A tale of Telmex and tycoons
#046: Why Mexican mobile data is so damn expensive
Olá technopolists,
A special edition this week as I’m off on holiday. Instead of What’s Hot/What’s Not, a spicier story that explains why mobile data in Mexico is so damn expensive.
Até já!
Stat of the Week
Latin America’s rapid growth in mobile penetration is one of the single most-cited reasons for investor optimism. Arm a country with smartphones, and watch the digital economy explode.
But let’s not forget about the less-sexy gatekeepers to the digital world: telecoms providers. Low data costs grease the gears, while high prices pump the brakes. So how does each nation stack up?
So what?
As a region, data costs in Latin America place more strain than other regions in the Western World. From El Universal:
In Latin America, the cost of acquiring a mobile phone and accessing 1 GB of mobile data a month represents more than 5% of resources available for all income groups, which stands in contrast with the 1% in Europe and North America.
Yet between countries, data costs are far from uniform. The countries where data is the cheapest (Uruguay, Colombia, Chile, Brazil) are leaders in the digital revolution. (Poor Argentina, while technologically advanced, is fighting its inflationary fires.)
That leaves a conspicuous outlier.
What’s up with Mexico?
Mexico boasts the second-largest mobile market in Latin America. Last year, mobile internet penetration cracked 75% — some 100mn people — compared to the regional average of 70%. Over 92% of mobile phone users in Mexico have smartphones.
We’d expect these trends to correlate with lower costs — yet that’s hardly the case. Historically, it’s had some of the highest mobile phone rates in the OECD: a single gigabyte in 2012 could run you nearly $20 in today’s dollars.
A weak peso has sometimes been used as a scapegoat, but that hardly stands to scrutiny when you see that Argentina, with persistent annual inflation above 90%, has half of Mexico’s prices.
So, why then? In a word: Telmex. Time for a history lesson.
Of Telmex and tycoons
Telmex was created in 1947 when a group of local investors bought the Mexican branch of Ericsson, the Swedish OGs of telecommunications. A few decades later, as nationalisation became the global It-girl of political economics, the Mexican government decided to buy it. Through the ‘70s and ‘80s, Telmex was the only game in town.
The sizzling ‘80s stock market put power and prestige back in the hands of financiers, birthing Wall Street wolves, privatised industries, and colossal conglomerates. The trend landed in Mexico and in 1990, a syndicate made up of France Telecom, Southwestern Bell, and a high net worth individual decided to take Telmex private.
That individual was Carlos Slim Helú. Born to Lebanese immigrants in Mexico City, Slim cuts a folk-tale figure, rising from middle-class modesty to global notoriety in a story that would make Horatio Alger do a double-take. Slim was (and is) an old-school industrial tycoon, a self-styled hybrid of 19th-century industrialists and 20th-century investors. Think John D. Rockefeller crossed with Warren Buffett, raised on shawarma and chilaquiles.
Slim’s playbook would Charlie Munger proud: using money and savvy he learned from stock trading, he would buy a business, harvest its cash flow, buy a new business (often a competitor), roll them up, and sell some equity at a profit. The profits got reinvested, and the wheel rolled onwards.
That’s exactly the playbook he used Telmex, which became one of the largest feathers in his cap.
After the 1990 purchase, Telmex went on an aggressive buying spree around Latin America, scooping up a laundry list of carriers that included AT&T and Verizon’s satellite operations. Telmex became the largest provider in Latin America, and its mobile subsidiary, America Móvil, used the same playbook for mobile carriers. Nowhere was the conglomerate more consolidated than Slim’s native Mexico.
Grupo Carso, Slim’s holding company, eventually amassed an empire touching virtually every supply chain in the country: bottling, property, construction, heavy metals. Weak anti-trust laws and distressed ‘80s asset prices put wind in his sales sails.
The playbook worked. By 2010, Slim’s net worth was estimated at $75bn, landing him on top of Forbes’ rich list ahead of Bill Gates, Warren Buffett, and Larry Ellison. Impressive — especially for a guy who doesn’t use a computer.
A big, bad boogeyman
Telemex’s chokehold on Mexican telecom eventually ran into headwinds.
His (quasi?) monopolies were criticised for all the classic anti-trust reasons: stifled competition, hampered innovation, unnecessarily high consumer costs. Grupo Carso was even blamed for forcing Mexicans to flee to the US in search of better conditions.
It wasn’t just journalists and politicians penning for change. The OECD estimated that a lack of competition in telecoms alone was costing Mexico’s economy $25bn a year — some 2% of GDP. Telmex and its sister, America Móvil, were its clear boogeymen with control of 90%+ off the broadband market. Since they basically owned the towers and cables, Telmex could charge inordinately high prices for other carriers to use its network, squeezing competitor profits and undercutting price.
Slim didn’t exactly ingratiate himself to the public, either. In an interview, he once responded to his critics by saying: “When you live for others' opinions, you are dead. I don't want to live thinking about how I'll be remembered [by Mexican people].” Somewhere in Silicon Valley, a young Elon Musk chortled.
Old game, new rules
Enter Enrique Peña Neto (EPN), a former governor and rising star from the aptly named Institutional Revolutionary Party. EPN wasn’t laughing at Slim’s interview. He ran for president in 2012 (and won) on a monopoly-busting platform of economic competitiveness and open markets.
In 2014, EPN inked a legal overhaul of the telecoms industry into law. The new framework incentivised foreign direct investment and competition, an expansion strategy that reduced costs and later paved the way for Spanish Telefónica’s entry and rapid growth.
The plan was a crowning achievement of EPN’s administration (despite a legacy marred by corruption). The government did its part, making +20,000 public locations available for telecoms infrastructure projects in addition to its legislative changes. By 2018, mobile broadband costs had halved while mobile broadband subscriptions doubled and traffic increased tenfold.
Slim had fallen from the top spot on Forbes’ list.
Sprinting up the down escalator
Glancing at our original chart, you might underestimate Mexico’s progress in the last decade.
In 2018, 1GB cost roughly $8; now, it’s down below $3. While it’s still in last place, it’s reduced the cost of data by at least 80% since 2013.
If Latin American nations were racing to low data costs, you might say that Mexico has been sprinting. The challenge? It’s been running up the down escalator.
And the escalator operator — Telmex (and Slim) — doesn’t seem likely to stop the staircase any time soon. Telmex still controls 80% of Mexico’s phone lines.
At the time this was written, Forbes estimated Slim’s net worth at $90bn, 8th on its rich list.
The Rundown
News up until Friday, March 17th
Mercado Libre announced a $1.6bn investment into Mexico over 2023, using the funds it will scale its fintech operations, launch consumer fintech offerings, and reinforce its logistics. (Forbes)
ICYMI: Tons of LatAm startups — including Platzi, Uellbee, Truora — had money locked in SVB. Here’s a peek inside the lives of founders during the bank’s chaotic final hours. (Rest of World)
In the wake of the SVB collapse, Latitud announced its new fintech product, Meridian, which automates dollar-based bank account opening for ‘Cayman Sandwich’ startups. They’ve also shared a resource guide for LatAm founders with funds in SVB. (Startups Brasil)
Rappi continues to add to its long-tail of consumer services in its attempt for profitability — but are some of these services, like recyclables collection, just a greenwashing publicity stunt? (Rest of World)
Walmart Mexico received authorisation to purchase a fintech — specifically, an electronic payment financial institution (IFPE) — but hasn’t yet disclosed the fintech or price tag. (Bloomberg Linea)
With all the hype and promise around nearshoring, ALLVP, a Mexican venture fund, launchd a cross-border pioneers map of the key tech players moving money, goods, and services around the region. (ALLVP)