Historical Reform of the Mexican Telecommunications Industry

by Sheppard Mullin Richter & Hampton LLP

The new President of Mexico, Mr. Peña Nieto, has reached an unprecedented multi-party agreement between his party, the Partido Revolucionario Industrial (PRI), and the rest of the major political forces: the Partido Acción Nacional (PAN), which governed Mexico between 2000 and 2012, the Partido de la Revolución Democrática (PRD) and the Partido Verde Ecologista (PVE).

The implementation of the agreement, known as “Pact for Mexico,” will have a tremendous impact in the realm of telecommunications. The main objectives of the bill are as follows:

  • Restrictions to media ownership

The Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones) (“FTI”), sister to the Federal Communications Commission (“FCC”) of the United States, will impose limitations on both national and local media ownership consolidation.

The FTI will have powers which in the United States are under the umbrella of the Antitrust Division of the Department of Justice, since it will supervise the economic competition within the main players of the industry by investigating and scrutinizing monopolies, media ownership consolidation and other economical restrictions that cause market inefficiencies in accordance with the Herfindahl index.

Although it has not been decided which threshold the FTI will use for horizontal and vertical ownership restrictions yet, the bill grants the FTI with the power to order mandatory divestments on certain entities that cause restrictions on competition. The question is how will they approach such divestments.

One alternative would be the one carried forward in the United States in FCC v. National Citizens Committee, 436 U.S. 775 (1978), where the ban on cross-ownership between newspapers and broadcast was deemed constitutional, but mandatory divestments were only ordered on egregious cases (i.e. those where one entity or person was holding the only newspaper and the only broadcast station in a particular local market). Such entities were given a five (5)-year period to divest, together with some tax exemptions for the transaction.

Another alternative could be the Argentine route. Unlike the United States, Argentina’s telecommunications law, enacted in 2009, mandates a divestment at a national and local level, but only giving a one (1)-year period to do so, regardless of how many entities are in the relevant market prior to divesting. These measures are currently being challenged in Argentina’s highest court.

Further, the FTI will also be entitled to supervise all activities that are against the public interest. Therefore, like the FCC, it will seek diversity, localism and competitiveness to achieve benefits for the public interest. For example, it will regulate the advertising of kids’ programming and promote a wide variety of viewpoints in the airwaves.

The FTI will not be entitled to restrict freedom of expression by any arbitrary and capricious decision or prior restraint.

On the other hand, Congress will create new criminal sanctions that severely punish monopolies and media consolidation.

  • Opening the doors to foreign investment

Currently, there is a 49% threshold for direct foreign investments in entities within the scope of the telecommunications industry. Moreover, there is no access for foreign investments in broadcast.

Since the aim of these changes is to foster competition, the bill intends to allow unlimited direct foreign investments in telecommunications entities, including satellite, and up to a 49% stake in broadcast stations.

Additionally, the development of the backbone to provide better network coverage for the general population could arise from private, public or PPP investment. Further, the 700 MHz and 2.5 GHz bandwidths will be used under the principles of non-discrimination, universal access, interconnection and common carriage.

  • Television: Digital transition

It is expected that by December 31, 2015, all full-power television stations nationwide will be broadcasting exclusively in a digital format. Once these steps are completed, licensees are requested to return the frequencies that were originally granted by the State. The goal is to guarantee an efficient use of the electromagnetic waves and have a better use of the 700 MHz bandwidth.

Further, at least 90 Mhz of the freed bandwidth will be used for expanding broadband services to the general population.

  • Must Carry Rules

Following the steps of the United States (see Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994)), the FTI will implement must-carry rules for free and simultaneous retransmission of over-the-air television stations, without any preemption powers whatsoever. However, the FTI will be entitled to deny free retransmission when it concludes that (i) there is competition in the market, or (ii) such networks have been labeled as having a “substantial power” in the market.

The FTI will closely scrutinize those entities that either directly or indirectly have a national participation of more than 50% of the broadcast or telecommunication services. Such percentage will be measured by the number of customers, the network’s traffic and its capacity, in accordance with the data collected by the FTI.

  • Two (2) new television stations

No later than 120 days after its new composition, the FTI will release the bidding terms and conditions to create two (2) new national broadcast television stations. Licensees that are in any way controlled by entities that have accumulated at least 12 MHz of broadcast services in any geographical area are not allowed to participate in the public bid.

  • Structure of the FTI

The FTI will be a fully independent agency of the government, integrated by seven (7) commissioners for a nine (9)-year term, without the possibility of reelection. These commissioners will be appointed by the President with the advice and consent of the Senate (they need at least the approval of two-thirds of the senators present at the time of voting). There are certain restrictions for the appointments. For example, those who have served as governors or members of congress five (5) years prior to an appointment cannot be considered for the position.

The decisions of the FTI (which will be issued by a majority vote) can be appealed to specialized courts that will be created no later than the second quarter of 2014. These courts will only hear cases related to (i) the implementation of the new telecommunications act, and (ii) antitrust. It should be noted that the FTI decisions will not be stayed through the entire proceeding of a relevant challenge.

  • Section 230 of the Communications Decency Act (“CDA”)

There is nothing in the bill that seems to create a mirror to section 230 of the CDA, which provides a safe harbor against laws that might otherwise hold providers that host third-party speech liable for what users publish therein (see Fair Housing Council of San Fernando Valley v. Rommate.com, LLC 521 F.3d 1157 (9th Cir. 2008); Zeran v. America Online, Inc., 129 F.3d 327 (4th Cir.1997); ?Ben Ezra, Weinstein & Co. v. America Online, Inc., 206 F.3d 980 (10th Cir.2000); ?Green v. America Online, 318 F.3d 465 (3d Cir.2003); ?Batzel v. Smith, 333 F.3d 1018 (9th Cir.2003); ?Universal Communication Systems, Inc. v. Lycos, Inc., 478 F.3d 413 (1st Cir.2007); Chicago Lawyers' Committee For Civil Rights Under Law, Inc. v. Craigslist, Inc. 519 F.3d 666 (7th Cir., 2008)).

Therefore, websites and search engines need to be aware that the general rules of defamation and invasion of right to privacy, amongst others, will still apply under Mexican jurisdiction, regardless of whether the content has been created by the provider itself or by an unrelated third party.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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