Introduction
Due to economic trends, such as good economic growth rates, increasing demand, and improving competitive regulatory framework within the product and service markets, Latin American economies have been investing and innovating to fulfill the information technology (IT) requirements of both households and firms in the last two decades. In this sense, stylized facts show that this sector has featured a steady growth path, turning the IT industry into one of the most appealing and dynamic markets among investors.Footnote 1 In most countries of the region, wireless and broadband telecommunications in particular have offered major business opportunities along with a higher level of competition. Mexico’s mobile market revenues, for instance, were estimated to reach US$24 billion by 2015, and two of its major carriers emerging in this game are América Móvil and Iusacell.
In this chapter, we describe 15 years of globalization of América Móvil, and the contrasting history of Iusacell. The former’s performance has been remarkable since the firm was spun out of Telmex in 2000. This company is one of the largest single privatization cases in Latin America in the early 1990s; it served as a benchmark experience for further privatizations and paved the way for reduced market constraints. América Móvil swiftly expanded its operations in South and Central America by exploiting the mobile communications market conditions; in the early stages it progressed by working with partners and, more recently, by acquiring assets from other firms. It is still involved in an incipient process of expansion into global markets. So far, Iusacell has been a local provider; however, AT&T acquired the company in early 2015, aiming at expanding Iusacell services to the rest of North America. This chapter explains the telecommunications industry and legal reforms in Mexico, provides a broad description of América Móvil, its origins and globalization strategy, and gives a brief description of Iusacell’s inward path. Finally, we present some lessons about this industry. Generally, América Móvil has taken advantage of business opportunities mainly in emerging markets by acquiring local companies and setting up market dominance in such a way that potential entrants find it difficult to cope with “competition.”
Telecommunications Industry Analysis
The history of the telecommunications industry in Mexico can be traced back to two companies: the American International Telephone and Telegraph Company, which started operations in Mexico in 1888, and the Swedish L. M. Ericsson in 1905. In 1947, in order to establish a single telephone operator in Mexico, a domestic company, Teléfonos de Mexico (Telmex), was set up, as result of consolidating the two companies operating at that time. From 1950 to 1958, Telmex was the main telephone company in the country. During the following 15 years, it operated as a private firm with strong links with the Mexican government to spread phone services nationwide. For instance, in the 1960s a telephone service tax and a long-distance tax were created, and represented 60 percent of Temex’s revenues by the end of the 1980s. These financial resources were allocated to unrelated government programs.
However, until 1972, the government’s role at Telmex kept expanding until it took control of the company by purchasing slightly more than 50 percent of the company’s voting shares. It is worth mentioning that in those years there was an open tendency to move private enterprises under the government’s control. Furthermore, in Mexico in those years, the relationship between the private sector and the government was tense. Mexican and foreign citizens and other institutional holders owned the rest of Telmex’s shares. From that year on, the company in practice ran its business as a state-owned asset (known as paraestatal). The government regulated tariffs impacting both on operating revenues and total costs, and made other business decisions not entirely based upon economic rationality. Telmex kept some of its private-company aims, though. For example, the government appointed shared seats on Telmex’s board of directors with individuals belonging to the private sector. However, the government held most of Telmex’s management after it took full control of the company.
As stated, Telmex operated as a private company during most of the 1970s. The CEO of the company from 1975 to 1987 was Emilio Carrillo Gamboa. During that period, the company expanded its telephone services at a rate of 6 percent annually, and the system was modernized. By 1980, operators no longer controlled Telmex’s exchanges, and the company started installing only digital rather than electromechanical lines (from zero to 20 percent of the whole infrastructure). Similarly, Telmex’s indicators on telephone service performance in comparison to other developing nations and other state-owned companies within Mexico ranked well. Nevertheless, political bias, operational inefficiencies, labor union interference, and fiscal mismanagement negatively affected Telmex’s financial performance. The net effect, in terms of service quality and financial position, arose by the end of the mid-1980s: prohibitive long-distance tariffs and hookup fees, high rates of inoperable lines, overpaid or long waiting times of connection. The main performance indicators were poor in comparison to other markets in the USA, Europe, and Japan.
Even though there was an effort to improve Telmex’s service during the late 1980s, inefficiency could not be minimized, and the company’s performance remained well below international standards. Furthermore, it failed to adopt key technologies such as toll-free services and fiber optic transmission. Telmex continued to pay dividends on its stock because the firm was artificially supported by the State, though.
By 1982, the privatization of a small number of large public enterprises, including Aeroméxico and Mexicana, Mexico’s two national airlines, began. At that time, the Mexican government, accounting for one-fifth of the Mexican GDP and employing around one million people, controlled more than a thousand state-owned enterprises. When Miguel De la Madrid Hurtado was in office (1982–8), one-half of these were ousted; most of them were non-large firms in non-strategic areas where the government’s direction was not essential. Of these divestitures, 294 were closed, 204 sold, 72 merged, and 25 transferred. However, there was a minor impact on government finances, which had small-scale macro- and microeconomic consequences. Moreover, the number of paraestatal workers has increased since, as some enterprises were divested and others from the private sector were incorporated. During the 1990s the government kept privatizing many of Mexico’s hundreds of state-owned enterprises; one of the largest was Telmex.
In 1990, Telmex was sold as a monopoly to a consortium led by a Mexican conglomerate, Grupo Carso, with Southwestern Bell and France Telecom as minority foreign partners. Grupo Carso put up half of the US$1.76 billion and received a 10 percent equity stake in Telmex, while its partners financed the other half and shared the other 10 percent interest. The agreement was that Grupo Carso would take control of the company, Southwestern Bell would be responsible for improving operations and developing paging and cellular divisions, and France Telecom would concentrate on line expansion and modernization. This was one of the largest single privatizations in Latin America, and generated US$6 billion for the Mexican Treasury.Footnote 2
Grupo Carso and its subsidiaries, the sixth largest company in Mexico at that time, operated in the retail, insurance, tourism, paper products, industrial and manufacturing, infrastructure and construction, mining, and energy sectors. It currently has a presence in the retail segment through department stores, boutiques, gift shops, record stores, restaurants, cafeterias, electronic and entertainment stores, and shopping malls through the Sanborns, Sears, Saks Fifth Avenue, Mix-up, and iShop brands. It produces cable products for use in the construction, automotive, energy, and telecommunications industries, copper, aluminum, automotive parts, and lighting solutions. It also has operations in highway construction and maintenance, water system and treatment plants, duct installations, fiber-optic, gas pipelines, oil well drilling, oil platforms and equipment, and real property construction.
Southwestern Bell increased its international focus throughout its subsidiary, Southwestern Bell International Holdings Corporation (SBIHC). One operation was the acquisition of 20.4 percent of the total equity and 51 percent of the shares with full voting rights in Telmex, Mexico’s national telephone company. This participation gave SBC a chance to sell services, such as long-distance telephone communications, that it was prohibited from offering in the United States.
The third partner was France Telecom, recently independent in terms of budget, management, and organizational independence, but still with monopoly status; it started looking for alliances and mergers to achieve the scale necessary to compete in international and new markets.
Telmex was granted a concession – expiring in 2026 – to provide voice, data, text, sound, and video transmission services, but was not allowed to provide television services over its telephone/broadband network either directly or indirectly. Telmex was given a monopoly in the provision of long-distance and international service for seven years, to allow network expansion targets and “rebalance” its finance structure. In return, Telmex committed to expand the number of basic service lines by a minimum average annual rate of 12 percent during 1990–94 and drive down prices. For the first years, Telmex was an unregulated monopoly except for enforcement of the concession by the Secretaría de Comunicaciones y Transportes (SCT). In the early nineties, Latin American countries followed a list of policy recommendations known as the Washington Consensus, which included the selling of non-strategic firms.Footnote 3
Telmex’s privatization was not accompanied by an institutional design to guarantee its customers’ satisfaction and reasonable mark-ups. Due to the lack of institutional capabilities, monopolistic rents were distributed among owners and employees. Consumers paid for monopolistic telecommunications services and Telmex’s competitors were unable to lower their own prices because of high interconnection charges. For example, in 1989, 26 out of 30 OECD countries featured a monopoly market structure in the fixed network; in 2003 only one country kept the same structure: Mexico. In 2000, Mexico charged the highest tariffs for both business and residential users among OECD countries: US$5 versus US$0.5 in Norway, controlling for purchasing power parity.Footnote 4 In 1999, Telmex launched a process of acquisitions of international subsidiaries in the Americas.
On the other hand, in 1978, the government granted the first concession for a wireless telephone system for cars. In 1984 Publicidad Turística, founded in 1956 as an affiliate of Telmex and owned by the Mexican government, changed its name to Radiomóvil Dipsa, like the original company that gave birth to Telcel, and started operating wireless communications. From 1988 to 1990, Telcel expanded its cellular network to cover Mexico City and other major cities of the country. In 1989 the company began operating under the Telcel brand. One year later, Telcel started supplying cellular services all over the country. In 1995, Telcel had 57 percent of the market and was a pioneer of prepaid phone cards for the medium- and-low income segment. In 2000 Telcel had around 9 million out of 12 million cellular-phone subscribers in Mexico. In the same year, the Telmex spin-off América Móvil was announced. See Table 21.1.
Table 21.1 Subscriber base in Mexico
| Year | Broadband | Fixed Lines | Cellular Phones |
|---|---|---|---|
| 2000 | 103 | 12,331 | 14,077 |
| 2001 | 105 | 13,774 | 21,757 |
| 2002 | 212 | 14,975 | 25,928 |
| 2003 | 432 | 16,330 | 30,097 |
| 2004 | 1,090 | 18,073 | 38,451 |
| 2005 | 1,980 | 19,512 | 47,128 |
| 2006 | 3,136 | 19,861 | 55,395 |
| 2007 | 4,633 | 19,997 | 66,559 |
| 2008 | 7,638 | 20,491 | 75,322 |
| 2009 | 9,976 | 19,505 | 83,219 |
| 2010 | 11,817 | 19,918 | 91,383 |
| 2011 | 12,733 | 19,731 | 94,583 |
| 2012 | 13,560 | 20,587 | 100,727 |
| 2013 | 13,552 | 20,590 | 105,005 |
| 2014 | 12,970 | 20,900 | 101,800 |
| 2015–2Q | 13,680 | 21,100 | 103,400 |
Data in thousands
América Móvil’s large market share has motivated regulators in Mexico and abroad to review its practices. A 2012 OECD study (OECD Review of Telecommunications Policy and Regulation in Mexico) on the Mexican telecommunications and media markets reported a below average performance of the two sectors due to insufficient competition. It caused an average annual welfare loss of US$129.2 billion or 1.8 percent of Mexican GDP between 2005 and 2009.Footnote 5 In 2014, the Federal Government promulgated a legal reform on the telecommunications industry, seeking to foster investment and competitiveness. The main objectives were to spread coverage, reduce prices, and improve quality of service. In terms of regulation, foreign investment can reach up to 100 percent in telecommunications, including satellite transmissions; the legal framework of the telecommunications industry will provide better legal certainty; there will be more rights for customers. In terms of infrastructure, wider access, high-speed connectivity, and coverage through fiber optic will be provided, with the aim of “universal digital inclusion”; and Government will build a network for broadband access.Footnote 6,Footnote 7 See Table 21.2.
Table 21.2 Mexican market share (%), 2Q 2015
| Celluar Phone | Fixed Lines | Broad Band | |||
|---|---|---|---|---|---|
| Telcel (América Móvil) | 69.5 | Telmex-Telnor | 62.7 | Telmex-Telnor | 62.8 |
| Movistar (Telefónica) | 21.5 | GTM (Telefónica) | 8.6 | Televisa Group | 18.7 |
| Iusacell-Unefón (AT&T) | 5.4 | Axtel-Avantel | 7.3 | Megacable | 11.4 |
| Nextel (AT&T) | 3.1 | Televisa Group | 6.9 | Axtel-Avantel | 3.4 |
| Virtual Movil Operators | 0.5 | Maxcom | 6.8 | Total Play | 1.4 |
| Alestra | 2.9 | Maxcom | 1.2 | ||
| Megacable | 1.4 | Others | 1.2 | ||
| Others | 3.4 | ||||
Finally, the Federal Telecommunications Institute (IFT), created in 2013 as substitute of COFETEL, and the Federal Economic Competition Commission (Cofeco), are the antitrust authorities in the industry. IFT’s main duties are to: provide or revoke operating licenses; limit concentration and market share; foster economic and free competition and content diversity; set costs for licenses; and establish fines. If IFT considers that the market indicators are not moving toward a more competitive environment, it could enforce more pro-competitive measures. Like the EU model through the European Commission, the Mexican reform intends to build a competition-based regulatory architecture.
In 2014, as part of its exclusive responsibility for competition issues in the telecommunications and audiovisual sectors, IFT declared América Móvil a dominant player as its market share exceeded 50 percent of the provision of audiovisual or telecommunications services, measured by number of users, subscriber base, audience, and traffic or network capacity utilized. As a consequence of its ‘preponderance’ position, América Móvil must comply with several regulatory measures determined by IFT and review its practices. This puts América Móvil in an exceptionally weak position with respect to AT&T, which has recently acquired Iusacell and Nextel.Footnote 8
América Móvil is quite complex to analyze in comparison to other firms. Most of its competitors in emerging countries are local and small, and its stocks are not traded on the international markets.Footnote 9
Nevertheless, the services in the wireless communication industry seem to be changing dramatically because many new customers are not seeking long-term contracts; rather, they are willing to be under the scheme of prepaid services with minimum requirements. In the future, the wireless segment market will converge to competitive conditions that will reduce profit growth opportunities.
Based in Spain and larger than América Móvil, its main competitor is Telefónica and its subsidiaries, the world’s third-largest telecommunications firm by access lines. This giant operates telecommunications, media, and contact center industries via three business branches: Telefónica Spain, Telefónica Europe, and Telefónica Latin America. It runs businesses in the UK, Germany, the Czech Republic, and Ireland with 100 million customers, and businesses in Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, Puerto Rico, Uruguay, and Venezuela with 200 million customers that represented slightly more than 51 percent of its overall revenues in 2013 and more than one third in 2014. In May 2015, Telefónica completed the acquisition of Brazilian fixed carrier GVT from Vivendi, and strengthened its presence in the Brazilian market with an increasing demand for fixed and wireless services.Footnote 10
In recent years, the telecommunications sector has featured a highly competitive structure in almost all developed countries, where markets are saturated for new players; however, there are plenty of opportunities for expansion in emerging countries.
Within the mature markets, incumbent companies usually compete in the quality dimension. For example, in the USA, competition in the mobile telecommunications industry has increased dramatically over time. The four main telecommunications firms, Verizon, AT&T, Sprint, and T-Mobile, have been struggling for new subscribers. In contrast, the Mexican market is still growing in cellular, fixed line, and broadband services.Footnote 11
América Móvil is currently the largest firm in Mexico; however, there is plenty of room to grow for the other competitors after América Móvil has been accused of monopolistic practices.
América Móvil: An Overview
América Móvil is one of the most important carriers within the telecommunications industry worldwide (it ranked ninth in terms of its revenues in 2013). In 2014 it was the fourth largest global mobile operator in terms of wireless subscribers and fixed lines. The corporation operates in 28 countries in the Americas and Europe through many subsidiaries such as Telcel, Telmex, Claro, Embratel, Simple Mobile, Net, and TracFone.Footnote 12
Based in Mexico City with around 190,000 employees globally at the end of 2014, América Móvil is the largest provider of wireless communications in Latin America, and the largest landline operator in Central America. In Mexico, the company controls around 70 percent of the mobile phone network and 80 percent of landlines. The company has usually reported above average returns based upon its particular market dominance within developing countries.
The firm has grown out of Telmex, which was a public telecommunications firm. In 2000, the spin-off América Móvil from Telmex, the largest mobile-service provider in Latin America with about ten million subscribers, was announced as an independent company for cellular and broadband Internet services.
The company mainly provides wireless and fixed voice services (30 percent of its revenues in 2015), including airtime, domestic, and international long-distance, as well as network interconnection and public telephone services. The company also provides data communications, such as messaging, web browsing, mobile entertainment, enterprise mobility services, and corporate network services, data transmission, email services, real-time messaging, content streaming, and interactive applications. Except in the USA, the corporation has the license to build, install, operate, and manage public and private networks.
Carlos Slim Helú (according to Forbes magazine, one of the world’s wealthiest people), controls more than 200 companies, ranging from telecommunications to mining, construction, banking, and retailing, through his conglomerate, Grupo Carso. Along with certain members of both his immediate family (for instance, his children) and the Lebanese community, he holds a majority interest (62 percent) in América Móvil through the holding company América Telecom. This company also holds a controlling interest in Mexico’s dominant landline telecommunications company, Telmex. It is worth mentioning that Wal-Mart de México, América Móvil, and Telmex are the largest private companies in Mexico, in terms of annual revenues. América Telecom has a remarkable management team. Although Carlos Slim has stepped down from regular operations, he is still the firm’s largest shareholder and honorary lifetime chairman. He is 75 years old and dedicated to philanthropic activities.
América Móvil’s strategy, as an entrant player in developing countries, is based upon scale economies (a vast network infrastructure): driving down competitive prices due to low costs (operating and interconnection) combined with quality services (speed, capacity, and coverage). Thus, its operations capture most market share. Additionally, this has allowed the company to generate one of the highest return rates among wireless operators globally, and to cover a vast population in Latin America. For instance, in Argentina the company’s wireless networks cover approximately 99 percent of the population; in Chile, its networks cover 98 percent of the population, while in Uruguay it covers 97 percent of the population.Footnote 13
In Latin America, América Móvil has carried out another business strategy throughout its subsidiaries, which operate with prepaid subscribers. These subscribers only purchase the number of minutes they need, either via a card in a particular selling location or online. Locations where cards are available may include places like service stations, convenience stores, phone stores, even street vendors. The customer does not need to sign a legal contract to commit to periodical payments. This attracts many low-income subscribers. Such figures are the result of state-of-the art technology innovation to increase market share and create a huge customer base as well.
In this light, América Móvil reported the following financial figures over recent years (see Table 21.3):
Table 21.3 América Móvil’s financial indicators
| 2010 | 2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|---|
| Revenues | 48 | 53 | 59 | 67 | 66 |
| Total assets | 71 | 68 | 77 | 79 | 87 |
| EBITDA | 19 | 20 | 20 | 22 | 21 |
| Gross profit | 29 | 27 | 33 | 33 | 31 |
| Net profit | 7.2 | 6.6 | 7 | 6 | 3.5 |
| Foreign investment | N/A | 10 | 10 | 10 | 10 |
| Exports | N/A | N/A | N/A | N/A | N/A |
| Employees | 150 | 161 | 169 | 173 | 191 |
| Countries | 19 | 18 | 19 | 20 | 20 |
| 0D/E percent | 88 | 120 | 159 | 221 | 233 |
| ROA percent | 11 | 9 | 9 | 7 | 4 |
| ROE percent | 33 | 28 | 34 | 33 | 24 |
Data in billions of US dollars
América Móvil’s relatively solid Balance Sheet (Net debt/EBITDA = 1.7) allows the financial support to exploit business opportunities. This allows targeting Latin American markets to return value to its shareholders through hostile acquisitions, dividends, and stock buybacks. It has featured an aggressive expansion strategy and built up a solid history of acquiring troubled companies and turning them into sound players. Robust demand for cellular services, along with aggressive pricing strategies, have allowed the company to become the largest wireless provider in the region, with more than 330 million customers. As consequence of this expansion, América Móvil has generated attractive profits on its investments: invested capital return is above the cost of capital. Regarding small markets, dominant share and margin expansion are some of the issues the firm is still trying to cope with. In this vein, lack of scale diminishes profits in these markets. Therefore, the company is taking advantage of its foreign operations to achieve greater scale.
After IFT declared América Móvil a dominant player in Mexico, the company was instructed to share its infrastructure; open broadband access to other competitors with a new cost structure; allow interconnection for other companies in their local and long-distance networks with fees regulated by IFETEL; no charge for national roaming, controlled tariffs for the end user and agreed roaming tariffs for wholesale services for visiting users. Because of these measures, it has been increasingly difficult for Telcel to compete on price. América Móvil is considering selling off its assets (customer base and infrastructure) to reduce its market share of the Mexican telecommunications industry to below 50 percent. Nevertheless, if IFETEL considers that the market is not moving toward a more competitive environment, it could implement more pro-competitive measures. Therefore, América Móvil has been facing tighter controls in Mexico, after the new telecommunications law requires it to reduce its share of the market, getting rid of its assets since it was accused of having a dominant status.Footnote 14
América Móvil seeks to enter the pay television market to be able to offer triple-play services. First, it would need to get out of the measures imposed as a dominant player in less than two years – the period that IFETEL had originally announced. América Móvil announced its intention to sell part of its assets in order to reduce its market share below 50 percent. In this operation, the company could obtain a minimum of US$10 billion by selling off 21 million out of 105 million mobile subscribers and 4 million out of 21 million fixed line subscribers.
América Móvil ExpansionFootnote 15
América Móvil swiftly expanded its operations in Latin America by exploiting communications development opportunities. This was originally done with partners and then, like its main competitor, Telefónica, through a challenging strategy of acquiring assets from other enterprises in the industry (BellSouth, Verizon, AT&T, MCI, TIM, and France Télécom). Later, it acquired assets in the broadband and television segments to reach sufficient coverage to allow it to provide combos of television, Internet, and phone services.
Its takeover of Telmex made América Móvil in 2000 the parent company of Telmex, Telcel, Claro, Embratel, Net, and Comcel, all of which provide services such as wireless, fixed telephony, broadband, and cable. By the end of the year, the company had a presence in Argentina, Brazil, Colombia, Ecuador, Guatemala, Puerto Rico, the United States, and Uruguay; and América Móvil started being listed on stock exchanges in Mexico City, Madrid, and New York; however, Carso Global Telecom (Telmex’s holding) retained majority control.
América Móvil’s principal markets of operations are Mexico and Brazil. In the latter country, the company operates under the brand names of Claro, Embratel, and Net, offering mobile and fixed telephony services, as well as pay-television. It provides wireless services under the brand name Claro in Argentina, Paraguay, Uruguay, Chile, and Colombia. In addition, América Móvil provides fixed telephony services in Guatemala, El Salvador, Nicaragua, and Panama; while in the United States it has operators Tracfone and SimpleMobile, owns several call centers, and has a comprehensive service agreement with Vodafone. It also has stakes in European companies Telekom Austria and Koninklijke KPN.
The Brazilian telecommunications industry in particular is mainly controlled by Spain’s Telefónica, Mexico’s América Móvil, and Oi (fixed line and mobile), which is controlled by Brazilian investors and Portugal Telecom. Brazil’s mobile market is the fifth largest in the world and subscriptions continue to grow; this is a key market for América Móvil and where it derived 25 percent of its total revenues in 2013. América Móvil started international operations in Brazil through Telecom Americas, a joint venture with Bell Canada International and SBC. In 2001 the company had acquired 100 percent of Tess and controlling interests in Telet and Americel. During 2013, Claro Brasil’s GSM network covered more than 3,600 cities and 92 percent of the country’s population, including the most important tourist and business cities. Embratel owned the largest long-distance network in Latin America and the largest data-transmission network in Brazil. Finally, Net Servicos had an advanced network that provided services and products to 18.8 million homes in 164 localities. Due to the 2016 Olympic Games, held in Brazil, the demand for fixed and mobile broadband, mobile telephony, and other wireless products such as smartphones and mobile applications is expected to rise. According to industry estimates, Brazil’s telecommunications market is expected to reach US$100 billion in 2017.
Three players dominate the Colombian mobile market: América Móvil’s Comcel, Telefónica’s Movistar, and Millicom-controlled Tigo. Broadband is growing due to a government initiative that seeks to close the ‘digital divide,’ and provides Internet access nationwide. América Móvil first entered the Colombia market in 2000 through its participation in Telecom Americas and controlling interests in Comcel and Occel, which together had 2.5 million subscribers. In 2003, América Móvil closed the acquisition of a 95 percent interest in Colombian wireless operator Celcaribe, which covered the Caribbean region of the country and attained nationwide coverage in Colombia, serving 22 million subscribers. In the same year, América Móvil launched its new GSM services in Brazil, Colombia, Ecuador, Mexico, and Nicaragua. América Móvil has inaugurated its undersea optic fiber cable system AMX-1 in Colombia. The submarine network had 11 landing points in seven countries, including the United States, Colombia, Brazil, Dominican Republic, Mexico, Puerto Rico, and Guatemala.
Peru is a very attractive country for América Móvil. Mobile Internet usage is expected to grow near to a percentage in the 70s per year. The main segments are prepaid customers that represent 75 percent of the market. The most popular services are entertainment subscriptions, music, games, ring tones, and “Ideas Idiomas,” a service developed for users to learn English. Claro’s strategy is to target mid- to low-income consumer segments usually represented by prepaid users, by using entertainment subscriptions.
In 2010, América Móvil was the largest or second-largest cellular phone company in every Latin American country except Chile, where it was third; and also, the fifth-largest telecommunications company in the world – behind China Mobile, AT&T, Vodafone, and Telefónica – with a market capitalization average of approximately US$97 billion. At that time, the company controlled 70 percent of the cellular telephone market, 80 percent of the fixed-line market, and an estimated 88 percent of the Internet service market in Mexico, the 13th largest economy in the World.Footnote 16
In order to transmit data more rapidly, América Móvil improved its wireless and landline networks throughout Latin America by investing around US$10 billion annually over 2010 and for the next five years. This capital expenditure was intended for submarine cable, fiber optic networks, cable to home, fiber to sites, 3G and 4G LTE coverage, and satellites. The company also has an advantageous bargaining position when buying inputs and capital goods from its suppliers.
In the first quarter of 2011, América Móvil reported a wireless subscriber base of 65.7 million customers in Mexico, 53.4 million in Brazil, 30 million in Colombia, 18.5 million in both Argentina and the United States, and 17.5 million in Central America and the Caribbean.
In 2012, América Móvil took its first steps to play within the competitive European telecommunication market, investing US$5.5 billion as it sought to acquire stakes in KPN (a Dutch group) and Telekom Austria. However, only the second of these transactions was successful. At the end of 2013, the company controlled a 28 percent stake in KPN; however, its actions to take over the Dutch firm ultimately collapsed.
In 2013, the International Olympic Committee awarded América Móvil the right to broadcast on all media platforms across Latin America, except for Brazil, two major sports events: the 2014 Olympic Winter Games in Sochi, Russia, and the 2016 Olympic Games in Rio de Janeiro, Brazil.
At the beginning of 2014, América Móvil secured a shareholders’ agreement, allowing it to launch a public tender offer through which it hopes to gain outright control of Telekom Austria (TKA). Once this transaction is complete, América Móvil will use TKA – which has operations in seven Central and Eastern European markets (Belarus, Bulgaria, Croatia, Liechtenstein, Macedonia, Serbia, and Slovenia) – as a takeoff platform for expanding its operations in the European telecommunications market. Nevertheless, the European competition authority has shown a tougher position under the leadership of its new commissioner, Margrethe Vestager.
On the other hand, América Móvil faces further considerable economic (poor economic performance of Brazil), political, and currency risks, provided that most of its operations are in Latin America. América Móvil has a substantial amount of debt denominated in US dollars (38 percent in 2014), but most of its revenue is generated in currencies such as Mexican pesos and Brazilian real, which have been negatively affected.
It is worth mentioning that the 2015 depreciation events in the firm’s operating currencies could imply a larger debt burden. The firm is also dealing with recurring operational challenges in Brazil due to brand positioning problems and integration issues. Its fixed-line business is eroding because of fixed-to-mobile substitution, and mobile termination rates are coming down in all of its key markets. Ongoing depreciation in the firm’s operating currencies against the US dollar will lead to higher debt obligations. Mexico is supposed to hold a sufficiently wide radio frequency spectrum in 2015 as to allow for more competition within the main telecommunications industry. Their main competitors, Telefonica and Telecom Italia, are depending on Latin America for growth and similar price competition is expected in the USA. As a consequence, América Móvil is looking for investment possibilities in India with Videocon Telecom. This will be its first foray into Asia.
In 2015, the still-low Mexican competitive market represents 29 percent of subscribers but 36 percent of revenues. Other developing markets like Colombia, the Panama region, and the Andean region exhibit the opposite effect, because more firms are struggling for market share, which causes excess competition. The aim of the company is to dominate its new markets and turn them as profitable as its home market. See Table 21.4.
Table 21.4 América Móvil’s domestic and international events
After trying unsuccessfully to sell part of its stocks, América Móvil took another asset-shedding strategy by spinning off part of its infrastructure into a tower rental company, Telesites, which was supposed to start operations in June. The company generates positive free cash flow each year while spending a significant and growing amount on capital expenditures, as well as paying off debt, buying back stock, and paying a dividend.
In the near future, América Móvil will continue to explore acquisition opportunities in Latin America, in particular in Venezuela, Panama, Bolivia, and the Caribbean. It is also open to expanding into other regions if the price is reasonable.
In terms of technology, América Móvil has also launched an Edge-based push-to-talk service for individual clients in Mexico and has 3G services available in Mexico’s largest cities. América Móvil is on the cutting edge of wireless technology, which is evident by the speed at which it delivers new products to the market. The company was the first telecommunications provider to offer 4G services in Mexico.
In emerging countries, considerable investments are expected in telecommunications and information technologies. Due to growing demand in mobile services, América Móvil, for example, will invest US$50 billion over the next few years. Traditional sectors like manufacturing and agriculture have a relevant role to play as well, to foster innovation and drive sophistication. Investors also expect a more favorable, market-friendly business environment in order to boost competitiveness.
Even though the Latin American mobile market is characterized by decreasing growth opportunities – improving market maturity and decreasing subscriber and revenue growth – there is still enough room within the region to expand at a relatively fast pace in the coming years. For example, broadband subscribers are expected to grow 30 percent annually. In the pay-television market the region is forecast to grow up to 100 million customers in 2018. In this way, América Móvil – with a large network infrastructure and competitive practices – is well positioned to take advantage of such a potential scenario. Nevertheless, 90 percent of Latin Americans already have wireless services, which means growth is going to have to come from outside, growing the customer base.
In sum, the firm has a well-structured acquisition strategy. It has been very good at taking control over other highly indebted companies during the information technology bubble. It then consolidates operations, improves management, and makes operations more profitable. However, América Móvil is intended to play in new markets through new acquisitions, which may involve a risk of buying above the market price.
Iusacell
Currently, Iusacell operates concessions for mobile services in the central and southern regions of Mexico. The company supplies local and long-distance telephony, messaging services, mobile television, and wireless broadband services as well. The company traces its origins back to 1955, when it was founded as Servicio Organizado Secretarial (SOS).
Grupo Iusacell is a mobile telephone pioneer in the Mexican market, set up in 1989. During 2000, the company tried to increase its market share in the largest Mexican cities, offering radio services, local phone calls, and long distance calls. In 2001, the company invested in a nationwide infrastructure in order to gain a presence all over the country. In the same year, the British company Vodafone acquired 34.5 percent of Iusacell. Two years later, Verizon and Vodafone sold out all their shares in Iusacell, totaling 73.9 percent of the company; the company faced insolvency problems and lost 200,000 subscribers.
The company merged in 2007 with Unefón, which belonged to the conglomerate Grupo Salinas. The company had a 4 million subscriber base, which represented an approximate market share of 7 percent. Nevertheless, Grupo Televisa had a 50 percent share of Iusacell.
Table 21.5 Iusacell’s domestic and international events
| Year | Domestic Events | International Events |
|---|---|---|
| 1955 | Servicio Organizado Secretarial (SOS) was founded. | |
| 1989 | Iusacell was set up as a mobile telephone player. | |
| 2000 | Globalstar and Grupo Iusacell entered into an agreement of a national connectivity hedge. | Iusacell signed an Internet contract with the US company “phone.com.” |
| 2001 | Invested US$229 million to modernize and increase connectivity and infrastructure all over the country. | Vodafone acquired a share of 34.5 percent of Grupo Iusacell for a total of US$973.4 million. Iusacell signed an agreement with the Chinese company Unicom Horizon Mobile Communications in order to provide roaming service to Asia. |
| 2003 | Iusacell postponed the interest payment on its debt. | Verizon Communications and Vodafone Americas BV sold their shares totaling 73.9 percent. Ricardo Salinas Pliego took control of the company. |
| 2005 | Launched “Radio Plus” radio service. | Iusacell ADRs were unlisted in NYSE. |
| 2007 | Iusacell merged with Unefón, which belonged to the conglomerate Grupo Salinas. Entered into an agreement with Nextel México for mobile interconnection. Salinas Pliego took control. | |
| 2008 | Lost market and suspended operations. | |
| 2009 | Negotiated debt in foreign currency. | |
| 2011 | Televisa bought 50 percent of Iusacell shares. | |
| 2012 | Changed strategy and focused on heavy users, not on volume customers. | |
| 2013 | Grupo Televisa had a 50 percent participation in Iusacell shares. | |
| 2014 | Grupo Salinas purchased Televisa’s equity participation in Iusacell for US$717 million. | |
| 2015 | AT&T acquired the total shares of Iusacell from its controller, Grupo Salinas, for US$1.7 billion, plus US$2.8 billion to acquire Nextel Mexico mobile network. |
Table 21.6 Iusacell’s financial indicators
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
|---|---|---|---|---|---|---|---|
| Revenues | 0.66 | 0.55 | 0.43 | 0.48 | 0.56 | 0.71 | 1 |
| Total assets | N/A | N/A | N/A | 0.98 | 1 | 1 | 1.2 |
| EBITDA | 0.27 | 0.18 | 0.03 | 0.05 | 0.09 | 0.12 | 0.2 |
| Gross profit | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Net profit | −0.1 | −0.21 | −0.43 | −0.17 | −0.06 | 0.35 | −0.29 |
| Foreign investment | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Exports | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Employees | |||||||
| Countries | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
Further information is not available.
Data in hundreds of US dollars.
In September 2014 Grupo Salinas purchased Televisa’s equity share in Iusacell for US$717 million. One year later, AT&T acquired the total shares of the company from its controller, Grupo Salinas, Mexico’s third most important wireless operator, for US$1.7 billion in order to gain access to 8.6 million subscribers and wireless coverage of 70 percent of the country. It also spent about US$2.8 billion to acquire Nextel Mexico mobile network with 2.8 million subscribers. Mexico is AT&T’s current target, due to the 105 million base subscribers that have grown at a rate of 7 percent for the last 7 years, 86 percent of mobile services penetration, and a big opportunity for the mobile broadband market with just 13 percent penetration.
AT&T plans to invest about US$3 billion to build up its recently acquired Iusacell mobile phone network in Mexico, including voice and data services to cover about 90 percent of the total population before 2019. AT&T also plans to set up the first North American mobile service area covering more than 400 million consumers (households and firms) in Mexico and the USA.
In summary, the deal aims to increase market share where cellular penetration is relatively low and attractive for potential growth. AT&T is looking to tap into the growing cellphone market in Latin America’s second economy now that the government is fostering international investment in the sector.
Lessons from the Telecommunications Industry
América Móvil took advantage of the 2000 capital excess crisis within the information technology sector by acquiring assets of telecommunications enterprises below the original price, and became a prominent player in Latin America. At that time there were high expectations in the IT industry business cycle such that the industry capacity (for example, the excessive number of satellites launched in 1998) was above the demand. As was the case in Mexico, Carlos Slim’s business expansion into Latin America was driven by his telecommunications investments. América Móvil is now the largest wireless telephone provider in the region, and also provides services such as fixed telephony, broadband, and pay-television, comprising 284 million accounts. It was a very strategic move to create a market for low-income households with a pay-as-you-go format with phone cards at several prices. Other strategies within this business model include using Telcel technologies to outperform local competitors, or to acquire dominant wireless communications firms in existing markets. The way forward is new markets reaching into Eastern Europe.Footnote 17
América Móvil’s extensive market share in Mexico generates economies of scale, which helps to fund the firm’s expanding operations internationally. It is worth mentioning that, so far, América Móvil has operated in Mexico in a market with a very low competition level. Fortunately, for consumers, new regulations will allow for players to increase the supply of services, increase quality and reduce prices. Finally, the company runs business in a keiretsu fashion as in Japan or chaebol in South Korea.Footnote 18 All the firms associated with Carlos Slim are closely linked: financial services, retailing, media, and construction. Other companies such as AT&T (ranked number 1 in terms of revenues in 2013), Telefónica (ranked number 4 in terms of revenues in 2013), and TDC have expanded their business following América Móvil’s steps: acquiring assets in its markets to reduce costs in order to increase its mark-ups. Nevertheless, strictly speaking, América Móvil followed the steps of Telefónica’s internationalization process. It is worth mentioning that profits in US dollars generated in 2016 are below its historical trend because most currencies all over the world have depreciated with respect to the US currency.
On the other hand, Iusacell could not expand its business to international markets due to the lack of a sound position in the Mexican market. There are still attractive opportunities for globalization for this company as part of AT&T, though.
In this chapter we offer an overview of the evolution of two Mexican companies in the telecommunications industry. The figures that we present here are so dynamic because the sector is booming and constantly adopting better technology: New information is being released every day. However, the chapter aims to shed light on the way América Móvil spectacularly expanded. For the future, we cannot yet reject the hypothesis that América Móvil could be a technological driver in the market, and interact with its main competitors.
