Share Square: Mexico

Mexico had an estimated population of 127.8m people and 103.5m mobile subscriptions at the end of 2015¹, giving a mobile penetration of 81% - relatively low for Latin America and in comparison to many markets around the world. Indeed, all of the other principal countries in Central America have mobile penetration of over 100%. 87% of subscribers in Mexico have a pre-paid account. There are three mobile operators serving the Mexican market (see figure 1), with Telcel (América Móvil) enjoying a dominant position with 70.5m connections and 68% market share, significantly ahead of Movistar (Telefónica) with 24.3m connections (24% share). AT&T has 8.7m connections (8% share).

Telcel’s dominant market share of 68% is a highly significant factor when considering the dynamics of the Mexican mobile market – being particularly high for a market with such a large number of subscribers. Whilst there has been considerable consolidation in the market in the past two years – with the number of MNOs decreasing from five to three as AT&T acquired Nextel and Iusacell, the dominance of Telcel has not been diminished significantly by these moves yet. Telcel’s dominance has had implications for subscriber and coverage growth and for the tower market. The fact that there are only three operators is also notable – Brazil, another large Latin American market, has seven and it is not uncommon for far smaller markets to have four or five operators, despite a global trend towards consolidation. The three largest operators in Brazil all have similar market shares to one another, all lower than 30%, and this makes for a very different competitive dynamic than in Mexico where a single player holds nearly 70%.

3G services were first launched in Mexico in 2005 by AT&T (operating as Nextel at the time). Telcel and Movistar followed in 2008. By the end of 2015 there were 52.4m 3G connections (51% of all connections), of which 40.0m were with Telcel (74% - slightly higher than its market share overall).

Mexico still lags behind many markets in terms of geographic and population coverage, with demand for services outstripping supply and quality of service inconsistent. The demand for greater coverage means a requirement for more towers – meaning potential for both existing and new towercos, particularly if the stranglehold of Telcel on the market can be loosened. Whilst 4G is gathering pace, it will co-exist with 3G for the foreseeable future so both coverage and capacity increases need to be catered for.

4G services were launched by Telcel and Movistar towards the end of 2012, with Nextel (since acquired by AT&T) following in 2014. By the end of 2015 there were 7.5m 4G connections (7% of all connections). Again, Telcel had the most connections – 5.6m (75% of all 4G connections).

In June 2015 Telcel announced that its 4G Long Term Evolution (LTE) network covered 14,500 Mexican towns and cities. The MNO noted that its network footprint was equivalent to a population coverage of 65.5%. Telcel claims to have forty 4G-compatible devices, and notes that both pre-paid and post-paid users can access the network for no extra cost.

Movistar Mexico’s initial aim was to reach the 4G coverage milestone of reaching fifty regional markets by the end of 2015, rising to 300 by 2018. In May 2016 it announced that it expected to extend its 4G LTE network to 23 new regional markets and 500 rural communities, via the deployment of 1,700 new base transceiver stations (BTS). New areas set to be covered include Aguascalientes, Cancun, Cuernavaca, Merida, Torreon, Veracruz and Villahermosa.

In 2015 AT&T suggested that it would likely be around 18 months before AT&T could deliver a “good, robust” 4G Long Term Evolution (LTE) experience beyond urban areas in Mexico. Indeed its initial focus was to deploy LTE rapidly in urban areas and on road transport links – acknowledging that in rural areas widespread coverage would not be achieved for some time. By April 2016 AT&T was able to announce that its LTE network was now available to 45 million potential customers in 42 Mexican cities, and by October 2016 this had increased to covering more than 70 million people in 144 cities across the country. Going forward, AT&T has stated that it expects to cover 75 million people, nearly two-thirds of the Mexican population, by the end of 2016, and 100 million people by the end of 2018.

In January 2015 AT&T Inc finalised its US$2.5 billion acquisition of Iusacell from Grupo Salinas. AT&T acquired all of Iusacell’s wireless properties, including licences, network assets, retail stores and approximately 9.2 million subscribers. The Iusacell wireless network covered about 70% of Mexico’s population at the time.

In early 2015 AT&T also reached an agreement with NII Holdings to buy Nextel Mexico, with the deal underlining the U.S. telco’s strategic shift into the Mexican market. The deal for Nextel Mexico covered all of NII Holdings’ wireless properties in the country, including network assets, retail stores, three million subscribers and spectrum licences. No competing bidders emerged to challenge AT&T’s initial offer, cash-strapped Nextel owner NII Holdings having filed for relief under Chapter 11 of the U.S. Bankruptcy Code in September 2014. The acquisition was completed in May 2015. AT&T paid US$1.88 billion for Nextel, less approximately US$427 million of net debt and other adjustments.

Fierce Wireless stated that Iusacell controlled between 20MHz and 25MHz of 800MHz spectrum, primarily in the southern half of the country, including Mexico City and Guadalajara, and an average of 39MHz of PCS spectrum on a nationwide basis. Meanwhile, Nextel is said to have presided over 20MHz of 800MHz spectrum and 30MHz of AWS spectrum. As a result it claimed that the substantial frequencies give AT&T ‘a better spectrum position in Mexico than anybody’. The new AT&T venture also came into the market as the second biggest revenue earner, comfortably surpassing Movistar in terms of revenue. With its takeover of Iusacell and Nextel, AT&T planned to create the first ever ‘North American Mobile Service’ area covering more than 400 million consumers and businesses in Mexico and the U.S. Randall Stephenson, AT&T chairman and CEO, stated: “It won’t matter which country you’re in or which country you’re calling – it will all be one network, one customer experience.”  However, AT&T emphasised that it will be several years before it is able to compete with Telcel on an even footing – with a heavy investment period planned.

Movistar (Telefónica) was in the news in February 2015 because Francisco Gil Diaz, Telefónica’s regional chairman for Mexico and Central America, urged the Madrid-based telecoms group to move quickly or risk being left behind by the wave of consolidation sweeping the Mexican telecoms sector. The burst of M&A activity which saw AT&T Inc buy Iusacell and Nextel back-to-back was perceived as leaving Movistar Mexico looking slightly vulnerable, with the Telefónica-backed operator’s rumoured tie-up with pay-TV giant Grupo Televisa having collapsed. An exit from Mexico was not an option given Telefónica’s US$13.5 billion investment over the past twelve years.

In May 2016 Movistar announced plans to spend MXN3.4 billion (US$184.8 million) to replace its fibre backbone in Mexico, and that it was also seeking to expand its LTE network coverage. Local press reports stated the company will be installing DWDM technology running at 100Gbps to replace its existing legacy infrastructure.

It has also started deploying Ericsson’s Radio Dot System small cells to improve mobile broadband coverage in Mexico City. The Spanish-owned operator contracted Ericsson to install 1,080 Radio Dot Systems in facilities including office buildings, shopping centres and airports that are otherwise difficult to cover using existing networks, with project completion scheduled for end-2016. The small cell architecture supports both 4G LTE and 3G W-CDMA indoor coverage. Movistar was quoted as saying that in the short term is envisaged the implementation in 50 facilities within Mexico City.

There are numerous MVNOs active in the Mexican market – with a string of launches of MVNOs based on Movistar’s network announced in the last five years, including Virgin Mobile Latin America (VMLA), Lycamobile, Maxcom, Megacable, Ekofon, under the ‘Cierto’(True) brand, Maz Tiempo, QBoCel, Pepephone and weex (in association with Austrian mobile virtual network enabler (in association with  Austrian mobile virtual network enabler I-New). In 2016 Movistar subsequently announced plans to start hosting a further five new MVNOs over its network during the second half of 2016. Simpati Mobile, also enabled by I-New, went live over the Movistar network in September, and October 2016 saw the launch of a further Movistar based MVNO in the form of Flash Mobile, which is supporting 4G connectivity from launch. In addition to all of these Movistar supported MVNOs, Movistar has its own Tuenti sub-brand.

In June 2016 it was announced that a further five new MVNOs were set to launch in Mexico after a series of deals were signed with Telcel. The first virtual operator expected to go live was Cuauhtemoc-based Buenocell, while other players were named as Inaecom, Neus Mobile, Quickly Phone and Maxcom. The last named company, which has operated an underperforming MVNO over the Movistar network since September 2007, has awarded an MVNE contract to XIUS, an operating brand of India-based Megasoft Limited as well as launching an MVNO in an alliance with supermarket chain Soriana. MVNO Maz Tiempo also announced in September that had migrated its business across to an MVNE platform built by Austrian vendor I-New.

2.5GHz

In August 2012 the government reclaimed spectrum in the 2.5GHz band from eleven companies, while also revealing plans to refarm the frequencies for the deployment of 4G technology. The Instituto Federal de Telecomunicaciones (Ifetel)²  subsequently stated in July 2015 that it would redistribute the spectrum for both frequency division duplex LTE (FDD-LTE) and time division duplex LTE (TD-LTE) usage from 2016, as part of its National Radio-electric Spectrum Plan (Plan Nacional de Espectro Radioelectrico). The regulator took the decision after considering recommendations from the ITU and the Comisión Interamericana de Telecomunicaciones (CITEL). Local reports had also suggested that AT&T had approached Ifetel with a request for a 50MHz block of frequencies in the 2.5GHz band. In August 2016, IFT revealed that the auction for LTE-suitable spectrum in the 2.5GHz band (2500MHz-2690MHz) would be delayed until 2017. The tender – which was scheduled to be held in the second half of 2016 – was pushed back to coincide with a change in the bidding schedule for an open access wholesale network with exclusive use of a 90MHz block of spectrum in the 700MHz band (delayed until January 2017). In the meantime, studies will be carried out to define the size of the blocks to be assigned, the band’s uses and spectrum caps.

In February 2016 Ifetel carried out a Combinatorial Clock Auction (CCA) for Advanced Wireless Services (AWS) spectrum, which generated a total of MXN43.7 billion (US$2.4 billion). Telcel committed to pay a total of MXN31.0 billion for 20MHz (2×10MHz) of AWS-1 spectrum³ alongside 40MHz (2×20MHz)in the AWS-3 band⁴. For its part, AT&T secured 20MHz (2×10MHz) of AWS-1 spectrum, paying MXN12.7 billion for the frequencies. All spectrum allocations are valid for a period of 15 years. The two companies had thirty days within which to pay their preliminary licence fees, although the full cost of the concessions are spread over the course of the licences’ 15-year lifespans. Initial payments were set at MXN2.1 billion (US$117.4 million) for Telcel and MXN1.0 billion for AT&T. Ifetel confirmed that following the auction, Telcel will hold a total of 41.2% of the available International Mobile Telecommunications (IMT) spectrum in Mexico, narrowly ahead of AT&T (38.2%). Movistar – which opted not to participate in the process – holds a total of 19.5%, while the remaining 1.1% of spectrum is held by construction firm Grupo SAI. Movistar decided not to take part following a spectrum swap in December 2015 between Movistar and AT&T worth US$168 million. The transaction involved a 10MHz block of Personal Communications Service (PCS) spectrum in the 1900MHz band transferring to Movistar, while AWS spectrum in the 1700MHz/2100MHz band reverted to AT&T.

In May 2016, Telcel subsequently requested permission to swap its AWS-3 spectrum with its rival’s allocation, in order to secure contiguous blocks of spectrum in the 1710MHz-1755MHz and 2110MHz-2155MHz bands. This request was approved on 25 May, in an extraordinary session, as it is perceived to encourage more efficient use of the resources.

In 2013 a plan for a state-owned mobile wholesale network was written into Mexico’s constitution as part of a sector overhaul designed to curb the dominance of Telcel. The plan called for groups of private companies to bid for the right to build and run the network, which would rent capacity to mobile providers, and which would have exclusive use of a 90MHz block of spectrum in the 700MHz band.

In October 2014 Mexico’s Secretario de Comunicaciones y Transportes (SCT) and Ifetel signed a series of framework agreements to the network to launch in 2018. In September of that year the authorities received their first bid to build the network from a mystery consortium assisted by vendor duo Alcatel-Lucent and Ericsson.

In May 2015, the government subsequently cut the estimated investment required for the wholesale mobile broadband network by almost a third, to US$7 billion. This was because the view was taken that the Mexican mobile landscape had changed dramatically since the reform legislation was enacted – with AT&T putting together back-to-back deals for Iusacell and Nextel Mexico – the country’s third and fourth largest mobile providers. Monica Aspe, the Undersecretary of Communications at SCT stated at the time that: “Mexico’s telecommunications sector is different today to two years ago, and the tender for the shared network has to recognise that. […] The network shouldn’t be designed as or perceived as a competitor to the operators that have their own infrastructure, but as an enabler.” The reduction in the budget required was made chiefly because it was assumed that the number of cell towers required will be closer to 12,000 than 20,000.

In July 2016 Ifetel stated that it will delay its announcement of the winners of the nationwide 700MHz open access network tender until 17 November 2016, citing the complexity of some 900 queries submitted by the bidders, as well as certain requests from international financial institutions interested in backing the project. The SCT was initially expected to declare the tender winners on 24 August. In light of the postponement, interested applicants had until 20 October to submit bids. Final contracts will be signed on or before 27 January 2017.

In December 2012 Enrique Peña Nieto took office as Mexican President, and in June 2013 he signed legislation designed to enhance competition, as part of which a new regulatory agency, Instituto Federal de Telecomunicaciones (Ifetel), was created – replacing former regulator Cofetel. Cofetel’s attempts to attract a new international player into the market had not been successful, perhaps owing to the very dominance of the Carlos Slim owned América Móvil and a perception that attempts to counter it had so far failed. Ifetel immediately set about examining means to even the competitive playing-field in Mexico, one of the first ideas being to examine a number of options for the creation of an independent operator that would use the 700MHz band to provide wholesale broadband services – the “Red Compartida”. Around the same time the government also worked on a deal with those companies holding spectrum in the 2.5GHz band under in order to recover a significant portion of such frequencies.

In March 2014 Ifetel confirmed that it had determined that América Móvil held significant market power (SMP). The decision meant that América Móvil would now be subject to tougher regulation, although it was also confirmed that Ifetel was not planning to push for the break-up of any companies at this time, with such actions only expected to be taken as a last resort.

Secondary legislation to underpin the Mexican government’s efforts to boost competition in the country’s telecoms sectors was put before Congress shortly afterwards, and was finally approved in July 2014. This included giving Ifetel extensive powers to police dominant telecoms operators, with control over elements such as tariffs and discounts, as well as the ability to force operators to seek approval every year for interconnection and infrastructure sharing terms, extending right up to being able to order asset divestitures. Ifetel made it clear, however, that it could repeal measures against Telecel and Telmex once their hold on the market had been loosened. The secondary legislation outlined one way in which it might do this, with the document noting: “The predominant economic player will cease to have such character when Ifetel determines that its national market share, considering the variables used to declare it predominant, have been reduced below 50%.”

Many of the powers detailed in the secondary laws did actually already exist under Mexico’s previous telecoms law, although Cofetel had been unable to apply them because companies had been able to file injunctions preventing the previous antitrust body, the Comisión Federal de Competencia, from declaring them dominant. However, under the updated legislation Ifetel now became the highest authority on antitrust issues in telecoms and broadcasting, while separate legal changes meant companies could no longer suspend regulatory decisions pending appeal.

There were several unsuccessful attempts during this period by América Móvil subsidiaries and associated companies to block the market dominance rulings via injunctions. Around this time América Móvil announced plans to sell assets in Mexico, with a view to lowering its market share, in order to cease being a “preponderant economic agent”. The telco noted that as-yet unspecified assets “must be sold at market conditions at their commercial value”. Further, it was announced that all of the company’s base stations, including towers and related passive infrastructure, “will be separated from Telcel for their corresponding operation and commercialisation to all interested parties”.

However, Ifetel subsequently made it clear to Carlos Slim that he could not present a plan to sell off a portion of América Móvil’s assets to the regulator without having an independent buyer lined up. For América Móvil to avoid the new measures the sale must be approved by Ifetel, but the watchdog said it would not consider América Móvil’s plan until a buyer had been confirmed, as it would not be able to verify the purchaser’s independence. Ifetel emphasised that suitors for América Móvil’s surplus assets in Mexico would have to prove they were completely independent from the Carlos Slim-controlled group, beyond simply making sure there were no direct financial ties – meaning that personal and historic relationships would also be scrutinised. This was pertinent at the time as one of the potential suitors for América Móvil’s assets was AT&T – a board member of which had served as the CEO of Telmex. Ifetel also requested several modifications to the proposed wholesale reference offers of Telmex and Telcel, following “a thorough analysis” of the documents. It requested the two operators submit wholesale offers for the following services: leased lines, access and passive infrastructure sharing in fixed networks, access and passive infrastructure sharing in mobile networks and mobile virtual network operators (MVNO).

In March 2015 América Móvil staged talks with Ifetel to discuss the former’s plans to spin off around 11,000 mobile masts belonging to Telcel into a dedicated infrastructure company – which would rent the towers out to Telcel’s fellow mobile operators, as a means of levelling the playing field. The move, which became a reality later in 2015 with the creation of Telesites, was part of América Móvil’s long-term strategy to cease being a “preponderant economic agent” and escape tougher regulation. However, the move was not enough in its own right to achieve that aim.

More recently, in October 2016 Ifetel issued a consultation on infrastructure sharing – namely “Proposed draft guidelines for the deployment, access and sharing of telecom and broadcasting infrastructure." – with a deadline for responses of the November 18. The Draft aims to promote and encourage sharing and deployment of infrastructure by increasing the supply of infrastructure in the country and ensuring the optimal use of existing infrastructure, seeking to lower the costs of deployment and operation of infrastructure, and removing barriers to entry into the telecoms and broadcasting sectors to promote greater competition.

Whilst tower sharing has not been mandated, tower companies have been active in Mexico for several years, in spite of the strangle-hold Telcel holds on the market – with the most notable players until recently being American Tower Corporation (ATC), Mexico Tower Partners (MTP), Inversiones e Infraestructura Mexicana en Telecommunicaciones (IIMT), Centennial, Torrecom and QMC.

However, in 2015 a significant change to the balance of the tower market occurred with the creation of Telesites, an entity created by spinning off around 11,000 Telcel towers. The spin-off represents part of a restructuring plan América Móvil devised in response to strict regulations designed to curb its market dominance in the mobile and fixed markets – although it should be noted that, as TowerXchange has indicated in the past, 97% of both América Móvil and Telesites shares with voting rights are or will be held by entities directly or indirectly controlled by the Slim family. Nevertheless, other operators have access to these towers, although initially Telcel was the principal tenant. It has been stated that the new entity will take active steps to expand its network footprint, improve its tower locations and increase its number of tenants. The Telesites spin-off instantly created Latin America’s second-largest wholesale supplier of tower space, after American Tower Corp, Bloomberg claimed. In early 2016 Telesites reported a portfolio of 13,873 towers, of which 1,108 were built in 2015. Shortly after its establishment both AT&T and Telefónica reported they were in discussions regarding deals to rent towers from Telesites.

After Telesites, ATC is the biggest towerco player in Mexico with some 8,870 towers at the last count. It was the first tower company in Mexico and started acquiring towers when carriers initially decided to divest their passive infrastructure portfolios.

MTP is the next biggest player with 1531 towers when last reported. MTP was founded Digital Bridge along with Macquarie Mexico Infrastructure Partners, and has a model whereby it outsources most of its acquisition and construction to partners – working with local towercos which build towers to then sell them to MTP – taking advantage of the local knowledge and expertise of those companies with regard to working effectively in local conditions. It the past it has stated it has the capacity and resources to build up to 500 new sites per year.

Of the other key players, Centennial is thought to have around 400 towers and IIMT is thought to own around 450 towers. Torrecom has 208 towers, at the last count, as part of a Central American focus which also includes towers in Guatemala, Honduras and Nicaragua (having previously divested assets in Costa Rica).

In total there are thought to be around 25,000 towers in the country. It has been reported that something like 70,000 towers will be needed in Mexico if it is to achieve 90% mobile coverage – meaning there is huge potential for additional towers to be built.

Whilst the dominance of Telcel is still very much a reality, the creation of Telesites, advent of AT&T as a disruptive force planning to invest heavily, and the regulatory changes underway in the Mexican mobile market are positive for the tower industry and bode well for the requirement for sites.

Indeed, a number of other factors could be said to be broadly positive with regard to the future potential of the tower market: mobile penetration is low in a country with a high population and 4G is the early stages of roll-out, both of which bode well for future coverage (and capacity) expansion and the need for more towers. The Red Compartida shared wholesale network will also create opportunities, and the 2.5GHz auction is also a positive event on the horizon. The tower market has been in existence in Mexico for a number of years and a number of leading players know how to operate there, and yet most experts seem to agree: Mexico does not have nearly enough towers to suit its future needs.

On the other hand the market is not without its difficulties – for example, with the regard to the process for gaining permits, with decisions made at the municipal level, and a large number of municipalities to deal with. Pricing is reported to be very competitive and tower prices high compared to other Latin Market (driven by a lack of supply).

As has long been the case, the success of Ifetel’s efforts to open up the market and loosen the grip of Telcel will be key to the growth of the market in general and the tower infrastructure required to enable this growth. As it stands, many positive moves have been made, but Telcel’s market share still stands at close to 68%. It will be fascinating to see if the regulatory and market developments in evidence in the last two years truly bear fruit over the next five. If they do, the potential of the tower market in Mexico is vast.

---

Sources:

1. GSMA

2. The Regulator of Telecoms and Broadband in Mexico (also known as IFT)

3. 1710MHz-1725MHz/2110MHz-2125MHz

4. 1755MHz-1780MHz/2155MHz-2180MHz

---