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Mexico: On Your Mark, Get Set Phone!


International Business: MEXICO

MEXICO: ON YOUR MARK, GET SET--PHONE!

As Mexican telecom opens up to rivals, how will Telmex fare?

The battle has begun. With Mexico's long-distance telephone market set to open fully in eight months, competitors are taking aim at Telefonos de Mexico (Telmex). AT&T's logo is all over Mexican newspapers. And workers for Avantel, an MCI Communications Corp. joint venture, are ripping up Mexico City's streets to lay telephone lines. Concerns about the new competition and a 39% drop in first-quarter operating income recently buffeted Telmex's heavily traded shares.

But don't write the Mexican giant off just yet. While the company has some serious flaws, its strong market position, dominance in local phone service, and $10 billion investment to create a modern digital network will make it a formidable opponent. Indeed, concern about Telmex' continued strength is one reason why two of the upstarts, new groups that include AT&T and GTE Corp., joined forces on Apr. 22.

ABYSMAL IMAGE. At stake is a fast-growing telephone market (chart). Even with Mexico's stagnant economy, local and long-distance volume is expected to grow to close to $9 billion from the present $6 billion by 1999. The question is how much share Telmex will lose to its new competition. Most estimates suggest the company, which now has a monopoly, could lose about 20% through 1997, with the loss rising to 40% over the next five years. The loss is not necessarily all that bad, if the market expands as expected.

Much depends on how Telmex deals with its weaknesses: marketing and an abysmal image. Salespeople from competing groups are already prowling corridors, peddling corporate packages that will be key to future growth. Telmex has been slow to take its competitors seriously--though it is now bringing in new marketing managers, including a special corporate group. The company also is having trouble living down a reputation for dismal service before privatization in 1990. "Our most important challenge is to change Telmex' image," acknowledges CEO Jaime Chico Pardo. "We'll change the image with facts and results, not only with an advertising campaign." He points out that Telmex is now offering some hot new services, including Internet access, a high-speed data network, and videoconferencing.

Of Telmex' seven announced rivals, Avantel--the joint venture between MCI and Mexico's largest bank, Banamex--is the furthest along. Avantel plans to hook up some customers as soon as Telmex' long-distance monopoly expires in August.

SCARCE MONEY. The other main challenger, Alestra--originally a joint venture between AT&T and Mexican industrial conglomerate Alfa--got a big boost through its Apr. 22 merger with a GTE group that also includes Telefonica de Espana and Bancomer, Mexico's No.2 bank. Executives say the deal almost doubles Alestra's $1 billion investment and will allow the company to move more quickly into other services besides long distance. The company intends to market its products under the AT&T name, which is well recognized in Mexico through equipment sales.

Some experts see the merger as a sign that competitors are finding money scarce for the huge investment needed to go head-to-head with Telmex. "We don't have $1 billion in our pocket," says Peter T. Hutchinson, director of Alfa's telecommunications division. Other players may wind up going after niche markets. For instance, Iusacell, a leading cellular-telephone operator in which Bell Atlantic Corp. holds a 42% stake, has a long- distance concession but is more interested in offering local service once the government defines the rules for competition in that business.

Even after that happens, Telmex will retain a near monopoly on local service for years. That will be a key future strength. Although it will be required to provide local access to long-distance providers starting next January, Telmex will collect a fee on each call.

Both Telmex and its competitors are lobbying the government on what that fee should be. Competitors argue for about 1 cents a minute, while Telmex is asking for almost 15 cents. With a decision expected soon, most analysts expect the government to allow charges of between 3 cents and 5 cents a minute, high enough to help cover Telmex' local service costs but low enough to encourage competition. Regardless of how that call goes, the best bet is that Telmex will prove far more resilient than many expect.By Elisabeth Malkin in Mexico CityReturn to top


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