Axtel creates the first alternative for communication in this country in 1999. And in 2000, if I am not wrong, it is the first broadband alternative. Where you aware at that moment what you were about to face?
Well, actually the company was founded in ’94. I founded it in ’94, it took us 5 years, almost 6, to achieve it.
That means operations start in ’99, right?
Exactly. From ’94 to ’99 we prepared the business plan, found the capital, and convinced the government of bidding airwave, giving the concessions and opening the market. And in ’99 we installed the first phone line here in Monterrey, which was the first to compete against Telmex. And in 2000, well, what you have just called broadband was actually dial-up.
And then we started with what was called broadband, not dial-up anymore, in 2001, but the broad band was 96K and 128K. I did not think that the total opening process and market levelling, and the elimination of structural issues that favoured the monopoly was going to be so long. I did think that in a few years everything was going to be solved, that interconnection rates were going to be low, symmetric, so that no company was in advantage. And well, as we have seen it was not like that.
Subsequent events prove that.
But we understood that since 2005 you have been the company that has battled the most to reduce and make that interconnection rate fairer. Nowadays, how is that battle? I mean, has Axtel achieved that difficult quest and harmonized this?
I think that now things are working out to finally have a fair playing field. You mention 2005 because we started noticing a problem with interconnection rates, actually in 2002, 2003, when we began to realize that mobile operators lead by the dominant one started selling their clients with rates that were much lower than the interconnection rates they were charging the competitors. So it is clearly an anticompetitive practice, monopolistic, and after meeting several times with them to try to get to an agreement, so that they offered us low rates too, we were unsuccessful and got to an interconnection disagreement.
That started in 2005, on the one hand, and in the other hand we submitted a complaint before COFECO due to the monopolistic practices. To sum it up, that was taken to court because COFETEL ruled in favour of Telcel mobile companies and other companies with high rates, which were already established by them. However, one clause of the administrative resolution established that rates could not be higher than the rates to the public. But that clause was not implemented. So we went to court, where we won first and second instance, and then it went to the Supreme Court. The Supreme Court resolved it, at the beginning of this year. Basically, what the Supreme Court did was to confirm the administrative resolution by COFETEL, regarding they could not get involved in their technical attributions to state that rates could not be overpriced, which is called externality and caused those rates to be so high. But at the same time they confirmed the other point in COFETEL’s administrative resolution by saying that interconnection rates could not be higher than the rates they sold to the public. Then, well, we still do not know if we are going to request or not the implementation of a weighted average rate or not. We are discussing it now to see if we get to a global agreement and we all stop doing everything. But clearly that global agreement should compensate the damage we have suffered during all this period.
When the 045, which is called international, entered into force, all the companies had a definite suspension on part of a federal court against the implementation of this scheme. But when it entered into force, ignoring the definite suspension of the federal court, COFETEL and mobile companies ignored this suspension, and mobile companies blocked the traffic of those who had definite suspension and did not want to enter this 045 scheme because it perpetuated the interconnection rate inequality already established by the 044, which is called local payment. Due to the block, all the other competitors accepted those high rates and withdrew their complaints and interconnection agreement, except for us. We believed the government was going to back us up and would not allow them to break the law concerning such a critical topic for a telecommunications company like interconnection. If you do not have interconnection you cannot operate, you cannot finish a call. In that case we were denied the 045, but not the rest, and that lasted 4 and a half years and that resulted in losses for more than 500 million dollars. Despite the President telling me that he was going to back us up, they did not do anything in the last six-year term. And well, this was solved at the end of the six-year term, the fact that they gave us back the 045 interconnection, but only after we accepted the high rates.
So you had to join to the other group that was going to accept them.
Yes, though I did not take away the interconnection agreements. I am going to pay them while disagreements are solved. Now the problem is with COFETEL, with the new government involved, which is pro competition. So independently of the rates, we see official rates that there is going to be an extra official agreement. At least that is what we think can happen, so that this is solved and we leave behind all these problems and focus on the future. These arguments, and disagreements and trials caused a reduction in the interconnection rate, and now it is 80% lower than it was when we started with the interconnection disagreements.
If you struggle you get it.
Yes, at least the argument was good for the country, because if we had not continued fighting the interconnection rate would be of 50 or 70, like it was six years ago, right? And we believe that the policy of the new government and the constitutional reforms, and the upcoming reforms of secondary laws, will lead to more equal, symmetric rates, from 2014 onwards.
The telecommunications sector is forecasted growth. There are several analyses that state it is one of the sectors to take into account, even with this status quo oppressing free competition. The telecommunications reform, what is going to do about this mess? The reform, what is its final goal? What is the turning point resulting from the reform?
I believe that if secondary laws back the reform and if members or commissioners that are truly independent and protect the interests of the country make up IFETEL, those are the pending tasks for the following months. But if those two things are done well, it will be a turning point opening competition in this industry in Mexico, which has lasted for so long. The competition is supposed to have started in ’97 with long distance, in ’99 with local calls, so we have been doing this for 16 years and the companies of AméricaMóvil still have 80% dominance in mobile and 85% in landline. I think it is important. Several constitutional regulations together with the reform give us hope about an important change. One of them establishes that any operator with more than 50% of the market share is called preponderant and it suffers asymmetric conditions. That means against them and in favor of the competition to encourage the growth of the competition and lower the market share of the preponderant below 50%. And these measures may even include the withdrawal of assets to force the preponderant to be below 50%. I believe the withdrawal measure is a last resource.
And they would be applied only if asymmetric regulatory measures do not work out. I think it should be like that, because I believe that a withdrawal of assets should not be the first measure. But I think it is going to help a lot. That also applies to broadcasting. Two new national private TV networks and one state are going to be opened, and we have heard they are going to operate behind the British BBC, with an independent council and with scientific, educative contents. I mean they will not compete against soap operas.
I think the ball is well played in that sense, regarding broadcasting. In that case if they have more than 50% they are also called preponderant and if there is an operator with more than 50%, and also in the television, it also pays. So all the sectors in the industry are treated equally in that sense, and I think that in the next 5 to 10 years we will see, if secondary laws and IFETEL are alright, in the next couple of months, in the next 5 to 10 years we will see that nobody is preponderant or nobody has the majority of any industry.
There are some issues like sharing infrastructure with the preponderant, so piping, posts, towers, etc. It will have to share all that by charging it, but charging a fee authorized by IFETEL. So it is an interconnection rate regulated by the authority. So if I want to become part of a colony with underground infrastructure but I cannot install pipes or posts, then I cannot compete there. So Telmex, which has the piping, has to lease us that pipe at a reasonable price, and if we do not get to an agreement it will be established by IFETEL. So that is a very important thing because it allows competitors to have better coverage and to compete to benefit most of the population. Nowadays there are many areas or cities where there is only one company providing the service. So that is important.
Another important measure regarding the constitutional change is that it was established the creation of a PPP company, Public-Private Partnership, with a private operator to run this company that is not related to the dominant ones and it is very professional and efficient. On one hand, this company is going to have the 18 thousand kilometres of CFE fibre. And then it is going to build, or at least that is the plan, another 20 or 25 thousand kilometres to have the biggest optical fibre network for national transportation. It is going to be complemented with the 700MHz band, with the 90MB that are going to be released there, of 700MB to create a mobile company as well. So it is going to be a company with a large transportation network and a mobile network with the best band selling capacity to market players. That means it will not sell to the final client but at a wholesale level to Axtelor other operator requiring transportation capacity or that want to become an MNVO, for example a mobile virtual operator. And that is very interesting. For example, nowadays if Axtel wanted to complement its X-treme broad band service with 200MB, and TV and metropolitan Wi-Fi, and we wanted to complement it with a mobile LTE or 4G service, if we wanted to do it first we should enter an auction, buy airwave and then invest a billion dollars. So it is not very attractive.
Right, it is not very feasible.
But with this network, once it is installed and operating, I think the optical fibre is going to be next year and the mobile network in 2015 or 2026, but when it is ready it will allow us, the companies with a number of services, to complete an experience to the client that includes everything. From the infrastructure at home or your business to the cell phone, but also metropolitan Wi-Fi, Axtel TV, I mean, having a complete range of products for the clients without making a massive investment. And that should also gradually cause the dominant ones to lose market share.
But this is quite a revolutionary model, right? The fact that it is a PPP and that it also answers market needs without them becoming a monopoly as well, I mean, it would be like a partner-provider?
Because they will be not allowed to sell to the final client, whether it is a company, a government institution or a house, so WE (the operators) will be its real clients. We are going to be its clients and it will be able to offer interesting rates enabling us to compete in the market and at the same time earn money because the government is going to supply the optical fibre and the airwave. So we will not have to pay 3 billion dollars for this. But they will be asked to give competitive rates.
And Axtel TV, why have you launched Axtel TV? Why do you consider it a niche of growth and opportunity?
Yes, we believe it is very important because in the consumer market, that represents 25% of our income, we did not have the complete package houses are demanding, Mexican families, which is a triple plan: voice service, broad band and entertainment. So, as we already had de fibre, we set out head in Guadalajara and we are being very successful with this service. We started selling it at the beginning of February and now we have 25 or 27 thousand people. So it is working.
It is not clear for me where you operate. I mean, I know that Monterrey, DF, Guadalajara were the first cities to be incorporated. How far does Axtel X-treme go? And then, how far does Axtel TV go? And then how far are you planning to go on the short term? What other expansions do you have in mind?
Well, in Axtel we have services for the consumption markets in 40 cities, the largest 40 cities in the country with the wireless technologies we had traditionally used. Nowadays with the X-treme and AxtelTv projects we are in seven cities, the seven largest ones. We will open the eighth one in August and between 2014 and 2015 we want to reach the 40 cities where we have consumption products, complete home services and small businesses. For our corporate or government clients we are all over the country, we are in more than 200 cities with our own infrastructure and we can get anywhere with leased infrastructure, even with CFE or Telmex, when they are very small towns and we do not have coverage. But we have our own infrastructure in 200 cities, maybe more. And corporate and government clients represent the other 25% of our income.
Axtel has 6,500 direct employees and other 20,000 indirect employees.
We estimate that, yes, 20 or 25,000 indirect ones.
What is the formula of success? How can you keep this under control? What is the leadership style applied to such structure?
No, well, we have to work a lot in HR, you always have to make sure you have the best HR, trained, to identify those susceptible to career growth to get to the higher levels in the organization and plan their careers. And well clearly you have to manage the company with organization, promote teamwork, emotional intelligence and not promotingdiscourage? How do you say that?
To discourage internal differences, internal politics.
The thing is they are 6,500.
Yes, it is hard, but well, every quarter we have an Axtel meeting with all the managers and executives to explain to them where we are, how was the last quarter, what we expect from them from now on. And each year we are making a massive Axtel event, we just did it last March. We did one in Monterrey, one in Mexico and another one in Guadalajara, and with that we cover 5,000 people in the event. This year we had some activities in the events apart from explaining them how we did, which were the challenges, the difficulties, the achievements, the setbacks, and what we expect to do in the future and what we expect from them. We had a session with a very interesting organizational orchestrator who makes you play music.
That is great. I have two more, one to open a 5-minutedebate, I am really interested in you sharing your point of view about the debate about the drug legalization. And then another one about Monterrey perception. Ok? But let’s begin with a macro topic like the debate.
Well, as I told you in the last meeting, together with other businessmen in Monterrey we requested a research to the EGAP and CIDE to analyse prohibition worldwide, the war against drugs, the effects it had had, whether it has been successful or not and which are the regulation alternatives to reduce damages to society. We realized, from the conclusions of this study brought by the academics, researchers, that the prohibition has never worked in any place in the world. Every time governments have tried to prohibit a human vice they cause crimes, violence, and cause more damage to the society than the vice itself. We have come across some interesting data especially from the US, because it has a lot of statistics, also in Europe, but in the US, if you see or estimate that given the level and intensity of the war against drugs, which they promote globally, that those drugs are causing great damage to society. However, you realize that legal drugs cause more damage than the illegal ones, I mean the cigarette, for example, accounts for half a million deaths in the US yearly. Alcohol causes approximately 100,000 per year, legal pharmaceutical drugs cause almost 75,000 deaths and all the other illegal drugs put together cause less than 15,000 deaths in the US annually. And marihuana does not cause any deaths. So these figures can be checked in Mexico or Europe, they have the same proportions. This shows a very big problem, because if public policies are aimed at reducing the damage to society, well, it is working out the other way round, right? Because in Mexico, where at least the previous government, took a strong position in the war against drugs and put the army in the street and made the war its approach of administration. Everywhere they talked about the war, whether at an event related to the drug issue, or at an educative event, at a cultural event, everywhere they discussed the drug issue. And that caused, first of all, psychosis, and secondly, a terrible war. Because when the business of criminal groups was threatened they answered back and cost a lot to the government, because they involved society, apart from killing each other and fight for their territory, etc. And well, depending on what estimate you believe, in six years between 70 and 200,000 people died in Mexico. So clearly the damage caused by the war against drugs was much greater than the one drugs cause. And well, we see the conclusion after analysing different regulation models around the world, like the Swiss, the Dutch, and Portuguese, Spain is already beginning with that, Australia too. The US itself has already legalized marihuana in more than 20 States for medicinal use and in two States for recreational use, which are Colorado and Washington. And Colorado has already established rules about the recreational one, how much you can buy, how, where, who can grow it, with which license, I mean, they have regulated everything. And of course they charge taxes, so, we see that a policy that decriminalizes drugs, focused on resources, prevention, educationand treatment, is much more effective than the war against drugs, right? It does away with violence, it costs less, and it is more successful. When Portugal decriminalized drugs in 2001, for example, it had a teenage consumption rate of over 20%, similar to the rest of Europe. After ten years that rate was 12%, meanwhile the rest of Europe still had a 22% rate. And this works for all types of drugs, of course every drug has to be treated or regulated differently. Marihuana can be a recreational drug, for adults, with licenses, controlled, without publicity, I mean, everything that has been done for tobacco or alcohol. They teach people that it is something that should be done regularly, but well there it is.
And you avoid a chain of damages to society that occur when it is forbidden. But when it is forbidden, well, users do not want to ask the government because they send them to jail. So they go and steal a convenience store, which is damage to society, or they kill the cashier there at the convenience store, well that’s more damage to society. They go and inject themselves with shared, dirty, infected needles. They can get AIDS, that’s more damage to society because we have to bear that. And if they end up in jail it harms society because we have to pay for him in jail. So we can avoid all this harm if we receive them at a hospital and register them, take care of, and try to get them out of the addiction. That’s the practical side, right? Everything shows that it is better to regulate this, for the government to take control of it to do away with those sources of income for organized crime. And well, crime will always exist but it would be without those huge resources they have always had to fight against governments against them, right? If we look at budgets, it is estimated that in Mexico drug trafficking profits are between 25 and 30 billion dollars a year. The total navy, army and police budget in Mexico is 18 billion dollars a year, or so it was the highest a couple of years ago. So you will never win them and people who like these drugs, who have these vices o simply those who want to try them are going to try them whether they are legal or not.
I think it has been widely proven that it does not work. There are two ways of solving this, one is to go back to a policy in which they reduce the intensity of drug trafficking persecution, and it is said, or it is implied, that if you are in the business and do not mess with society we will have peace, right? Like in the US, and like it was in Mexico before this war started during the last six-year term. And we can see that with this new government. This new government has never mentioned the word war, not even once, and the intensity of the subject has been reduced. They are not capturing all the small distributors in each corner, not actively.
Yes, it is not the government’s identity.
It is not the identity. This government, its idea of economic growth, we are going to pass the reforms, we are going to take Mexico out of that violent circle, it is bad publicity and bad image, and we are going to change reality, right? And I think that the final solution is to regulate illegal drugs, as it has been done with the legal ones. I mean, there are many drugs, alcohol and cigarettes and pharmaceutical ones, that are legal drugs. And they all cause damage, I mean, alcohol causes damage, tobacco causes damage, but you do not see killings due to alcohol or tobacco.
That is also what we were discussing the other day, many drugs are consumed in Spain and they do not count thousands of deaths, and I am sure there are traffickers everywhere.
Because the government is not addressing drug dealing. It does not mean to allow them to sell, brand it and make publicity on TV, but it is not a war against drugs. So that is very important. And philosophically speaking, it bothers me a lot a war against an activity and people that consume a substance as long as they are not violating someone else’s rights. If you steal, you kill, you kidnap, if you drive drunk, well you may potentially kill someone. But if I want to drink an entire bottle of tequila at home and want to just lie there, whose business is it?
It is a health issue. It may be a stability problem for my family. But it is my call, it does not affect you, or you, or you. So it is the same with marihuana, with cocaine, it is the same, as long as they do not damage someone else. But if you mess with cocaine and get aggressive and you punch someone, well, you have hurt him. But it is not because of cocaine, it is because you punched someone. If you get high and drive a car then the same rules as with alcohol can be applied. If you are going to be aggressive and get in a machine that has the potential of not only hurting you but also killing someone else, or hurt someone else, then the government can act. But I believe that from the practical point of view and taking into account the evidence collected during not one or two years but during many decades.
You can even go back a thousand a years, because one of the first thing humanity tried to forbid was prostitution, for example. And well, we have never been capable of prohibiting prostitution because there is always a horny one that wants to go and there is always someone that offers, then you cannot take that away from them.
There is a lot of double morality game in the middle, it is very complex.
Yes, I think it is a lot. Many conservative people say it is immoral then it has to be forbidden. Well, wait, it may be immoral. So you have to teach, try to prevent it but not just prohibiting it because it is immoral.
Is it the one about Monterrey? Is it a survey?
Yes, reality and perception back to back; data provided by TEC that are approved by the Secretary of Economy. Monterrey is in the first place in national competitiveness during the last three years, first second national place in FDI attraction, second national place in labor productivity, GDP per capita, in 2010 the highest nationally, second place in human development index. I mean, all positive, positive. BUT 87% of the population does not trust the state security system, 53.5% considers the city to be less safe than in 2010. 45% of the population feels a bit proud of Monterrey, 70% of the population considers that more than half of the citizens are corrupted. I want you to give me the formula to understand this. What should we do with all this?
But there is a population that does not feel proud and then there is a clear feeling of pride, some interpretations and feelings are mixed up.
I think that a great part of the population felt sorry about what was going on, but instead of getting angry and trying to use their energy to do something…”Well, where are you from?” “From Mexico”, not “From Monterrey”Because it had a bad image, it still has a negative image in the world.