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Competition in the Telecommunications Sector in Mexico

April 2008

2

Coverage of Telecommunications services have still not reached its full potential. This Administration is promoting measures to increase penetration of telecommunications services.

Fixed Telephony, 2006(Lines / 100 inhabitants)

Mobile Telephony, 2006(Subscribers / 100

inhabitants)

Broadband, 2006(Subscribers / 100

inhabitants)

Switzerland 69.4 UK 116.4 Korea 29.3

Germany 65.5 Spain 106.4 Switzerland 26.5

Canada 64.1 Switzerland 102.1 Canada 23.6

UK 57.6 Germany 101.9 UK 21.7

US 57.2 France 85.1 France 20.9

France 55.8 Korea 83.8 US 19.3

Korea 56.0 US 77.4 Germany 18.1

Spain 42.4 Chile 75.6 Spain 15.4

Brazil 20.5 Brazil 52.9 Chile 5.9

Chile 20.2 Mexico 52.6 Mexico 3.4

Mexico 18.3 Canada 52.5 Brazil 3.1

Fuente: Unión Internacional de Telecomunicaciones

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Over the last year, there has been a dramatic fall in prices of close to 30% in mobile telephony, due mainly to an increase in competitive pressures. In other services more competition and faster reduction in rates are needed, particularly in Internet access.

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High Medium Low$USD, PPP

Source: OECD, Communications Outlook 2007.

OECD Basket of Mobile Telecommunications, October 2006

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Household Expenditure in Telecommunications Services as percentage of Total Expenditure, by Population Deciles

I II III IV V VI VII VIII IX X

Total Communications 4.8 2.9 3.2 3.5 3.9 4.3 4.7 4.7 5.6 5.7 5.0

Local Service2/ 1.7 1.3 1.4 1.5 1.6 1.8 2.1 2.0 2.1 2.0 1.4

Long Distance Service 0.6 0.3 0.4 0.5 0.5 0.5 0.5 0.6 0.7 0.8 0.7

Mobile Telephony/3 1.9 0.8 1.0 1.0 1.3 1.5 1.5 1.7 2.3 2.4 2.3

Internet Service 0.3 0.1 0.1 0.2 0.1 0.2 0.2 0.2 0.3 0.4 0.5

TotalHousehold Deciles1/

1/ According to its monetary income

2/ Includes telephone installation and local calls.

3/ Includes initial payment, equipment acquisition, prepaid cards and mobile telephony service payment.

Total communications expenditure includes public telephony and other services such as mail, telegraph, public fax, beeper and others not specified.

Source: Own estimates based on Household Income and Expenditures National Survey 2006.

ICTs have an important share in households expenditure, regardless of their income level.

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In order to reduce the income gap it is necessary that Telecommunications Services reach the entire population.

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1 2 3 4 5 6 7 8 9 10 Total

Decile

%Fixed Telephony

Mobile Telephony

Internet Access

Penetration of Telecommunications Services in Mexico, by Population Decile

Source: INEGI, Household Income and Expenditure National Survey, 2006.

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Competition in the telecommunications sector has intensified, particularly in the mobile market.

Otros3%

Telmex92%

Axtel4%

Maxcom1%

Movistar15%

Telcel76%

Nextel3%

Iusacell-Unefón

6%

Telmex68%

TV por cable26%

Otros6%

Fixed Telephony Mobile Telephony Broadband Access

Market Share Distribution in Main Telecommunications Markets in Mexico

Source: Pyramid, Communications Markets in Mexico 2007. Datos a diciembre 2006.

Source: Merrill Lynch, Global Wireless Matrix. Datos a diciembre 2006.

Source: Pyramid, CANITEC y Telmex. Datos a diciembre 2006.

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Spectrum Auction ProgramFrequency

Band (MHz)Total

BandwidthBlocks Geographic Area

1850-1910/ 1930-1990

30 MHz3 blocks of 10 MHz

Cellular Regions

1710-1770/ 2110-2170

90 MHz

5 blocks of 10 MHz

2 blocks of 20 MHz

Cellular Regions and Basic Service Areas

3400-3700 150 MHz

2 blocks of 25 MHz

2 blocks of 50 MHz

Cellular Regions and Municipalities / Groups of municipalities

71000-76000/ 81000-86000

10,000 MHz

1 block Basic Service Areas

Competition will be fostered by making more spectrum available.

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Auction Programs since 1996Program Year Service MHz Availability

1 1996 Mobile 3 Country wide

2 1997

Pay TV* 118 53% of the country

Fixed 200 Country wide

Links 6,270 Country wide

Mobile 120 Country wide

3 1998

Links 2,271 Country wide

Pay TV * 180 50% of the country

Mobile 7 Country wide

4 2000 Mobile 0.025 Country wide

5 2004 Mobile

20 30% del país**

30 22% del país**

40 Country wide

6 2008

Links 10,000 Country wide

Fixed *** 150 Country wide

Mobile90 Country wide

30 88% of the country

Usos

Program 1 Program 2 Program 3 Program 4 Program 5 Program 6

1996 1997 1998 1998 2004 2008

Links 0 6,270 2,271 0 0 10,000

Fixed 3 200 0 0 0 150***

Mobile 0 120 62 0.025 90** 120

Other No Yes* Yes* No No No

* Pay TV auctions** Mobile service auctions which include 30% of the country.***The inmediate use is fixed service, however no restrictions existe forl delivering mobile services in the future..

This program is the most ambitious that has been published

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Indicators of tariffs, lines and traffic

1999 2000 2001 2002 2003 2004 2005 2006

Fixed-mobile retail rate1 2.5 2.5 2.5 2.5 2.5 2.5 2.25 2.03

Fixed-mobile 1.9 1.9 1.9 1.9 1.9 1.9 1.71 1.54

Mobile-mobile 1.9 1.9 1.9 1.9 1.9 1.9 1.71 1.54

Mobile-fixed 0.3 0.316 0.117 0.094 0.105 0.11 0.106 0.106

Mobile network2,5 7.7 14.1 21.8 25.9 30.1 38.5 45.1 56.4

Fixed network2,5 10.9 12.3 13.8 15 16.3 18.1 19.2 20.9

Mobile network3,5 5,152 10,975 15,919 19,990 26,386 38,188 50,236 73,000

Fixed network4,5 23,426 24,738 25,567 25,679 26,494 26,782 26,680 26,666

Number of lines

Network traffic

Interconnection rate1

1/ Pesos per minute 2/ Figures in millions of lines in service. 3/ Millions of minutes. 4/ Millions de Telmex calls. 5/ 2006 Figures correspond to estimates up until December. Source: Cofetel and Telmex

In order to effectively increase competition it is important to set more efficient conditions in interconnection.

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0.20 0.27 0.34 0.

44 0.51 0.57

0.59 0.65

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91 0.98 1.

17 1.30

1.65

0.000.200.400.600.801.001.201.401.601.80

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Source: European Communities Commissions, “European Electronic Communications Regulation and Markets 2006, march 2007. Peak-hour rates, adjusted by 85% factor (Exchange rate 1.3 dollar/euro); FCC, “Intercarrier Compensation and Retail Rate Regulation in the US”; China and India: TRAI, Financial Analysis of Telecom Industry in India and China, june 2006.

Fixed Local Termination Rates in Selected Countries

(US cents per minute)

Fixed local termination should be cost based and symmetric for all carriers.

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Competition of backbone services has been enhanced by the entrance of Electric companies in the Market.

Country Utility Company OwnershipRelation with the Parent Electric Company

Dark Fiber

Lit Fiber Collocation

Canada ENMAX Government Yes (business unit) Yes Yes YesCanada Telecom Ottawa Government Yes (subsidiary) Yes Yes YesCanada Toronto Hydro Telecom Government Yes (subsidiary) Yes Yes n.a.US Edison Carrier Solutions Private Yes (business unit) Yes Yes YesUS FPL FiberNet Private Yes (subsidiary) Yes Yes YesSpain Ufinet Private Yes (subsidiary) Yes Yes YesFrance @rteria Government Yes (subsidiary) Yes Yes YesIrland ESB Telecoms Government Yes (subsidiary) Yes Yes YesPortugal RenTelecom Private Yes (subsidiary) Yes Yes YesSouth Africa Infraco (in project) Public-Private Non Yes Yes n.a.Central AmericaNewco (in project) Public-Private Non Yes Yes YesSpain Adif* Private Yes (business unit) Yes Yes YesSweden Stokab* Government Non Yes Yes Yes

Telecommunications Service Offerings of Electric Companies in selected Countries

Source: Internet web-pages of the companies

*They are not related with electric companies, but with other utility companies such as railway in the case of Adif and the local government in the case of Stokab.

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OECD basket of national leased line charges 2 Mbps, August 2006

(000’ USD PPP)

OECD basket of national leased line charges 34 Mbps, August 2006

(000’ USD PPP)

Fuente: OCDE, Communications Outlook 2007.

CFE entrance into the telecommunications market will lower prices, particularly for internet access services.

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CFE entrance into the provision of Internet access will help to lower the price disparity between rural and urban areas.

Leased Lines Prices for Internet Access (2 Mbps)

City Backbone ProviderMonthly Rent (MXN$)

Toluca, Edo. Méx. Bestel, Maxcom, Alestra $ 3,300

León, Gto. Bestel, Maxcom, Alestra $ 3,300

Cd. Hidalgo, La Piedad, Zitácuaro, Mich.

Telmex $ 6,000

Tenancingo, Edo. Méx. Telmex $ 6,000

Tapachula, Chis. Telmex $ 13,000

Salamanca, Gto. Telmex $ 18,200

Cd. Altamirano, Gro. Telmex $ 20,971

Huetamo, Gro. Telmex $ 35,108

El Grullo, Sayula, Jal. Telmex $ 40,000

San Miguel de Allende, Gto. Telmex $ 58,650

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Local Call Revenue of the incumbent when its costumers make Long Distance Calls and Calls to Mobiles

(Millions of Pesos per year, 2005 prices )

3,4163,157

1,340

2,818 2,711

634

1,744

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

LongDistance

Calls toMobiles

Source: Own estimates based on information reported by the Company.

Competition will be also impacted by empowering consumers- Practices such as double billing should be avoided.