Challenger Pursues Constant Innovation

Q: How is the company strengthening its offering in Mexico?

A: Telefónica Movistar México entered the country through the acquisition of several carriers established in northern states. These companies had around 600,000 clients and today we have over 26 million users. Telefónica has also made significant investments in Mexico, including the acquisition of the initial carriers, the country’s spectrum, telecommunications infrastructure and stores. 
Telefónica Movistar México has built its image as a company that defies the status quo by presenting the most innovative products to the market. In the past, carriers used to round up the time spent on a call and charge for those extra seconds. In 2012, Telefónica decided to end this practice and only charge for the seconds that our clients spent on the phone. In 2013, we were the first company to launch an unlimited-calls plan and in 2014, we were the first to let Mobile Virtual Operators (MVOs) use our network. In 2017, we launched a fixed wireless internet modem that connects to our mobile network. Our latest achievement was at the end of 2018 when we launched an unlimited-data plan. Our competitors have followed our example, which is good because end consumers benefit from a broad array of competitive services. 
Q: How does Telefónica’s progress in Mexico differ from its experience in other countries?

A: Our experience in Mexico has been significantly different. In some of those markets, we bought the preponderant operator and started from a larger client base, while in Mexico we bought small carriers that allowed us to gradually grow our participation in the market as a challenger to the market leader. 

Q: How has Telefónica Movistar México tackled the challenge of low profitability in Mexico and what does that mean for the company at a global level?
A: Mexico is a country with extraordinary potential. It has over 120 million inhabitants in need of connectivity. However, we require changes in public policies so investments can enjoy higher returns. The Mexican market is basically dominated by three large companies and only one has an acceptable profitability. Our business is based on economies of scale, which means that 26 million clients are not sufficient to reach the profitability levels we require.
Profitability also reflects market conditions. In the past two years, telecom prices dropped 50 percent, while operational costs increased because of factors like inflation, volatile exchange rates and the constant investment we make in infrastructure. We also need to factor in spectrum costs in Mexico, which are among the most expensive in the world. The country has a model for spectrum payment unlike any other. We have to pay not only when we win a public tender but also every year through rights of use that are discretional and may vary on a yearly basis and increase with inflation. 

Q: How has Telefónica adapted its business strategy to compete against other providers and boost profitability?

A: We have not stopped investing in our network despite the fall in prices. We have optimized our investments, directing resources to the most profitable and fastestgrowing geographies. Thanks to regulations, we have also signed roaming contracts for extended coverage with the preponderant player, so clients always have coverage even if Telefónica Movistar México does not have infrastructure in their region. In terms of data, traffic and use in Mexico are increasing exponentially. For the past three years, we have doubled the capacity of our network annually, evolving from 4G to a 4.5G network. 
We also have developed projects through collaborative innovation. We have a project of rural franchises that allows us to make alliances with engineering and financing companies to provide coverage to small towns across the country. Our allies are in charge of building the infrastructure and we connect it to our core network. That small town becomes a franchise for the investor and shared-revenue project with Telefónica Movistar México.

Part of the company’s transformation is a result of diversifying our revenue streams. Five years ago, around 90 percent of our income came from our prepaid business. By the end of 2019, we expect prepaid services to account for around twothirds of our revenue. On the other hand, we have boosted our post-payment solutions to target higher socio-economic population segments and we already have 1.2 million clients in this segment. 
We are also boosting our Full Connection home internet offering, which allows us to be more than just a mobile telecoms company. Within the corporate sector, over the past three years, we have developed four digital services focused on cybersecurity, IoT, cloud and Big Data. This was a natural path to take and already, these services are growing at an annual 30 percent rate. These strategies diversify our portfolio, reduce volatility and fuel profitability. 

Q: What regulatory changes are needed to foster competition in the market and improve benefits for users?

A: Spectrum costs are among the main issues to tackle. In 2019, our estimates show the country’s three main players will pay around US$1 billion for use of the spectrum. Yet, this money will not go to the telecommunications sector. Public policies should ensure resources are destined to investment in connectivity. Spectrum costs could also be lowered in line with international practices to incentivize investment. Similarly, the government could provide spectrum-related incentives to companies that invest in rural infrastructure. 
Even though the Telecom Reform opened the market to foreign investment, the government must still create a level playing field for competition. The reform, for instance, states that special promotions from the preponderant player must be replicable. However, this analysis is done after the company launches its offer, so other companies have to complain about it for the authorities to check whether it is replicable or not. Other countries force the preponderant player to disclose its future promotions beforehand, which helps to maintain fair competition for smaller players. This sometimes leads to complications, however, because smaller players can copy those strategies and implement them before the preponderant company has a chance to do so.

Q: What are Telefónica Movistar México’s goals for the next two years?

A: Profitability is essential for us. Therefore, our goals are to optimize our business model, to continue looking for partners and to be an example of what it is like to work with all kinds of alliances. Our short-term goal is to become a more relevant option for clients, while increasing our income in a more responsible and diversified way. We are looking to become an even more open, transparent and trustworthy company.