April 8, 2008 Woodrow Wilson International Center for Scholars

1. What Keeps Holding the Mexican Economy Back?A Discussion on Competition and ConsumersLessons From the Telecommunications Sector April 8, 2008 Woodrow Wilson International Center for Scholars

2. Mexico’s cable telecommunications industry

3. Competitive and consumer landscape in Mexico • Mexican families’ expenses in telecommunications services are much higher than those in electricity, gasoline, milk or tortillas. • The National Index for Prices to Consumers (INPC) acts as an indicator of the consumer characteristics of Mexican people. • A pro-competitive policy will contribute to reduce inflation, increase buying power and increment consumer’s well being.

4. Competitive and consumer landscape in Mexico Telefonía: 3.51 Telephony:3.51 Telefonía INPC: National Index for Prices to Consumers Source: Banxico. www.banxico.org.mx

5. Competitive and consumer landscape in Mexico • A 30% reduction in telecommunications’ prices would have an impact on people’s well being, measured by the INPC, equivalent to a decrease of: • 37% on gasoline’s price, or • 53% on electricity’s or • 59% on milk’s or • 98% on tortilla’s.

6. Competitive and consumer landscape in Mexico Total lines: 20.1 million Teledensity: 18.9 lines/100 inhab. Source: Cofetel. Reporte de actividades 2006 – 2007, Telmex. Reporte del 1er trimestre 2007, Canitec

7. Competitive and consumer landscape in Mexico 1st operator 2nd operator 3rd operator 4th operator México Source: OCDE Communications Outlook 2007. Focus on Mexico

8. Competitive and consumer landscape in Mexico Source: Merill Lynch, 2007

9. Competitive and consumer landscape in Mexico Low-usage Fixed Residential Service Fees Source: OCDE Communications Outlook 2007. Focus on Mexico

10. Competitive and consumer landscape in Mexico OECD basket for low-usage mobile telephony service USD PPP Source: OCDE Communications Outlook 2007. Focus on Mexico

11. Business fee Residential fee Competitive and consumer landscape in Mexico Fees for International Service USD PPP Source: OCDE Communications Outlook 2007. Focus on Mexico

12. Competitive and consumer landscape in MexicoTelmex’s own regulation • Despite the agreements reached by the Federal Telecommunications Commission’s (Cofetel’s) Local Service Operator’s Committee, regarding Local Service Areas, last year Telmex opposed consolidation of 70 areas. • These grouping would have benefited more than 33 million people living in more than 1,400 cities, by converting long distance calls into local calls. • Telmex’s “Ciudades Vecinas” plan does not eliminate long distance fees for any city and only offers discounts to 148 cities.

13. Competitive and consumer landscape in Mexico International Comparison for Fixed Service -Fixed lines per 100 inhabitants- Source : International Telecommunications Union and Dirección de Información Estadística de Mercados, COFETEL.

14. Competitive and consumer landscape in Mexico National Teledensity Source: Cofetel, 2007. Fixed lines per 100 inhabitants

15. 15 companies 1 company 195 companies Competitive and consumer landscape in Mexico Pay TV Market Distribution in Mexico • Sky has nation-wide presence in Mexico. • Example: in the city of Puebla there are 5 alternatives of pay TV: Megacable (cable), Sky (DTH), Ultravisión (MMDS), MVS (MMDS) and Maxcom (Telco). • All telcos, but Telmex, may offer pay television services in any location in the country.

16. Entry barriers to new comers in telecommunications. Examples • Present conditions for getting access to essential resources to offer telecommunications services, as interconnection and transmission (inter-city transport) … • force competitors to charge users for a service that has a marginal cost close to zero, • are particularly harmful for low-income regions, due to high fees and scarce availability of interconnection and transport and • impose a high cost “floor” to new comers, which limits further fee reductions to users.

17. Current Situation • Telmex keeps pressing the Federal Government to be authorized to offer television services to its customers, what it has explicitly forbidden on its license. • The Federal Antitrust Commission (Cofeco) just started last January a dominance investigation in several telecommunications markets. • Telmex has evaded compliance of antitrust conditions that had been established. • Telmex’s control of essential resources precludes its competitors to enter markets in which it is the only service provider.

18. Conclusions • High fees and low teledensity in fixed telephony services are a consequence of scarce or almost inexistent competence. • In addition to imposing its conditions to competitors, Telmex defines its own regulation when that established by the authority is considered by Telmex as “incorrect”. • Without a previous asymmetric regulation, Telmex will transfer its dominant power to the television market. • It is essential that Cofeco and Cofetel take effective actions to regulate Telmex. • Only after Telmex has been properly regulated, it should be permitted to enter into a new market.