At a new switching center in downtown Monterrey, Mexican and Canadian engineers pore over a city plan that shows neighborhood income levels. Their quarry: sections of the city where Axtel, a joint venture between local investors and Bell Canada International, will find the fewest telephones--and the strongest demand. With the launch of service in Monterrey this month, Axtel is committing $1 billion, along with a new wireless technology, to Mexico's potentially huge market for local phone service. By 2005, it wants to sell 2 million lines--hooking up everything from working-class households to offices in need of Internet connections. Says Tomas Milmo Santos, Axtel's director general: "We're ready to compete as a true alternative to Telmex."
Agile entrepreneur vs. lumbering giant? Not quite. Telefonos de Mexico now faces rivals in its local market for the first time. The new ventures expect to invest at least $3.5 billion in the local and mobile-phone markets over the next five years. But Telmex is no stranger to competition. Since the long-distance market was liberalized two years ago, the former monopoly has kept 70% of the market by slashing prices and revamping service. Telmex is likely to cede local market share, too. But the market will be bigger: It is expected to grow to twice Telmex' local phone revenues of $4.5 billion last year.
The government's intent is plain. It wants more Mexicans to have telephones, and Telmex doesn't meet even current demand. Mexico has fewer than 10 lines per 100 people--a lower ratio than in Venezuela or Malaysia and far below the 64 lines per 100 in the U.S.
WIRELESS. Companies such as Axtel promise a leap forward: They are investing in wireless technologies that can expand supply quickly at half the cost of laid lines. Axtel's fixed wireless access system, developed by Canada's Northern Telecom Ltd., uses radio frequencies and antennas to transmit calls through base stations and into Telmex' network. Axtel's network is the technology's first test in a large emerging market.
Axtel isn't alone. Pegaso PCS, a partnership of Mexican investors and Leap Wireless International of San Diego, is spending $1.3 billion on a network focused chiefly on digital cellular technology. It launched mobile service in Tijuana in February and will expand to Mexico City, Guadalajara, and Monterrey by midyear. Niche players include MCM Telecom, which is investing in fiber-optic lines, and Maxcom Telecommunications, which will serve the capital and eastern Mexico. Says Pegaso President Alejandro Diez Barroso: "We'll benefit thousands of families that haven't had telephone access because of the lack of infrastructure."
STRETCHED THIN. That's if Telmex doesn't get there first. It is already a player in the mobile market, where it has a two-thirds share. Telmex has started rolling out new services, and analysts expect it to lower installation charges, now $180. And when Axtel and other new entrants acquired wireless frequencies at a government auction last year, Telmex bought some, too.
The stakes are higher in the mobile market. The number of cell phones in use grew 90% last year, to more than 3 per 100 Mexicans--compared with 29 per 100 in the U.S. Prepaid phone cards drove the growth. As the market takes off, though, some companies may be stretched too thin. Since the auction of wireless frequencies last year, top bidders Unefon and Miditel have missed payments and are scrambling to meet a government deadline extended to the end of March. Miditel's partner, Korea Telecom, pulled out last year.
Even the stronger players will face challenges. Many new phone users are low-volume customers, and rivals will compete head-on with Telmex for profitable corporate clients. Some entrants say regulators favor Telmex. And if its money-losing long-distance competitors are any guide, profits may be more than two years away. Nonetheless, salespeople are set to fan out across Mexico. Eager new customers will be all ears.