Cease Fire.

Peace breaks out on Mexico's telecom scene. Can it last?

AFTER YEARS OF BITTER FIGHTING MEXICAN phone giant Telmex has opened the country's local fixed-line telephone market to competitors. What remains to be seen is if upstarts Avantel and Alestra can capitalize on long-sought change. They are, after all, going up against Carlos Slim Helu, Latin America's richest man and the controlling shareholder in the former state telephone monopoly.

Some expect Telmex to struggle now that it has finally opened Mexico's lucrative, US$5.7-billion-a-year local market to Avantel, part-owned by MCI WorldCom, and Alestra, part-owned by AT&T. Under the deal struck in early 2001, Avantel and Alestra also agreed to pay Telmex $137 million in unpaid connection fees.

The newcomers see a chink in the giant's armor: unhappy customers. "It's atrocious. Telmex has had a monopoly for too long and it shows," complains Antonio Navarro, a 38-year-old Mexico City businessman.

Marketing executives at Avantel and Alestra will be baffling to take advantage of their opponent's poor image, although it will still be hard to pull off Telmex's domestic brand recognition is on par with Coca-Cola. In Chile, where regulators sought in 1988 to open the local market through competition, former state behemoth CTC--now owned by Spain's Telefonica--still runs the show, with 82% of lines in service a dozen years later.

Avantel predicts it can snatch 20% of local calls from Telmex in the first year. Together, Avantel and Alestra already have managed to seize nearly 30% of the long-distance market since that was opened up three years ago, a prospect some analysts expect to be mirrored in local telephony.

Competition is hitting Telmex from both sides of the border. WorldCom and Telmex have recently set settlement rates--what Worldcom pays Telmex for completing calls from the United States to Mexico--at 10 cents per minute by 2003. down from 19 cents. AT&T, however, says 10 cents is too high. Mexicds government also has begun talks aimed at opening fixed-line telephone service to foreign ownership.

In Mexico, meanwhile, Avantel and Alestra also have unveiled similar attack strategies. They are concentrating on the country's biggest urban areas, Mexico City, Guadalajara and Monterrey. First they will target existing corporate clients, then look to take a piece of smaller business and, finally, offer residential service. Avantel executives expect to begin that final stage in early 2002.

Alestra says it is investing $70 million this year in its broadband and local infrastructure while Avantel says its total investment in 2001, including in its nascent local networks, will be $180 million.

Fighting shape. Telmex, however, holds a wild card--it can choose when and where to allow Avantel and Alestra access to its local network, a crucial lever until the two smaller companies complete their own networks, if they ever do.

"Telmex will never do it," says Tucker Grinnan, Baltimore-based head of Deutsche Bank's Latin American telecom unit. Grinnan estimates that Telmex will keep around 85% of the local calls market in 2005. "It will be a very hard baffle for Avantel and Alestra," says Grinnan. "They will have to build their own networks up from scratch." Telmex did not respond to LATIN TRADE requests for executive interviews.

An Avantel executive, who once railed against Telmex's "illegal and unethical practices," says now "only honey" can come out of the mouths of Avantel staff when they talk about their competitor. "We are going to baffle in the marketplace instead of at the regulatory level over practices which were not legal," says Rodrigo Martinez, Avantel's deputy head of product marketing. "We are now going to square up and see who is actually the best at winning customers."

Has peace broken out on the Mexican telecom scene? Perhaps only because Telmex has more to gain by changing its once-aggressive stance towards its competitors. Bigness has its advantages, too, in pricing and promotion. But, all else being equal, time--and consumer preference--will tell.