Key Developments in 2008 for TEF and NIHD

Implications: The competitive dynamics among competitive telcos (all others than AMX and TMX) in Mexico will be drastically modified by the planned Wi-Max/AWS/PCS spectrum auction and other related developments.

Analysis: It's very significant that the Mexican Ministry of Communications and Transport had to clarify that will make anything at hand to armor-plate the planned 2008 spectrum auction against possible legal action by involved telecom players. A lot it's a stake.

What is being auctioned?

Mexico follows pretty much the same frequency allocations for spectrum as in the US, so the bands auctioned are going to be:

+ The remaining of the PCS band (1900 MHZ) for GSM or CDMA networks
+ The AWS band (1700-2100MHz bands) for 3G (UMTS/HSDPA) Services
+ The remaining of the 3GHz band for WiMax

Who are likely bidders?

In general, no one expects new entrants in the Mexican market (former titans with global ambitions like the Verizon, Vodafone, the former MCI and the old AT&T have come and gone before).  We will see then the attempts for several competitive operators to position themselves as the second most relevant player behind the AMX / TMX duo.

NIHD may want to have its options open. A migration from iDEN to a different technology it’s not a question of if, but when and how it’s going to happen.  While NIHD it recently bought WiMax spectrum (3.5 GHz band) through the acquisition of the company Cosmofrecuencias, the relative immaturity of the WiMax technology and the uncertainty that surrounds what pretends to be the largest deployment of it (Sprint-Nextel) make a bid for PCS spectrum very likely. I think NIHD is waiting for the end of the auction to make and announce the inevitable decision about which way to go after iDEN.

Most chances are that the three existing PCS operators (AMX, TMX, and Iusacell) will be forbidden by the antitrust regulator to bid for more spectrum (a possible source for legal action by those companies and the reason for the clarification by authorities), so expect NIHD bidding against fixed line operators (Maxcom NYSE:MXT, Axtel) and cable operators entering the telephony market  (Grupo Televisa NYSE:TV and Megacable).

No matter the results of the auction investors still need to ask:

+ If their valuation models have the eventual network migration priced in.
+ If their models consider both a considerable increase in CAPEX (one-time) AND OPEX (recurring) since whatever the chosen technology, it will operate in a higher frequency that iDEN and most chances are it will require additional towers to provide users the same coverage that they currently have with iDEN.

TEF has been open in the past about their intentions to build a WiMax network for fixed services. One will assume that TEF it is depending on the restrictions for foreign investment in the fixed market to be lifted (a proposed reform on the subject is expected to be voted next year) and while lobbing furiously to make that happen, TEF is hedging its bets by “testing” the reaction of government officials and competitors by demanding interconnection for GTM, a subsidiary where is the majority shareholder even it does not have any voting/controlling rights (to circumvent the aforementioned restriction for foreign investment using a “neutral investment” vehicle).

Expect TEF to be looking for legal/regulatory certainty for an eventual large investment in the fixed market. Interconnection for GTM it is not relevant at all by itself, but as a way to test the certainty that the “neutral investment” route could give to a bid for WiMax spectrum or the eventual acquisition of an established fixed services provider, being AXTEL the most likely candidate (and there are several reasons for this).

If TEF is succesful entering the fixed market,it wont be a surprise that NIHD will consider doing the same.