The future of Telefónica in Mexico

The second main mobile carrier in Mexico, with 18% of the market by end-2021, Telefónica's Movistar has just concluded the migration of its 3G and 4G traffic to AT&T's network, under an infrastructure partnership deal aimed at cost-savings and efficiency signed in late 2019.

As a result, the company is dismantling these networks, a process to date amounting to 58,000 decommissioned components, and handed back spectrum to regulator IFT.

Of this total, around was 36% was sold in the market, 13% redirected to Telefónica subsidiaries and 44% recycled, Ana de Saracho, head of public affairs, regulation and wholesale at Telefónica México, tells BNamericas in this interview.

De Saracho also talks about this process and its next steps, as well as about 5G plans, the wholesale business, and more.

BNamericas: Telefónica just completed the migration of its 3G and 4G traffic to AT&T networks, shutting down its own networks and handing back spectrum. How did that process evolve and what are the next steps?

De Saracho: This decision was made in November 2019 and works began in January 2020, so we are achieving this milestone in two and a half years. 

The contract with AT&T established a gradual schedule. Mexico is divided into nine regions from a regulatory standpoint, which is how frequency bands are normally tendered. 

What we did was, based on those regional divisions, create phases [for the network migration]. Phase 1 took all of 2020 and comprised regions 1, 3 and 4, which is the northern part of the country, along with the US border.

Then the second phase, which was completed in 2021, was for regions 5, 6 and 9, which are the most important, as it comprised Mexico City and the metropolitan region, Guadalajara... 

And then in a last phase, which lasted only six months, we did the three remaining regions, 2, 7 and 8.

Today we have 100% migration of 3G and LTE traffic to AT&T, our network has been completely turned off, and the radioelectric spectrum has been cleaned and returned to the regulator.

I think it was a very innovative, disruptive solution that led us to become a company that could be sustainable in the long term, with operational and financial efficiency that we were not having before.

In Mexico, the regulatory and competitive conditions are not easy. Especially the competitive ones are among the most complex in the region – having an operator [Telcel] that concentrates 73% of market revenues...

At Telefónica Movistar México we consider that we are a new, alliance-based telecom network.

For the future, what we want to do is achieve as many alliances as necessary with other operators to be able to establish several transmitting services with the same antenna.

BNamericas: How is Movistar's coverage now?

De Saracho: We had a significant footprint of 3G coverage kept, since the coverage of AT&T [for 3G] was very similar.

However, in 4G coverage, when we signed the agreement with AT&T, we had reached 38 markets in Mexico, which corresponds to about 53% of the population.

So we were missing an important section. Today we are concluding this migration with 83% of the population covered [with LTE], comprising 230 markets. And in absolute record time.

If we would have done it ourselves, regardless of the capex required, we would have taken about five and a half years to reach the same footprint.

Regarding highways, we had only 140 covered in the country, or about 2,800km, and at the end of this project we are concluding with a total of 347 highways covered, which implies 10,501km – practically 3.7 times more.

We also have a contract signed and operating with Altán Redes. Same functionality, same type of contract. It is a contract only to use their access network, as an entry and exit door, and the rest is all on us, our management: the transport network, the network core, etc.

With this [Altán] contract, we have been able to reach 3,000 localities with less than 5,000 inhabitants, where there was no type of service, not even by AT&T. And this is allowing us to provide our service to 383,000 people in these places.

BNamericas: What are the perceived efficiencies related to moving to AT&T's network?

De Saracho: There are efficiencies related to spectrum payments, but there are others that are somewhat more difficult to capture.  

The financial efficiencies to be achieved are not, let's say, tied to these two and a half years [of work], but they extend over time. We are pending the dismantling of part of this network. Because one thing is to turn it off, the other is to remove it. 

The amount of savings that is missing, the amount of efficiencies still to come, seems to me to be closely related to achieving the dismantling of the entire network. 

There are regions we are turning off now, which means this has not even begun to be decommissioned. The truth is that we will carry this 'tail' of the project into 2023.

However, we have been reporting a positive and growing operating cash flow for about two years now. We hope that this will continue to be the trend. We also achieved a significant reduction in our financial debt, by 90%.

I think it's a success story. The sharing of infrastructure, especially active infrastructure, is little explored in the region. We managed to demystify this thing that operators have to own infrastructure, that they have to be heavy-asset companies, when in reality the more efficient the networks, the easier it is to make them profitable.

And getting further away from urban areas [with telecom networks] is becoming more expensive and more difficult.

BNamericas: Telefónica rebuffs the notion that it has become an MVNO in Mexico.

De Saracho: We are an alliance company. In the end, what Mexico needed was to preserve its operators and the competitive environment.

That benefits the country. Having these underutilized networks with this level of intensive capital invested is ... complex.

Today we are not the only one doing infrastructure sharing. Altán does it too, AT&T will surely start doing it with someone else. We can all do together.

This does not mean being an MVNO. We would be a very large MVNO having 23mn clients, and with very large proprietary infrastructure, like our transport networks. In fact, we had to deploy about 250km of fiber optics to make all the connections behind AT&T's base stations [antennas]. 

Network traffic and operations management fall on us. And we have eight MVNOs [associated with us].

BNamericas: With respect to the dismantling of the network, what are you doing with the decommissioned parts, with the equipment and antennas?

De Saracho: We have to date taken down 58,000 network elements – antennas, masts, air conditioners, batteries, shelters, etc.

BNamericas: And is this all going to be sold?

De Saracho: Of these 58,000 that we have already managed to dismantle, we reused 13% on internal demand from Telefónica HispAm. 

We sent it to other countries. This equipment was mostly in perfect condition.

The second option was the sale. We began to offer part of this infrastructure to the market in general. Of the total decommissioned, we sold 36%.

BNamericas: Whom to?

De Saracho: Different companies, especially tower companies for what used to be masts and related equipment. Most of what was sold related to this passive infrastructure.

And what could not be sold, about 44%, was recycled.

If in a year we get together to talk about this again, I'm sure this number [58,000] will have been doubled.

BNamericas: Telefónica's main competitors in Mexico have already turned on 5G networks. What is the company's strategy? Will it be launching through partners, have its own network or a mix of both?

De Saracho: Our agreements and these alliances [with AT&T and Altán] that we have give us access to this technology. 

We are going to start tests with our alliances and begin work on a schedule of where to start, establishing our own 5G entry schedule. This is what we are going to do now.

With these trials, we want to assess the behavior of the market, of users, of traffic, to try to design the best value offer that we can give our users. I still can't give you a date, I don't have it. But we are very clear that this is how we will evolve.

We are going more slowly, thinking carefully about what we are going to do [with 5G] and above all trying to find and analyze what is the best value offer we have to give to our clients to make this technology profitable.

BNamericas: Telefónica is not concerned about falling behind in 5G?

De Saracho: I think that in the end 5G has still very little traffic. And sometimes waiting before launching can give one an important advantage.

We are not concerned. We are busy, working until we have this [strategy] perfectly defined in terms of times and in terms of offers.

BNamericas: Could this still happen this year or more likely in 2023?

De Saracho: I can't give you a date. I would be telling you something that we have not yet established.

BNamericas: But what is the current status of Movistar México's 5G project?

De Saracho: We are going to start tests and with that schedule our launch. And in the meantime, the commercial and supply areas will be analyzing to see what we have to do and to offer.

BNamericas: The company has handed back 3G and 4G spectrum and is considering partnerships to launch 5G. Will it bid again for spectrum in Mexico?

De Saracho: I don't have a definitive answer. We have to see the evolution of everything. Of the market, of the competitive environment.

The spectrum cost issue has been exactly the same since 2019. There has been no reduction, no change in policy regarding privileging connectivity over collection.

BNamericas: So, spectrum cost is the main problem right now?

De Saracho: The problem is the country's, which is losing the ability to connect more people, of having that money flowing into investments and all the different things that can be done.

BNamericas: What is the strategy for fixed services?

De Saracho: All our fiber optics deployments are for the transport network, and now for AT&T's accesses. We do not consider entering the fixed market. Mexico has always been a mobile operation and always will be.

What we do have is a business into which we are putting a lot of effort this year, which is being a carrier of carriers [wholesale].

Because we have so much high-capacity fiber optics, we are becoming suppliers to other operators, both mobile and fixed, to provide them with 100Gbps services, for example, to transport their traffic. 

We are considerably expanding this carrier of carriers business. We target double-digit growth this year and we are very focused on that. But it is a 100% wholesale service.

BNamericas: How many wholesale contracts does the company have?

De Saracho: Right now, we have around 50 contracts, and with commitments until 2030.

BNamericas: Will Telefónica stay in Mexico? There were rumors the operation could be sold.

De Saracho: We are here to stay. 2019 was our new beginning, this model basically enables us to remain in the market.

Last year we celebrated 20 years in Mexico, with an accumulated investment of US$16.5bn in the country. We now wait for 20 more years.