Presentaci

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PUBLIC POLICY TELECOMMUNICATIONS IN MEXICO
TELEFONICA MÉXICO FRANCISCO GIL DIAZ APRIL 2008
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INDEX

• The Network
• International Rankings
• Price Gauging
• Network Costs
• The Price Cap
• Local Area Dialing Costs
• Accounting Separation
• Apportionment Of International Settlements
• Regulatory Capture

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The Network
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• TELMEX is Mexicos telecommunications hub. After
  18 years of its privatization some service
  indicators have had remarkable improvements
  phones are reliable, the network is modern, there
  is fiber optic all over the country and
  subscribers are not required to buy shares of
  TELMEX, bribe, pay a fortune and wait months for
  installation.

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The Network
01

• But if this outcome is judged by what it should
  have been, by its unfulfilled potential, by its
  comparison with what other countries have
  accomplished in a short time despite starting at
  a much later date, we have a dismal failure.
• The national network was turned into the private
  sphere without putting in place the public
  policies, legislation and specially enforcement
  to prevent it to prey upon competitors and
  ultimately upon consumers.
• Beyond the disproportionate cash flows captured
  by the incumbent, lack of national
  competitiveness and an epidemic of depredatory
  practices, we have a State within the State. A
  power within itself that can influence and block
  policies to its advantage.

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International Rankings
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Jen ranks as top celebrity cover girl

• Charts 1a, 1b and 1c and Charts 2a, 2b, 2c
  portray telecommunications indexes for Latin
  America. The first set show unadjusted ranks. The
  second set uses per capita income to normalize
  them. Mexicos ranking then tumbles, to last,
  before last and third from last respectively, way
  below countries with per capita incomes far under
  it.

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International Rankings
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CHART 1a
CHART 1b
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International Rankings
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CHART 1c
CHART 2a
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International Rankings
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CHART 2a
CHART 2b
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International Rankings
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CHART 2c
Source International Telecommunication Union,
World Bank
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Price Gauging
03

• Vincent Price
• High prices explain low quantities demanded. The
  poorest segment of the population, the one that
  never exceeds the 100 calls per month included in
  the monthly basic rent, pays 4.85 pesos per call,
  almost half a US dollar1.
• Notwithstanding the above, with a great sense of
  humor the incumbent dares to complain about
  alleged local monopolies that compete unfairly
  against it cable operators that provide
  telephony, Internet and television, even though
  the latter rely on TELMEX for transportation and
  call delivery.
• But market shares and the number of firms are
  irrelevant under a monopolist supplier of an
  essential backbone and last mile termination.
  Imagine 2 possible situations. One a highway
  network owned by a single proprietor who charges
  for its use. To label its situation as a
  monopoly, does it matter if the owner owns no
  trucks or buses? The same would be true of an
  airport network owner with no airplanes. In both
  cases there will be monopoly prices for the final
  consumer.
• 1 It is not a price as such it is arrived at
  by dividing the amount spent by consumers by the
  number of calls.

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Price Gauging
03

• Another egregious example of favoritism in the
  same year TELMEX was privatized, with no charge
  for the frequencies to be used, and through a
  direct grant sans competitive bidding, it was
  granted a concession to operate a nationwide
  wireless operation.

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Price Gauging
03

• Under its prerogatives the government can tackle
  the monopoly problem by pricing services that are
  essential as if there were a competitive market.
  The concession title of TELMEX also contains
  provisions related to competitive requirements.
  However, legislation, international treaties and
  title provisions have not mixed with enforcement

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Network Costs
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• Network Cost Structure
• Chart 3 is constructed such that equal distances
  from Mexico City to other cities are considered.
  One route is from Mexico City to a fixed line in
  Tepic compared with a Mexico City call to a fixed
  line in Compostela. There is interconnection to
  Tepic while TELMEX refuses to interconnect
  Compostela and collects what it labels a resell
  charge. Green labels are used to depict TELMEXs
  costs and/or the charge made by a competitive
  provider.

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Network Costs
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Network Costs
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• Costs faced by a competitor are 26.6 centavos per
  minute under competition (Tepic termination)
  versus 83.8 centavos under the resell charge. It
  costs therefore 3.15 times more to deliver a call
  when TELMEX refuses to recognize that what it
  provides is an essential input. With TELMEX in
  control of 60 of the national backbone and 94
  of last mile terminations, its charges prevail.
• If TELMEXs costs, including a competitive return
  to capital, are taken into account, the
  interurban transit fee falls to 4 centavos per
  minute and the termination interconnection fee to
  6 centavos. With these numbers the relevant
  comparison is between the 83.8 centavos already
  mentioned and 18.8 centavos, or a ratio of 4.5
  times instead of the already high one of 3.15
  times.

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Network Costs
04

• Regulatory paraplegia has also protected TELMEX
  from fulfilling a prerequisite for a competitive
  market physical interconnection. Competitors
  wait up to two years. AVANTEL received its
  concession for local services in 1998 to achieve
  interconnection only 2 years later. GTM waits
  since February 2006 for the monopolys deference.
  Cable operators who provide broadband Internet,
  TV signals and telephony have suffered similar
  delays.
• 4 Ds that illustrate the behavior of a
  monopolist regarding interconnection DENY ---
  DELAY --- DETERIORATE --- DUMP. TELMEX honors
  them all.

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The Price Cap
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• The powerful instrument provided by a required
  price cap revision of TELMEX has been neglected.
  The authorities have not taken into account
  TELMEXs productivity increases. The pallid
  adjustments required in Mexico are striking when
  compared with what similar countries have imposed
  on the incumbent

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The Price Cap
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• Chile imposed a 30 percent adjustment in 1999 and
  is currently going over the next one. Peru
  required a 10.4 adjustment over 2004-2007 with
  a further one of 6.4 percent per year for
  2007-2010. The accumulated change will be 41
  percent for the 6-year period. In Mexico the
  adjustment factor for the same 6 years is of only
  3 percent.
• Chile and Peru post processes in the Internet
  while Mexicos is a closed-door process with the
  result announced at its termination.

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Local Area Dialing Costs
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• expensive - the cost of one call ...

• Because the marginal cost of transporting a call
  over long distances has fallen to practically
  zero, local area dialing zones (LAD) have been
  eliminated in most of the world. To benefit the
  incumbent (LADs) have not been eliminated in
  Mexico. Some LADS were eliminated in 2007 but
  even these timid regulatory efforts have been
  successfully challenged in court by TELMEX

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Accounting Separation
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• The avoidance of cross subsidies is a key
  competitive issue. TELMEX has never complied with
  its titles or legislation requirements to
  apportion the costs of its diverse services. Some
  examples
• In 2005 it introduced a retail long distance
  tariff of 50 centavos while charging wholesale
  operators 75 centavos
• TELMEX packages unlimited LD calls with its local
  service, an offer impossible to replicate by the
  other operators since they are forced to pay
  TELMEX for LD services in half of the LADs.

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Apportionment Of International Settlements
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• .. International Telecom
• International long distance settlements favored
  Mexico in the late seventies by 1 billion
  dollars. To benefit TELMEX the authorities
  devised a concept labeled proportional return.
  Under this formula an operator could not compete
  with TELMEX to capture incoming traffic, it had
  to accept to share the pie according to its
  proportion in outside calls. The starting rules
  (1996) stated that the system would last only
  three years, it went on for seven, and only
  because the government lost an arbitration panel
  before the WTO

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Regulatory Capture
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• Peter-Paul-Rubens-The-Capture-of
• We have a perfect case of regulatory capture, of
  a giant economic machine created by a government,
  one that commands a cash flow of several billion
  dollars per year that has allowed it to prey upon
  suppliers, competitors and consumers. It has
  allowed it as well to branch out and to dominate
  or attempt to dominate other areas of economic
  activity. It is a case of lost welfare in a
  competitive global environment. In a flat world
  Mexico is surrounded by huge artificial mountains.

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HOPE
Hope on the Horizon
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HOPE

• However, there is hope in the horizon, President
  Calderón has announced his firm intention of
  providing competitive conditions for all Mexican
  markets

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