Mexico Telecommunications Report Q3 2007

Despite its large population and relatively low teledensity, Mexico's mobile growth has been modest in recent years, growing by 21.1% in 2006, which increased penetration by only nine percentage points to 53%. The proportion of prepaid customers is among the highest in the region and the two main operators are already trying to migrate such customers over to postpaid services, suggesting that growth rates will continue to be unexceptional. Telcel continues to dominate Mexico's mobile market, with 75.6% of the total market and 63% of net additions in Q107, but second-ranked Movistar is performing much better than a year ago, thanks to improvements to its commercial network, service quality and customer service and a better focus by Telcel on the contract segment. As a result, the total market grew by 22.3% y-o-y in Q107, slightly more quickly than in Q106 and a little ahead of BMI's expectations. However, we are maintaining our previous forecasts in the expectation that Movistar's growth will slow in the next two quarters, while Telcel will continue to lead the market in terms of net additions even given its increased emphasis on the postpaid segment. We anticipate the market will expand by 18-19% during 2007 as a whole to bring penetration to nearly 62%, rising to 87% by 2011.

Although 3G services are available in Mexico, they are only offered by third-ranked Iusacell, which accounts for less than 6% of the market even taking its merger with Unefon into account. Although the group is now finally emerging from debt restructuring, it racked up a big net loss in Q107 and is continuing to invest considerable amounts in 3G deployment - it has recently contracted Nortel Networks to increase coverage of its 3G network to 10 new cities. However, the company's major disadvantage is that its rivals - which also have better financial backing and regional roaming advantages - both operate GSM networks. Iusacell has been complaining about the high cost of CDMA handsets in the region and its first-mover advantages may not be enough to save it when Telcel and Movistar take the 3G plunge.

The major news in the Mexican telecoms market this quarter is the approval of Grupo Televisa's acquisition of a 49% holding in cable company Cablems. The anti-trust body, the CFC, has made the deal conditional on Televisa sharing programming with other TV stations within 90 days, as well as carrying a wide range of local programming on its networks. Similar conditions were imposed on its acquisition of Monterrey-based cable TV and internet provider Televisin Internacional (TVI) earlier in the year, but the CFC has not yet indicated whether the group has complied.

Telmex indicates it has lost 50% of the voice market in areas where cable companies have rolled out triple play services, and is now urging the government to speed up the process of allowing it to enter the pay TV market to compensate for the loss of business. The Ministry of Telecommunications has previously said Telmex will be allowed to offer pay TV services on the condition that it implement number portability and sign interconnect agreements with cable operators. Cofetel has now published a final version of the number portability regulations that will come into effect in February 2008 while, as previously reported by BMI, Telmex had already signed interconnect agreements with a number of cable TV operators by March.