1. What Keeps Holding the Mexican Economy Back? A Discussion on Competition and Consumers Lessons From the Telecommunications Sector April 8, 2008 Woodrow Wilson International Center for Scholars

2. 2 700 Concessionaires associated to Canitec 802 Operational networks 4.1 Subscribers (millions) 1.1 Internet users (millions) 210,000 Telephony users 1,800 Cities covered 11 Homes passed (millions, from a total of 25.5) 56,000 Network extension (miles) +30 Localities where telephony service is being offered (since 2006) 15 Companies which will start telephony service during 2008 Mexico’s cable telecommunications industry

3. 3 Competitive and consumer landscape in Mexico Mexican families’ expenses in telecommunications services are much higher than those in electricity, gasoline, milk or tortillas. The National Index for Prices to Consumers (INPC) acts as an indicator of the consumer characteristics of Mexican people. A pro-competitive policy will contribute to reduce inflation, increase buying power and increment consumer’s well being.

4. 4 Competitive and consumer landscape in Mexico INPC: National Index for Prices to Consumers Source: Banxico. www.banxico.org.mxwww.banxico.org.mx Telefonía Telefonía: 3.51 Telephony: 3.51

5. 5 Competitive and consumer landscape in Mexico A 30% reduction in telecommunications’ prices would have an impact on people’s well being, measured by the INPC, equivalent to a decrease of: –37% on gasoline’s price, or –53% on electricity’s or –59% on milk’s or –98% on tortilla’s.

6. 6 Competitive and consumer landscape in Mexico Total lines: 20.1 million Teledensity: 18.9 lines/100 inhab. Source: Cofetel. Reporte de actividades 2006 – 2007, Telmex. Reporte del 1er trimestre 2007, Canitec

7. 7 Competitive and consumer landscape in Mexico Source: OCDE Communications Outlook 2007. Focus on Mexico 1st operator 2nd operator 3rd operator 4th operator México

8. 8 Competitive and consumer landscape in Mexico Source: Merill Lynch, 2007

9. 9 Low-usage Fixed Residential Service Fees Competitive and consumer landscape in Mexico Source: OCDE Communications Outlook 2007. Focus on Mexico

10. 10 OECD basket for low-usage mobile telephony service Competitive and consumer landscape in Mexico Source: OCDE Communications Outlook 2007. Focus on Mexico USD PPP

11. 11 Competitive and consumer landscape in Mexico Source: OCDE Communications Outlook 2007. Focus on Mexico USD PPP Business fee Residential fee Fees for International Service

12. 12 Competitive and consumer landscape in Mexico Competitive and consumer landscape in Mexico Telmex’s own regulation Despite the agreements reached by the Federal Telecommunications Commission’s (Cofetel’s) Local Service Operator’s Committee, regarding Local Service Areas, last year Telmex opposed consolidation of 70 areas. These grouping would have benefited more than 33 million people living in more than 1,400 cities, by converting long distance calls into local calls. Telmex’s “Ciudades Vecinas” plan does not eliminate long distance fees for any city and only offers discounts to 148 cities.

13. 13 Source : International Telecommunications Union and Dirección de Información Estadística de Mercados, COFETEL. International Comparison for Fixed Service -Fixed lines per 100 inhabitants- Competitive and consumer landscape in Mexico

14. 14 Competitive and consumer landscape in Mexico Source: Cofetel, 2007. Fixed lines per 100 inhabitants National Teledensity

15. 15 Competitive and consumer landscape in Mexico Sky has nation-wide presence in Mexico. Example: in the city of Puebla there are 5 alternatives of pay TV: Megacable (cable), Sky (DTH), Ultravisión (MMDS), MVS (MMDS) and Maxcom (Telco). All telcos, but Telmex, may offer pay television services in any location in the country. Pay TV Market Distribution in Mexico 15 companies 1 company 195 companies

16. 16 Entry barriers to new comers in telecommunications. Examples Present conditions for getting access to essential resources to offer telecommunications services, as interconnection and transmission (inter-city transport) … i.force competitors to charge users for a service that has a marginal cost close to zero, ii.are particularly harmful for low-income regions, due to high fees and scarce availability of interconnection and transport and iii.impose a high cost “floor” to new comers, which limits further fee reductions to users.

17. 17 Current Situation Telmex keeps pressing the Federal Government to be authorized to offer television services to its customers, what it has explicitly forbidden on its license. The Federal Antitrust Commission (Cofeco) just started last January a dominance investigation in several telecommunications markets. Telmex has evaded compliance of antitrust conditions that had been established. Telmex’s control of essential resources precludes its competitors to enter markets in which it is the only service provider.

18. 18 Conclusions High fees and low teledensity in fixed telephony services are a consequence of scarce or almost inexistent competence. In addition to imposing its conditions to competitors, Telmex defines its own regulation when that established by the authority is considered by Telmex as “incorrect”. Without a previous asymmetric regulation, Telmex will transfer its dominant power to the television market. It is essential that Cofeco and Cofetel take effective actions to regulate Telmex. Only after Telmex has been properly regulated, it should be permitted to enter into a new market.