public policy telecommunications in mexico telefonica mÉxico francisco gil diaz april 2008
TRANSCRIPT
PUBLIC POLICYTELECOMMUNICATIONS IN MEXICO
TELEFONICA MÉXICOFRANCISCO GIL DIAZAPRIL 2008
2TELEFONICA MEXICOPRESIDENCIA
The Network International Rankings Price Gauging Network Costs The Price Cap Local Area Dialing Costs Accounting Separation Apportionment Of International
Settlements Regulatory Capture
INDEX
3TELEFONICA MEXICOPRESIDENCIA
The Network
TELMEX is Mexico’s 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.
01
4TELEFONICA MEXICOPRESIDENCIA
The Network 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.
01
5TELEFONICA MEXICOPRESIDENCIA
International Rankings
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. Mexico’s ranking then tumbles, to last, before last and third from last respectively, way below countries with per capita incomes far under it.
02
Jen ranks as top celebrity cover girl…
6TELEFONICA MEXICOPRESIDENCIA
International Rankings02 Fixed Telephone Lines per 100 inhabitants
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Cost
a R
ica
Uru
guay
Arg
entin
a
Bra
sil
Chile
Mˇx
ico
Surinam
e
Colo
mbia
Venezu
ela
Salv
ador
Guya
na
Panam
a
Ecu
ador
Belic
e
Guate
ma
la
Hondura
s
Per
Boliv
ia
Para
guay
Nic
ara
gua
CHART 1a
Mobile Lines per 100 inhabitants
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0A
rgent
ina
Chile
Sur
inam
e
Ven
ezue
la
Uru
gua
y
Colo
mbi
a
Ecu
ador
Guat
em
ala
Sal
vado
r
Bra
sil
Méxi
co
Pan
ama
Par
agu
ay
Bel
ice
Guya
na
Cost
a
Nic
ara
gua
Per
ú
Hond
uras
Bol
ivia
CHART 1b
7TELEFONICA MEXICOPRESIDENCIA
International Rankings02 Internet Subscribers per 100 inhabitants
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Co
sta
Ric
a
Pe
r
Ch
ile
Bra
sil
Uru
gu
ay
Gu
ya
na
Arg
en
tin
a
Mˇx
ico
Ve
ne
zu
ela
Co
lom
bia
Be
lice
Ecu
ad
or
Gu
ate
ma
la
Sa
lva
do
r
Su
rin
am
e
Pa
na
ma
Bo
livia
Ho
nd
ura
s
Pa
rag
ua
y
Nic
ara
gu
a
CHART 1c
Internet Subscribers per 100 inhabitants
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Co
sta
Ric
a
Pe
r
Ch
ile
Bra
sil
Uru
gu
ay
Gu
ya
na
Arg
en
tin
a
Mˇx
ico
Ve
ne
zu
ela
Co
lom
bia
Be
lice
Ecu
ad
or
Gu
ate
ma
la
Sa
lva
do
r
Su
rin
am
e
Pa
na
ma
Bo
livia
Ho
nd
ura
s
Pa
rag
ua
y
Nic
ara
gu
a
CHART 2a
8TELEFONICA MEXICOPRESIDENCIA
International Rankings02 Fixed Telephone Lines per 100 inhabitants
0.0
20.0
40.0
60.0
80.0
100.0
Gu
ya
na
Ho
nd
ura
s
Bo
livia
Co
lom
bia
Co
sta
Ric
a
Sa
lva
do
r
Su
rin
am
e
Uru
gu
ay
Arg
en
tin
a
Ecu
ad
or
Nic
ara
gu
a
Bra
sil
Gu
ate
ma
la
Pa
rag
ua
y
Be
lice
Pe
r
Ch
ile
Pa
na
ma
Ve
ne
zu
ela
Mˇx
ico
CHART 2a
Mobile Lines per 100 inhabitants
0.0
40.0
80.0
120.0
160.0
200.0
240.0
280.0
Para
gu
ay
Guyana
Nic
ara
gua
Bolivia
Hond
ura
s
Colo
mbia
Ecuad
or
Surin
am
e
Salv
ado
r
Guate
ma
la
Arg
entina
Uru
gua
y
Belice
Venezue
la
Bra
sil
Chile
Panam
a
Per
Mˇx
ico
Costa
Ric
a
CHART 2b
9TELEFONICA MEXICOPRESIDENCIA
International Rankings02
Internet Subscribers per 100 inhabitants
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Gu
yan
a
Pe
r
Bo
livia
Costa
Ric
a
Colo
mb
ia
Bra
sil
Uru
gu
ay
Ecu
ad
or
Arg
entin
a
Gu
ate
ma
la
Hon
dura
s
Sa
lva
do
r
Chile
Be
lice
Pa
ragu
ay
Nic
ara
gua
Ve
nezu
ela
Mˇx
ico
Su
rin
am
e
Pa
na
ma
CHART 2c
Source: International Telecommunication Union, World Bank
10TELEFONICA MEXICOPRESIDENCIA
Price GaugingVincent 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 dollar[1].
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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11TELEFONICA MEXICOPRESIDENCIA
Price Gauging
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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12TELEFONICA MEXICOPRESIDENCIA
Price Gauging
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
03
13TELEFONICA MEXICOPRESIDENCIA
Network Costs04Network 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 TELMEX’s costs and/or the charge made by a competitive provider.
14TELEFONICA MEXICOPRESIDENCIA
Network Costs04
Chart 3 Tx Link Costs and Termination Fees
Call Termination Cost per minute (MXN)
TxLink(n/C)+LDCM$2.248
TxLink(n/C)+LTr +MLT$1.742
TxLink(w/C)+LDCF$0.838
TxLink(w/C)+FLT$0.266
Total
TxLink(n/C)$0.288
TxLink(n/C)$0.50
TxLink(w/C)$0.088
TxLink(w/C)$0.156
Tx Links
Mobile onNEA
Mobile onEA
Fixedphone on
NEA
Fixedphone on
EA
Calling to:
TxLink(w/C)+CLTr +CMLT$0.678
LDCM$1.96
TxLink(w/C)+CLTr +CMLT$0.678
LTr + MLT$1.242
Tx link(w/C) + CFLT$0.216
LDCF$0.75
TxLink(w/C)+CFLT$0.216
FLT$0.11
Should be paying(regulated fee)
CallTermination
Cost
CFLI: Cost-based Fixed Local Termination Fee (Regulated)CMLI: Cost-based Mobile Local Termination Fee (Regulated)CLTr : Cost-based Local Transit Cost(Regulated)TxLink(w/C): E1s link cost with competitive providers
FLT: Fixed Local Termination FeeMLT: Mobile Local Termination FeeLTr: Local Transit FeeLDCF: LD resell charge terminating on fixedLDCM: LD resell charge terminating on mobileTxLink(n/C): E1 cost without competitors at Telmex current prices
NOTES:Tx LinkÕs monthly rates are proportional to distance and band-capacity allotted. The cities consideredon the diagram represent routes with similar distance from Mexico City, in order to facilitatecomparison.* The cost per minute assumes an E1 link is leased from a competitive provider at current prices.These costs could be lower if COFETEL imposes a regulated interurban transit fee based onTelmexÕs costs and/or if more competition in the long-haul market is encouraged (e.g. if CFE offersblack fiber).** EA: means equal access for cities with interconnection to TELMEX network
NEA: means non-equal access for cities without interconnection to TELMEX network
Total: $0.266 p/m
Total: $0.216 p/m
vs.
Total: $0.216 p/m
Total: $0.838 p/m
vs.
Total: $1.742 p/m
vs.
vs.
Total: $0.678 p/m
Total: $0.678 p/m
Total: $2.248 p/m
Current Scenario (Current termination fees and TxLinks rates leased to TELMEX)
Proposed Scenario (Cost-based termination feesand Tx Links rates leased to competitive providers)
MovistarSuscriber
Guadalajara
Coatzacoalcos
CFLT $0.06 p/m
FLT$0.11 p/m
CFLT$0.06 p/m
LD Ņresell chargeÓ$0.75 p/m
CMLT$0.50 p/m
MLT$1.21 p/m
CMLT$0.50 p/m
LD Ņresell chargeÓ$1.96 p/m
Tx link* (E1) $0.068 p/m
D.F.Movistar
Tx Links w / competition (E1)Aprox . $22,000 / month
Aprox. $ 0.088 p/m
Veracruz (EA**)
Alvarado (NEA**)
Tepic (EA**)
Compostela (NEA**)
Tx Links w / TELMEX (E1)Aprox . $72,000 / month
Aprox. $0.288 p/m
Tx Links w / competition (E1)Aprox . $17,000 / month
Aprox. $0.068 p/m
Tx Links w / TELMEX (E1)Aprox . $53,000 / month
Aprox. $0.212 p/m
LTr$0.032 p/m
CLTr$0.022 p/m
Tx link* (E1)$0.068 p/m
15TELEFONICA MEXICOPRESIDENCIA
Network Costs04 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 TELMEX’s 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.
16TELEFONICA MEXICOPRESIDENCIA
Network Costs04 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 monopoly’s deference. Cable operators who provide broadband Internet, TV signals and telephony have suffered similar delays.
4 D’s that illustrate the behavior of a monopolist regarding interconnection: DENY --- DELAY --- DETERIORATE --- DUMP. TELMEX honors them all.
17TELEFONICA MEXICOPRESIDENCIA
The Price Cap
The powerful instrument provided by a required price cap revision of TELMEX has been neglected. The authorities have not taken into account TELMEX’s productivity increases. The pallid adjustments required in Mexico are striking when compared with what similar countries have imposed on the incumbent
05
18TELEFONICA MEXICOPRESIDENCIA
The Price Cap
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 Mexico’s is a closed-door process with the result announced at its termination.
05
19TELEFONICA MEXICOPRESIDENCIA
Local Area Dialing Costs
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 (LAD’s) have not been eliminated in Mexico. Some LAD’S were eliminated in 2007 but even these timid regulatory efforts have been successfully challenged in court by TELMEX
06
20TELEFONICA MEXICOPRESIDENCIA
Accounting Separation The avoidance of cross subsidies
is a key competitive issue. TELMEX has never complied with its title’s 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 LAD’s.
07
21TELEFONICA MEXICOPRESIDENCIA
Apportionment Of International Settlements
.. 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
08
22TELEFONICA MEXICOPRESIDENCIA
Regulatory Capture
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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23TELEFONICA MEXICOPRESIDENCIA
HOPE
Hope on the Horizon
24TELEFONICA MEXICOPRESIDENCIA
HOPE
However, there is hope in the horizon, President Calderón has announced his firm
intention of providing competitive conditions for all Mexican markets