Telecoms wars: Telmex facing tough competition on the ground.

The Mexican telecoms battle-ground of the last 15 years has claimed many victims.

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The amount of money spent in legal battles and infrastructure has frustrated even those players with deep pockets. Some regulators, such as the Comision Federal de Telecomunicaciones (Cofetel), have been accused of being complacent, while market giant Telmex has acted boldly to defend its territory.

Yet, the winds of change are starting to blow. The Mexican telecoms consumer is beginning to experience the pleasure of choice, and price wars are becoming an increasing feature of the retail telecoms market.

In the cellular arena, Telefonica Movistar has clearly positioned itself as the main challenger to America Movil, a spin-off from Telmex. While Axtel, a Mexican outfit, has made impressive inroads into Telmex's coveted cash cow--its local traffic business.

Meanwhile, the U.S. group Avantel has stood the test of time. As an early entrant (initially with Mexican partner Accival), it endured years of uneven rules, but today it is a growing company and proving to be quite adept and competitive.

Though there are other important telecoms business lines--such as data and Internet services--the three main fronts in this battle are cellular, long distance and local traffic. Finally, Telmex is beginning to sit up and take notice of the competition.

Choice Means Change

Telecom customers are discovering that finding other options is becoming easier.

Kiosks located on street corners as well as in shopping malls are now pushing alternative communications products. In fact, the competition has become a veritable street brawl.

Vendors shout out to passers-by in an attempt to entice them to approach their sales stand. Potential Telefonica customers are seduced, for instance, by an offer to turn in a competitor's telephone in return for a Telefonica phone with enhanced features for under US$50.

The biggest challenge, however, has been how to dislodge residential customers who have become Telmex "property." This relationship is best characterized as complete market domination. Whereas, long distance users can easily switch to another company using the same Telmex line (an interconnection fee is included) and cellular customers can switch by buying another phone, switching local service is a different matter entirely.

Axtel has taken up this challenge by turning to microwave dishes. For very little money, an Axtel customer can order up microdish-based local service and for a flat monthly fee, the new customer can make unlimited local phone calls. Furthermore, the company offers attractive incentives such as building up "points" if the customer pays on time.

Industry experts have long assumed that competing against Telmex in local phone traffic is the toughest challenge for any new entrant. The crux of this assumption is that Telmex controls the vast network of physical cables that lies at the heart of any traditional local phone business model. Physically installing a parallel fixed-line system would be extremely costly.

The Weapon Of Technology

Technology has served the competition well, however.

Technological advances allow competitors such as Axtel to leapfrog the trenches of the battlefront. One product is the Axtel Box--a small metal box offering cellular, Internet, local, and long distance services for a monthly fee. And adding additional phone lines through the same box is as simple as flipping a switch.

A satisfied Axtel customer said: "About a week after I ordered my new local service, I was offered several price options on long distance and local calls. Today, I pay my bills via Internet for a low monthly set price, and I can make an unlimited amount of local calls. Plus, the customer service is fantastic."

Such examples have been rare until recently. In the late 1980s, the waiting list to have a phone line installed was said to be 1.5 million. And middle class Mexican households commonly shared one phone line with several other families.

Threats To Telmex

Telefonica de Espana has had its sights on Mexico for some time. They had teamed up with Accival and GTE in an attempt to purchase Telmex when it was privatized in 1990. Ten years later, they established themselves with a US$2.6 billion bid for Motorola's Northern Mexico cellular territory. With this purchase, they instantly gained 1 million cellular customers.

Telefonica has quickly established itself as Mexico's second-largest cell operator. By December 2004, Movistar had 5.6 million customers, a 63-percent jump over the previous year.

Avantel, predominantly a long-distance company, has settled into its position as Telmex's biggest threat in long distance and corporate data services. MCI-backed Avantel clearly maintains a technological edge over Telmex, which they deliver in the form of an integrated group of services slowly making inroads into Telmex's formerly exclusive market.

Avantel has learned that technology can be a mighty weapon. They formally introduced. VoIP technology into Mexico and its integrated services package includes voice, data, images and video in one connection.

In the early years, Avantel management took an aggressive approach. MCI-WorldCom officials did not hesitate to accuse Telmex and Mexican regulators of collusion.

In 2000, John Stupka--then president of MCI-WorldCom--accused Cofetel of being nothing more than a cheerleader for Telmex.

"We need a regulator that can get things done, that is interested in serving the public, not in safeguarding the stock price of Telmex," he said.

Investor Frustration

A great irony, certainly, was that Grupo Carso's acquisition partners in the privatization process were the foreign telecom companies of France Telecom and SBC. It would become clear to these foreign partners by the mid-90s that their wish for quick profitability upon entering Mexico's telecoms market would not be ensured by their Mexican partner.

France Telecom suffered the most, eventually putting their 7-percent share of Telmex up for sale. SBC and Carlos Slim initially cultivated their strategic relationship, with SBC increasing its 5-percent stake to 10 percent. The relationship weakened, however, when Slim resigned from SBC's board in June 2004.

In the past five years, the amount of investment in telecoms infrastructure has increased dramatically. Traffic as a result of investment has more than tripled in some cases. For instance, national long distance traffic has increased from 7.3 million minutes in 1995 to 21 million minutes in 2004. This tremendous hunger for services has been a great source of hope for the sector's equally hungry industry competition.

Even so, the number of frustrated telecom entrants in Mexico's "privatized" telecoms industry over the past 15 years would fill up these pages. Players such as Atlantic Bell, with the complete arsenal of capital and technology needed to wedge oneself into the local market, would be found on such a list. Their mistake was bad timing, due to an immature regulatory scene.

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Clearly, competition's best ally has been the spirit and determination of international regulatory agencies and their efforts to open Mexico's relatively young telecoms industry.

As a result, the scenario is changing and new competitors are gaining a foothold. Axtel which was founded in 1993--might be the greatest success story.

Axtel is described as a Competitive Local Exchange Carrier (CLEC). A CLEC is defined by industry experts as a company that competes with the already established local telephone company by providing its own network and switching. The term distinguishes new or potential competitors from Incumbent Local Exchange Carriers (ILECs).

Axtel currently operates local telephone services in the 12 most important telecoms markets in Mexico, including Mexico City, Guadalajara, and Monterrey.

Axtel Growing Fast

Axtel's growth rates are impressive. In early May, it announced 4.10 billion pesos in net earnings for the past 12 months. They also announced that, through the first three months of 2005, they had installed 490,000 local lines, 33 percent more than the same period in 2004.

Another impressive sign of Axtel's staying power is the long list of sophisticated investors and technological partners committed to the Axtel business model. Major investors include George Soros, AIG-GE and the Black-stone Group. These foreign players hold 40.5 percent of total company equity. Axtel has also signed major technological agreements with the likes of Nokia and Yahoo.

The telecoms playing field will continue to be titled for some time. But as it levels out in the years to come, there will be plenty of room for additional winners ... including the public.

Ramon Ruiz ([e-mail]) is a director of Vintage Partners.