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The Mexican government has taken several steps to further develop its information and communications technology (ICT) sector and increase the competitiveness of the industry over the past decade. As early as 2013 under President Enrique Peña Nieto, the Mexican government introduced constitutional reforms that transformed the telecommunications sector. Upon recommendations from an Organization for Economic Cooperation and Development (OECD) review of telecommunication policy and regulation in Mexico, the Mexican government reformed the industry by lifting restrictions on foreign direct investment and creating an independent regulatory agency—the Federal Institute of Telecommunications (IFT). These reforms were created with the intention of generating more competition in Mexico’s telecommunications industry.
In addition to the landmark 2013 reforms, Mexico agreed to further promote competition in the telecommunications industry when it signed the United States-Mexico-Canada Agreement (USMCA) in 2020. The USMCA dedicated an entire chapter to telecommunications, based in part on Mexico’s reforms, and instituted provisions to guarantee a level playing field and increase regulatory power throughout the telecommunications industry. Despite the strength of these reforms, competition in Mexico’s telecommunications industry has remained relatively unchanged, as América Móvil retains 70 percent of the market share for mobile internet services and a market cap nearly 10 times higher than the next largest Mexican competitor.
As Mexico emerges from economic hardships and the effects of Covid-19, its ICT sector will continue to increase in importance. In a country where only 77 percent of urban communities and 48 percent of rural communities have access to broadband mobile coverage, increasing connectivity will be critical to Mexico’s overarching digitalization efforts. For small- and medium-sized enterprises (SMEs), digitalization presents a unique opportunity to increase productivity as work from home and online business becomes more common. Moreover, Mexico plans to host its first spectrum tender for 5G services in 2023, which will further stimulate economic growth and broadband connectivity.
While there is much at stake for Mexico’s ICT sector, it faces several obstacles in creating a more competitive landscape. The market is awash with failed entrants, as exemplified most recently by Telefónica. The result is inadequate telecommunications infrastructure to support increased broadband coverage across the country. Furthermore, public policies and bureaucratic procedures that constrain the IFT prevent the sector from attaining its full potential. Of all the obstacles, however, one of the most important is the current spectrum situation, as Mexico has some of the highest spectrum fees throughout Latin America and the Caribbean—spectrum being the radio frequencies that are the main input for digital communication. High spectrum fees prevent the telecommunications sector from having enough competition, increasing broadband coverage, and attracting investment. On the other hand, lower spectrum fees could generate more government revenue and increase coverage. Given the importance of spectrum for the future of telecommunications, Mexico should undertake a serious effort to lower spectrum costs, thereby removing a major obstacle to achieving a more competitive market.
In this context, the future development of Mexico’s ICT sector and its impact on overall North American global competitiveness is highly dependent on potential reforms to Mexico’s spectrum fees. If left unaddressed, high spectrum fees will hamper Mexico’s economic and competitive viability in the twenty-first century.
Spectrum fees in Mexico are assigned by the Federal Law of Public Fees, or the LFD, which is Mexico’s legal framework for the provision of public services and the use of public domain assets. In line with the law, private operators must pay the Mexican government through the Secretariat of Finance and Public Credit for the use and rights of spectrum in two separate components. At tenders hosted by the IFT, operators are given the opportunity to submit bids for any band of spectrum frequency offered by the government. Upon successful bids for specific bands of spectrum of their choice, operators pay an upfront fee for each band. In addition to this upfront fee, operators must also pay annual spectrum fees for the rights to use the spectrum received at the tenders. As it stands, the current fee structure poses several challenges for increasing competition in Mexico’s telecommunications sector, and if left unresolved, it will continue to impact the industry in the coming decade.
Since 2013, the IFT has hosted five different tenders for telecommunications spectrum rights. The last of these was in October 2021 and was known as ICT-10. While in theory the IFT-hosted tenders would allow for competition in the telecommunications sector, high spectrum fees as assigned by the LFD have had negative effects on the ability of recent tenders to sell available bands of spectrum frequency and receive bids from new operators. For instance, at the IFT-10 tender, 41 different blocks of various bands of spectrum frequency were on offer with the objective of expanding coverage to regions without current telecommunications capacity. However, only three of the 41 blocks received bids and only two companies participated in the tender: AT&T and América Móvil’s subsidiary, Telcel. Unpurchased spectrum rights translate to less coverage and lower quality service for the Mexican people, as well as missed business opportunities for U.S. and Mexican firms alike. The IFT may be responsible for hosting the tenders, but high spectrum fees set by the Mexican government are directly responsible for a lack of competition and development in the telecommunications sector. As evidenced with the most recent tender, new operators are unincentivized to expand their coverage and purchase additional bands of spectrum frequency because the costs do not justify themselves.
The current fee structure also favors larger operators that possess bands of spectrum frequency with higher amounts of users, and therefore, revenue. Because operators like América Móvil’s Telcel have a large market share, they are inherently favored by the fee structure since smaller competitors are unable to purchase bands of spectrum frequency in areas with less mobile users. Even the largest operators cannot create a viable business plan in rural zones that would allow them to pay operational expenses, spectrum rights, and get a return on investment. Thus, at the most recent tender, Telcel was able to purchase a single band of frequency of 2.5 gigahertz (GHz) that it needed to develop its comprehensive 4G network without any serious competition. Furthermore, when smaller operators do purchase bands of spectrum frequency, they typically must pay a higher per-user fee than operators that have a larger amount of users in densely populated areas of spectrum. For instance, AT&T’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2021 was 3.5 percent, but when compared to América Móvil’s EBITDA of nearly 40 percent, it demonstrates that the latter’s market concentration allows it to generate a far larger margin of revenue per subscriber on the basis of its concentrated market position. This combination of high spectrum fees and market power inhibits new operators from entering the telecommunications markets and allows the existing operator to further consolidate its power.
Additionally, some existing operators have chosen not to renew their spectrum licenses in the past years due to high spectrum fees. In November 2019, Telefónica decided to return its bands of spectrum frequency to the Mexican government and has instead chosen to partner with AT&T to utilize its infrastructure. The process itself took over two and a half years, and finally concluded in June 2022. This decision improved Telefónica’s business model as it transitioned into using AT&T’s infrastructure, expanding coverage, and saving money on the rights for spectrum. However, Telefónica’s decision also decreased competition by reducing the number of competitors investing in spectrum. The current fee structure is directly responsible for Telefónica’s decision to return its spectrum licenses and operate as a reseller as well as the reduction of competition for telecommunications infrastructure.
The effects of Mexico’s high spectrum fees also permeate the global telecommunications market. Former presiding commissioner of the IFT, Adolfo Cuevas Teja, contends that Mexico’s higher spectrum fees make Mexico less competitive in attracting international telecommunications operators. This means that in international operators seeking additional opportunities will not be attracted to Mexico’s telecommunications sector as a business opportunity because of high spectrum fees. As such, not only does the current structure inhibit domestic competition, but it also detracts from international investment to further develop the sector.
In 2021, four countries in Latin America and the Caribbean—Brazil, Chile, the Dominican Republic, and Mexico—hosted tenders for the use and rights of spectrum, and the results of these tenders demonstrate how Mexico’s higher fees depress investment into its domestic telecommunications sector. For example, in spectrum bands under 1 GHz, Mexico’s fees were nearly double the amount of those in Chile and Brazil. As a result of higher fees, Mexico also received fewer bids on its spectrum offerings than other countries. With the exception of Mexico, which only received bids for 28 percent of spectrum offerings, each of the other three tenders received bids for at least 50 percent of spectrum offerings, even reaching up to 78 percent in Chile. These tenders show that Mexico’s spectrum fees represent an outlier within the region and that reforming the way in which Mexico values and calculates spectrum is crucial for increasing telecommunications investment.
As the regulatory body for telecommunications, the IFT is responsible for ensuring fair conditions for competition; however, the authority to change how spectrum is valued and calculated belongs to the Mexican government. While the IFT continues to encourage the government to modify spectrum costs, there has been no policy shift or traction with the government. In its most recent push for reform in 2021, the IFT presented a proposal with three elements to redefine the fee structure for bands of spectrum. First, the IFT requested that annual fees for bands of spectrum suitable for 5G networks be reduced in advance of the next spectrum tender for 5G services. Additionally, the IFT proposed adjustments to the fee structure for certain bands of spectrum that would allow local and regional operators to make payments for the rights and use of spectrum proportional to the economic level of their coverage zones. Finally, the IFT also proposed a mechanism to credit expenditures as a method for incentivizing existing operators to expand coverage to locations without mobile internet access, a model that Brazil used in its 5G tender. Nonetheless, this proposal lacks the tools to mitigate the distortions in the market created by high spectrum fees and has not prompted a response from the Mexican government.
Regulatory backsliding driven by President Andrés Manuel López Obrador’s (AMLO) active attempts to undercut the IFT’s authority present another difficulty to lowering spectrum fees. Since February 2019, the IFT has been operating without a full set of commissioners, and after the exit of Teja in February 2022, the IFT has operated with only four of seven seats full. As per the constitution, AMLO needs to send proposals to the Mexican Senate to approve new commissioners, yet he has ignored this responsibility as a direct method of diminishing the power of the IFT. A strong regulatory body is necessary for improving the current dynamics of spectrum fees and the overall ICT sector.
Given the challenges posed by high spectrum fees, the future of Mexico’s telecommunications sector depends on policies that will lower fees for the use and rights of spectrum. Without change to the current fee structure, there will be neither an increase in competition nor mobile coverage for Mexican citizens. To take full advantage of Mexico’s rapid digitalization efforts, the IFT and the Mexican government should work together to create a more efficient system for allocating spectrum to private operators.
Through a combination of reforming spectrum fees and valuation methods as well as strengthening the IFT’s institutional regulatory power, Mexico can catalyze the competitiveness of its telecommunications sector. Reducing spectrum fees can promote investment across Mexico in sectors without coverage and in new 5G networks. It will also increase the revenue the Mexican government can collect from spectrum as more bands of spectrum frequency will be sold to operators. The positive downstream effects of pricing spectrum more effectively would be instrumental in increasing competition in Mexico’s telecommunications sector, strengthening North America’s overall competitiveness, and spurring the country’s ICT market to take full advantage of the economic opportunities in this important sphere.
Ryan C. Berg is a senior fellow with the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Andrew Sady-Kennedy is an intern with the CSIS Americas Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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