend the lease for additional renewal periods. NII Holdings also noted that its agreement with American Tower provides for a post-closing adjustment period, after which it will recognise the sale of the sites and any associated gain, which will be recognised over the lease term. At that time NII Holdings has said it will record a capital lease liability of approximately US$80m to US$125m, while it says it expects to complete the sale of the remaining communications sites in Mexico that were agreed to be sold once closing conditions are met.

IIMT is notable for signing an agreement with the CFE – the Mexican state-owned electrical utility – which gives IIMT the right to utilise CFE’s infrastructure and therefore to install telecoms equipment on CFE’s towers. IIMT is working with all four main mobile operators and owns or manages around 250 towers.

Mexico Tower Partners was formed after the 2013 acquisition of Global Tower Partners (GTP) by ATC. ATC acquired all GTP’s assets and operations with the exception of those in Mexico – with the remaining business becoming Mexico Tower Partners. It owns and operates approximately 600 towers in Mexico.

Whilst sharing has not been mandated, operators in Mexico are sharing infrastructure, driven by common strategic and commercial concerns. In 2012, for example, Movistar announced a sharing deal with Iusacell - with the five-year deal expected to cover the sharing of cell sites as well as fibre-optics. The agreement between the pair was expected to see Telefónica benefit from an improved level of coverage in larger cities, where Iusacell has a more developed network, while for its part Iusacell will be able to benefit from Movistar’s rural network.

Whilst the issue of market dominance is addressed, sharing is likely to be stimulated by a need for competing operators to roll-out as quickly as possible without lengthy individual permit applications. It will also be driven by the fact that there is likely to be a shortage in the tower stock – with around 25,000 towers in existence, against a forecast market requirement for 70,000 towers. This is likely to mean there will be some good opportunities for tower companies considering entering the market. Whilst some difficult market conditions remain to be negotiated, the creation of Ifitel and moves to address the dominance of Telcel give hope that the full potential of the market will be unlocked.

Ed Siegle is a Principal Consultant in Mott MacDonald’s Technology & Communications Division. He has 20 years of experience as a consultant, primarily focused on the telecommunications industry, working for operators, vendors, investors, regulators and public sector organisations. His particular expertise lies in market analysis, commercial due diligence, product and market strategy development, demand forecasting and business case production.

In the course of his career he has worked for clients in the UK, Europe, the USA, Africa and Latin America. He has spent over 2 years living and working in Latin America, including 18 months in Brazil where he helped establish new offices for two consultancies. Over the past 3 years he has been part of a Mott MacDonald team commissioned to execute a series of advisory projects for towercos looking to invest in developing markets.