Sneaking Across the Border.

Telmex and Sprint are off and running in the United States despite opposition from AT&T and MCI/Worldcom.

WHEN 24-YEAR-OLD CONSTRUCTION worker Gilberto Gonzalez moved to Tucson from Mexico five years ago, it was difficult staying in touch with his mother, who lives in a small village near Guadalajara. She did not own a telephone and had to walk two blocks to her sister's house to receive his calls.

So Last September, when he heard at a swap meet about a service that places telephones in the homes of Mexican relatives, he jumped at it. It only took about a month for his mother to get the phone line in Mexico and Gonzalez pays the bill back in the United States. "It's much cheaper," he says. "I can talk to my mother three or four times a month and it only costs me US$12."

That has a pleasant ring for Telmex Sprint Communications. The joint venture between the two telecommunications giants has been offering the novel plan to Mexican-Americans since winning Federal Communications Commission (FCC) approval to start operations last August. Victory came with a price. Competitors AT&T and MCI/Worldcom were partially successful in arguing that their attempts to break into the Mexican long-distance market had been hindered by Telefonos de Mexico (Telmex), the country's very dominant carrier. The FCC gave a provisional green light to the partners based on the condition that AT&T and MCI/Worldcom be granted the same level of access to the market in Mexico. "This isn't about not having competition," says AT&T's Dianne Bernez, the company's point guard on the issue. "It's about insuring level playing fields."

All players are jockeying for a share of the world's second-biggest binational telephone market. Callers chat up 1.8 billion minutes a year between Mexico and the United States, more talking between any two countries except Canada and the United States. These figures are more impressive when Mexico's low telephone penetration is taken into account. Despite modernization efforts, fewer than one in 10 Mexicans have a telephone--nearly all of them wired to Telmex. By tapping Mexican-Americans to cover the costs of providing a line to their family members in Mexico, Telmex-Sprint hopes to boost call volume and grab a big piece of the business in the process.

The twosome is off to a fast start. The cross-border alliance has spent $7 million on a flashy Spanish-language advertising campaign, promotional booths in Mexican grocery stores, even fotonovelas, or short picture books describing the service, distributed at fairs, rodeos and soccer tournaments. "Mexico en Linea" launched in Tucson in August and Phoenix in September. The calling plan then rolled out in El Paso; San Antonio; and Fresno, California, in October; and Houston; Dallas; and Los Angeles in February. Marketing chief Javier Palomarez won't reveal the exact number of customers he's been able to capture, but he claims the figure is in the tens of thousands of paying clients. "We've surpassed every one of our sales goals," he says. Next stop: New Mexico, Illinois and possibly the Northeast. The company plans to move its headquarters to San Diego to be closer to its largest customer base.

New products are on the way, too. First up: personal toll-free numbers that reverse calling charges at rates significantly lower than calling collect. Then comes "Dial One," which will charge lower rates for calls to the telephone numbers the consumer uses most (similar to MCI's "Friends and Family" promotion in the U.S.).

The cross-border, cross-company span has created problems typical to two big companies working together--like getting computer systems to communicate--as well as atypical obstacles: locating relatives' homes in remote Mexican villages and explaining the reversed billing system to customers.

The biggest hitch has been melding two wildly different corporate cultures. Telmex, the 50-year-old, former state monopoly, is renowned for deplorable customer treatment; Sprint, the scrappy upstart that has become the third-biggest provider of U.S. long-distance calls, won its success on the strength of service, with four straight customer relations awards from JD Power & Associates to prove it. The marriage of unequals has caused friction. "There's a lot of dialogue, a lot of playing intermediary," says Palomarez, a Mexican-American from south Texas who left U.S. brewer Adolph Coors Co. to join the telecom. "I log a lot of airplane time to Mexico City."

The duo's regulatory problems, however, are not over. Last November, the FCC filed a show-cause order demanding that Telmex prove it was complying with conditions that allowed its entry into the United States. The main sticking point is the high price the Mexican phone company charges to complete calls from the United States to Mexico and U.S. regulators are signaling that they are not happy with progress to date. "Telmex has to explain why it has not taken certain actions," says Sherille Ismail, a senior attorney at the FCC. "We let them in and held up our end of the bargain. Now they have to hold up their end." The FCC is expected to come back with its final decision sometime this spring.

Could the FCC eventually boot TelmexSprint out? Fred Voit, a senior analyst at the Yankee Group, doubts it. "How are they going to de-subscribe all these people?" he asks. "Once they're in, they're in."