Does this mean I may be able to pay less to call Mexico than Europe?
Mexico-U.S. long distance system due for overhaul
By Fiona Ortiz
REUTERS
5:50 a.m., May 7, 2003
MEXICO CITY ? This year could see the end of the expensive interconnection system between U.S. and Mexican telephone operators, a change seen forcing
some Mexican long-distance firms deeper into financial trouble.
Operators told Reuters they are in talks to phase out the system that handles one of the world's biggest binational telephone exchanges, with some 7.5
billion minutes in calls and $1 billion in revenues for Mexican operators last year.
But so far there is no clear plan to replace it, since most possible alternatives will end up harming someone.
The current system of high interconnection rates gave rise to a practice called bypass, whereby operators sell heavily discounted U.S.-Mexico calls
and dodge connection fees by passing calls over the border in high-capacity data lines.
Deputy Minister for Communications Jorge Alvarez Hoth said at a recent telecommunications forum that operators that depend heavily on bypass will
disappear and others will have to merge with each other to survive if the system disappears.
"I believe there will be a fundamental transformation the minute this system is modified. And that's where you could see business models of companies
that have dedicated themselves to (bypass) radically transformed, especially if they have not developed an infrastructure and a client base," he said.
A SYSTEM THAT BENEFITS MEXICAN OPERATORS
For every one minute of calls from Mexico to the United States, about three minutes of calls go the other way. U.S. operators pay Mexican operators a
per-minute fee for handling the difference and that is called the settlement rate.
Settlement is paid based on a system of proportional return, meaning that each Mexican operator receives a percentage of the total settlement rate pie
equal to its share of outgoing calls to the United States.
The biggest long-distance operators on each side, dominant Mexican telephone operator Telefonos de Mexico (Telmex) , and in recent years WorldCom in
the United States, set the rates in yearly talks.
For years Telmex, a former state-owned monopoly that controls over 95 percent of local phone lines in Mexico, reaped the benefits of high
international settlement rates. But the rate has fallen steeply in recent years and is currently 5.5 U.S. cents per minute in major Mexican cities.
Telmex hoped that lower rates would eliminate incentives for bypass, but the bypass business has grown, depriving Telmex of an estimated $13 million a
month in revenues.
BAD NEWS FOR ALESTRA
Telmex's biggest long-distance competitors, Alestra and Avantel, face conflicting pressures regarding settlement rates. Their U.S. parent companies,
AT&T and WorldCom Q, are fighting for the end of the proportional return system, but the Mexican companies depend on the settlement rate revenues.
Rolando Zubiran, chief executive of Alestra, which estimates it has 18 percent of Mexico's international long-distance traffic, recently told analysts
in a conference call: "The end of the proportional return system represents a threat to our international revenue stream and more importantly to our
gross profit."
"If rates drop dramatically upon the opening of the international market we will have a hard time making up the shortfall from additional volume," he
said.
MIXED NEWS FOR TELMEX
Telmex's head legal officer Javier Mondragon told Reuters recently that the company wanted to eliminate bypass by doing away with proportional return.
If the system disappears, each company would negotiate international connection rates with each of its individual counterparts, he said.
But analysts say Telmex could be hurt by such an arrangement, because Alestra and Avantel will set preferential rates with their U.S. affiliates.
Jorge Arredondo, president of Mexican telecommunications regulatory body Cofetel, told Reuters bilateral deals did not work in the past and he does
not see them as feasible.
"They could not agree because it was disadvantageous for Mexican companies," Arredondo said.
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