The Battle for 3G+ Spectrum in Mexico

June 5, 2009

Last week, Cofetel, Mexico's telecommunications regulator, approved the guidelines for the upcoming spectrum auctions in the 1.7GHz and 1.9GHz bands, which are suitable for 3G+ deployments. As the next legal step, Cofetel has sent the guidelines to the antitrust agency for further analysis.

Not only does the move finally advance the administrative procedure for granting more 3G+ spectrum licenses, but it also incorporates two elements that will shape the market for years to come:

• The contests are designed to promote the entry of at least one new competitor on a national level.
• The auctions for both the 1.7GHz and 1.9GHz bands will be carried out simultaneously.

We believe these auctions will provide one of the last chances for entirely new players in the Mexican mobile market. Official sources say the 1.7GHz band auctions will favor at least one new operator. After this, we really do not see more opportunities to launch new wireless systems in Mexico in the medium term because of the lack of suitable spectrum, the slow pace of regulatory activity, the high market concentration and the barriers to entering any market niche. The only way to bring new faces on board will be through M&A.

We also believe new operators that can deploy truly alternative mobile broadband systems will motivate all operators to upgrade their networks beyond the 3G stage. Since 1.7GHz is an identified band for LTE, an entrant could leap directly to this platform, taking advantage of the inherent economies of scale of a dominant standard, which we expect LTE to become, and putting real pressure on existing 3G operators (see our From 3G to LTE: Latin America’s Path to Mobile Broadband Telecom Insider).

Considering the Mexican context, the timing makes sense. A lot of things must still happen before any operator can deploy a network in the 1.7GHz band, but LTE commitments are expanding rapidly worldwide (see our LTE’s Five-Year Global Forecast Global Telecom Insider), and we expect LTE to be a realistic option by the time the winners of the 1.7GHz auction have to define a network strategy. Of course, existing operators outside the GSM/UMTS/HSPA umbrella could also choose LTE.

So who might be interested in the Mexican spectrum? Perhaps we should start with the top 10 global mobile carriers, a likely source of bidders. Telefónica (ranked number three in terms of total revenue) and América Móvil (number 10) are already in Mexico, leaving Vodafone, China Mobile, T-Mobile, AT&T, Verizon Wireless, Orange, NTT Docomo and Sprint Nextel. From that list, China Mobile and Vodafone have the highest EBITDA margins (53% and 48% respectively in 2008) — good indications of financial strength. Though it is outside the top 10, Brazilian operator Oi last year acquired Brasil Telecom and performs well enough to think about expanding into other markets in the region.

As for the auctions being simultaneous, we believe this will help prevent undesirable practices in the competition for these frequencies, such as speculation, collusion or intentional delays in the overall process. But we’ll elaborate on this soon, when we analyze the Brazilian experience with sequential auctions for 1.9GHz spectrum in December 2007.

— Cesar Jimenez, Senior Analyst

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