Scott Wallsten: Hi and welcome back to the Technology Policy Institute’s podcast, Two Think Minimum. Today is Wednesday, September 24th, 2019. I’m Scott Wallsten, TPI President and Senior Fellow. I am joined by Judith Mariscal who is a professor at the Centro de Investigación y Docencia Económicas (CIDE) and Executive Director of the Cyber Policy Center for Latin America. She’s a leading telecommunications scholar and easily the most knowledgeable and thoughtful person on telecom in Mexico. We’re thrilled that she’s spending a little bit of time with us now as a TPI Visiting Scholar and also happy that she’s sitting down for this podcast today. Welcome Judith. For the last few years we’ve seen lots of big changes, not just in politics in Mexico, but in the telecommunications sector and one of the biggest issues that possibly has broader lessons for the rest of the world is the story of Red Compartida, the wholesale network, where the government provided a 90 MHz block to the 700 MHz spectrum band and awarded build out to a company. It’s been hugely controversial. Tell us a little bit about how that came to be and where and what its status is today, its purposes and so on.
Judith Mariscal: Okay. It was mandated by the Constitution and that was part of the 2013 reform in telecommunication. The reform in itself had basically two objectives. One was to diminish market concentration, so discipline the incumbents in telecom services, also in media services.
Scott Wallsten: And the incumbents were who at the time?
Judith Mariscal: The incumbents were basically mobile and fixed. It’s Telmex and América Móvil, owned by Carlos Slim, and then in media is Televisa. So both of them have market shares close to 86, 87% of the market in each segment of the market.
Scott Wallsten: So the government went into this with a very concentrated market.
Judith Mariscal: Exactly. You could look at it as a new take at what the first reform, the 1990 reform, did not accomplish. It was like pending issues that after 20 years of different regulatory policies, they had not been able to tackle- both the lack of competition in the market, and the other one is the infrastructure deficit and the digital divide, the inequalities within the country. Having those two objectives in mind, the competition issues were addressed through asymmetrical policies and the infrastructure deficit through the mandate of creating two wholesale networks. One of them was Red Compartida, that’s where it comes from. And what you actually have written in the Constitution are very-
Scott Wallsten: Wait, before you move on and talking about Red Compartida, you said there were two, what’s the other?
Judith Mariscal: The other one is called Red Troncal. The names are kind of random. The Red Compartida is mobile, is broadband, and the Troncal is fixed broadband. As you mentioned, Red Compartida uses the totality of the 700 bandwidth, which in and of itself is interesting. It’s the only country, for example, in Latin America to not have auctioned that spectrum to the market. Other countries, Chile, Argentina, Brazil, actually got quite a lot of money from the spectrum. And more importantly, the market got spectrum and inputs to invest. So, the totality of it was given to this company that is a private public private partnership. The government puts in the spectrum plus additional soft loans. So they carried on-
Scott Wallsten: The companies actually had to bid, they put out a request for proposals, right?
Judith Mariscal: Yes. And there was very little interest. First of all, it’s a wholesale network. Both of them are-
Scott Wallsten: Meaning….?
Judith Mariscal: Meaning that their only customers are MVNOs.
Scott Wallsten: So they don’t sell directly to consumers. They sell to companies who sell to consumers.
Judith Mariscal: Doing this construction and the design of the-
Scott Wallsten: Sorry to interrupt, but an interesting little side not is that one of the companies that bid for it was Rivada Networks, which is a company that here has tried to get ahold of free spectrum in order to provide a wholesale network with the help of political insiders. It so far has failed, like they did in Mexico.
Judith Mariscal: Even more interesting also is the fact that Rivada also- someone that works for them is called [inaudible] and I’m being pretty open here about it. Low was the key person in deciding the wholesale, the Red Compartida, because he was working for the Ministry of Communications at the time of the reform. He was an advisor to the Minister and he lobbied very strongly for the specific design of Red Compartida. He left the government and then worked for Rivada and was a bidder.
Scott Wallsten. Huh. But they didn’t win.
Judith Mariscal: They didn’t win, but you would think it was a conflict of interest. But anyway, they didn’t win. They didn’t win because- very, very strange stories- but the day they had to come with the sealed envelope that had a guarantee, they didn’t take the guarantee with them.
Scott Wallsten: You mean they forgot the paperwork?
Judith Mariscal: It’s like you want to go get your license- yes. Or they really weren’t interested. I don’t know. How do you forget that part? But they sued the government and they’re still pending.
Scott Wallsten: Oh, the suit is still active.
Judith Mariscal: Uh huh. Anything that they’re looking at it all the time and saying, look, they didn’t do this and that.
Scott Wallsten: Okay so Rivada didn’t get the network and a different company.
Judith Mariscal: Exactly. ALTÁN got the network. When you look at the funding, the law mandates this is to be a public private partnership, a PPP. There were safeguards that were good, that were reasonable, like this was supposed to be neutrally competitive on competition. They couldn’t be favored for regulation because it had public funding or public participation in those to be treated like-
Scott Wallsten: From the government’s perspective, it’s supposed to be treated like all the other networks.
Judith Mariscal: Exactly. It couldn’t be favored
Scott Wallsten: Except for the specific rules that it operated under.
Judith Mariscal: Right. But also, in the end, which was something that was not expected, was that the funding did not come from ALTÁN, the company. It came from the World Bank, IFT, from the Chinese who also fund at the World Bank. It came from different companies. They have Huawei.
Scott Wallsten: Huawei is an investor?
Judith Mariscal: Well, not through the Chinese Fund.
Scott Wallsten: But by themselves?
Judith Mariscal: No. I don’t recall all of the partners. But I can share that with you, how much- also Mexican Development Bank. So it’s not only the spectrum, it’s also the Mexican Development Bank putting in funding all this to pay for that, winning that.
Scott Wallsten: So it was supposed to be a private company winning the competition and building the network. But instead it ended up being mostly consortium of international development organizations?
Judith Mariscal: And the Mexican development bank.
Scott Wallsten: Which is the same thing except it’s not international.
Judith Mariscal: It’s just the same thing. So private, not really private actually. ALTÁN put zero money and they’re managing all these different funds. This is just a hypothesis, but clearly one of the obligations that the Red Compartida had to fulfill was to take the network, deploy network to 98% of the population, and in the process of the bidding, designing the bidding process, they took it down to 86, they realized it was just not a good business model. It was not sustainable. 86% of the population.
Scott Wallsten: 86% of the total population.
Judith Mariscal: Have 4G by 2026.
Scott Wallsten: The remaining 14%, are they allowed to exclude the same populations that are already excluded? What 14% of the population do they not have to serve?
Judith Mariscal: It’s just what they decide. As a whole, they had to save originally 98 of whatever, and then it went down to 86 of whatever, it also included magical towns.
Scott Wallsten: Right. I saw that. What exactly is a magical town?
Judith Mariscal: It’s a tourist- Basically they give it so they can get more tourists. So it has a history or heritage.
Scott Wallsten: They see it as an economic development tool?
Judith Mariscal: Yes. When you look at why it’s not sustainable and that part of the problem, besides the first issue that is the opportunity cost of the use of the spectrum, then the next thing is will this work? Even if you don’t have the spectrum in the market, but this is really going to do the trick of getting places where there’s no service. And get it to places like hospitals and schools and you’re not expecting it to get to homes. The problem is that there’s just not enough MVNOs in Mexico. That’s why the model is not a good business model.
Scott Wallsten: Why didn’t it attract new MVNOs?
Judith Mariscal: Why does in Mexico attract more MVNOs? We have, I think it’s 0.07 of the market, that are MVNOs. It just hasn’t been an attractive model in general for Mexico. It’s Virgin Mobile is in Mexico.
Scott Wallsten: Is it because they didn’t offer a low enough wholesale price to attract any entry?
Judith Mariscal: We Would have to have new entrants into the country.
Scott Wallsten: Just not worth it?
Judith Mariscal: No. Especially because what happened-
Scott Wallsten: There’s one though, it’s called Mega-
Judith Mariscal: No, there are a couple, again, we have the data. But what they were saying is that they thought that- I have actually lost the debate. Lobbied a lot from them. One of the arguments was we’re also going to be a service to the current carriers. AT&T and Telefonica Mobile, which does that make sense to them, because (these are their own words) they’ve already invested in their own spectrum and networks and so they need to display using their spectrum, that’s their business model. They’re not going to change their business model to become MVNOs, they’re just going to compete. Even though 700 is a good spectrum, they have 1.9 they have others that are just going to compete.
Scott Wallsten: You’re moving to what might the real effects of the network be, setting aside who’s paying for it or how it was awarded. And so there are a few: one is might be investment in new networks with new subscribers, effects of competition, lower prices, and then you might want to think of how it affects anybody’s incentives to invest in the future. But are you saying that this has actually caused AT&T and others to invest more in their networks to compete or that they’ve ignored Red Compartida completely? And even before that, how much has Red Compartida invested in network? How much of it is its own network and how much of it is itself buying wholesale from existing networks?
Judith Mariscal: This question, I don’t have the latest data. I know that the overall investment was supposed to be 7 million dollars. What they’ve done is that they have invested some of it, I don’t have the data but I should, and they’ve also rented out America Móvil’s towers.
Scott Wallsten: They’re buying wholesale access to a network that they can then resell wholesale and clam it as coverage.
Judith Mariscal: Exactly. Interesting. It’s sad actually. Aslo, what has is that- this is why it’s an interesting question that has no straight answer, the second one, because there’s two things happening at the same time and you cannot isolate to get the- the new government is not interested in this anymore. At the same time the reform is happening and doing other stuff besides the Red Compartida, and one of the things I think is a good consequence of the reform is that the regulatory agency got stronger mandates, more transparency, new people. So it was like refreshed and energized. One of the huge accomplishments was that during 15 years or more, I actually have a paper on that one, there was just no auctions. Spectrum is scarce, but this was like artificially scarce. They just didn’t go out there. And when the new regulatory agency, the FTA, came in, they just started putting a spectrum out there like crazy. I actually presented that. This is going on at the same time. AWS 2.5 was auctioned, when it had been years since, I think, it was the 1.7 came out. Plus you have AT&T.
Scott Wallsten: As a new entrant. Or within a few years now.
Judith Mariscal: Actually presumably not in good shape in Mexico right now, they bought a lot.
Scott Wallsten: Why is that? Why are they having trouble in Mexico?
Judith Mariscal: Well, I think that having trouble elsewhere, no?
Scott Wallsten: I don’t know.
Judith Mariscal: I read that they’re redesigning their investments and they bought out several companies when they came in. So they used her money to buy Nextel so they had a lot of spectrum.
Scott Wallsten: And they had to incorporate several different networks into one
Judith Mariscal: And it took a while for them to do that. The service was terrible for a while and then they went into the auction for AWS and got it. So right now AT&T is the one that has the most spectrum in the market. So you put that next to the Red Compartida and it’s hard to know what-
Scott Wallsten: You can’t separate out the causes of what… what happens next for Red Compartida?
Judith Mariscal: One of the things just as a lesson, for other countries because it didn’t happen in Mexico, but that people were like me were trying to say, okay, you’re going to do this, it’s not a good idea, but if you’re going to go ahead and do this, at least allow the network to rent out spectrum. Not only be a wholesale, not only by and MNVO but be able to rent capacity to other carriers.
Scott Wallsten: So to lease actual spectrum or access to its network? To at lease access to its network.
Judith Mariscal: Access of course. Cause it’s their spectrum. But they could access to their network, but the carriers may have been interested in that. They didn’t have to become MVNOs and they would get the capacity to go to the last mile, to the customers with that spectrum. And it would give him money to the Red Compartida.
Scott Wallsten: And then the question is whether that would have been net more or less investment than without it, but it’d be hard to know, but you’re saying they didn’t do that anyway.
Judith Mariscal: Because it was against the constitution.
Scott Wallsten: Oh so the constitution prevented that anyway.
Judith Mariscal: They could go from 98 to 86 even though it wasn’t in the constitution. So it’s just kind of, I don’t know.
Scott Wallsten: I mean and of course it takes stepping back for a second and noting how weird it is to have such specific rules embedded in not just the law, in your constitution. Like here it would be little kids listening to Schoolhouse Rock and singing a song about how to build telecommunications network instead of We the People.
Judith Mariscal: A good example of that is, and you wonder why, because you just really want to not let any room movement. I know the right thing to do, so I’m going to tell you what to do right, when a law should be just the nature of it is this. And you never know what you know technology is going to look like. So you better-
Scott Wallsten: Even if they had been right in 2013, it wouldn’t be right anymore.
Judith Mariscal: In the law, it said, and these are just two examples of how really bizarre this is. the law says in the chapter of human rights, Mexicans have the human right to access broadband. Not communicate using technology, or like telegram, it’s broadband. In the US, as you know, the asymetrical regulations, it says in the law, it’s not in the constitution, that interconnection rate is zero. Like milk should be seven whatever. What’s going to happen now is anyone’s best bet. What has happened, looking at it from the tech, you have a redundant network. The Red Compartida has been displayed now in places where there’s already other networks.
Scott Wallsten: So it’s overbuilding.
Judith Mariscal: It’s not in places where there’s no service. So in terms of coverage or digital divides, it’s not-
Scott Wallsten: It hasn’t done anything.
Judith Mariscal: And it will not.
Scott Wallsten: In terms of will not, that’s sort of interesting. You have a new government and it’s a very left populist government. And so you’d think that it would be sort of in favor of this kind of wholesale, not exactly government owned by public-private initiative, but it also sounds like it’s the kind of government where, like here, Trump doesn’t like anything that Obama ever did just because, and so what’s happened?
Judith Mariscal: That’s the first one of course. But also, I have to say, that the president is saw something that is pretty obvious and trivial, that the Red Compartida is not going to get to the places that it ought to, where there is no service. He sees this is not going to happen. He is just letting it die itself.
Scott Wallsten: Wither on the vine. So he’s actually making up, well I don’t know if this is the right way to put, a considered decision on Red Compartida.
Judith Mariscal: It’s like the same reason why Trump wanted- There’s a good reason to think that Red Compartida was not a good idea in terms of digital divide, of covering people that did not have access. It’s not and he’s right. Now what do you do with that is the problem. What are you doing instead? Instead what he’s doing is taking the fiber optic of the Red Troncal that had not been launched, the fixed broadband network, wholesale network, that model is being this charge. It’s not going to happen, it’s not going to be launched. Actually tried during the first month, Undersecretary of Communications Jalife [Villalon] announced the auction and two days later they said, sorry, it’s not going to happen.
Scott Wallsten: What exactly were they auctioning?
Judith Mariscal: The Retruncal, the second network.
Scott Wallsten: So that’s the fixed network And so they were auctioning the right to build it or the right to use their company’s fiber optics or…?
Judith Mariscal: Both. This was going to be, just as the Red Compartida, a PPP. So they wanted to get the private sector to be involved. The government was going to put the fiber optic that is has to be illuminated, but it has an extended network throughout the country.
Scott Wallsten: So they announced this was going to happen, and then how many days later did they call it off?
Judith Mariscal: Two.
Scott Wallsten: It’s not like they give anybody a chance to bid. What made them change their mind so quickly?
Judith Mariscal: They told them they weren’t going to do it.
Scott Wallsten: Who’s they?
Judith Mariscal: The president, I’m assuming. I don’t know how.
Scott Wallsten: He probably didn’t pick up the phone himself. But who wanted to do the auction?
Judith Mariscal: The Undersecretary of the Ministry of Communications which was her job and it was in the constitution. It wasn’t the regulatory agency, it was her job.
Scott Wallsten: The ministry was doing, whether or not it’s a good idea, it was doing what it’s supposed to do because the constitution says it, and so then as soon as they started, somebody in the executive office said, you’re not going to do this.
Judith Mariscal: That’s our facts. I mean the fact is, two days after there was the announcement, it was delayed.
Scott Wallsten: They call it a delay. What does the new president want to do?
Judith Mariscal: A new network, a different network. And this is not a PPP. Actually he did come out in the new saying what we need a real- he didn’t even mention Red Compartida- he said a real network that will get to the people. He said, who is going to follow me in the private sector, and silence, and very little after that.
Scott Wallsten: Was it a show to demonstrate that the private sector wouldn’t do it and that give him an excuse to then put public money towards it?
Judith Mariscal: I think he would have loved to have somebody put money into it. He wanted money. Well to understand how this works, he has a six o’clock every morning show, TV and radio every morning including Saturdays, and he talks, that’s his message to the people every morning.
Scott Wallsten: Do people watch this? Keeping up with Trump’s Twitter is bad enough I couldn’t imagine hearing him every morning.
Judith Mariscal: That’s how we know of his cause he communicates things in every day, he’s got something going on.
Scott Wallsten: This isn’t secret, he says these things to a certain audience.
Judith Mariscal: He says who wants to do this with me? Because the past administration didn’t do anything. Obviously everything that past administration’s done is just terrible.
Scott Wallsten: We study telecom and we think it’s interesting even when nobody else does, and so it’s really easy to get caught up in it and thinking that everyone else cares. Is it a big deal for him or is it just-
Judith Mariscal: Yes.
Scott Wallsten: So this is a big deal for him.
Judith Mariscal: Internet. Yeah, whatever it means. The concept of internet, social media, I think is sort of the proxy for internet for him. I understand, the internet is very important, but he didn’t say broadband or anything like that.
Scott Wallsten: How does he feel about the big tech companies like Facebook and Google. There’s this big, maybe there’s some question whether it actually exists, but tech lash. Where does he stand on that? He doesn’t have an opinion on that as far as he’s actually hasn’t said anything?
Judith Mariscal: He doesn’t know, he doesn’t have an opinion on that. He’s into three or four pet projects and that. There’s a train he’s very fond of.
Scott Wallsten: So internet, trains.
Judith Mariscal: One train. Maya is going to get from Mexico city to the Southeast.
Scott Wallsten: He should talk to Joe Biden. He’s a big train guy too.
Judith Mariscal: And the airport. Right. The current, I think you’ve met the past Chief Executive Officer of digital strategy, you’ve met her. Well she was doing some-
Scott Wallsten: I’m asking the questions here! I think I did meet her.
Judith Mariscal: I mean you could criticize a lot of things that were not done and not enough, but the current guy is totally- he doesn’t speak to anybody, all I know is that he’s in charge of doing this new network that is called Internet for Everyone, Internet para Todos. How, when, we don’t know.
Scott Wallsten: So right now it’s a, a slogan, it doesn’t have plans or at least public plans or anything like that yet.
Judith Mariscal: No. An everybody is saying it’s not going to happen, it’s unlikely.
Scott Wallsten: And when you say people, do you mean just people who study the internet?
Judith Mariscal: The community stakeholders? No, because the broader population, I don’t think it’s even aware of what Red Compartida is or what he says. But he does say he’s going to give internet to everybody.
Scott Wallsten: What do you think will happen over the next couple of years in the sector and if you were the one giving advice, and you usually are the ones giving advice, but if you’re the one giving advice and they were listening to you, what should happen?
Judith Mariscal: I have to have another podcast for that. But in terms of what regulation and what the regulatory agency is doing is I think they should stop designing and implementing regulatory policies that were maybe good 15-20 years ago, such as unbundling the local loop, they have 15 different mathematical rules and that is costing a lot of money and it’s not working. Much more forward-looking regulations. In terms of the divide of the what to do within networks, it’s there. I’m not even thinking constitution. I think that unfortunately, because this is not a good thing for Mexico, but it’s probably not going to work. It’s going to crush the business model.
Scott Wallsten: Do you think they’ll end up ultimately auctioning the spectrum?
Judith Mariscal: I don’t think this government, maybe the other government would have rescued it.
Scott Wallsten: So this government won’t rescue it. But what about now? It’s got so many international agencies, will the bank, pour more money into it? The bank hates to see things that fail.
Judith Mariscal: I don’t know. They’re willing to let it happen. Well you have another network there. It will not fulfill expectations.
Scott Wallsten: What about upgrades? I mean we’re already talking 5G. Do they have any plans?
Judith Mariscal: They all talk about plans. But 5G is really tested in how many countries? There’s so much to be done with 4G and 3G in Mexico that it’s like concentrate on the pending thing. Some like doing some tests.
Scott Wallsten: The Red Compartida calls its network of 4.5G. I have no idea what that means.
Judith Mariscal: I don’t either.
Scott Wallsten: Well I think we should probably wrap up on that note, but you also mentioned a few papers and we’ll post those links on our website along with the podcast. We’ll have to have you back soon so we can continue the conversation and know more about what the government is doing. And in addition to all of its other, all of this other new activities that are relevant.
