Telecom: With doors now open to foreign competition, Satmex's fate is up in the air as it loses its monopoly.

By CHRIS KRAUL
TIMES STAFF WRITER
 

MEXICO CITY -- This country's home-grown satellite telecommunications business is about to get a heavy dose of competition from powerful U.S. and European
companies with more satellites and bigger wallets, and many think it could prove fatal.

Those fears have provoked the latest in a long chain of heated debates in Mexico on free trade's pros and cons. It pits proponents of national sovereignty and
security against those who argue for the benefits of open markets and competition in a key industry.

With demand for pagers, cell phones, data transmission and video services all exploding here, Mexican officials believe the nation must foster competition in satellites.
But the process could result in a major casualty: Satelites Mexicanos, or Satmex. The former state-owned monopoly, which privatized in 1997, is in shaky financial
shape, and company officials admit they may not survive the new environment.

"For Mexico to deliver on the promise of access to communications throughout its territory, it must count on satellite technology," said Juan I. Fernandez, senior
telecommunications analyst at Gartner Dataquest in Corvallis, Ore. "But the fate of Satmex is an emotional issue in Mexico. Satmex was the first national satellite
company in Latin America and was a source of pride for Mexicans, who saw this as a part of the promise of a 'new' Mexico."

The dispute is the latest in a string of skirmishes in the wake of the 1994 North American Free Trade Agreement, which is erasing all trade barriers between the
United States, Mexico and Canada.

But this controversy offers a new twist, because of the importance of satellites to Mexico's government communications and its development of high-technology
industries. National security and pride are now shading the debate.

At its 1997 privatization, the principal investors in Satmex--including U.S.-based Loral--paid $911 million believing they would have, if not an indefinite lock on
satellite customers transmitting from Mexico, at least a big head start on any rivals.

But under a 1998 accord made possible by NAFTA, Mexico agreed to open its satellite market to private competition. That was after U.S. satellite firms
complained that Satmex was gathering U.S. transmission business but that U.S. firms were forbidden from doing the same in Mexico.

Earlier this month, Mexico cleared the way for three new satellite operators to launch service this year, breaking Satmex's monopoly.

Those three new operators include what Satmex calls "the two Generals"--groups led by PanAmSat, which is 81% owned by Hughes Electronics Corp.; and by
Luxembourg-based SES Global, which is in the process of buying General Electric's satellite system, called GE Americom. The third new licensee is broadcasting
giant Televisa, which says it will use the satellite for its own programming.

Satmex says it is not upset about competition per se, which it knew was coming, or about the technology the newcomers will offer, which it says it can match
(Satmex uses satellites made by Boeing). What Satmex is hot about are the terms of the concessions, which it insists create an uneven playing field.

At a meeting Tuesday with the Mexican Chamber of Deputies' communications commission, Satmex Chief Executive Lauro Gonzalez said the terms of the
privatization mean his company pays $27 million per year for rights to each orbit, compared with $300,000 paid by PanAmSat and SES Global.

Gonzalez blames his government for letting in two giant satellite companies with a total of 18 satellites covering Mexico, compared with Satmex's two, which are both
operating at capacity.

Gonzalez also faulted free trade, specifically the NAFTA-based bilateral telecommunications accord that both countries signed in late 1997, saying the pact did
nothing to protect one country from economic "incongruencies" that give the other competitive advantages.

Although the Mexican Congress cannot intervene in the satellite licensing process, Jesus Orozco Alfaro, the lower house's communications commission chairman,
criticized the terms of the deal and promised to address them in an upcoming revision of the telecommunications law to provide more congressional oversight.

"My personal opinion is that the conditions of the concession should be changed," Orozco Alfaro said.

President Vicente Fox's administration so far has stood by its awarding of the contracts. In a radio interview this week, Communications and Transportation
Secretary Pedro Cerisola dismissed the Satmex complaints, saying the auction was "valid, legal and legitimate." He accused Satmex of not having taken advantage of
its monopoly to sign strategic ventures with international companies beforehand.

Mexico was also under the gun to assign the orbits allocated to them by the International Telecommunications Union, orbits it would lose unless it used them, said
Gabriela Baez, a telecommunications specialist at Boston-based Pyramid Research. Mexico lost six such orbital rights because it hadn't assigned rights, she said.

In any case, the outlook for Satmex is grim, with Wall Street analysts including Bruce Stanforth of BNP Paribas having turned bearish on the company's prospects.
Satmex is loaded with debt and short one satellite since its Sol 1 was decommissioned last August. A replacement won't be in orbit before early 2003.

Loral can't be happy either, with its $450-million investment in Satmex in deep trouble, but officials declined to comment on the situation.

In any event, Satmex has filed with federal courts here for an injunction to block the competitors, but that process could take years.

A clue to the future direction of Mexico's satellite market comes from the fact that PanAmSat's partner, Pegaso, a wireless telephone company, is expected to roll
out "next generation" wireless service later this year involving high-speed Internet and data transfer.

"You will see this rolled out all over Latin America, all made possible by satellites," said Carlos Guzman, a telecommunications expert with Yankee Group office in
Mexico City.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Vying in the Sky

Satmex, the Mexican national satellite company that was privatized in 1997, has had its home market to itself--until now. The Mexican government broke the
monopoly by awarding operation licenses to groups that include General Electric and Hughes' PanAmSat. Here is how the companies stack up:

Satmex SES Global PanAmSat

Where based Mexico City Luxembourg Wilton, Conn.

Revenue $136.4 million $1.73 billion $1.02 billion

Satellites 2 41 21

Employees 226 751 750

Note: Figures for SES Global assume the successful merger of SES-Astra and GE Americom.

*

Sources: Satmex, SES Global, PanAmSat

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