Commentary: Mexico: Why At&T And Mci Are Up In Arms

Phone giant Telefonos de Mexico is Mexico's biggest company and the bellwether of its stock market. So Mexico's regulator, the Federal Telecommunications Commission (Cofetel), has powerful reasons to be protective of Telmex: Its performance strongly influences investor confidence in Mexico.

But competitors charge the rules are stacked in Telmex' favor. The Mexican joint ventures of MCI Communications Corp. and AT&T complain that Telmex is using fat profits from its local service to subsidize deep price-cutting on long-distance rates. Worse, competitors say, those profits are fed by steep fees they must pay Telmex to route calls through its local lines. In protest, MCI's Mexican venture, Avantel, is freezing outlays halfway through its ambitious $1.8 billion investment plan. In addition, MCI and AT&T are opposing Telmex' application to operate long-distance service in the U.S. with Sprint Corp.

Mexico's regulators must act quickly and decisively to settle this dispute. If it is allowed to fester, it will put a brake on the expansion of telecommunications in Mexico, with Mexican phone users the ultimate losers. For starters, Cofetel should turn up the heat on Telmex to show that, with total sales of $7.45 billion and profits of $1.58 billion last year, the company's long-distance and local businesses each pay for themselves, as Mexican law requires. Competitors will be watching closely at the end of the month, when Cofetel expects Telmex to deliver a belated accounting breakdown, to see whether the numbers give an accurate picture.

Despite appearances, the dispute is not simply an issue of Mexican vs. foreign investors. When Telmex was privatized in 1990, France Telecom and U.S. Baby Bell SBC Communications Inc. joined with Mexico's Grupo Carso to buy a controlling stake. Now, foreigners own more than 65% of Telmex' stock.

A major sore point is the interconnection fee of about 6 cents a minute--one of the highest in the world--that competitors must pay Telmex to complete calls through its local lines. That compares with an actual connection cost that Avantel estimates at just a half-cent. AT&T and MCI also are seeing red over another subsidy that they must pay Telmex, equal to 58% of the "settlement fees" their Mexican ventures receive from foreign carriers for handling inbound calls to Mexico, mostly from the U.S. In all, Avantel estimates that it is handing over half of its revenue to Telmex.

Originally, the high fees were justified as revenue to help Telmex expand its local service. But the number of local lines grew only 5% last year, and there are still only 10 lines per 100 persons in Mexico. That's far below what's needed to develop the country's economy. If regulators don't sort out the long-distance dispute, it could crimp plans to open the local market to competition--the key to hooking up millions of villagers and working-class Mexicans.

In its defense, Telmex says rivals' success in capturing 30% of the long-distance business in just a year proves the market is open. Communications Under Secretary Javier Lozano Alarcon and Cofetel say they are willing to renegotiate the subsidies, but they want a package deal. They are looking to clear the way for Telmex' entry into the U.S. And they insist on linking the fee dispute inside Mexico to the negotiation of cross-border settlement fees, worth $800 million to Mexico last year. U.S. carriers and the U.S. Federal Communications Commission want to bring the latter down at a faster pace than the Mexicans will accept. AT&T, pushing the issue, may decide unilaterally how much to pay when the quarterly settlement comes due in March.

A LOST GAMBLE. Despite the onerous charges, MCI's predicament stems partly from a business gamble it took and lost. Even before the local interconnection fees were set in April, 1996, MCI committed itself and its partner, Grupo Financiero Banamex-Accival, to spending $900 million. "How come we have objections now, after the regulations have been in place for two years?" asks Ricardo Peon, telecom analyst for Deutsche Morgan Grenfell in Mexico City.

So far, Mexico's long-distance market opening is a success where it counts--for the consumer--admits Avantel CEO Francisco Gil Diaz. "But it doesn't offer conditions for the investment to continue flowing," he adds. Mexico's regulators will need to loosen up and negotiate--to build a better phone system, and a modern Mexico.

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