A spectrum runs through Mexico: the spectrum of digital underdevelopment. The state of affairs in terms of radio spectrum points to the possibility that actions or omissions by authorities and industry place the sector in a phase of stagnation.
The expensive spectrum and where it took us. It should be remembered that spectrum payment has two components. The initial or “glove”, price set by the IFT for bidding or extension, corresponds to approximately 11% of the total. In addition, annual disbursements for fiscal rights, established by Congress, paid throughout the term of the concession (20 years), represent the remaining 89%.
IFT studies (2022) prove that the radio spectrum for the set of bands is around 60% more expensive than for a sample of 40 countries, controlling for per capita income and purchasing power. The central cause is the excessive amount of fiscal rights.
This has led, on the one hand, to Telefónica, once the second operator, returning all of its spectrum, which meant that the State stopped receiving around 4.5 billion annually. In the same way, ATT began to return part of its spectrum, causing losses of the order of hundreds of millions per year.
Another consequence is that of the 660 MHz of spectrum available by 2022, only 476 are assigned. Not counting the wholesaler Altan, the rest is divided between Telcel (61%) and ATT (39%).
5G development engine, its fuel the spectrum. 5G technology offers transmission of more data, faster download and upload speeds and with less waiting time (latency) between sender and receiver. This provides better experiences in traditional services and, above all, the possibility of new applications in more sectors. It already happens in ports, mining, automotive plants, and so on.
Combined with other technologies, such as edge computing (of the network) and in the cloud (servers or massive computers), artificial intelligence, big data, etc., 5G becomes a cornerstone of the ICT world and enables innovation and productivity, revitalizing sectors and to economies as a whole.
But 5G demands more spectrum to fully realize its potential, such as download and upload speeds of 100 and 50 megabytes, respectively, and 1 million connections per km2. According to a study sponsored by GSMA (Coleago Consulting 2021) for several countries (Mexico included) around 1,100 MHz is required in low and medium bands. With the IFT-12 tender we would go from 660 MHz to more than 1,000. The question is whether they will be acquired by the industry.
Underdevelopment as a choice. The urgent need to lower the price of the spectrum, to provide global competitiveness to the Mexican telecommunications industry is an issue that transcends the fiscal and points to a national development strategy. Without a competitive telecom sector and the possibility of being a leader in the digital economy, Mexico will continue to suffer from low productivity and slow growth; generation of precarious employment and social marginalization.
The leadership is in Congress, with the guidance of the SHCP and the orientation of the IFT. Lowering the price of the spectrum is raising the welfare of Mexico.
Situation and long-term vision. Part of the industry asks not to bid more spectrum before its price has dropped (fiscal rights). The claim that puts the regulator in the predicament of making public policy on the subject depend on a future event of uncertain realization is understandable. However, the IFT could delay its decision until the approval of the economic package (October) when it would be known if the tax rights had been reduced, in order to favor a greater participation in the IFT-12.
It is true that if Telcel were the only acquirer in the IFT-12 it would have a disproportionate share of the spectrum. It should be noted that, by maximizing bands and coverage, considering accumulation limits, the payment of their annual rights would go from the current 9,173 million, equivalent to 4.4% of their annual income (IFT 2022) to about 7% of their income.
On the other hand, ATT annually disburses 7,677 million, equal to 13.6% of its income (id.), so it could be prohibitive for it to acquire the spectrum in bands 600, L, PCS, AWS, 3.3., necessary to improve services in general and the full provision of 5G, since it would mean an increase of the order of billions of pesos per year, which would extract more than 20% of its income.
Operators could lower the cost if, as the IFT proposes, the country is divided not into 9 regions but into 65 service areas (ABS), allowing them to purchase (and skim) only the most profitable ones.
If the spectrum is not tendered, Telcel’s option to achieve the possible benefits of 5G would be to install more macro sites and numerous micro cells. But this, according to the cited study, is economically less efficient than adding spectrum to existing sites. Increasing the density of its network to counteract the lack of spectrum would raise capex (eg infrastructure) and opex (eg energy) around 5 times more, for Mexico City, than a deployment based on additional spectrum (Coleago 2021), regardless of the fact that the feasibility is not clear given the availability of sites, interference, etc.
For this reason, for ATT it would not constitute, in principle, a viable option, since it would be as expensive or more expensive than acquiring spectrum.
Not bidding, in order to protect competition, could force América Móvil to pay more to continue developing its 5G network in Mexico. But if the higher density deployment is not technically or financially viable, América Móvil could leave the development in Mexico and use those resources in other countries in the region that offer better conditions. In this last scenario, the country loses because, after all, a fundamental sector would stagnate
In this order of ideas, the regulator’s decision is outlined as a choice between two non-optimal alternatives to different degrees: protecting imperfect competition in the mobile market, compromising the future of the sector; or promote the future development of the latter by exposing the former.
Even without a tender, we would have a better positioned leader, with its 5G deployment in band 3.5, as indicated by the fact that its monthly ARPU (revenue per user) ($171) is the highest in the industry and has grown 5% in 2022.
ATT, without efficient deployment of 5G by using only the 2.5 band, will continue to be at a disadvantage to compete in advanced services. Proof of this is that, even with 25% of postpaid users, compared to 17% for Telcel, it has a monthly ARPU lower ($141) that grew only 1% in 2022. A postpaid user (plan) is 4 times more profitable than a prepaid one (recharge).
Telefónica, linked to ATT, would suffer the same fate, added to the fact that having migrated to an OMV strategy has led it to a monthly ARPU ($69) of less than half that of Telcel or ATT.
Not convenient for everyone, not urgent for some. For Telcel, the acquisition of more spectrum in the possible IFT-12 Tender would be convenient in several ways. By having the bands for the development of an advanced 5G system; by consolidating and increasing its dominant position.
For ATT it is admittedly inconvenient and not really urgent or necessary under the limited 5G tracked model. Proof of this is the use of the current spectrum, when observing the growth of data traffic (the most relevant indicator). Its monthly average (IFT BIT) in Q3 2019 was 77.0 thousand Terabytes and 85.7 thousand TB for Q3 2022. A growth of 11% in 3 years. Its lines increased 13.6% in the same time, so (unique case) its traffic per line decreased in the period.
Its client, Telefónica, went from a monthly average of 38.6 thousand TB in 3Q 2019 to 55.0 thousand in 3Q 2022. 42% increase in traffic, while its lines decreased 14.6% (id.).
Telcel had 234.4 thousand TB per month in Q3 2019 and 501.8 thousand TB per month in Q3 2022. Traffic growth of 114% in three years, a period in which its lines increased 7.1%, doubling it per line (id.).
The combined traffic of ATT and Telcel in Q3 2022 was 28% of that of Telcel. In Q3 2019 it was 49.3%. ATT currently has 63% of the spectrum that Telcel owns.
The foregoing shows, in my opinion, that ATT does not have an imminent need for more spectrum. If the low data growth rates persist (10% per year for ATT and Telefónica combined) and its limited 5G model, ATT may not require more spectrum for the remainder of the decade, even more so considering technical advances that improve efficiency, and that at any time you could add the mobile service to the 3.5 band that you already have.
Finally, fixed operators will have in mind the implications of a fixed wireless internet (for homes) that, with higher speeds and lower latencies, would directly compete with their service. At the moment, Telcel’s offer is limited by data consumption cap, price, speed and a tacit policy of non-competition with Telmex. The landlines, however, would have a high response capacity due to the high margins of this service.
My opinion. I consider the option of carrying out the tender to be less harmful, even if it affects competition in the short term. The acquisition of spectrum solely by Telcel would be full proof of the structural flaw that lies in fiscal rights and would perhaps motivate its solution by Congress. This, without denying that the current pressure on public finances and social spending in an election year will play against it.
The regulator, for its part, can establish strict and fixed spectrum accumulation caps, regardless of the number of rounds, in addition to pro-competitive measures in the biennial review of preponderance.
Failure to carry it out would indefinitely postpone the awarding of bands, would delay the development of 5G, the sector, the digital economy and, ultimately (and first importance) the country. The laziness of authorities and industry would lead us towards immediate digital underdevelopment as a scale of a continuous general mediate underdevelopment.
Perhaps it is also worth reflecting on the synergies and efficiencies that a merger of ATT and Telefónica would produce, for example, by reducing the relative cost of the spectrum, even more after the decrease decreed by Congress, together with other economies and decision-making power. of Telefónica on the development of this network on which much (more than two) depends.
The future may not be dystopian, perhaps being duopolistic.
* Adolfo Cuevas Teja is a former commissioner of the Federal Institute of Telecommunications (IFT).
