Telecom
Telefónica Issues an Ultimatum: AMLO Must Place New Regulations on Slim or It's Adiós México
The Spanish telecom giant can't find a road map to growth. Its CEO will attempt a final lobby while analyzing sale options.

Telefónica continues to advertise its for-sale sign in Mexico. Rumors of a possible withdrawal from Mexico have been whispered for years but have never materialized. Now the company's plans are making the sale a priority - it didn't happen earlier because they didn't have a suitable buyer. In the meantime, Telefónica readies its options for securing a more favorable scenario in Mexico - a Herculean feat according to experts consulted by this media outlet.

"Telefónica is on its way out," a source close to the company tells LPO. Telefónica wasn't able to adapt to market conditions following the telecommunications reform. The reasoning behind leaving Mexico is not new, and follows simple logic: "You can't compete in a market where one player controls 80% of the market share."

Headed by Colombian Camilo Aya Caro, senior management attended a meeting last week at the Federal Telecommunications Institute to again voice their grievances: high fees as well as Telcel's dominance - the company that receives 72% of market revenue from mobile communications.

Aya's first decision after assuming his position a few days previous was to pressure the IFT (Mexico's Federal Telecommunications Institute). "This is the last chance before a much-talked-about possible sale, but nothing has yet been set in stone," commented Jorge Bravo, an analyst from the sector who interpreted the meeting as an ?ultimatum' before the company officially up and left. "Their Colombian executive was very brave in going against América Móvil in Colombia, and against concentration, even though in Mexico we already have a regulation that sanctions that type of dominance."

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Movistar complains that the market is becoming concentrated on income ever since an a priori reform was going to open up the sector. Although América Móvil has parted ways with many clients, they are the ones who report the fewest benefits. This characteristic makes Movistar's sale a thorny matter. The majority of their clients are pre-paid, bringing in less revenue and making the company less appealing to investors.

The telecommunication reform, "hasn't worked, or has provided what it was going to. New measures are needed to level the playing field," says Gonzalo Rejón of agency The Competitive Intelligence Unit, though it is unlikely that the government will agree to Movistar's demands, according to analysts.

The first reason is that Mexico's financial situation is precarious and at the moment, taxes or levies will not be lowered because the country needs income. Arguments are also being made that the 4T is antagonistic to the telecommunications reform, and moving forward with new regulations would mean radically upsetting the government's complicated relationship with Carlos Slim.

"That picture from the press conference (in which Slim supported the agreement on gas pipelines) is not going to be free of charge," points out Bravo. AMLO (President Andrés Manuel López Obrador) could repay him in telecommunications by paralyzing any new regulatory action in favor of Movistar and AT&T. "It seems as though Telefónica is grasping at straws," he concludes.

The Spanish company has tried to redirect its situation in Mexico on several occasions by offering novel post-paid services. "They offered Spotify Premium, then they signed an agreement with Netflix, and a little while ago they launched their own video platform, but have continued to have problems," according to Rejón, who recognizes the commitment they've made to continue in Mexico's telecommunications market.

The specialist adds, "They're constantly fighting for dominance and negotiating the cost spectrum which seems very expensive to them. They've made investments at auction to have the spectrum for the 2.5 band."

On the other hand, Jorge Bravo thinks they aren't investing, only keeping their operation afloat and describes Telefónica's business disconnecting in Central America as "utterly intelligent". In Mexico, they could do the same thing because, "it's not a market that's bringing in significant revenue - it isn't growing, and growth that could still happen is among disconnected users who aren't going to turn into significant additional revenue."

"They were very small markets that weren't going to grow in volume and you also had to invest in 4G networks that didn't yet exist. They got rid of something small to protect their other interests, and I think a company as serious as Telefónica did the right thing, and I think in Mexico they´ll probably follow suit," he assured in conversation with LPO.

According to Bravo, Telefónica should leave Mexico and concentrate on markets like Argentina, Brazil, and Germany that will bring additional income and will, "resolve issues related to debt which is what has led to all of this," he concludes. "They want regulatory favors to lead to solutions regarding their own expansion and their own debts." 

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