Mexico’s plan for telecoms reform will require careful implementation
As it promised in the wake of the recent elections, the newly appointed Mexican government has presented an extensive set of reforms that aim to transform the landscape of the telecoms sector. Most proposals appear to go in the right direction, moving toward a more competitive market, in particular the much-needed creation of a stronger and more independent regulatory body.
As Ovum noted in our Regulatory Scorecard 2013: LATAM, the lack of such a body has been the main reason for inefficient regulation in the country, which has so far hampered both competition and growth. This is particularly true for the mobile sector, which is strikingly concentrated and growing more slowly than those of neighboring countries. On the whole, operators are likely to welcome the proposals, which will also enable them to compete in different markets in the future. However, some of the proposed measures, such as the introduction of local loop unbundling (LLU), require more careful consideration. They may have the unintended effect of slowing investment in and the development of next-generation access (NGA).
The proposed reforms address Mexico’s confusing regulatory framework
Having promised reform before the recent elections, the newly appointed government in Mexico is pressing ahead with a set of major changes to the telecoms and broadcasting landscapes, with the aim of making them more competitive.
Provisions related to broadcasting include the creation of two new national TV channels, as well as must-offer obligations on free-to-air TV networks and must-carry obligations for cable-TV providers. Considerable change is also planned for the telecoms sector, where a new independent regulator will be created.
The new regulator will also be the competition authority for the sector; it will be empowered to impose asymmetric regulation (i.e. tailored regulatory remedies according to the dominance of each player in the market). The reforms will encourage competition by enabling operators to provide different services with one license. For example, cable-TV operators will be able to provide broadband, while broadband providers will be able to offer audiovisual content.
The new government plans to create shared public networks by exploiting the fiber network currently owned by the Federal Electricity Commission, as well as at least 90MHz of spectrum in the 700MHz band made available by the transition to digital television. It will devise policies of digital inclusion, aiming to enable at least 70% of households and 85% of SMEs to access broadband at competitive prices and download speeds up to international standards.
The foundation of an independent regulator with stronger powers can only be good news for Mexican consumers and operators. As we noted in our Regulatory Scorecard 2013: LATAM, the confusing current regulatory framework in Mexico is the main reason why the country ranks poorly across the board compared to its neighbors.
A number of different bodies currently have a role in regulatory activity; they are often in conflict with one another or unable to behave independently of each other. The powers of the new Federal Institute of Telecommunications as outlined in the proposal would provide it with the instruments it needs to achieve a regulatory environment more in line with international best practice.
More targeted regulation will address concentration in the mobile sector and encourage growth
One of the main benefits of the proposed reform is likely to be healthier competition in the mobile sector. The dominance of Telmex has not been adequately addressed by regulation so far, with the incumbent still holding a share of mobile subscribers close to 70%.
Mexico is a rank outsider compared to other South and Central American countries, which generally have good levels of competition in mobile. Concentration has also resulted in a recent slowdown in mobile penetration; while penetration in Mexico has been close to 80% for the past three years, in countries such as Argentina, Chile, and Brazil it has risen to approximately 120%.
The limited increase in uptake is largely explained by the number of low-consumption users, which is a sign that people have been unable to benefit from competitive offers.
Mobile number portability (MNP), which has been available since 2008, has so far failed to deliver the pro-competition effect that was intended. The incumbent Telmex has actually gained more than 1.6 million subscribers since the introduction of MNP, which indicates that in the absence of adequate regulatory measures a concentrated market is unlikely to naturally tend toward competition.
The Mexican mobile market needs a stronger regulator that is able to implement asymmetric regulation in a timely fashion if it is to get to the level of competition that triggered growth in neighboring countries.
Imposing LLU requires careful consideration by the regulator
The new government’s proposal also includes a range of measures aimed at increasing competition in the fixed sector. However, the new regulator should be careful in implementing them to ensure they obtain the intended effects.
In particular, one of the short-term measures that the new Federal Institute of Telecommunications will adopt is to impose the unbundling of the local loop on operators found to be dominant in the wholesale or retail markets (or both).
While there is no doubt about the regulator’s willingness to achieve a more competitive outcome, it will have to take into account the possibility that imposing LLU at a moment when operators should be encouraged to deploy fiber could ultimately affect the incentives to invest in fiber. This could hamper the development of NGA, and even lead to a situation in which assets become stranded.
Examples from other countries also show that getting LLU to work well in practice is not without difficulties, since it requires the regulator to ensure that non-discrimination obligations are in place and that compliance with them is carefully monitored.
In the UK, Ofcom imposed functional separation between the incumbent BT and its wholesale division, eventually called Openreach, to ensure that alternative operators were granted access to BT’s physical infrastructure in the same way as BT itself. In the absence of the necessary safeguards, imposing LLU may not be sufficient to foster competition in fixed broadband.
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