There are still more employees than customers at the customer-service center built in Tijuana by Mexico's newest telecommunications upstart, Pegaso. Surrounded by equipment displays and eye-catching ads, a dozen cashiers and sales people await the multitudes that Pegaso and countless newly licensed telephone companies hope to serve since Mexico opened the sector to competition.
Many have been slowed by funding problems or stiff competition from market incumbent Teléfonos de México (Telmex), the former state-run monopoly turned private-sector powerhouse, but Pegaso has quickly created a telephone company from scratch. Since paying $220 million for one of three nationwide wireless licenses in mid-1998, the company is working furiously to offer fixed and mobile services in Mexico's four largest cities -- representing 60 percent of the market -- by the end of the year, when it hopes to have 100,000 customers.
Marketed as the country's only completely digital network, the telecom and its list of heavyweight backers are looking to carve out a niche in Mexico's underdeveloped market by offering state-of-the-art technology and customer service rarely seen in Latin America. It's a strategy many hope to duplicate, not only in Mexico but throughout the region as governments in country after country open the telecommunications industry to competition in a bid to provide much-needed phone lines to consumers.
"Clearly the lessons learned here will go into creating the perfect launch model," says Dan Pegg, senior vice president of Leap Wireless, subsidiary of digital equipment manufacturer Qualcomm, and part owner of Pegaso.
As elsewhere in the region, newcomers in Mexico are turning to wireless systems for fast and comparatively cheap installation. Already cellular penetration has grown from less than 1 percent of the population in 1994 to 4.5 percent, with subscriber growth averaging 90 percent last year alone. The density is still significantly below countries like Venezuela, with a comparable domestic growth rate and a cellular penetration of 8 percent, but analysts expect the number of subscribers to double to 7.8 million Mexicans by 2003.
Similarly, the entry of many more new competitors in the next four years is expected to push the number of fixed lines per 100 inhabitants from 10 to just under 17, boosting total telecom service revenues from $6.9 billion to more than $11 billion. Of that, Pegaso figures it can cull 1.6 million fixed and mobile lines, or 10 percent of the market, by serving some 70 cities by 2005.
Given those numbers, Pegaso shareholders left nothing to chance when they launched the new service in Tijuana, Mexico's fastest-growing city. Since neighboring San Diego is home to several equipment suppliers including Qualcomm, the inventor of CDMA (Code Division Multiple Access) digital technology, local vendors were able to oversee, in record time, the installation of more than 50 microwave base stations in and around Tijuana's rugged hills. After Tijuana, Pegaso plans to move into Mexico City, Monterrey, and Guadalajara.
Pegaso is moving quickly -- as its namesake, Pegasus the winged-horse of Greek mythology, suggests -- to position itself as more than a dozen new licensees get set to come online. In Tijuana alone, there will eventually be five cellular companies to choose from, not to mention Telmex, which earlier this year announced a massive two-year, $4.6 billion investment plan to increase its still sketchy coverage by 48 percent to 20 million lines. "The idea was to launch as quickly as possible in order to establish brand awareness," says Juan Moragas, Pegaso regional manager for Tijuana.
The third player to enter the Tijuana market -- after Telmex's cellular phone company Telcel and its main competitor Bajacellular -- Pegaso got an important jump-start over its two wireless rivals bogged down by financial problems. Midicel, owned by the powerful Kanahuati family, had its license revoked earlier this year after it failed to pay its already twice-deferred license fee. Mexican magnate Ricardo Salinas Pliego also delayed payment on his license for close to a year, while he sold 50 percent of his yet-to-be-launched phone company, Unefon, in June to rustle up the cash. He continues to be held up by a litany of court injunctions filed by rivals arguing preferential treatment.
Like its competitors, Pegaso is the brainchild of a Mexican tycoon, Alejandro Burillo Azcárraga, but unlike some rivals, Pegaso is backed by a sturdy international ownership structure. In addition to his stake in three Mexican soccer teams, Burillo Azcárraga, the cousin of Televisa chairman Emilio Azcárraga Jean, is best known as one of the principal heirs to Televisa, the world's largest Spanish-language broadcaster. Alongside his 30 years' experience at the network, Burillo Azcárraga dabbles in personal investments through his holding company, Grupo Pegaso, and after a joint venture with Qualcomm in a satellite tracking enterprise, the idea to launch a telephone company was born.
When it came time to pay the costly licensing fee, the two partners enlisted the support of financial backers: U.S. bank Citicorp, venture capital group Latin America Infrastructure Fund, and the Japanese trading company Nissho Iwai. Together the three control a 31.25 percent stake in the company. Grupo Pegaso and Televisa own 28.75 percent and 15 percent respectively, while Leap remains with a quarter of the company. "Pegaso has thought its partnerships out very well," says Leslie Arathoon, Latin American telecommunications analyst with Boston-based Pyramid Research.
So far, the five investors have committed $400 million in cash out of a total planned investment of $1.3 billion to 2005. The company is looking to take on an additional $300 million in long-term debt, says Pegaso chief financial officer Juan Marco Gutiérrez, but the bulk of the money is coming from vendor financing with Qualcomm and Alcatel, who together are providing $580 million to cover all equipment needs.
The deal is much like the one recently sealed by Axtel, another local service newcomer. It obtained $750 million in financing from Nortel Networks, the Canadian equipment supplier and Axtel shareholder through Bell Canada. "Most of the new players don't have capital, so the name of the game is vendor financing," says Arathoon.
With most of the money in place, what Pegaso doesn't have is a high-profile operator like Axtel or long-distance providers Avantel and Alestra, both of whom partnered up with powerful U.S. telecoms, MCI Worldcom and AT&T, respectively. Instead, Pegaso counts on Leap Wireless to provide startup support and financial planning. They have also contracted GTE out of the United States and British telecommunications specialist the Red Wing Group as consultants in the areas of billing, customer service, and information technology. GTE alone has brought in 70 expatriates from Sri Lanka to Australia, while Leap personnel head up Tijuana's 60-person operation.