Mexico recently passed a telecommunications reform that seeks to increase competition and reduce the dominance of America Movil and Televisa in mobile telephones and television. KITE Invest met with the President of Telefónica Mexico, Francisco Gil Díaz, in order to discuss and analyze the telecommunications sector in Mexico, as well as, to get a glimpse of the business climate in Mexico from a foreign company’s point of view. 

KITE Invest: After almost 15 years since its entry into Mexico, what is your assessment of the trajectory of Telefónica in the Mexican market?

Francisco Gil Díaz: Through acquisitions and organic growth Telefónica has been able to become the second largest operator of mobile telephones in Mexico.

We have a substantial infrastructure, have invested over $13 billion, have an extensive network of over 45 thousand-kilo meters of fiber optic across the nation, and of course, there is a large number of micro wave antennas. We cover about 22% of the families in Mexico. Such a degree of coverage is pretty substantial, whether you measure it in terms of geography or population.

KITE: How do you face the challenge to grow while maintaining profitability?

FGD: As the different technologies emerge we have to adapt to them as they come along and there is no way that can be avoided. If you don’t adapt to innovations, someone else will.

We have investors associated with Telefonica who are setting up telecommunications in 1500 additional new towns across Mexico. Furthermore, another expansion opportunity is our collaboration with the Government in its effort to provide inexpensive and/or free Wi-Fi in many areas around the country.

Our wide deployment of high quality LTE is an inexpensive strategic move that has positioned us, again, as the provider of the fastest wireless Internet in the country.

KITE: The telecommunication reform seeks to increase competition and reduce dominance by America Movil and Televisa in mobile telephones and television; in your opinion what are the new opportunities now open to the telecommunications sector with the new constitutional laws and what are the benefits for Telefónica? 

FGD: Well there have been some advantages but we are also somewhat disconcerted by several resolutions of the Instituto Federal de Telecommunications. The Institute, for instance, accepted the ‘Offer of Terms of Reference’ by America Movil of its infrastructure despite the absence of prices for the services offered! Therefore, there are some issues that do worry us that are not congruent with the spirit and the letter of constitutional and bylaws reforms. At this point we are waiting to see to what extent the Institute will issue resolutions within the original spirit and  impetus of the reform.

Having said that, there have been advances:

1). Ease of number portability should improve if the IFT revokes the conditions it issued, that have encumbered it, and that go beyond the mandate of the law.

2). Legislation also eliminated Telcel’s possibility to create a privileged community for its own customers, by providing them free calls and other services.

3). While the level of asymmetry required by the legislation for interconnection charges is still too low and doesn’t recognize the different sizes of the various service providers, we now have some semblance of asymmetry. This means that in the case of Telefónica, which receives more calls from other networks than vice versa, we obtain some revenue from other service providers, signally from the monopoly.

4). The possibility of 100% foreign ownership of fixed line operators is also a significant new reality.

5). IFT issued a resolution requiring America Movil to offer other service providers a more efficient and less costly distribution of interconnection points.

Overall we are still waiting for more changes, probably the most significant ones for Telefonica. However, it is noticeable that the landscape of telecommunications has changed just by the fact that AT&T has come in to buy bought two medium-sized service providers. The new legislation has already created a different environment for investors.

KITE: For Telefónica, what strategy is being taken to consolidate its presence in the market? 

FGD: We continue developing our network and we have to make a stronger effort in the post-paid market.

In comparison, we have been extremely successful in the pre-paid market. Last year – a difficult year economically speaking- we were the only telephone company in Mexico that increased its number of customers, its revenue, its EBIDA, and its market share.

KITE: Despite this successful growth, what challenges still remain?

FGD: The prospects of acquisitions, which is getting harder due to all of the mergers occurring now.

Another challenge is being able to transmit that our network is better than others, in terms of quality, the speed of our data network, and the customer service benchmarks. We have highest customer loyalty, but the challenge is accessing the market outside of our network.