Mexico's Telecom Reform Pits President Enrique Peña Nieto Against Billionaire Tycoon Carlos Slim Helú

MEXICO CITY -- President Enrique Peña Nieto has been busy in his first year as leader of Mexico. He has managed to introduce a tax reform and revolutionize the oil sector, opening up state monopoly Pemex to foreign investors in the face of fierce opposition. Now, his administration is focusing on changing the rules of the game in Mexico’s $32 billion telecom industry, and it's close to succeeding.

Peña Nieto has a tough opponent: telecom tycoon Carlos Slim Helú, the richest man in Latin America and second-wealthiest in the world.

With Forbes estimating his worth at $73 billion (equivalent to 6 percent of the country’s GDP), Slim controls three-quarters of the communications market in Mexico. His two-decade rise to dominance in the telecoms market made him the wealthiest man in the world in 2010, a position he later lost, narrowly, to Bill Gates. Today, 70 million Mexicans, or 70 percent of phone users, are customers of his flagship company, América Móvil (NYSE:AMX).

His son, Carlos Slim Domit, now chairman of the near-monopoly, has openly opposed the proposed reform, saying it is “worrying” for its “confiscatory elements.”

However, the country needs the reform badly. Prices are relatively sky-high, quality is low, and the law governing the sector is 20 years old -- an eternity for the fast-moving world of mobile telecoms.

The telecom near-monopoly is also bad for Mexico's economic growth. GDP grew just over 1 percent in 2013, but it could have been higher: A report by the now-defunct Comisión Federal de Telecomunicaciones (Federal Commission for Telecommunications, or Cofetel) in 2012 showed that overcharges to phone and Internet clients by Slim's companies cost Mexico $129 billion in four years, an amount equal to 2 percent of the nation's annual economic activity.

“This reform will allow the development of a key sector for Mexico’s economic competitiveness and every Mexican's quality of life,” said Peña Nieto in March 2013, when he first introduced the reform proposal that is now finally going to a final vote in Congress.

The lack of competition has made phone rates in Mexico among the highest in the world. América Móvil and its cell operator, Telcel, not only control most of the market but also own practically the totality of the telecom infrastructure and network in the country. The other companies, Movistar, a unit of Spain's Telefónica SA (BME:TEF), and Iusacell (OTCMKTS:NUGPF), which have 22 percent and 4 percent of the market, respectively, rent the equipment and pay for network access from Slim, which prevents them from offering prices competitive with Telcel.

Phone plans in Mexico are also very complex, with clauses and multiple offers that baffle most consumers. A consequence is that out of the 101 million Mexicans who have a mobile phone, 88 percent use pre-paid cards to avoid wading through convoluted plans.

Carlos Martínez, a freelance designer, moved back to Mexico City from Chicago two years ago. In the U.S., he had a contract with Sprint (NYSE:S) that for $40 a month gave him 700 minutes, 1,000 texts and 4GB of data use. In Mexico, he was unable to find a similar plan with Telcel, or any other company. Just having 3GB of data, with no minutes or texts, would have set him back $70 a month.

So he settled for a pre-paid SIM card in his American phone. “Plans are so confusing, you never know what they give you or what they take,” he said.

Besides being complicated, the plans are too costly for most of the population. What would be an average phone plan for a U.S. consumer, like one that includes a new 16GB iPhone 5, 700 minutes, 150 texts and 500 MB in data usage, for 12 months, would be prohibitive for a Mexican.

With Telcel, that plan would cost $61 a month, plus $523 for the phone, for a combined cost of $1,255 a year. With Movistar, that would be $1,206 ($33 a month plus $810 for the phone); and with Iusacell, it would be $1,114 ($40 a month plus $634 for the phone).

Such costs are equivalent to a year of working for minimum wage in Mexico, which in 2013 was $1,269 annually. For an average Mexican household, with a disposable income of $12,732 a year, owning an average cell phone would eat 10 percent of the annual income.

The same plan with the dominant cell provider in the U.S., Verizon (NYSE:VZ), would set the user back $940 a year, including the phone, and with unlimited texts and minutes. That's just 2.5 percent of the average U.S. household income of $38,000 a year.

In the biggest Latin American economy, Brazil, the largest provider, Oi, offers the same plan -- iPhone 5 included and unlimited texts and calls -- for $1,019 a year. For the average Brazilian household, this would be 4.4 percent of its income of $23,047 a year.

The Organization for Economic Co-operation and Development (OECD) reported in 2012 that Mexico’s costs for mobile phone usage were five times the average of the other countries.

Even if most Mexicans stick with pre-paid cards, they spent an average of $28 a month for the actual phones, or almost a third of the minimum monthly wage of $96. The percentage is so considerable that the Bank of Mexico included mobile phone bills in the basket of basic goods used to calculate inflation, along with tortillas and running water.

Mexico is a federal republic, and things get even more complex when making calls to a different state. In the richest states, like Nuevo León and the Distrito Federal, or Federal District, rates are higher. It also means that a phone call from Monterrey to Acapulco is considered long distance, with a rate almost on par with international phone calls.

This difference from most of the rest of the world perplexes most expats to Mexico. Fernando Torres, a Spanish civil engineer based in Mexico City, is in constant communication with his office in Madrid and is used to international rates. During a recent work trip to Cancún, in the state of Quintana Roo, he made as many calls to his office in Mexico City, in the Distrito Federal, as calls to Madrid. He was in for a surprise when he received his phone bill.

“The calls to Mexico City were just as expensive as the calls to Madrid! I was baffled, and totally unprepared,” he said.

Peña Nieto's reform would eliminate long-distance rates and all calls within Mexico would be considered local.

“It is time for long-distance rates to be abolished,” said Minister for Communications Gerardo Ruiz Esparza. “It will be a respite for the wallets of all of us who make long-distance calls daily.”

What infuriates Mexicans the most, though, is that high rates do not mean high quality of service. Cofetel received more than 4,000 complaints about mobile phone service between January and February of 2013, a 73 percent increase from the 2,300 complaints it received in the same period the year before.

But Cofetel had no sanctioning power; it could only make suggestions. The reform introduces the Instituto Federal de Telecomunicaciones (Federal Institute of Telecommunications), a new institution that would take over and expand on Cofetel’s domain. Ifetel has actually been partially operational since April last year, but pending final approval of the reform, it isn't able to deal with consumer complaints yet.

Mobile phone complaints were the bulk of the work of Cofetel throughout the commission's period of operation, from May 2011 to March 2013. Out of the total 74,602 reports it received from customers, half were about the precariousness of cell service.

However, complaining never really goes anywhere. Mexico City-based lawyer Ángeles Navarro, a Telcel user, said she filed a complaint for a $200 overcharge in her bill in September 2012. It took her five months, several visits to Cofetel, and a threat to leave the provider to receive a response -- and a mere $60 refund.

“They use that strategy to tire you out. If you get fed up with them, you will eventually give up on your quest,” she explained to Spanish newspaper El País. “It is so unfair that they keep money that doesn’t belong to them."

Unsurprisingly, Telcel got the most complaints, 19,900, whereas Iusacell got 7,906 and Movistar received 3,210. Considering Telcel has the majority of the market, it's only logical it should get the most complaints. But in Mexicans' experience, Telcel is often to blame.

Full-on blackouts are not unknown to Telcel users. In February 2014, the high-end neighborhood of Polanco, in Mexico City, was left without service, on both mobile phones and Internet, for almost 24 hours. On Twitter, the hastags #teodiotelcel (I hate you Telcel) and #telcelapesta (Telcel stinks) were trending for the whole day.

“We usually have a steady stream of businessmen who come for informal meetings and students working on presentations here,” said Néstor Castañón, who works at a neighborhood Starbucks. “But that day, with no Internet to provide, there was nobody in the store.”

A similar situation happened a year early in the neighborhood of Benito Juárez. That time, Telcel offered the equivalent of $1.50 in compensation to its users. The company was mum on the blackout in Polanco, which is most surprising considering that's where Slim has his offices.

One of the most debated provisions of the reform bill is the opening of infrastructure and network, owned by América Móvil, to its competitors. Iusacell and Movistar currently rent most of the equipment they use. Per the law, they would be able to provide their service on the existing infrastructure, free of charge.

Slim Domit does not agree. The investment América Móvil made in the infrastructure should return profit for the company, he said.

“It is surprising that they are trying, by law, to force a company to invest in order, later, to make it sell its services to its competitors for nothing,” he said in a statement. “The confiscatory proposal rewards the chronic lack of investment on the part of our competitors to the detriment of consumers.”

His competitors do not agree. Francisco Gil Díaz, president of Telefónica México, said his company will grow exponentially thanks to the reform. Since the bill will allow them to use the network for free, the company will be able to invest the money into expanding its services.

“There will be immediate benefits for the consumer. Faster service for a better price, for starters,” he said, adding that the investment will result in better technology that could be put to use in education and health services, too.

“The telecom industry in Mexico needs to be demolished and rebuilt, brick by brick,” said Deputy Minister for Communications José Ignacio Peralta.

Ermilo Vásquez, managing director of phone company Axtel (OTCMKTS:AXTLY), said that a government-enforced division of the market would be a tough decision, but it would make the field more competitive. “The goal is to make the market grow, and for its driving forces to find balance,” he said.

The bill is currently being discussed in the Mexican Senate, where it's expected to pass. For Carlos Slim and his son, it looks like the vote will spell a defeat.