Carlos Slim’s Telcel, Femsa’s Oxxo Face Anti-Monopoly Probe

Both companies, leaders in their markets, are allegedly limiting customer access to competitors of Carlos Slim’s mobile network

An OXXO convenience store
August 30, 2022 | 02:15 PM

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Mexico City — A little over a year ago, on August 2, 2021, Mexico’s telecommunications watchdog IFT opened an investigation into Telcel, América Móvil’s (AMXL, AMX) Mexican carrier, and convenience store chain Oxxo, owned by conglomerate FEMSA (FEMSA) over alleged monopolistic practices for the sale of Telcel SIM cards without offering those of Telcel’s competitors in the country.

Oxxo, of which there are 20,196 outlets nationwide, only sells Telcel SIM cards and those of its own brand, OXXO CEL, Oxxo’s mobile virtual network operator (MVNO), with which it offers mobile telephony and internet services through FreedomPop.

On a visit to Oxxo stores in Mexico City and its metropolitan area, Bloomberg Línea found that the chain only sells Telcel chips, and not those of any competitor, such as Telefónica Movistar or AT&T. Employees of the stores visited agreed that, for years, only Telcel SIMs have been available and, since 2019, OXXO CEL MVNO SIMs.

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However, Oxxo stores do offer airtime recharge purchases for other cell phone carriers.

However, despite the Telcel SIM-only sales in Oxxo stories, a Telcel spokesperson told Bloomberg Línea that the company has no exclusive contract with the FEMSA-owned chain of convenience stores.

Alexander Elbittar, an expert in economic competition and academic at Mexico’s Center for Economic Teaching and Research (CIDE), told Bloomberg Línea that there are horizontal competition displacement strategies that can be carried out through an agreement, even by word of mouth, to exclude competitors, by offering, probably, a higher commission.

The economic logic of such practice is that the company asking for exclusivity offers a commission double that of a non-exclusivity contract, according to a a person familiar with the matter who asked to remain anonymous. “If you are the store, what you sell from other brands would have to be higher than the commission reduction you would have to make for not having exclusivity. So you can’t sell other brands because it doesn’t benefit you”.

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Limiting the sale of SIM cardds to the Telcel brand, to the detriment of other operators, is a monopolistic practice however, by imposing exclusivity.

Distribution is one of the important elements of fair competition, in this case, among mobile operators. But this type of displacement strategy would limit competition with other competitors, and the authorities must therefore review whether the convenience store chain is engaging in a monopolistic practice, Elbittar said.

He explained that it would be necessary to review how many chips Telcel sells through Oxxo to determine if it is an amount that affects competition.

For the other mobile operators, entry into Oxxo’s distribution channel is complicated, negotiations drag on and in the end it is not possible to enter, a person with knowledge of the subject but who asked not to be identified told Bloomberg Línea.

This is not the first time that Oxxo has come under investigation over anti-competitive practices. An inquiry into the convenience store chain’s beer sales was launched in August 2010, as at the time Oxxo only distributed Grupo Modelo brands, excluding those of competitor Grupo Moctezuma.

When approached for comment by Bloomberg Línea, Oxxo responded that: “At FEMSA/Proximidad we do not give statements on ongoing proceedings as per protocol”.

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Elbittar points out that, although it may not seem so, a majority of convenience store chains’ revenues come from the provision of telecommunications services, such as airtime recharges or the sale of SIM cards.

However, the IFT is in charge of determining whether or not the company is engaging in monopolistic practices, since selling airtime recharges from other telephone operators, as in this case, may not be considered as such.

Oxxo, ‘Telcel territory’

According to Elena Estavillo, an expert in economic competition in telecommunications and FTI former commissioner, what Oxxo is doing by selling only Telcel SIMs has “many possibilities of being a monopolistic practice”.

“We will have to see the conclusions of the IFT, but I would say, looking at it from the outside, that there are several elements: Oxxo’s network of stores is huge throughout the country, and they are giving exclusivity to a company that is dominant, which has a very high proportion of the market,” she told Bloomberg Línea.

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The Oxxo chain comprises 20,196 stores in Mexico, according to FEMSA’s second quarter 2022 financial report. Selling one chip a day would add 20,196 new prepaid lines to Telcel, and in one month the outlets would sell 605,880 at that one-a-day rate

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Exclusive sales take other competitors out of the game, and which favors the growth that Telcel reported in its 2022 second quarter earnings report. The dominant player in Mexico’s mobile telecommunications sector, Telce, recorded revenues of 56.83 billion pesos ($2.82 billion) in second quarter, 2.9% higher than in the same period of last year, and accounting for 70.5% of market revenues, according to market research firm Competitive Intelligence Unit.

Telcel’s financial data for the second quarter in Mexico indicate that it added 374,000 subscribers, including 22,000 post-paid subscribers, to close June with 81.4 million mobile customers in the country, 3.3% more than during the previous year.

Of these customers, 66.8 million are prepaid, which depend on airtime recharges. In the last year, Carlos Slim’s company has added 2.7 million prepaid users, an increase of 4.4%.

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Likewise, Telcel had an 8.8% increase in revenues from the commercialization of services, driven by a 10.4% increase in prepaid revenues, in which SIM card sales play an important rol), while postpaid revenues grew at a rate of 6.6%.

“Distribution channels are essential to compete in this segment; here we are talking about prepaid, which are the people who have to routinely top up,” said Estavillo.

With these results, “we continue to be concerned about the marked concentration of revenues that it continues to show, which takes us further and further away from a scenario of effective competition in the mobile market, and which has been developing under a scenario of marked differences between operators,” wrote Gonzálo Rojón on CIU’s blog.

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The perfect competition model establishes there should be free entry to the market for all players in an industry, and especially since restricting access is detrimental to consumers.

“One of the criteria that must always be kept in mind when analyzing competition issues is whether consumer choice is being affected. And in this case it is being affected, by closing a very important channel to other mobile companies and virtual mobile operators,” adds Estavillo.

Bloomberg Línea contacted Telcel, AT&T and Telefónica Movistar, but the companies said they cannot comment on an ongoing process that is in the hands of regulators.

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The IFT was also consulted to find out how the investigation is proceeding, but the agency declined to provide information on the case.

Possible sanctions

Estavillo, who is familiar with the IFT’s processes, said that the ongoing investigation since December 2021 may last two or three years, since the period may be extended up to five times, by following all the formalities allowed by Mexico’s Federal Economic Competition Law.

“Right now they are in the investigation period, and not even the IFT, for example the commissioners, can have access to the investigation, until it concludes,” she explained.

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Once the IFT establishes whether there are sufficient elements to proceed, there is a second stage where the probable perpetrators of the alleged monopolistic practice are informed. And in the face of this accusation, the responsible parties have the opportunity to argue in their favor and to present evidence in their defense.

In the event of a sanction, both Estavillo and Elbittar agree that the first action should be to eliminate the monopolistic conduct.

In addition, Estavillo points out that the sanction could be a fine, which could be substantial because it could be defined as a percentage of the companies’ revenues, although Elbittar points out that the fine would only be for Telcel, since this is where the IFT has jurisdiction.

A person familiar with the industry, who asked not to be named, estimates that the fine could amount to around 10% of Telcel’s revenues.