Since 2013 Mexico’s ICT sector has positioned itself for new investment opportunities on the back of constitutional reforms that sought to increase competition and reduce monopolistic behaviour in the market, especially when it came to telecommuications. At the beginning of the decade América Móvil, owned by Mexican billionaire Carlos Slim, dominated mobile telecoms, an industry that is expected to account for 3.8% of Mexico’s GDP in 2020, according to trade organisation GSMA. Today, América Móvil’s Telcel mobile business competes with Movistar by Spain’s Telefónica and the US’ AT&T.
The increased competition is beginning to yield results across the sector. One effect of the reforms, which also lifted the 49% cap on foreign direct investment in companies in the sector, is that mobile and broadband internet prices have decreased steadily since 2013, while mobile and fibre-optic coverage has expanded. AT&T mobile subscribers, for example, are able to locate a 4G signal 82% of the time in Mexico, according to an April 2019 mobile experience report by global telecoms intelligence unit Open Signal.
The more open environment is also allowing investors to capitalise on opportunities in Mexico’s digital infrastructure space, especially regarding data centres, cybersecurity and financial technology. Furthermore, although Mexico currently engages in a relatively small amount of online shopping, infrastructure rollout is facilitating greater levels of e-commerce and other online transactions.
The 2013 reform laid out a new regulatory framework that continues to shape the telecoms industry. One result of the changes was the formation of an anti-trust regulator that is independent from the government’s executive branch. The role of the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones, IFT) is to break up monopolistic features of América Móvil, and craft and enforce policy that paves the way for a more competitive telecoms environment. In 2017 the IFT called on América Móvil to separate some of its business units in response to a review of unbalanced rules imposed on the company earlier in the period of reforms, and in December 2018 the IFT charged América Móvil with a $5.4m fine for violating anti-trust laws.
Investment has increased substantially since the IFT’s interventions, but while the body has made strong progress, the future of the regulator’s impact could be constrained by budget cuts. Congress, led by the Morena party of President Andrés Manuel López Obrador – commonly known by his acronym AMLO – cut the IFT’s 2019 budget by 25%, prompting the organisation to file a lawsuit. After already asking for less funds than in 2018, the IFT said that the 2019 amount, which was $14m lower than requested, would impair its proper functioning.
In 2012 the OECD, at the request of the Mexican government, published the “Review of Telecommunication Policy and Regulation in Mexico”, outlining 31 recommendations to bring about sector growth in the years ahead. By 2017 the country had implemented 28 of the recommendations, but more can be done to grow services. The OCED’s “Telecommunication and Broadcasting Review of Mexico 2017” report noted that reforms have brought more competition, dynamic investment, and consumer satisfaction to Mexico’s phone and internet scene, but greater emphasis must now be placed on inclusiveness. Mexico aims to expand access to rural regions, as well as public institutions like schools and health care facilities.
Other stakeholders believe that reform should take on a new focus, particularly in facilitating wider economic growth and personal empowerment. “The telecommunications reform was too focused on connectivity and not so much on providing society with the necessary tools to know what to do with it,” Carl Rianhard, managing director of technology solutions firm Opentec, told OBG. “The primary result of the previous years’ reform has been the massive use of ICT for entertainment, not the understanding of the democratising impact it could have on all citizens.”
América Móvil’s Telmex and Telnor hold dominant positions in fixed-line services, while its Telcel business is first in the mobile segment. In 2018 América Móvil controlled around 64% of mobile lines, Telefónica 21% and AT&T 14%. In fixed line, América Móvil held 59% of the market, compared to 18% by multimedia company Televisa and 9% by cable, phone and internet provider Megacable.
According to the IFT, the prices of mobile services fell by 26.2% between 2013 and 2018. Over this period, the share of Mexicans who accessed internet on their mobile devices rose from 23% to 71%. The 2017 OECD review, meanwhile, noted a 69-81% drop in mobile broadband prices between 2012 and 2016, resulting in an additional 50m users during those years. Still, there is room to grow internet use. The IFT states that 88% of people had access to 3G and 4G mobile coverage in mid-2019, leaving 12% of Mexico’s population with no coverage at all. High-speed mobile data coverage could be expanded as well, with the share of mobile users with access to 4G speeds in 2019 ranging from 72.4% through Movistar to 81.9% through AT&T.
Pedro Terrazas, director of strategic planning at the IFT, told OBG that coverage rates are tied to income and development. “The reason Mexico has a coverage rate of 88% instead of the near-100% seen in Europe is a question of demand. Increasing the demand for telecoms services in rural areas is how coverage will be expanded there. However, people need to have some other things before that, such as education facilities, proper housing and other types of infrastructure. Once that is in place, demand becomes related to income,” he said.
Reforms mean that mobile virtual network operators (MVNOs) are growing too, albeit from a low base. Companies that rent out network infrastructure to provide mobile services – like FreedomPop and Virgin Mobile – are estimated to operate a combined 2m mobile lines in 2019, up from 1.7m in 2018. In 2018, 17 MVNOs controlled 1.47% of the market, with FreedomPop capturing 32% of that share.
For customers who already have internet access, increasing the speed of data and broadband services is important. According to the “2018 BSA Global Cloud Computing Scorecard” report by trade organisation BSA – also known as the Software Alliance – Mexico’s average broadband connection speed in the first quarter of 2017 was around 8 Mbps, compared to an average of 12 Mbps for the 24 countries studied. BSA found that Mexico’s mobile data connection speed was also around 8 Mbps, compared to an average of 11 Mbps. Download speeds are more varied among the three big operators. Telcel averages a download speed of 16.8 Mbps, while AT&T offers 10.8 Mbps and Movistar 9 Mbps, according to Open Signal.
In the spirit of improving connectivity, the government has earmarked MXN5.9bn ($305.1m) for its 2019 communication budget, 23% more than the MXN4.8bn ($248.2m) allocated in 2018. A significant portion of the funds is likely to go towards the AMLO administration’s focus on bringing broadband internet and mobile data to remote, rural areas.
On the corporate side, América Móvil is raising capital expenditure to $8.5bn in 2019, compared to $8bn in 2018. The company is prioritising rolling out additional fibre-optic lines to expand coverage.
Mexico’s telecoms industry is going through a period of mergers, acquisitions and transfers, which presents various opportunities for investors. One of the most significant transactions of recent years was AT&T’s acquisition of providers IUSACELL and Nextel in 2015 for $4bn. Indeed, those companies originating outside Mexico have an advantage, as explained by Deloitte in a 2017 report titled “Mexico Mergers and Acquisitions”.
“Since 2015 the peso has generally declined against the dollar, but with many peaks and valleys along the way,” the consultancy wrote. “As a result, private investment funds, banks and companies that have capital in dollars will likely want to take a closer look at Mexico, thanks to the stronger currency position they are in. Likewise, Mexican companies that operate in pesos but carry debt in dollars may be more willing to collaborate or even divest assets in order to reduce financial leverage.” The report noted that in 2016 alone, nearly 50% of mergers and acquisitions that took place in the technology, media and telecommunications sector involved a US private equity company or fund.
Investors are eyeing opportunities in Mexico’s wireless towers, data centres and fibre-optic cable networks. As traffic at cell towers and data centres becomes congested due to increased urbanisation and the resulting demand for services, international investors are stepping in and assets are changing hands. For example, in February 2019 the US’ Phoenix Tower International bought 500 wireless towers across Mexico, Nicaragua and Colombia from Uniti Group, also of the US, for around $100m. Activity among domestic players is proving dynamic as well. In May 2019 Guadalajara-based Megacable bought the fibre-optics business of Mexico’s Axtel in five cities for MXN1.15bn ($59.5m).
Sector reform has led to an increase in private-public partnerships (PPPs), and in 2016 the government tendered a PPP for a wholesale mobile network called Red Compartida. The intention was to foster competition with América Móvil’s network and break up concentration. ALTÁN Redes, a consortium of Axtel, Megacable, the World Bank’s International Finance Corporation, and Dutch and Chinese investors, won the $2.5bn concession to operate 90 MHz within the 700-MHz spectrum. “We have identified 50 or 60 companies that have already signed a contract with ALTÁN Redes, but only three are currently offering services,” Gabriela Gutiérrez, director of statistics and analysis at the IFT, told OBG in June 2019.
Red Compartida, which launched in March 2018 and covered an initial 32.2% of the population, is committed to expanding these services further. According to the IFT, the commitments are staggered, with 50% coverage planned for January 2020, 70% in 2021, 80% in 2022, 88.6% in 2023 and 92.2% in 2024. Mexico City, Monterrey, Guadalajara, Toluca, Querétaro, Puebla, Morelia, Colima, Tepic, Aguascalientes and Celaya, as well as 29 small, tourism-focused towns known as Pueblos Mágicos, were the first to get access to Red Compartida’s mobile and wireless broadband infrastructure.
Under the conditions of ALTÁN Redes’ contract, the network is not required to use a specific technology, but the company was using 4G technology in 2019 and plans an eventual rollout of 5G. América Móvil is responding with its own upgrade plans. At the end of 2018 the sector leader partnered with ICT infrastructure provider Ericsson of Sweden for the rollout of 5G. América Móvil has been conducting 5G tests in Puerto Rico in 2019 in preparation for large-scale deployment in Mexico.
Policymakers are similarly in the planning stages for the rollout of 5G infrastructure. In mid-2019 the spectrum unit of the IFT told OBG that they were determining which spectrum bands to put up for an eventual auction, which is hoped to take place in 2020. However, the country’s 5G initiative is waiting on national regulations before it can be fully implemented. “5G is going to be important, but we still do not know if it will happen in the medium term – say five years,” the IFT’s Terrazas told OBG. “The issue is that we do not have sufficient coverage of 4G services to advance to 5G.”
Even if the proper regulations are put in place, Terrazas noted that there are infrastructure and fee issues that need to be addressed, as progress on 5G could be limited because of high regulatory payments. “Mexico has very expensive rights to use spectrum infrastructure; annual fees here are among the highest in the world,” he told OBG. “This is something that is already reducing demand for 5G services, and it is important for Mexican companies to consider because they have to pay those fees regardless of the spectrum they have.”
Mexico has high spectrum fees compared to those in Europe, the US and Canada, with fees making up 82% of the reserve price in 2017. “These financial burdens increase the final price of mobile services, creating a barrier to affordability and leading to reduced consumer demand,” the GSMA wrote in its 2016 country overview report on Mexico. “These taxes also lead to higher costs of operation, pressure on margins and reduced investment incentives for mobile operators.” In the report, the GSMA stated that if Mexico were to cut regulatory fees by 10%, it could lead to 290,000 new connections, $590m in GDP and 3000 jobs over the span of five years.
Despite the challenges, a number of 5G trials are happening in Mexico. For example, the IFT granted a concession to AT&T in January 2019 to undertake tests in certain boroughs of Mexico City.
One of the government’s priorities during the current 2018-24 term is expanding telecoms and internet services into rural geographies. Around 12% of Mexico lacks mobile broadband coverage and the new administration under President López Obrador wants to address that gap. According to the IFT, the municipalities that do not have 3G or 4G coverage are usually located in mountainous regions or places personnel have a hard time accessing, such as localities in the south and south-east. “Parts of Oaxaca, Chiapas and Guerrero are lacking coverage, as are some northern states because of the mountains, like the north side of Durango and Sonora,” Terrazas told OBG. “The primary factor behind a lack of coverage is the lower-than-average socio-economic situation in those parts of the country.”
In a bid to solve rural coverage issues, AMLO proposed a state-run telecoms firm. “We are going to create a telecommunications company, and what we are looking for is to partner, but the state will have a telecommunications company to guarantee internet connectivity and mobile telephony in the country,” he told local media in June 2019.
In early 2019 Mexico suspended an auction that would tender a 25,000-km fibre-optic cable network, pledging to re-tender it later in the year. The president then requested control of the project from the IFT with the intention of expanding internet and mobile into geographies that require coverage.
In August 2019 the government also scrapped the Red Troncal Plan to tender 25,000 km of fibre-optic cable, a PPP borne out of former President Enrique Peña Nieto’s administration that aimed to bring internet to some of Mexico’s most remote areas. In its place, AMLO created a new company called Telecomunicaciones Internet para Todos (Telecom Internet for All) that will install a total of 50,000 km of fibre-optic cable. The unit is a subsidiary of the Federal Electricity Commission.
The measure is sure to help address the lack of rural coverage, with the company to use the former Red Troncal network as part of its plan. Yet there are concerns about how the government will operate a subsidised telecoms service – charging customers only enough to cover operational costs – when Mexico’s fiscal situation is troubled. The president wants to expand internet coverage from the current 88% to 95% by 2024, but the caveat is that state ministries will be forced to cut costs elsewhere and drum up revenue in order to deliver on his promise.
Where the 2013 telecoms reform made great strides for the consumer, not every service in the technology, media and telecommunications arena has shown a decrease in price over the years. Pay TV, for instance, has experienced a rise in prices since the reforms, as the expansion of cable and satellite infrastructure has been slower to evolve than fixed broadband and mobile internet.
The OECD recommends Mexico drop the restriction that prohibits foreign investors from owning more than 49% in pay TV entities, as was done for telecoms, to increase competition. Until then, Televisa will likely continue to hold the leading position in pay TV services: in mid-2017 the company accounted for 60.6% of the country’s 22.3m subscribers through providers Sky and Cablemás. US corporation Dish was the second-largest provider at the time, capturing 18.1% of the market, followed by Megacable (14%) and Totalplay (2.1%).
In the IT realm, Mexico is expanding its internet of things (IoT) services. The government could follow the private sector’s lead in building on the country’s telecoms network to more widely utilise LTE-M infrastructure, a type of LTE network designed specifically for IoT services.
In May 2019 AT&T said it was going live with its NB-IoT network, after building out the company’s existing LTE-M network in the US and Mexico in 2018. The network is well suited for stationary uses with basic data requirements, such as simple sensors, on-off buttons, smart agriculture applications, smoke detectors, door locks and industrial monitors. The LTE-M technology will also help companies with asset management, medical wearables, utility metres and other solutions.
In March 2018 América Móvil announced the launch of its 4G-LTE service under the GigaRed 4.5G brand. The offering of increased speed for the company’s 4G users also supports América Móvil’s own LTE-M network for the IoT market. Additional IoT applications include home, business and school monitoring; water and electricity consumption measurement; tracking stolen vehicles or lost pets; health monitoring; and analysing the flow of traffic.
Mexico is consuming more and more internet-based services, which range from social media platforms like Facebook, to business uses such as cybersecurity and fraud-detection software. According to the National Institute for Statistics and Geography, 52.9% of households had an internet connection in 2018, compared to 39.2% in 2015. In 2018, 45% of households had a computer, while around two-thirds of Mexicans above the age of six were internet users, up from 57.4% in 2015. Business data platform Statista puts the number of internet users in Mexico at 88m as of 2019, for a penetration rate of 68% – lower than the internet coverage rate of 88%. By 2023 the number of internet users in the country is expected to reach about 101.6m.
However, according to the “2018 BSA Global Cloud Computing Scorecard”, Mexico is average in terms of internet development. On the ICT development index, the country received a score of 4.87 out of 10 in 2016, compared to an average of 6.58 across the 24 economies studied. That same year, Mexico’s network readiness was scored 3.99 out of 7, compared to a global average of 4.77, in the World Economic Forum’s “Networked Readiness Index 2016” report. The measure looks at how well a country is using the internet and other communication technologies to promote competitiveness and well-being.
Full utilisation of ICT capabilities is particularly important in today’s business world. “If companies across all sectors do not go through a significant digital transformation, they will lose competitiveness both nationally and globally. This trend does not mean a disappearance of the traditional company-customer relationship, but digital transformation will enhance both product and service delivery considerably. In Mexico a company’s value is largely determined by its digital presence,” Guillermo Lara, CEO of IT solutions company Stefanini, told OBG.
The IT sector comprises a range of specialised companies, from big corporations like IBM, Microsoft and Oracle, to smaller, local players like Ingressio. According to IBM, around 20% of companies they work with have a clear digital strategy, while the remaining 80% are unclear on how digital solutions can help their business.
“In the Mexican market there are a group of companies that lead productivity not only in terms of their performance, but also in how they analyse the current digital world and think ahead to make a competitive advantage out of it,” Martha González Pérez, director of cognitive solutions at IBM’s Cloud Division in Mexico City, told OBG. “In the arena of small and medium-sized enterprises (SMEs), there always seems to be someone with a lot of interest in the world of digital solutions – of big data – and has a vision of how to create a competitive advantage.”
Other stakeholders agree that the SME segment holds promise for digital service providers, yet certain factors must be weighed carefully by these smaller businesses. “The fastest-growing segment for the technology industry this year will be SMEs, which number around 5m nationwide. Studies show that digital transformation at a basic level can foster business growth of up to 7%,” Santiago Cardona, Mexico country manager of Intel, told OBG. “However, to reach SMEs’ full potential, access to finance and fiscal incentives has to improve to make digitalisation a more attractive prospect.”
According to IBM, when it comes to digital transformation and how it can support business goals, companies often follow one of two paths: finding ways to be more competitive and transform information into money, or increasing operational efficiency by doing more with fewer resources.
Mexico is already adopting some innovative technology for business. Some firms are contracting IoT services like sensors, while others are hiring mobile applications for in-house portals. The use of artificial intelligence (AI) is also growing. “Companies in multiple sectors are investing in AI to boost their customer service capabilities, such as the use of robots answering client queries. This allows firms to more effectively use their staff in more valuable areas of work,” Peter Kroll, CEO of technology consultancy Everis México, told OBG.
The banking industry has been among the quickest adopters because of intense competition and the entrance of financial technology start-ups (see analysis and Banking chapter). Many firms in other sectors are tapping these new financial products and avenues, as well as expanding their overall IT use. “We need to move faster to understand consumers’ needs, to provide them what they need before they realise they need it,” Alfonso Romero, CEO of consultancy IZERTIS, told OBG. “AI and big data are catalysts for digital transformation. Insurance, banking and retail are demanding these services faster than any other industries, trying to add value and increase their knowledge of consumer habits.”
IBM identifies three sectors that stand out for their growth and adoption, namely financial services, retail and telecoms. Meanwhile, agro-industry, health, and heavy machinery and industry are not far behind. “Many private clients and public entities see it as advantageous to have models in the cloud – to have continuous robotic processes and to take advantage of IoT applications. This translates into knowledge of clients or patients, or of seeds and other inputs in agriculture,” González told OBG. However, a hurdle to wider IT adoption in the fields of health, agro-industry and heavy industry is that there is less sector-specific IT talent available. This means it often takes more time to define a use case. While the technology is there, personnel must find how best to apply it to support business goals. A focus on broader skills could help increase the remit of IT personnel and thus boost wider IT adoption. “Mexico has a large and dynamic talent pool, it just does not know how to make the best use of it,” Mauricio Prieto, CEO of local technology services provider Lennken, told OBG. “If we focus on boosting leadership and business administration skills, then we could put our talent through its paces.”
The ultimate aim is for the use of IT to stretch across the entire value chain and create benefits for companies of all sizes. This is evident in the beer industry, where Mexico is the world’s fourth-biggest producer. “Digital transformation is not only necessary, but also a game-changer for brewery companies because it bolsters quality and productivity at each step of the value chain – from the opportunities it gives us to support micro-entrepreneurs in sourcing inputs, to the facilitation of direct contact with consumers and clients,” Cassiano de Stefano, CEO of Grupo Modelo, told OBG.
Privacy & Security
A major opportunity for growth in the local ICT sector is in cybersecurity and biometrics software. Companies operating in Mexico are increasingly deploying these types of systems to boost productivity by tracking movement and preventing fraudulent activity, yet there is a long way to go to reach widespread adoption. “We are so far from where we should be on cybersecurity – not only in terms of execution, but also in terms of legislation and best practices,” Humberto López, CEO of Ingressio, told OBG. “This extends beyond security to privacy policies and procedures as well. There are so many areas to be developed in this sphere.”
Biometrics – the use of finger prints, eye scans and facial recognition for security and tracking – is poised for expansion both in Mexico and worldwide. According to Ingressio, the biometrics business in Mexico has grown by an average of 18% annually since 2013. “There is huge opportunity for further application in that area,” López told OBG. He adds that the Latin American culture of valuing security above personal privacy means that while deploying these types of technologies leads to intense monitoring, employee pushback is rare. López believes most of the growth in biometrics will occur in health, education and heavy industry, which are dependent on a large number of workers.
Sometimes, however, infrastructure and talent constraints limit adoption. Internet coverage can be a problem in remote areas, meaning they do not have access to enough bandwidth to deploy IoT services that support increased security. In the talent realm, there must not only be a sufficient number of software engineers and related professionals in the country, but a labour force that keeps up to date in this rapidly changing field. “There is more need than ever for agility and flexibility to be at the forefront of human capital in Mexico. As the global business environment becomes increasingly unpredictable and the national economy takes a different track, it is important that employees be able to react appropriately and be creative in problem solving,” Felipe Rivelles, managing director of executive search and consulting firm Signium, told OBG.
Despite significant progress in recent years, Mexico’s ICT sector faces certain challenges. “From a return-on-investment point of view, bringing significant investment into Mexico to develop an ICT business is a challenge,” José Antonio Sánchez, CEO of IT solutions company Mainbit, told OBG. “ICT services are growing in Mexico at a slower pace than hoped, the competition is tough and margins can be low. In fact, only around 50% of ICT companies survive their first 12 months.”
While the 2013 reforms opened the market up to competition and investment, legislation still needs to be improved so that Mexico can fully take advantage of opportunities in the digital economy. GSMA recommends Mexico build more municipal-level antennae, lower annual spectrum fees and incentivise infrastructure development. However, the government’s efforts are primarily directed at improving mobile data and broadband internet coverage.
In a show of confidence, foreign tech giants are expanding operations in Mexico. Google Station – which supplies free, public Wi-Fi points – had about 100 live sites across the nation in 2019 and plans to increase this figure. By Google’s estimates, 74m people in Mexico were online as of 2019, with the country to add another 18m users by 2021. Facebook is lending its expertise as well, and Mark Zuckerberg, CEO of the social media platform, spoke with AMLO in June 2019 about expanding connectivity in Mexico. “I expect 2020 to be an important year for technological disruption,” Kaleb Ávila, vice-president for Latin America at infrastructure solutions company Panduit, told OBG. “Business models will change, but human behaviour will also be influenced by new technology allowing for hyper-connectivity.”
With demand for ICT services on the rise, Mexico holds exciting opportunities for foreign and local investors. If the government can keep up the reformist momentum, incentivise investment, and craft enabling laws and regulations, companies will be able to provide a more robust technology offering.
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