The story of the telecom monopoly in Mexico begins with the Mexican Telephone and Telegraph Company, abbreviated Mexicana or Mextelco. Founded in 1882, relatively little is known about the company prior to its acquisition by an AT&T (T) subsidiary in 1905.

That was the same year that Ericsson (ERIC) acquired a concession to operate in Mexico. It formed the subsidiary Mexikanska Telefonaktiebolaget Ericsson, or Mexeric, in 1909. Two years later, the Mexican Revolution tore the country apart and forced Mexeric to contend with everything from urban warfare to Pancho Villa, who was not initially convinced that telephone poles' utility lay in communication rather than the gallows. Still, the firm more than tripled its subscriber base in the chaotic 1910s, turned a profit and managed not to lose it all to the peso's devaluation.

Mexicana was not so lucky. The government nationalized the firm during the revolution, and by 1920 it had a smaller subscriber base than the upstart Mexeric. In 1926, ITT (ITT) purchased the firm and—in Ericsson's telling—fought dirty with its Swedish rival, even cutting its lines. In the view of UNAM economists Gabriel Pérez and Gerardo Tunal, however, the firms' relationship was not one of fierce competition but coordinated price gouging. The two networks weren’t integrated, and consumers had to pay both companies if they wanted access to the whole.

Things became really convoluted when ITT acquired a sizeable stake in Ericsson, and Ericsson's Mexeric acquired a portion of ITT's Mexicana. In 1947, a new company, Teléfonos de México, or Telmex, was founded to take over both companies' networks.

In 1958, Mexican companies bought out Ericsson and AT&T's shares in Telmex with government support. In 1972, the Echeverría administration nationalized the company. Telmex was re-privatized in 1990, when 20 percent of its shares went up for public auction. France Télécom (now Orange (ORAN)), Southwestern Bell (now AT&T) and Carlos Slim's Grupo Carso were the largest buyers.

Carlos Slim

Carlos Slim is a man who has never lacked ambition. He invested in bonds at 11, bought shares in Banco Nacional de México at age 15, became a stockbroker in his twenties and was sitting on $40 million before he turned 27. During Mexico's 1982 financial crisis, he bought ailing companies and turned them profitable. Slim is the first or second richest person in the world, depending on the year, yet he wears a plastic watch and lives in a very reasonably sized house—albeit one filled with Van Goghs and Rodins.

Through a shifting set of conglomerates, Slim owns or has owned businesses in manufacturing, chemicals, construction, transportation, telecom and retail. These include Sears (SHLD) in Mexico and ProdigyMSN, the Spanish-language internet portal that he co-founded as T1MSN with Microsoft's (MSFT) Bill Gates in 2000. He has sat on the board of Phillip Morris (PM) and is now the largest individual shareholder in the New York Times Company (NYT).

But for over 20 years, the bedrock of Slim’s empire has been the Mexican telecom monopoly, comprised of Telmex and Telcel, the country's dominant mobile service provider. He took control of Telmex in 2011, buying out AT&T's 40 percent stake. AT&T, however, retained shares in the parent corporation, América Móvil (AMX), of which Telmex and Telcel are now subsidiaries. AT&T sold those shares last year.

Telmex controls around 80 percent of the country's landlines, while Telcel controls around 70 percent of mobile subscriptions. América Móvil operates in 16 other Latin American countries and the U.S., not to mention the firm’s significant holdings in Dutch and Austrian companies.

The End of Mexico's Telecom Monopoly?

Recent legislation may lessen Telmex and Telcel’s hold on the market. At the end of 2012, Mexico's three main parties agreed to a raft of cross-sector reforms known as the Pact for Mexico. Specific legislation detailing telecom reform passed in July 2014. The law handicaps dominant businesses, defined as those that control more than 50 percent of the market in a given sector, requiring them to pay different rates from their competitors. A dominant company cannot charge competitors for calls to its network, but those providers can charge it for calls to theirs. The dominant company must share its infrastructure and is prevented from charging roaming fees. The reforms also eliminate long-distance charges for all providers.

The new rules are already beginning to chip away at América Móvil's revenues in Mexico. Wireless service revenues fell 6 percent in the first quarter of 2015. Wireless subscribers fell by 1.7 percent. The company's net income tumbled 42 percent, but this was largely due to depreciation in the peso and the Brazilian real.

Given the onerous new rules it's subjected to, América Móvil can't lose market share fast enough. CEO Daniel Hajj told analysts in April that it was in the company's interest to cross the 50 percent mark, but didn't specify how to do it.

A first step will be spinning off América Móvil's towers into a new company, Telesites. It should have significant room to grow, as Mexico's tower density is currently a quarter of that in the U.S.; it may also present a threat to Mexico's largest tower operator, American Tower (AMT). Sloughing off Telesites will not by itself end América Móvil's market dominance, and the company may be forced to sell assets. 

Game of Phones

América Móvil's competitors in Mexico are happy to help the company lose market share. Spain's Telefónica (TEF) is currently Mexico's second largest wireless provider through its subsidiary Movistar. Between the third quarter of 2013 and the third quarter of 2014, the company edged up from 18.7 percent of Mexico's wireless subscriptions to 20.1 percent.

Iusacell saw its share of the market increase from 7.1 percent to 8.4 percent. It is still a distant third, but will likely become increasingly formidable. AT&T purchased the struggling company in November, not long after selling its remaining stake in América Móvil. AT&T is poised to make a big re-entry into the Mexican market, having also acquired Nextel Mexico from NII Holdings. By 2017, both brands will be subsumed under the AT&T name and logo, which the company hopes will help it take advantage of the geographic, economic and cultural connections between the U.S. and Mexico.

Source: The Competitive Intelligence Unit; chart generated using Google Sheets.

The Bottom Line

Telmex and Telcel have been the only game in town for decades, and while the specifics of their ownership have shifted, Carlos Slim has always been the man behind the curtain. AT&T has dabbled in the country under various guises since the 1880s, but now it wants to ramp up its presence under its own recognizable, long-established brand. Constitutional reforms mean that Slim's empire must either shed market share or bleed cash. The next era in Mexican telecommunications is shaping up to be one of stiff competition between three international rivals: América Móvil, Telefónica and AT&T.

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