Mexico's LTE Wholesale Network: Opportunity and Risk

Mexico is creating a big Long Term Evolution wholesale network using the entire 90 MHz spectrum in the digital dividend (700 MHz band), and hopes to have the network activated by 2018, and soon will begin taking financing bids.

The new network might cost $10 billion, and require construction of 8,000 to 15,000 cell sites.
The wholesale Long Term Evolution network is viewed as a way to bring the benefits of more competition to the Mexican mobile market.

Existing mobile service providers have not been entirely sure they want to operate under such a structure.

Others say the incumbents may boycott the network. There is good reason to believe Telcel, the largest mobile provider, which has its own network, will simply continue to use its own facilities.

Telefónica likely also might believe it has enough scale to justify its own network. Telcel (America Móvil) has 69 percent market share, but will divest assets to get its share down below 50 percent.

Movistar (Telefónica) has 19 percent market share. Assuming the divested Telcel assets go to a third party, not to Telefónica, but that the new buyer acquires the cell tower networks in its serving areas, it is conceivable that providers of about 12 percent of Mexican mobile service are the primary candidates to buy service from the wholesale network.

That might not be sufficient volume to justify building and operating the new network. In a more-optimistic scenario, Telefónica would eventually switch some of its leased access to the new network, and the owner of the divested Telcel assets might do so as well.

That could create a potential opportunity representing 30 percent or more of the Mexican market, eventually.

Incumbent service providers will be able to buy capacity on the wholesale network, with one key trade-off. If they do so, such incumbents also must open up their existing networks to third party wholesale as well, on conditions similar to wholesale access terms on the new 700-MHz wholesale network.

That is another reason either Telcel or Telefónica might not want to source capacity from the new wholesale network.

Others think there are additional risks. The business model is a concern, given that the Mexican government has promised lower prices and mobile communications “as a human right.”

All that means the government will be under pressure to keep prices on its network low. So regulated prices that are too low could endanger the wholesale network’s viability, or create a need for continuing subsidies.

Wholesale prices too low might mean the wholesale network is not profitable. But if prices are too high, potential customers will conclude there is not a viable business case for their retail operations, and they will not buy.

The other hard to assess issue is whether the existence of a state-subsidized network would discourage private investment because other networks can simply buy from the state network, rather than building their own facilities.

Worse, some competitors might simply decide not to compete in the market.

The wholesale-only network will sell capacity to retailers, according to Ernesto Flores-Roux, Associate Researcher, Centro de Investigación y Docencia Económicas - CIDE, Mexico.

That is similar to the situation in Rwanda, where 4G spectrum was donated--not auctioned--to a an entity charged with building a national LTE network. In Rwanda, KT Corp. was selected by the Rwandan government to build a national LTE network, known as olleh Rwanda Networks, (oRn).

The new infrastructure company oRn will operate exclusively in a wholesale capacity, providing services to retail service providers. And it appears that as many as nine other African nations are considering doing something similar.

Nigeria also appears to have taken the wholesale-only LTE approach.

Kenya likely also is interested in a wholesale LTE network approach.

The decision to build a wholesale-only network was driven by the belief that this is the best way to assure lowest-possible cost for consumers, said Flores-Roux.

It remains unclear how investment in the wholesale network will be made. At the moment, “any conceivable structure can be used for the ownership and financing of the network,” said Flores-Roux.

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