At the beginning of 1997 Telefonos de Mexico (TELMEX) had to
relinquish its monopoly on long distance. This was followed by
liberalization of the local market in 1998. Many of the world's
biggest global players have entered the market, such as MCI
WorldCom, Bell Atlantic, AT&T, Qwest and Korea Telecom.
TELMEX has lost less market share than anticipated and, as
prices stabilize, may well recover some revenue losses.
TELMEX is benefiting from a favourable economic climate, with
expected GDP growth of 2.8% in 1999. This is likely to lead to
an increase in the number of lines and a rise in cellular
subscribers of over 70%. TELMEX has invested in PCS licences
and cellular companies such as TOPP Telecom. Telmex plans to
use the experience it has gained through its wireless
subsidiary in Mexico, Telcel, to enter other wireless markets
in Latin America.
According to Oliver Mizne, a telecoms analyst at Credit Suisse
First Boston, TELMEX benefits from a flexible regulatory
environment in Mexico: "One of the points that is making TELMEX
so strong is the fact they can still keep all their accounting
together. In Argentina, both Telefonica and Telecom are kept as
one entity, but the accounting has to be separated. So you see
how much each segment is making. The big challenge facing
TELMEX is to try and keep the company as one entity as long as
they can. I don't think that will last forever. Under the
concession contract they already have, they will eventually
have to split the accounting."
Although a new regulatory agency, COFETEL, has been
established, the telecoms ministry retains significant powers
that may well favour TELMEX, as Mizne explains: "They also have
another structural advantage in Mexico: COFETEL was created as
a separate entity from the ministry, while the communications
and transport ministry was kept as the entity that could issue
a fine or grant you a renewal or non-renewal of your
concession. That power lies with the telecoms ministry, not
COFETEL. This is very different from the Brazilian structure
for example, where Anatel has the power to impose fines."
TELMEX aims to increase its presence in other Latin American
markets. It has formed a joint venture with SBC to buy Puerto
Rican cellular operator, Cellular Communications. Mizne notes:
"TELMEX has strongly stated for a while that they wanted to
expand their share of businesses throughout Latin America and
that this would be the vehicle they would use to grow within
the region. I think that it makes sense to buy some partners,
such as the Puerto Rican company."
The company recently decided to dissolve a joint venture with
Sprint to provide long-distance services to the US Hispanic
market. Mizne talks about the operator's international
strategy: "They had differences with Sprint over their
strategic direction. It makes some sense that they would go
their own way eventually."
TELMEX also benefits from a strong financial base which it can
leverage to finance further acquisitions in the region and buy
back shares, as Mizne explains: "TELMEX is one of the best
positioned companies in Latin America to acquire other assets.
The Brazilian companies have EBITDA margins of 60% and have
been investing 75% of EBITDA. In other words, they have EBITDA
margins because they need to. Their regulator requires them to
invest and be able to grow and meet the regulator targets.
TELMEX has a 55-60% EBITDA margin, but only needs to invest 27%
of what they make of that EBITDA. So they have a huge amount of
free cash flow which they have been using to buy back shares,
but apparently they have now been shifting more of that cash
into acquisitions and growth in other areas."
In an interview with Global Telecoms Business, the CEO of
TELMEX Jaime Chico Pardo explains how the company is going to
expand its service offerings in Mexico and exploit
opportunities in Latin America.
Mexico's telecoms market has become highly competitive
in a relatively short time. TELMEX appears to be thriving in
this new environment. To what do you attribute this
Chico Pardo: Mexico has achieved a lot, developing a
market that is in many ways more competitive than other
countries in the world. It is easy to lose sight of these
tremendous accomplishments, as they have occurred in such a
short time frame. You are right. TELMEX is doing well. We have
many opportunities in this rapidly changing market. We are
close to the US, the largest telecoms market in the world,
while our own market has a variety of strong, new players.
TELMEX's strength derives from three main elements: our
strategy, which envisioned the changes to come and prepared for
them, our investments in high-tech infrastructure and our
people, who have made outstanding advances in knowledge and
customer service. We have invested in training over the past
eight years. We have raised the educational level of our
employees from the 7th to the 14th grade, which compares
favourably with several leading international telcos. The value
of this investment in our personnel can be seen in their
loyalty towards the company and our success in an aggressive
competitive environment. Owing to our employees' improved
skills, we have also been able to develop productivity and
efficiency in times of rapid change that will continue to
We have also been able to aggressively pursue the commitment
we made at the time of privatization to bring additional
telecoms services throughout our country. Our extensive
communications infrastructure reaches close to 85,000 rural
communities in Mexico through wireline and wireless services.
TELMEX's footprint covers most of Mexico's territory. We
provide products and services tailored to the economic
characteristics of our customers.
Let me provide one example of how we make these services
flexible for our customers. We introduced an innovative
product, Linea Virtual, in the most remote places in Mexico,
where there is no telephone coverage. With this service - which
we are extending nation-wide - we provide our customers with a
telephone number and voice mail where they can receive
messages. When a message comes in, they are notified through a
pager. They can retrieve the message at any public or rural
phone for the cost of a local call.
What do you perceive to be TELMEX's competitive
advantages over other operators in Mexico such as MCI WorldCom
and Bell Atlantic? How will you maintain market share?
Chico Pardo: We can leverage the following
advantages: firstly we know more about this country. Secondly,
we have our staff and, thirdly, our network, which is one of
the most technologically advanced infrastructures in the world.
Market knowledge, in other words knowing what our customers
require, coupled with our advanced infrastructure and the
loyalty of our people, enables us to develop a better market
presence. We are entering the second stage, growing outside our
home market, particularly in North America. That is where we
want to develop a presence. It has taken a long time for us to
enter that market. It will help us remain competitive in our
How would you compare the Mexican market to other
countries within Latin America? How do you view the regulatory
environment in Mexico?
Chico Pardo: Apart from Brazil, Mexico is the largest
market in Latin America. It is the single most important market
in terms of long distance, for example. It has attracted the
attention of the biggest telecoms players. That is why we have
AT&T, MCI WorldCom and Bell Atlantic. We have Korea
Telecom. Telefonica is investigating the market. No other
market in the world has opened up to competition as quickly as
In Mexico the new competitors have gained a 30% market share
in only two years: in the US it took 10 years for competitors
to capture that much market share from AT&T. In Mexico 80%
of the market was opened to competition in just one year, while
it took five years to reach that level of competition in the
US. You don't find the same developments in Argentina,
Colombia, Chile and the rest.
Secondly this market has greater potential than in any other
country owing to its sheer size and economic situation,
compared to other countries in the region. Mexico also differs
in another way: we initiated this process many years ago. In
that respect we are more advanced in terms of modernization,
competition and globalization.
I think that we also have a very advanced regulatory
environment. It has taken the new competitive environment into
account. I think that the regulatory issue is very fluid in
every country, as telecoms is changing dramatically. Each
country has to look on its own at regulation in terms of the
impact on that country's development. We are talking about an
industry that will in my opinion play a strategic role in the
next century. We need regulations based on our national
interest and should then link them into the industry's global
What do you perceive to be the benefits of SBC as a
strategic partner? How did this partnership affect your
decision to buy the Puerto Rican cellular operator?
Chico Pardo: In SBC we have a partner with extensive
business experience and common interests in this region.
Together we take a long-term view. One of the advantages of
partnering with SBC is that we have known them for nine years.
We know how they operate. We know them personally. The
relationship is very valuable if you are launching more
alliances and joint ventures. We know what each partner can
contribute to the venture. We have developed a great deal of
At the same time TELMEX has initiated a strategy of
internationalization based on our successful experience of
innovation and accelerated development in the Mexican market.
Cellular Communications of Puerto Rico represents an excellent
opportunity for both TELMEX and SBC. TELMEX has significant
experience in the development and marketing of the cellular
business and pre-paid products. SBC has a well-known brand and
a strong presence in parts of the US, where there are large
Puerto Rican communities.
SBC caters to a large proportion of the Mexican
American population in the US owing to its location. How do you
react to claims that a cross-border merger with SBC would be
beneficial to TELMEX owing to the traffic flow and
Chico Pardo: As we have said publicly before, TELMEX
is not planning to merge with SBC, nor is this a prerequisite
for business development or the search for market synergies.
Our relationship with SBC is a successful strategic alliance
of long standing. We think that we can continue to build up
business through this relationship in the future. However, in
such a highly integrated and global industry as telecoms,
alliances can take many forms. So TELMEX has made a
considerable effort to develop additional alliances with
strategic partners to benefit the company. Let me cite, for
example, TOPP Telecom. TELMEX recently acquired most of the
shares in TOPP Telecom. It will compete along with SBC in the
pre-paid cellular market in the US.
What have you learned from your partnership with
Chico Pardo: When TELMEX was privatized, France
Telecom contributed its experience in plant expansion and
modernization. We have continued to work together on
technological and other issues.
In public telephony, for example, we developed solutions that
ensure that more people gain better access to telecoms
services. As a result TELMEX is installing technologically
advanced digital phones that accept pre-paid cards. We also
plan to work with France Telecom in cellular, enabling them to
take advantage of our experience, knowledge and expertise in
this market. France Telecom is an excellent partner for TELMEX.
We continue to look for opportunities to expand the
relationship in areas of interest to both companies.
Why did you decide to dissolve your JV with Sprint to
provide long-distance services to the US Hispanic market? Will
you look for another partner to provide services?
Chico Pardo: After 18 months of negotiating to
operate and compete in the United States, we launched a set of
products to test in the market. Mexico en Linea was very
successful among consumers. It offers Mexican Americans and
Mexicans who live in the US the possibility of paying for the
installation and use of telephone lines for their families and
friends in Mexico. Mexico en Linea performed better than the
services in which Sprint was particularly interested. So we
made a joint decision to continue marketing our services and
What potential do you perceive for wireless in Mexico?
What are the current levels of penetration? How many
subscribers would you expect to acquire over the next two
Chico Pardo: The potential is enormous. We are
growing by 90% a year in terms of subscribers and traffic. Our
current infrastructure can support growth in customer numbers.
We have the right marketing strategies in place. When we
started the pre-paid programmes in Telcel a little more than
three years ago, everyone thought that we were crazy and that
we were going to bring in business with lower consumption
rates. We developed the right product for present market
conditions: namely the customer requires telecoms services,
wants mobility and at the same time wants to control expenses.
You can see it throughout Mexico. Taxis have pre-paid
wireless. They advertise their phones to customers. If you take
into account new wireless technology for data transmission, the
business is bound to grow. We are using wireless technologies
to access areas of Mexico that it would have been very
difficult or expensive to reach otherwise. We are planting
wireless technologies throughout the market. Telcel has
developed and evolved as an independent company that can
implement such a strategy.
Can you expand on your pre-paid offering in Mexico?
You have a 65% market share, which seems a high figure in a
competitive market. Do you think that you will be able to
maintain such a high percentage?
Chico Pardo: A major part of the successful growth of
wireless telephony in Mexico is attributable to the
introduction of innovative products, such as the Amigo pre-paid
plan, which Telcel introduced in Mexico three years ago.
Telcel's Amigo system has been one of the most important
marketing strategies developed in the cellular industry
world-wide. To date, 71% of our customers are in the Amigo
Innovative products, modernization, coverage and Telcel's
service have given us leadership in the wireless market. We
actually entered this business after the competition. We have
had some very important competitors, such as Motorola and Bell
Atlantic over the past eight years. We have been able to
increase our market share. That is our aim and objective in the
Why have you decided to accept implementation of
Calling Party Pays in Mexico? Why did you initially resist such
Chico Pardo: TELMEX opposed Calling Party Pays for
two reasons. First of all, the rate of $0.25 a minute is
extremely high, practically double the cost of a domestic
long-distance call. This affects TELMEX's customers directly
and therefore the company. Secondly, from the point of view of
the shareholder of the main cellular company in Mexico, Telcel,
we believe that it does not make sense to modify the operating
plan of an industry that is growing by more than 80% annually.
A business of this nature doesn't require incentives. On the
contrary, it needs space to operate freely.
What was the significance of the recent agreement over
settlement charges? Another contentious issue in Mexico has
been the resale of international services. It has been
estimated that 30% of international traffic in Mexico is
handled by call-back operators, backed by new technologies. How
are you managing that situation?
Chico Pardo: We have just signed an agreement with
AT&T that regulates settlement rates at 19 cents a minute
for the period 1999-2000. The agreement establishes a highly
competitive level. It recognizes market tendencies. Operators
that gain from these negotiations effectively pass on the
benefit to the consumer through lower rates.
It should be borne in mind that an industry's competitiveness
is not solely determined by a single factor such as the
accounting rate. It should be assessed on a series of factors
such as the rates to the public, volume, operating costs and
other variables. Even so TELMEX has acted on industry trends
and has made great strides towards lowering accounting rates
over the past four years.
The by-pass matter affects TELMEX and the other operators that
have invested millions of dollars in infrastructure in Mexico,
particularly those that started operations recently. By-pass
draws revenues away from the industry and away from Mexico. As
a company that is accountable to its shareholders, TELMEX is
bound to be concerned about this issue. However, we also
understand the dynamics of competition and the long-term
benefits of succeeding in a competitive environment. Ultimately
regulators will have to decide what is best, based on the
long-term interests of an industry that is strategically
important for the country.
The Mexican regulator COFETEL does not have the power
to impose large fines or take away concessions. Do you believe
that they should have the power to impose stricter
Chico Pardo: I think that COFETEL has that power
indirectly, as they can exercise that authority through the
Ministry of Communications. Most importantly, one should
consider what COFETEL has accomplished in a short time. We are
talking about an institution that is three years old at most.
As COFETEL continues to develop, I think that it will
institutionalize a body of people, experience and expertise
that will make it even better. But I think that they have done
quite a bit already.
It is quite remarkable when you consider what has been
achieved in Mexico. Part of that change is attributable to
dramatic regulatory change in our country. The market has been
opened. I think that it is now imperative to create and
maintain a market where competition works. Opening the market
and supporting a successful competitive environment are
separate issues. I think that the second one is more relevant.
In that context, it is quite clear that regulation, which
allows our competitors to primarily focus on the top end of the
market, while at the same time restricting TELMEX's ability to
compete in that market segment, adversely affects the
Much of the competition is likely to come from data
communications. What has been the impact of data services on
TELMEX? Why did the largest ISP in Mexico change its name to
Prodigy Internet de TELMEX?
Chico Pardo: Data transmission has been one of the
main activities of TELMEX in recent years. Today this business,
which didn't even exist three years ago, is thriving. That kind
of growth provides incentives for the company to invest in this
One example concerns our purchase of a controlling interest in
Prodigy. It is a major provider of Internet services in the US
with 850,000 customers and a network that reaches 750 cities.
Additionally, Prodigy was the first ISP to introduce Internet
services in the Hispanic market. The presence and brand
recognition of Prodigy motivated us to change the name from
Internet Directo Personal to Prodigy Internet de TELMEX. This
has given us the benefit of a well-known brand and adequate
platform, with content specifically directed at the
TELMEX is promoting greater use of Internet services,
by selling PCs to consumers at cost price. Surely there is a
risk that you may fail to sell all the inventory and that the
PCs at your disposal may become technologically obsolete before
the benefits of increased usage are perceived?
Chico Pardo: Strategically, the Internet business is
very important to TELMEX. We wanted to stimulate market growth
and expand the customer base in the country. So we launched a
promotion to sell Internet services along with the computer,
and then provide financing over a two-year period. So now more
customers have access to the Internet. There is an additional
benefit: the price of this PC is affordable for our customers,
who may decide to upgrade their equipment at the end of two
How do you view the potential for Internet telephony,
as it can cost 90% less to send a long-distance voice minute
over the Internet than a standard wireline phone? Do you think
that TELMEX needs to cannibalize its own revenues through
Internet telephony to retain clients?
Chico Pardo: The name of the game is the Internet,
not just for the future, but for the present. In our view, the
Internet is not just another product, but rather a rapidly
evolving business that integrates communications, commerce,
entertainment and advertising.
So I would not use the term cannibalize, but rather
development. We are trying to add, not subtract. If the
Internet provides more added value, it is bound to become a
substitute for the telephone as we currently know it. But this
is a situation of technological convergence, rather than simply
supply and demand.
As CEO of one of the biggest operators in Latin
America, how are you handling the transformation of TELMEX into
a more IP-based telco that offers a whole multitude of
services? What are the main challenges?
Chico Pardo: I think that one of the main challenges
is to make sure that we constantly keep updated about new
technologies. This is the single most important commitment we
have to our customers. In other words, we have to make sure
that we have the right technologies at the right moment. We
have to adjust those technological requirements to our
customers' requirements. I think that this is the big
challenge. It is not just about having the technology. It is
knowing exactly what your customers want and in turn developing
the products and services for them. Even though TELMEX is a
very big company, we have to operate as a small company, as
flexibility is an important strength.
Global Telecoms Business recently conducted an
interview with the CEO of Level 3, James Crowe, who explained
how a new operator benefits from building a state-of-the-art
network from scratch. Do you think that TELMEX has been
successful in bridging the gap and becoming a forward-thinking,
Chico Pardo: We are going in the right direction. The
data business has evolved within TELMEX over the past three
years. We are moving forward with strategies that will position
us better in that business. The recent alliance with Williams
Communications is in line with that strategy. TELMEX and
Williams Communications will connect their fibre-optic networks
to jointly develop a new competitive platform of voice, data
and video services, which will enable us to serve an integrated
North American market.
We need to take the assets that we have and evolve them into
assets for the new businesses of the future. That is the
constant challenge that everyone faces. We have that vision and
we are working in that direction.
TELMEX's network is designed to provide high-speed service. It
is one of the newest, largest and most reliable networks in the
world. This is precisely why our competitors use it as a
platform to resell their products and services in the Mexican
market. This technological strength allows us to increase its
capacity and evolve in line with technological changes. In this
sense we have developed a strategy to evolve our network into a
next generation network that will enable us to cater for the
capacity required by the new communications protocols.
How do you view the corporate sector in Mexico?
Chico Pardo: This is a very important sector. It
played a key role in our competitive strategy in the
long-distance market. We have been working with these large,
corporate, multi-national customers for a long time to make
sure that we deliver service at international quality levels.
Secondly, we have given commitments that we will continually
invest in our network, so that we will be constantly upgraded
and updated in terms of services and products. Those two
assurances are critical.
We have been recognized as one of the key suppliers. We have
trained people. We have a group of executives who have gained a
great deal of customer respect during the three years that we
concentrated on the corporate sector. As a matter of fact, some
of these multinationals have invited us to serve in other
places outside Mexico.
To meet those commitments, we have to be able to provide
one-stop shopping when customers have cross-border
requirements. That is why we have relationships with all the
carriers that customers have selected. If we need to link with
AT&T for one-stop shopping, then we will. If it is Sprint,
then we will do it. We will do whatever the customer requires.
How much do you spend annually on network
modernization? Which suppliers do you work with in fixed? Which
technologies will drive penetration rates?
Chico Pardo: Our 1999 CAPEX programme totals about
$1.6 billion. The focus of our investment programme is to
continually update our infrastructure and enhance its capacity
to ensure future growth and develop a modern systems platform
to respond immediately to our customers and maintain strict
network management. We also take our social commitment to our
country and its citizens seriously. We continue to expand
public and rural telephony and invest in long-term
infrastructural construction that will ensure coverage and
quality service nation-wide.
To be able to ensure the technological transfer and
development of applications that fit customer needs, we have
established strategic alliances with a limited number of
suppliers world-wide, focusing on common strategies and
businesses. So we have been able to develop technological
solutions for TELMEX and its customers in our labs and with our
In this way we can exchange experience and make sure that the
developments are innovative and appropriate for the real
necessities of our market. Our advanced billing systems allow
our customers to access their accounts in real time. Similarly
we have diverse pre-paid platforms. These are examples of
applied technologies that provide solutions to Mexico's
Will you have to reduce staffing levels? How will the
make-up of the company change?
Chico Pardo: When TELMEX was privatized, we had two
options. We could either reduce staffing levels or provide our
people with new skills, so that TELMEX could evolve and grow
without adding more people. We decided on the second option. I
think that our success indicates that we made the right
decision. We have developed a culture and organization that is
unique in Mexico. We have developed loyalty that is very
important in a business as competitive as ours.
Training is another very important aspect. Today we have one
of the most qualified workforce in the industry. We have moved
a lot of our operators into commercial responsibilities. We
have 360 commercial offices that are very important to us. We
have people in construction. We have a substantial amount of
people in telemarketing. When you look at the breakdown of
TELMEX's workforce, you will see that it differs from other
companies. In other words you should take a closer look at
productivity measures. You cannot judge merely from a simple
statistic, such as lines/employee.
But as I have said before, that is not as relevant as having
the right people, trained staff - the right attitude towards
competition. These are major strengths for us. We have now more
than doubled the company since we started. Much of that success
can be attributed to the learning and productivity of our
staff. We will continue along the same lines.
Why did you decide to repurchase $430 million of your
own shares in the first quarter of 1999? Do you plan further
share buy-backs this year? Do you plan to issue new shares to
fund other network investments? Does this imply similar changes
to the ownership restrictions of TELMEX?
Chico Pardo: We have a repurchase programme that
seeks to provide additional benefits to our stockholders.
Actually, we have authorized a repurchase programme for 800
million shares. As our sound financial position allows us to
pursue whatever type of financing we want, we don't need a new
Our repurchase programme is not related to the issue of
company control in 2001. Since privatization was first planned,
it has been known that after 10 years shareholders would have
the right to convert their shares to voting shares,
representing up to 51% of the capital stock. We announced that
Carso Global Telecom (CGT) had increased its stock
participation in TELMEX from 5.2% in 1990 to 26.6% in 1999.
Owing to its majority holding of 26.6%, CGT will control the
company. Additionally, Carlos Slim Helu, President of TELMEX's
and CGT's Board of Directors, recently confirmed again that
CGT's interest lies in keeping control of the company.
Where do you hope to position the company over the
next couple of years?
Chico Pardo: Our aims and ambitions are to position
TELMEX as the market leader in Mexico and, more importantly, as
a major regional player in the North American market. We can
achieve this goal through partnerships and alliances, while at
the same time maintaining our independence. TELMEX will be a
successful company in its own market, but will be well
positioned in the globalization and integration of an industry
that is moving very rapidly. In my opinion, this will enable
TELMEX to create shareholder value and be successful in Mexico
and our region over the next two to three years.