Carlos Slim is likely to keep his dominance over Mexico’s wireless industry as government regulations deter potential rivals such as Deutsche Telekom AG from bidding for airwave licenses this week.
The government designed the auctions to bring more competitors into the mobile-phone market, where the 71 percent share held by Slim’s America Movil SAB has kept prices high for some customers and helped make him one of the world’s richest men. While China Mobile Corp., Reliance Communications Ltd. and Deutsche Telekom showed interest, they had concerns about regulators’ ability to foster competition, said Gonzalo Martinez Pous, a commissioner at the Federal Telecommunications Commission. It’s now unlikely any additional rivals will bid in the auction, he said.
A fifth competitor in Latin America’s second-largest wireless industry would lower prices, cutting into sales and profits at America Movil’s Telcel unit, said Christopher King, an analyst at Stifel Nicolaus & Co. Slim’s dominance, along with the annual fees required for auction winners, scared off potential bidders, he said.
“This has to be viewed as a win for Telcel,” said King, who is based in Baltimore and advises buying America Movil shares. “It’s a disappointment for the government.”
The government had expected to generate about $5.8 billion, from the May 25 auctions largely from annual usage fees to be paid over two decades, according to data from the Federal Telecommunications Commission. Without an additional entrant, the figure would fall to about $4.3 billion because a block of airwaves will go unsold, according to the regulator’s data.
President Felipe Calderon cited the auctions in an April 30 speech as an example of how his administration would bring more competition to an economy where one or two companies dominate industries from television and cement to beer and bread. His press office did not return phone calls seeking comment.
The auctions won’t be a failure without a new competitor, said Martinez Pous in a May 10 interview. Though the country may have the same number of carriers, two of them should be able to offer high-speed 3G service across Mexico for the first time, boosting competition against Mexico City-based America Movil.
Telefonica SA, based in Madrid, hasn’t had the capacity to offer 3G services in Mexico City and other large urban areas. The auctions may help Telefonica to compete in that market.
Mexican officials sought new rivals for Slim in China, India, Korea and Germany, Martinez Pous said. Representatives of the Federal Telecommunications Commission held talks with Bonn, Germany-based Deutsche Telekom, Beijing-based China Telecom and Mumbai-based Reliance.
The companies expressed concerns over regulation of interconnection fees between carriers, the lack of rules for companies to share infrastructure and the tight control over the Federal Telecommunications Commission by the Communications and Transportation Ministry, he said.
Deutsche Telekom spokeswoman Sylvia Braunle declined to comment. China Mobile doesn’t plan to seek mobile-phone airwaves in Mexico “at the moment,” Chairman Wang Jianzhou said May 15 at a conference in the eastern Chinese city of Ningbo. Syed Safawi, president of the wireless business at Mumbai-based Reliance Communications, said he wasn’t aware the company was interested in Mexico’s wireless auctions.
Interconnection fees can be an effective way to keep out competition, according to a report last year by Mexico’s Federal Competition Commission. The telecom operator receiving a call in the country bills the company initiating the call for the connection. That means a dominant company like Telcel can charge rivals for completing their calls, driving up their costs and hampering their ability to offer low rates, the antitrust regulator found. Telcel’s market share gives it lower costs to begin with, since it doesn’t have to pay any connection fee when one of its customers calls another.
The telecommunications commission has sought to force Telcel to charge lower interconnection fees than wireless rivals. Telcel sued to block the plan and the case is tied up in court, America Movil said in a regulatory filing last month.
“What worried them the most was the regulation in Mexico,” said Martinez Pous.
Alejandro Cantu, general counsel for America Movil, said in an e-mail that the interconnection rates are competitive with the other member countries of the Organization for Economic Cooperation and Development and with other Latin American nations, and there has always been opportunity for new entrants in Mexico’s mobile-phone business. Arturo Elias, a spokesman for Slim, 70, didn’t return phone calls seeking comment.
Telcel is the biggest unit of Slim’s America Movil, representing 40 percent of its sales and almost half of its profit, excluding interest, taxes, depreciation and amortization. Its profit margin, excluding those items, was 58 percent last quarter. America Movil also offers wireless service in the U.S. and in most of Latin America.
America Movil’s sales rose 9.8 percent last quarter to 98.7 billion pesos, growing at more than twice the rate of the Latin America revenue of Telefonica, its closest competitor in the region. America Movil’s shares fell 10 centavos to 30.86 pesos at 4 p.m. New York time in Mexico City trading. They are little changed for the year, compared to a 23 percent decline at Telefonica.
Telcel will more easily keep its dominance without a new rival, King said. Telefonica has 21 percent of the market, giving the top two players more than 90 percent together.
For customers who make a few dozen calls a month, Telcel’s prices are lower than those of rivals in Mexico and carriers in other countries, according to Teligen, a London-based unit of Strategy Analytics Inc. that analyzes prices for the Organization for Economic Cooperation and Development. Telcel is more expensive for customers who make hundreds of calls monthly. Its customers used an average of 201 minutes a month last quarter, spending 163 pesos ($13) a month.
Lower prices would make mobile-phone service affordable for more people in Mexico, where about 77 percent of the population had a mobile phone line at the end of last year, according to an April report from Bank of America Corp.’s Merrill Lynch unit. That trailed the 90 percent average in Latin America.
Local companies are unlikely to bid in the wireless auctions. Guadalajara-based Megacable Holdings SAB, Mexico’s largest cable carrier, dropped out of the bidding this month after concluding it wouldn’t make financial sense to build its own wireless network. While San Pedro Garza Garcia-based Axtel SAB, Mexico’s second-largest land-line carrier, is qualified to bid, Chief Financial Officer Felipe Canales said in April the fees required to use the airwaves made the option of participating in the auction “less attractive than other ones that we are evaluating.”
NII Holdings Inc., which operates the Nextel brand in Latin America, plans to build its own 3G network with funding and marketing support from Mexico City-based Grupo Televisa SA, the nation’s largest broadcaster. Reston, Virginia-based NII, the smallest of Mexico’s four carriers, agreed to sell a 30 percent stake in its Mexico unit to Televisa in February.
Though Televisa will give NII more advertising power and will help the mobile-phone carrier expand from its niche of business customers, the companies aren’t likely to go after America Movil’s largest customer base, customers who make calls using prepaid minutes, said King of Stifel Nicolaus.
“While certainly they don’t want to see competitors get any stronger, I think Nextel’s probably the one that worries them the least,” he said.