Mexico’s Cellular Phone Market Suddenly Busy

Until recently, the Mexican mobile phone market was about as exciting as a dial tone.

Consumers were turned off by high costs and poor service and debilitated by the 1994 peso devaluation. At the end of 1998, the number of subscribers per capita was half that of Chile, Argentina or Venezuela.

But fresh competition and a recovering economy have suddenly set the Mexican market ablaze; it is now Latin America’s hottest wireless country. The number of subscribers has doubled nationwide over the last year to nearly 7 million, and local carriers have a tough time keeping phones in stock and the airwaves clear.

Analysts say the explosion was set off by new competition for Telefonos de Mexico, the former state-owned monopoly privatized in 1990 that still controls 70% of the cellular market. Its Telcel mobile unit and other major players, including Iusacell, which is controlled by Bell Atlantic, have slashed prices, streamlined their networks and become more flexible in payment plans as a result.

So have other regional Mexican mobile phone providers, including Baja Cellular, Movitel and Norcel, each of which is partly owned by Motorola.

The competitive frenzy could build further with Thursday’s launch of all-digital service by Pegaso, a $1-billion venture that includes Leap Wireless International, a San Diego-based spinoff of Qualcomm, and Televisa, the Mexican entertainment giant. Pegaso is the first carrier to propose a nationwide, exclusively digital voice and data network in Mexico and won licenses for it in early 1998.

Pegaso, already operating in Tijuana, Guadalajara and Monterrey, hopes to stir things up in the world’s second-largest city by offering handsets costing as little as $55, including fees and a nominal amount of air time. That’s about one-third to one-half the cost of comparable phones currently offered by Telcel and Iusacell.

The marketing battle has also become a war of words. In an interview, Salvador Cortez, director of Telcel’s regional operations, on Tuesday described Pegaso’s offer as “crazy and foolish,” alleging that the sale price of the phone is half the cost of producing it.

Cortez added that Telcel, whose current network is a mix of digital and analog services, is responding with its own digital phone offer, “but it won’t be a trick like what they’re doing.”

Replied Roberta Lopez, a Pegaso spokeswoman: “We are offering the deal. As to how we have arranged to do it, that’s an independent and internal issue.”

In addition to low prices, Pegaso will offer prepaid as well as “caller-pays” service options that have been enormously popular with low-income and small-business consumers who until recently had stayed away from Mexican mobile phones.

Many Mexicans, like Genaro Lopez, distrust any form of credit, what with memories of bank failures and devaluations still vivid.

Lopez, a federal employee and graduate student who bought a mobile phone in September, said the prepaid and caller-pays features made the difference for him.

“Before, I would have been afraid to leave the phone on in case I got a call I didn’t want,” Lopez said.

Telecommunications analysts warn that Pegaso is up against a powerful competitor in Telcel, whose parent has enormous resources to throw at an interloper. Just ask AT&T;, MCI WorldCom and other long-distance operators that were bloodied in recent years trying to penetrate Mexico’s long-distance market, which is dominated by Telefonos de Mexico, or TelMex.

TelMex, and thus Telcel, exert tremendous dominance of Mexican telecommunications infrastructure, marketing and subcontractors, said Erica Eppinger, senior research analyst at Yankee Group in Boston. Its large retail presence gives it enormous flexibility in offering promotions and commissions to pump up sales.

Pegaso also will be at a disadvantage at first because its customers can only originate calls in the four cities in which it offers service, whereas Telcel has virtually 100% Mexican coverage.

Emphasizing that Pegaso is targeting customers for whom Mexico City coverage is paramount, its chief commercial officer, Alejandro Orvananos, said the company is adding 15 cities next year and will offer national service by the end of 2001.

That may not be fast enough, said Bryan Prohm, a Durham, N.C., telecom specialist with Gartner Group/Dataquest.

“If Pegaso wants people to leave Telcel, they have to come up with a compelling argument to that. I don’t see how they have the means to compete on price when they don’t have national coverage or the resources of a Telmex or Iusacell,” Prohm said.

Just “how big a gorilla Telmex is,” to use Prohm’s phrase, was illustrated by the fact that Pegaso’s roll-out this year in Tijuana, Monterrey and Guadalajara, which started in February, has netted it a total of 30,000 Mexican subscribers as of November--barely 1% of all the new cellular subscribers signed up in Mexico during that time. And Telcel is getting about two-thirds of all those new users, Prohm said.

Unefon, another newcomer whose investors include TV Azteca, the No. 2 Mexican broadcaster, is expected to start service next year in selected Mexican cities. Although it is weeks or months away from its first call, Unefon is already touting plans to offer innovative products that will cut down on home installation costs and delays.

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Wireless Siesta Ends

Mexicans have finally started buying cellular phones and are belatedly catching up with the rest of Latin America. Market penetration by wireless mobile phones: Mexico

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