Growing giant: Mexico's telephone giant Telmex expands its operations in South America.

Wherever telecom assets come up for sale in South America, Mexican mogul Carlos Slim appears, ready to pay a good price then operate the business efficiently. The magnate's South American sojourn started in February 2004, when Telmex paid US$196.3 million for most of AT&T Latin America's assets in Argentina, Brazil, Chile, Colombia and Peru. Impressive growth in the fixed-line phone business doesn't include the rapid and considerable expansion of Slim's mobile affiliate, America Movil, which has just shy of 74 million subscribers in 12 countries across Latin America.

Telmex is taking advantage of the departure of foreign companies from Latin America, yet it is also spurred on by the fact that the company, a near monopoly in Mexico, doesn't have much more room to grow at home. Thus began a colossal regional expansion.

"Telmex's Mexican clients are going out to look for other markets and other national markets are getting closer to Mexico. What's happening is that users' needs are starting to cross borders and we want to meet those needs, in addition to looking for a growth strategy," says Eduardo Diaz Corona, general director of Telmex Chile and coordinator for Telmex in Colombia and Peru.

Telmex's acquisitions in 2004 included phone companies Techtel and Metrored in Argentina, Embratel and cable television operator Net Servicos de Comunicacao in Brazil and Chilesat in Chile. The company invested $996 million in the region in 2003, $1.70 billion in 2004 and expects to invest $2.05 billion in 2005. At press time, Telmex was in talks with Colombia's government to acquire the national long-distance provider Colombia Telecomunicaciones.

Telmex is preparing to make aggressive inroads into Latin America. "The company is making a big bet, because it believes in the region's growth potential. The economies of the region are reviving and, as Slim says, telecommunications infrastructure is a country's nervous system, and seeing as we meet that need we have a responsibility to make sure our clients can compete in a globalized world with top-tier solutions," says Diaz Corona.

In Mexico, Telmex has 17.2 million phone lines in service, 3.3 million data transmission lines and 1.7 million Internet access accounts. Last year, fixed lines increased about 10%, although that didn't translate into revenue growth because of a decrease in national phone rates. Currently, Telmex controls 95% of the domestic fixed-line market in Mexico, 80% of the long-distance market and 74% of the international traffic, according to Mexico's Federal Telecommunications Commission (Cofetel).

Although Mexico's phone giant has a near monopoly at home, its smaller competitors are starting to battle for territory using Voice over Internet Protocol (VoIP), a technology that is inexorably lowering the costs of telecommunication services. Even though Telmex uses VoIP for internal operations, it has yet to offer such a service to its clients.

"What Telmex has is voice telecommunications service, independent of whether the technology that we are using in each country will go toward IP infrastructure or not," says Diaz Corona. Nevertheless, experts in the field believe the giant is currently watching the market and waiting for it to mature before engaging with companies already offering VoIP, which accounts now for just 1% of Mexico's telecom market, versus 20% in Singapore.

"Companies want to see how they can use this technology to lower costs and to get closer to their clients. When we talk about the possibilities of VoIP, we see a lot of interest from our Mexican clients," says Phil Larson, the marketing director for convergence solutions for the Latin American and the Caribbean division at Canadian telecommunications equipment manufacturer Nortel.

What's clear is that Slim's army is carefully plotting its attack on the VoIP market. Telmex is one of Nortel's clients in Mexico. Larsen says that the two companies are working together to figure out how to bring the telecom behemoth into the future of VoIP technology. "I believe Telmex is already preparing to offer this service," sas Ernesto Vargas, president of cable TV yoperator MVS. "U.S. phone companies have lost more than 14 million lines to the technology. I think it's unlikely that people will be paying in five years what they pay today to make long-distance calls."

Telephone companies in Mexico such as Avantel, Alestra and Maxcom already offer VoIP service to residential and business users, although geographical coverage is limited. In the first quarter of 2005 Avantel and MVS teamed tip to offer a package called Netvoice, which includes broadband Internet, long-distance phone service and unlimited local calls. The service is currently available in just four cities but the company hopes to reach 24 destinations by 2006. At the start of this year, the goal was to reach 10,000 clients but the company now believes it will have double that number by the close of 2005.

"We believe VoIP will be the future of telecommunications not only in Mexico but across the globe," says Miguel Calderon, marketing director for Avantel. "Obviously, all we ask is that the competition be fair, that no anticompetitive practices be allowed."

Regulators at Cofetel are optimistic and believe VoIP will spur competition in a market now dominated by Telmex. "These new technologies allow new operators to have a larger share of the market, and everyone will have to adjust to this new way of operating," says Salma Jalife, a Cofetel functionary.

Battle brewing. Telmex may be king in Mexico, but it will have to battle players of equal stature in South America. Spain's Telefonica, for example, controls 38% of the market in Brazil and 80% of the market in Chile.

Still, the fortunes of Mexico's telecom giant in South America hang largely on Brazil. "Everything outside Brazil is very small. Telmex's success outside Mexico will depend on this country," says Stefaan Peelers, an analyst for Grupo Banamex' brokerage firm Accival. Now. Peeters says, Slim's strategy in Brazil will be to consolidate assets and look for ways to use the cable television network owned by Net Servicos to offer at the very least broadband Internet. "This may or may not be a good investment," he says. "The market is still quite skeptical."

Telmex executives say that its strategy in each country will be determined by the needs of each domestic regulations. In Brazil, for example, where the company offers service to residential and corporate clients, the goal is to improve those two market segments. On the other hand, in Colombia, where the focus is the value-added data market and local telephony for corporate clients, the goal is to target companies more than people.

Slim is on solid ground considering expectations for growth in markets like Brazil and Chile are high, executives say. "In general, Mexico's market is good-sized and it has maintained its pace of growth, but then there is Chile and Brazil," says Bafael Fernandez, director of corporate networks for Nortel Mexico.

TELMEX'S INTERNATIONAL OPERATIONS

                                                  Acquisition
Company                     Country   Ownership          date

Telmex Argentina (1)      Argentina      100.0%      02/24/04
Techtel                   Argentina       93.3%      04/19/04
Metrored                  Argentina       93.3%      06/30/04
Telmex do Brasil (1)         Brazil      100.0%      02/24/04
Embratel                     Brazil       63.9%      07/23/04
Net                          Brazil       37.1%      01/31/05
Telmex Chile (1)              Chile      100.0%      02/24/04
Telmex Corp. (Chilesat)       Chile       99.3%      06/08/04
Telmex Colombia (1)        Colombia      100.0%      02/24/04
Telmex Peru (1)                Peru      100.0%      02/24/04