Summary: Mexico's Telecom Reform

Speakers:

• Francisco Gil Díaz, Executive President, Telefónica México
• Jonathan H. Herbst, Managing Director and Senior Member, Global Media & Communications Group, UBS
• Ruben Kraiem, Partner, Covington & Burling LLP (Moderator)
• Gustavo I. López, Vice President & Regional Counsel, Discovery Latin America/US Hispanic

Summary

A June 25 AS/COA panel brought together top experts to discuss Mexico’s telecommunications reform. The conversation focused on the reform, its goals, and its expected significance—not only for the Mexican telecommunications sector but also for investment, politics, and the country as a whole.

• Watch the video of the panel.

The Reform

Covington & Burling LLP's Ruben Kraiem opened with an explanation of the telecommunications reform, signed into law on June 10 by President Enrique Peña Nieto, as well as the current state of the country’s telecom industry. Kraeim gave figures from a 2012 OECD report on the Mexican telecommunications sector, showing that one single company owns 80 percent of fixed lines and 70 percent of mobile. The lack of competition, as well as poor market penetration, results in a dysfunctional system. This is typified by an injunction system that, as the report explains, allows for regulatory decisions under judicial review to be suspended and found in favor of the plaintiff.

The reform closely follows OECD recommendations. It seeks to raise competitiveness in the sector, opening it up to greater foreign investment and smaller industry players, and giving Mexicans access to better, cheaper telecom services. A new regulatory body, Federal Institute of Telecommunications (IFETEL), will have the expanded powers to regulate the sector—including the ability to break up sector concentrations. The reform covers a broad array of issues associated with telecommunications in Mexico, such as ensuring the availability of infrastructure, creating a regulatory framework, and uniting the scope of the sector under a single, overriding policy framework to create a level playing field.

The Expected Significance

Telefónica México’s Francisco Gil Díaz discussed the impact of the reform on companies such as his, as well as what the reform is expected to accomplish. He explained how the reform will work at a constitutional level, thus establishing a set of conditions that must be followed by IFETEL. La Comisión Federal de Telecomunicaciones (COFETEL), the regulatory body that previously regulated Mexican telecommunications, did not fulfill the role it was expected to as a regulatory body. Instead of applying the same rules to all, as COFETEL did, the establishment of  asymmetric conditions ensures that each individual firm will be treated differently so as to curb advantages held by dominant firms. The hope is that this will improve upon the low levels of competition outlined in the OECD report by entrusting new regulator IFETEL with the capacity to mold the competitiveness of the sector’s market. Furthermore, the reform will be significant in diminishing the possibility of commissioners being chosen as a result of their political or private affiliations, breaking a judicial barrier that has been present in the telecommunications sector for years.

The discussion continued with UBS’ Jonathan Herbst, who outlined the significance of the reform in terms of new capital and investments. Historically, there have been barriers to foreign investment in Mexico, particularly in the telecommunications sector. However, this reform is expected to break these down and open an attractive market to foreign investors. Herbst emphasized how this will ultimately depend on how committed the regulators are to allowing foreign investment while also backing competition and creating a more level playing field for new entrants, both internal and from abroad.

The perspective from the content and media world differed slightly, added Discovery Latin America’s Gustavo López. He recognized that although the reform was detailed and thorough in some aspects, it was still too broad in regards to content. The anti-competitive activity that had been common between incumbent public networks and cable television took many shapes, as the incumbents felt threatened by the growing popularity of paid television. Local networks were able to use their power to manipulate the rules and laws in the past, and López expressed concern that the new reform did not address these issues adequately, making it difficult to end this manipulation.

Goals and Future of Telecommunications in Mexico

Though the reform still needs some changes, the panelists agreed the reform would ultimately improve the penetration, cost, quality and competition of the sector in Mexico. It remains too early to tell what the challenges and pitfalls for the reform are. Corruption will not likely be an issue; the thrust of the reform is to ensure that the new elements of the commission are sufficiently divorced from special interests. The next six months will prove crucial in the development of the reform and the path it is likely to take. The major concern, the panelists agreed, is the concentration of power in one entity. Gil expressed confidence that the Peña Nieto administration will seek to implement the reform in a manner that will address this concern. Competition will allow a plurality of opinions through the media, and this will result in an improved telecommunications sector and media culture for Mexico.