Banking on long-distance: for the CEO of long-distance provider Avantel, connecting Mexicans to the rest of the world is only one part of the strategy to battle Telmex

Latin CEO: Executive Strategies for the Americas, April, 2000 by Daniel J. McCosh

WITH AN OFFICE alongside the company's legal team, well west of Mexico City's downtown, it would appear that Avantel CEO Francisco Gil Diaz spends most of his time devising legal strategies to combat dominant phone company Telefonos de Mexico (Telmex) -- and pushing regulatory bodies to regulate.

As a former candidate to head Mexico's central bank in late 1997, Gil is no stranger to the ways and means of Mexican bureaucracy. Aside from holding the position of vice governor at the central bank, he has also headed up the tax collection office of Mexico's national customs.

But it wasn't until long-time friend and Banamex CEO Roberto Hernandez tapped the academic norteno that Gil considered making the jump to telecommunications.

Now, after three years of leading Avantel in the battle for the Mexican long-distance phone market, Gil has grown the Banamex/MCI venture to a 10-to-15-percent market share. The market position is all the more remarkable considering that Telmex still controls the local infrastructure. Avantel, says Gil, remains hostage to what it considers high fees to patch in and out of Telmex's local lines.

"As a new entrant we have to offer better service at a better price," says Gil. But given that Telmex at times charges interconnection fees that exceed Telmex's corporate phone rates, it's often difficult to undercut the market leader in price. So Avantel and its parent company MCI are petitioning government agencies in both the United States and Mexico to open the Mexican market more fairly, and for behemoth Telmex to be constrained.

The results so far: In December, the US Federal Communications Commission (FCC) slapped subsidiary Telmex USA with a US$100,000 fine for failing to provide private circuits to competitors. More recently, the US Trade Representative has stepped in to pressure the market leader.

Gil says that short of a legal breakthrough, the only thing that will open up the market is providing strong alternative services. "[Telmex] has lowered prices in long-distance, but it is not going to lower prices in other markets until there is competition," says Gil.

That competition may soon be a reality. The opening of Mexico's telecommunications industries has rolled out by sector. It began first with the long-distance market, then moved to wireless and is just now moving to fixed local access. So, while Avantel and AT&T subsidiary Alestra have a combined 25 percent of the long-distance market in Mexico, Telmex remains an absolute monopoly for local service.

This year could change that formula, as Avantel prepares to roll out its own local service -- pending necessary operating agreements with Telmex. "The market is asking that we complement our long-distance service with a local one," says Gil. "The local market will give us cash flows that will allow us to diversify."

Avantel's strategy of expanding services in Mexico has already received high marks by industry analysts. "If you provide local services you can avoid long-distance interconnection charges," says Zain Manekia, a telecommunications analyst at Warburg Dillon Read. "They will be able to bundle different services in one package and offer a single billing." Lars Schonander, an analyst with ING Barings in Mexico City agrees: "To be a stand-alone, long-distance operator is a difficult business to be in, In the long run, you need other businesses for critical mass in Mexico."

Nonetheless, Avantel posted an operating profit last year for the first time, although the still-private company declined to reveal figures. It can safely be assumed, however, that Avantel is still far from making a substantial return on the US$1 billion dollars it has invested in a 4,000-mile, fiber-optic network. For more growth, Gil wants to push Avantel to expand its Internet services as well as its local phone presence. To pay for expansion, the company is planning a high-yield bond placement in April. Although the amount has yet to be determined, Gil says it will be enough to "position us well in these markets."

The company considered making an equity placement, but decided that it would be premature to enter the stock market. "We are waiting to define some alliances and to allow the local market to develop," says Gil.

Avantel is already in the Internet business with a dial-up ISP (Internet service provider) that links clients to the Web. Launched in November, the company's ISP captured more than 8 percent of the 500,000-account dialup market in Mexico in its first three months of operation. "It's a good number to start with, but it doesn't compare to the 400,000 accounts of Telmex," says Warburgs Manekia.

Gil is not sitting idly by, however. Next on his list are plans to form an alliance with an established portal. Avantel is also selling what it calls a virtual ISP service, which is a full dialup service that can be marketed under a client's brand. As it is, Avantel is already the largest supplier of wholesale ISP service for servers and large companies in Mexico, despite charging more than Telmex for similar services. "What companies want is speed and quality," says Gil, noting that Avantel's fiber-optic network helps give it the fastest ISP connections in Latin America. "They certainly have built a very solid network, especially for broadband services for large customers," says Manekia.