Spend no more than a paragraph or two explaining the case events. Then please address: What economic tools have you been taught to help analyze both the circumstances discussed in the assigned caselet below and the decisions made by management?

Americas: It's Time to Bust the Telmex Monopoly

Author: O'Grady, Mary Anastasia

It is a decade overdue, but Mexico finally has a clear path to ending the near-monopoly status of Telmex -- Carlos Slim's Telefonos de Mexico. Whether President Felipe Calderon seizes the day will signal just how serious he is about modernizing his country's economy. The cost to the economy of Telmex's dominance cannot be overstated. Lack of competition is the reason Mexicans pay some of the highest telecom charges in the developed world, according to a report last year by the Organization of Economic Cooperation and Development. It's also the reason Mexicans' access to telephone services -- landlines and mobile -- is "one of the lowest in the OECD." As a result, while the world forges ahead in the information age, Mexico is being left in the Stone Age. Good news came last week when the government ordered Telmex to provide interconnection to a key competitor. It is the first time since 1997, when Telmex's monopoly privileges ran out, that the government has been willing to enforce the terms of the 1990 concession title. That is the agreement signed at the time of privatization. Even so, the ruling does nothing to solve the main cause of Mexico's inefficient and costly telecom market. Until Telmex is forced to provide competitive pricing to non-Telmex carriers that have to use the network, and simple number portability to customers who want to switch to other carriers, competition will not evolve. Telmex should also have to cease its practice of cross-subsidizing its telephony businesses. Until now, Mr. Slim has been an immoveable object. When his monopoly privileges expired in 1997, regulators tried to make him provide network access, at competitive rates, to the other carriers. But by then he had gotten used to the spoils of the monopoly. Whenever regulators have tried to force competitive practices, he has used the courts to block them. Mexico's largest special interest is also known for using his influence in the halls of Congress and with the executive. During the presidency of Vicente Fox (2000-2006), a former Telmex employee was miraculously named the minister of communication and transport. Judging from how little was accomplished under Mr. Fox, that minister wasn't shy about looking after his former boss's interests. Until now, Mexicans have been wary of crossing the powerful Mr. Slim, who is said to control 40% of advertising in the country. But the problems caused by Telmex's uncompetitive practices can no longer be ignored. To that end the telecom regulator, known by the Spanish acronym Cofetel, has drafted a proposal aimed at creating an environment where competition can flourish. The initiative calls for interconnection for all competitors at cost- based rates. It would also introduce an institutional framework similar to that of most OECD countries, and bring Mexico into compliance with the World Trade Organization. The trouble is that Mr. Slim has already shown that he can litigate to eternity anything coming from the regulator. So even if the new regulation is adopted, Telmex is likely to use the injunction process to block its effectiveness. That is, unless Mr. Calderon trades Mr. Slim something for his cooperation. Economic giants have gigantic appetites, and Mr. Slim's needs to be fed again. Having consumed Mexican

telephony, he now wants to begin eating into the television market by delivering video. But the terms of his 1990 purchase of Telmex strictly forbid such an expansion. So all the Calderon government has to do to tame the Telmex beast is to enforce the terms of the existing title concession. This would mean that the company would have to adopt accounting practices that avoid cross- subsidization. It also would mean making it clear to Mr. Slim that the Telmex concession title prohibits the provision of television services.

If Telmex wants to change the terms of that original contract so it can compete in video, Mr. Calderon should exact a price. If the company otherwise complies with its original obligations, the Cofetel plan can be put on the table, along with a fee, as the cost of a television license. Standing firm on this point is important to the future of both television and telephony in Mexico. Right now cable companies are trying to deliver telephone services, but Telmex's interconnection rates are making it difficult to compete. Mr. Slim will crush these mid-sized competitors if he is allowed to offer video without opening telephony.

The Slim dynasty cannot prosper if it cannot expand into television. If Mexican regulators get smart and begin to aggressively privatize the wireless spectrum, its odds are even slimmer. That's why this is the moment to drive a stake through the heart of the Telmex monopoly. If Mr. Calderon passes up the chance, he will seal his own fate as a reformer and practically guarantee that Mexico will fail to live up to its potential in the next decade.