23 June 2015

From oligopoly to competition: the story of Mexico’s telecom reform

By Armando Regil Velasco

Mexico’s Enrique Peña Nieto has staked his Presidency on economic reforms that, he said, would boost the country’s annual growth to between 5% and 6% per year. Yet, despite approval of several major reforms in Congress, including telecommunications overhaul and significant transformation in the energy sector, growth continues to come in below target.

Despite promising macro-economic measures, economic life in Mexico remains riddled with corruption and high transaction costs, while a small number of large firms continue to enjoy dominant roles that stifle innovation and growth.

The Peña Nieto government has promised to uproot these monopolies, and greater competition in all sectors has now gained crucial public support. Despite significant market-oriented transformations in the past 25 years, especially in trade and in the wave of privatizations in the early 1990s, Mexico’s economy remains tied to anti-market and mercantilist rules of the game. Perhaps the most vivid example is telecommunications.

The privatization of Telmex in 1989 produced a huge and sorely needed investment in Mexico’s telecommunications networks. Today, citizens can secure a phone line in twenty minutes, rather than twenty months. But the government used the privatization process as a cash cow for state coffers, and so failed to open up the telecoms market to new competitors. The result was the eventual consolidation of one of the most powerful private monopolies in the world, with high prices and huge power to use the legal and political process to perpetuate its dominance.

New reforms, some of which are enshrined in the Constitution, aim to end the incumbents’ dominance at last. So far, progress in the wireline sector has been inconsistent and halting But the most promising of these proposals center around the structure of the mobile-broadband market.

Under the new laws, the Mexican regulator is required to establish a wholesale-only wireless network — a “carrier’s carrier” that will sell mobile-network capacity to all comers.

Unlike the telecom regulator’s sometimes-inconsistent enforcement of competition rules, this has the potential to be a true game changer. Regulators around the world too often try to achieve competitive balance by turning the dials on pricing rules, interconnection rates and the like. And yet somehow the largest players usually manage to stay large, and new entrants have a hard time reaching critical mass.

The genius of Mexico’s “Red Compartida,” as the envisioned wholesale market is called, is that the regulator does not have to pick winners or set prices. It lowers barriers to entry to the wireless market while letting price discovery work its magic.

For this to work, the Red Compartida wholesale market will have to be structured in a way that prevents the incumbents from locking up all the capacity, but this should be feasible technically. As long as that is accomplished, Red Compartida stands to be the most radical market-opening reform in the world.

That wireless carriers both in Mexico and abroad are warning about the posible failure of the Project is merely proof of its effectiveness. Wireless carriers pay fortunes for spectrum licenses, but in return they receive monopolies over those frequencies. Mexico’s Red Compartida would replace that old-fashioned model with continuous competition for wireless resources. No wonder the incumbents are nervous.

Red Compartida is still in its formative stages. The government intends to solicit offers to build the new network later this year, and it’s still possible it could be derailed or captured by vested interests that would like to see it fail. That would be a shame. Rarely does a regulator have such a sweeping opportunity to replace oligopoly with genuine competition. It will be fascinating to watch the project develop.

Armando Regil Velasco is the Founder & President of the Instituto de Pensamiento Estratégico Ágora A.C. (IPEA). He can be found on Twitter: @armando_regil.