Lessons from South of the Border


On March 11, 2013 Mexico’s new President announced a fundamental and sweeping set of reforms in the telecommunications and broadcasting sectors.

These reforms are aimed at transforming the dynamics of and introducing effective competition into these key sectors of the economy.  Until now these markets have been dominated, despite formal liberalization, by a combination of a quasi-monopoly and a duopoly. These reforms would not be possible without strong leadership from the President and broad agreement among all major political parties on the imperative for transformation. The proposed reforms are impressive in terms of their breadth and depth and the comprehensiveness and interlocking nature of the measures that are proposed. They provide an example of the kinds of changes and the types of cooperation at the political level that are required to have an impact on powerful entrenched interests likely to be motivated to protect and perpetuate the status quo.

Similar bold moves could be pursued in South Africa. Both countries face comparable challenges to tackle in bringing their broadband and related markets up to speed (literally and figuratively) in terms of competitive performance and pricing by international (continually improving) standards. Actions to meet these challenges have been promised in the past but not implemented and whatever they are, they have been too long delayed. Absent such reforms, neither country will be able to keep up with its peers and best-in-class continental neighbours that have been pursuing more productive public policies and creating regulatory environments that are more sensitive to the needs of customers as well as more open to innovations from new as well as traditional sources.

Introduction

Mexico has just announced a sweeping and fundamental set of reforms for its telecommunications and broadcasting sectors. These reforms hold valuable lessons for South Africa. Mexico, which occupies the southernmost part of North America, now provides more relevant and instructive insights for policy makers and regulators everywhere than does its giant northern neighbor the U.S. that was the inspiration and pioneer in market liberalization in the last decades of the 20th century. Unfortunately today the U.S. is moving towards a “back to the future” uncompetitive or oligopolistic broadband market structure, particularly since the approval in August, 2012 by the Federal Communications Commission (FCC) and the Department of Justice of the cartel of Verizon/Comcast/Time Warner Cable.  Mexico is moving actively in the opposite direction to break open its telecommunications and video services markets to greater competition

The new Mexican President, Enrique Peña Nieto, (in office since December 1, 2012) has created an unusual cross-party consensus about the need to transform the Mexican economy and society into a 21st century leader in Latin America and even on the global stage.  He successfully built bridges between the main political parties first with a series of cross-party appointments to his cabinet to overcome the obstacle of their traditional divisions or gridlock that would make reform impossible.  Then came the Pact for Mexico (Pacto por México) , a manifesto laying out a reform timetable on subjects ranging from social security to energy that was signed by all the party leaders.  Now reforms that would not have been possible without this groundwork are challenging the tycoons and entrenched reform-resistant interests that have traditionally dominated key sectors in the country’s economy and society, including in particular telecommunications, broadcasting, the oil industry and education.  The National Development Plan could be South Africa’s “Pact”.

Background

The origins of a quasi-monopoly in Mexican telecommunications despite formal market liberalization lie in the acquisition by Carlos Slim (today the world’s wealthiest individual) of the state telecommunications monopoly Telmex some 25 years ago upon its privatisation. In making this acquisition he was aided by the U.S. operator, SBC Communications (today’s AT&T). There are some eerie partial parallels in this history with the circumstances (the role of SBC Communications) and consequences of Telkom’s privatisation in South Africa after which it, in effect, became a private instead of an entirely state-owned monopoly.  Similarly, the stranglehold that Multichoice has on the South African broadcasting sector, similar to that of the two broadcasters Televisa and TV Azteca in Mexico, is becoming more pronounced as Top TV, its only real competitor in the subscription broadcasting market, struggles to gain market share.  Multichoice has also been able, through its various diversified business interests in the Naspers group, to gain market share in other markets, including internet and print media.

However the market power and resistance to change of América Móvil (as the Slim telecommunications empire is now branded) have been even more significant than Telkom’s or Multichoice’s. América Móvil controls 70 per cent of Mexico’s 100 million mobile phone subscribers and 80 % of its landlines. América Móvil’s intra-continental foreign ventures (unlike Telkom’s failures in Africa) have been very successful. About one-half of its revenues come from elsewhere in the Americas including an MVNO in the U.S. (Tracfone which has about 20 million subscribers), and mobile market shares of some 25% in Brazil and two-thirds in Colombia, among other South American businesses. Admittedly, its more recent forays into Europe (e.g. a stake in the Dutch former incumbent KPN) have so far been generating losses.

Until now Mr. Slim has successfully stymied attempts to restrain or penalize him or his businesses and strengthen effective competition in Mexico against his quasi-monopoly. His companies’ size and influence and their weight (including his other businesses in areas such as retailing and finance) in the index of the Mexican stock market (Bolsa) also made them appear “untouchable”. In an interview with the Financial Times in 2007, Luis Téllez, then Mexican telecommunications minister, accused the regulator of playing more to the interests of corporate giants than consumers. “The regulators have been captured by the regulatees,” he said, “They do not always respond to the public interest. I’m having a huge problem.”

A study released last year by the Organization for Economic Cooperation and Development (OECD) - “Telecoms reform would boost competition and growth in Mexico,” http://www.oecd.org/newsroom/telecomsreformwouldboostcompetitionandgrowthinmexicosaysoecd.htm - estimated that the lack of competition in telecommunications was costing the Mexican economy about $25 billion a year. The study found that Mexico was at the bottom of the rankings among OECD countries in penetration for fixed, mobile and broadband markets. It also noted that profit margins for América Móvil are much higher than the OECD average, but the company invests less per person than companies in any other country.

Thankfully, at last Mexico seems to be coming to grips with the challenge of how to transform the dynamics of its telecommunications sector so that it can contribute fully as it should and must to the overall economic and social development of the country and to narrowing the “digital divide.”

The Reforms

The fundamental and sweeping nature of the reforms now being launched in Mexico as announced on March 11 is evident in their title: Iniciativa de Reformas a la Constitución en materia de Telecomunicaciones y Competencia Económica or “Initiatives for Constitutional Reforms in the matter of Telecommunications and Competition in the Economy.”

These proposed reforms include several major elements and will have profound consequences for customers and competitors when implemented. While the following list is not a complete one in terms of the measures being proposed it does give an idea of their comprehensive and interlocking nature, or the multiple dots that are being connected. For example:

  • A strong industry regulator will be created (the Instituto Federal de Telecomunicaciones (IFT) or Federal Institute of Telecommunications) replacing the current Cofetel (Comisión Federal de Comunicaciones) to curb dominant companies that have more than 50 per cent of the market, and to open up space for new entrants.
    • The new regulator will be able to apply sanctions, ranging from so-called asymmetric regulation on pricing, to fines and even forced asset sales; so far the criteria to be applied for determining whether a company is dominant have only been outlined for the telecommunications and not for the broadcasting sector
    • The independence of the regulator will be protected with the help of conditions on the Commissioners who can serve on it, including the procedures for and terms of their appointments and limits on their relationships with the companies they are regulating.
  • Increased powers will be given to a new Comisión Federal de Competencia Económica

(CFCE or Federal Commission for Economic Competition.  The current Cofeco, or Comisión Federal de Competencia has struggled to impose fines on América Móvil and tried unsuccessfully to force broadcasters to provide their free channels to pay TV competitors (South Africa has suffered from the opposite problem).

  • Existing television networks will be required to offer their free-to-air programming at no cost to cable operators.
  • New entrants will be facilitated through the creation of two new free-to-air television channels that neither member of the current duopoly in broadcasting - Televisa (70% market share of free-to-air broadcasting) or TV Azteca (30% market share) - can acquire.  These broadcasters are each controlled by another billionaire, Emilio Azcárraga and Ricardo Salinas Pliego respectively.
  • More broadly competition between these three largely separate businesses (América Móvil, Televisa, and TV Azteca) on the other’s home turfs should become more intense (e.g. the way will be opened for Televisa and TV Azteca to grow the current small share (5%) of their jointly owned company Iusacell in the mobile market and for América Móvil to offer video programming over its access networks)
  • Limits on foreign ownership of broadcasting companies will be increased to 49 per cent, and in the case of telecommunications, including satellite, to 100 per cent.
  • In addition passage of a Bill is being speeded up to make it impossible for companies holding public concessions – such as América Móvil – to delay regulations and fines by using standard legal processes and procedures such as seeking court injunctions (amparos). The Bill, that still requires approval in the Senate, strips companies of the main weapon they have used (just as for example Verizon uses litigation in the U.S. to challenge the FCC’s right or authority to impose regulatory conditions on its activities) to block or delay government or regulatory sanctions or actions they do not like. Instead special tribunals will be established specializing in matters of broadcasting, telecommunications, and competition. The grounds on which actions and decisions by the CFCE and IFT can be challenged will be limited.
  • A new wholesale-only network will be put in place by 2018 by the state-owned Telecommunicaciones de México building on the physical infrastructure (e.g. fibre optic links etc.) installed by the state-owned electric utility Comisión Federal de Electricidad (Federal Electricity Commission), and eventually exploiting the 700 MHz “digital dividend” spectrum.  This band plan has been structured, thanks to a wise decision by Cofetel, as 2x45 MHz in accordance with the Asian plan for this band, rejecting the less efficient and idiosyncratic U.S. 700 MHz band plan. This network will be available on an open access basis to service providers under non-discriminatory conditions. Its purpose is to help reach the goal of universal affordable access to broadband, and the State will support the achievement of this goal.

Next Steps

The reforms outlined that were just announced must still clear a series of legislative hurdles before the transformation of Mexico’s broadband and related markets can begin in earnest. The first step is for Congress and State assemblies to approve a constitutional reform. Because the changes were negotiated among President Peña Nieto’s top aides and leaders of the three main political parties, they are expected to pass.

Then Congress must rewrite several laws to put these changes into effect. This process is where entrenched interests may find ways to dilute some of the measures just described.

The ultimate effects of these reforms on América Móvil, Televisa, and TV Azteca are not clear-cut. On one hand América Móvil still derives around two-thirds of its profits from Mexico, and its profitability in its home base in telecommunications may shrink. On the other hand it may be able to exploit new video services opportunities in Mexico and offer triple or even quad-play packages to customers. Furthermore it may be able to grow by building on its already very significant foreign investments. Among the open questions that remain are the nature of the asymmetric regulations that could be applied to América Móvil, and the conditions that might prompt the new regulator to force it to divest assets. These questions should be answered more definitively over the next 6 months.

As for the two broadcasters they will lose revenues by being obliged to offer their free-to-air programming to cable companies. On the other hand as noted they will gain easier access to the telecommunications market that is much larger than their broadcasting operations.

It is also unclear what the consequences of the telecommunications reforms will be for other stakeholders such as Spain’s Telefonica that is a distant #2 in the Mexican mobile market and América Móvil’s main competitor throughout most of Latin America. The deteriorating situation in Telefonica’s home market of Spain is limiting its ability to make large investments. Nextel International is rolling out a 3G (HSPA) network in AWS (1.7/2.1 GHz) spectrum acquired in a national licence in 2010 and is another operator whose fate will be affected by the reforms. It is possible that new foreign investors currently discouraged by the lock of América Móvil on Mexican telecommunications will be tempted to enter the Mexican market, in which case they may decide to partner with or even acquire a smaller competitor.

Many specific conditions of the Mexican market and economy, and institutional traditions and culture are very different from South Africa. Nevertheless the core challenge faced by the two countries is similar in both the telecommunications and broadcasting markets.  In telecommunications, how to inject a new dynamic into their broadband and related markets on the supply side to overcome the high prices, poorer service and uncompetitive performance of the services available to their residents, business and institutions compared to their peers and in the context of the needs inherent in their national, regional and even global economic and social aspirations.  In broadcasting, how to reduce the price of content, increase choice for consumers in their bouquets, increase South African-specific content, and more fairly allocate the rights to content such as premium entertainment and sport content.

South Africa would do well to take some carefully selected leaves out of the book of initiatives and processes now launched in Mexico in terms of building stakeholder support against powerful entrenched resistance to change, and of understanding the scope and content of the measures that are required to make a real impact.