In a previous article, I posited that the Latin American telecommunications sector is the key growth sector in the region and will be one of its most interesting industries. Mexico, due to its proximity to the U.S., bilateral trade agreements (such as the

North American Free Trade Agreement

) and the corporate integration of U.S. and Mexican firms, should be the focus of international telecom investors.

As

Moody's

recently pointed out when it upgraded the country's sovereign rating, Mexico continues to distance itself from the rest of Latin America by having stable fiscal and monetary policies. Despite recession in Latin America and volatile equity markets, Mexico continues to enjoy a fair amount of investor confidence.

The Mexican telecommunications industry itself, however, is going through a period of change, and it is not yet clear what its future will look like. This is because the old guard is busily trying to reinvent itself while the new guard is plunging ahead, supported by some very strong backers.

David vs. Goliath

Since competition was permitted two years ago, the story of the Mexican telecommunications industry has been that of a Goliath, in the form of

Telefonos de Mexico

, or Telmex

( TMX), vs. a bunch of Davids, such as

Avantel

and

Grupo Iusacell

(CEL) - Get Report

.

The Goliath is the former telecommunications monopoly, which still dominates the industry. Telmex controls not only the vast majority of fixed lines in Mexican homes and businesses, but owns the main switching facilities and the routers, and is far and away the dominant provider of long-distance service. Also, Telmex has the ear of the government, particularly the all-important bureaucracy that really runs governmental relations with corporate Mexico.

Despite some interesting efforts by the Mexican telecommunications regulators to loosen the company's grip on the industry, Telmex has successfully managed to perpetuate its dominance in the face of growing competition. Telmex even convinced a Mexican court that, despite a 78% penetration of household long-distance services and a near monopoly on switching services, it is not a dominant player in the market and therefore not subject to antimonopoly sanctions.

Telmex is best comparable to the pre-breakup

AT&T

(T) - Get Report

. Its ambitious investment program could allow the company to reform, allowing it to become a low-end, and very profitable, provider of local and domestic long-distance service. However, it is unclear how long the company can fend off its increasingly aggressive rivals. Telmex is also busy trying to reinvent itself as a provider of value-added services. Recently,

Microsoft

(MSFT) - Get Report

announced that it will join with Telmex to develop a Spanish-language Web portal -- a field that

Telefonica

of Spain,

Starmedia

(STRM) - Get Report

and others are trying to crack. Telmex already has a relationship with

Prodigy

( PRGY) to provide Internet service provider services.

Davids Have Friends

The upstart companies make up for their lack of political and market power with two things: aggressive investment in new areas, such as cellular telecommunications, and powerful and well-financed backers, particularly U.S. firms moving into the Latin American telecommunications market.

Avantel was the first to challenge Telmex's dominance of Mexican telecommunications, offering domestic and international long-distance service. Avantel's catch is that it is 45%-owned by

MCI WorldCom

( WCOM).

Alestra

is the latest entrant into Mexican telecommunications, offering international long-distance service, expanding into domestic long-distance service and even local and cellular service in the near future. AT&T owns 49% of Alestra (the limit under Mexican law), giving it brand power and significant financial and technical resources.

Grupo Iusacell, a cellular company that has achieved impressive market share and brand recognition in Mexico's most populous states, is 47%-owned by

Bell Atlantic

(BEL)

.

Iusacell

, the No. 2 mobile-phone provider in Mexico, is perhaps the most interesting of the country's telecom companies and continues to see rapid expansion of its subscriber base and airtime minutes. Iusacell is also trying to expand service into northern Mexico, possibly through a deal with

Motorola

( MOT). Iusacell is the only one of the upstarts to have an ADR.

The problem with the Davids is that while they are throwing stones together at Telmex's Goliath in the political arena, they are also eating each other's lunches in the business arena. Though Alestra will attempt to break Telmex's local service hold by providing local telephone service, the effect of its wireless local loops will give it the ability to expand into cellular services.

Avantel, which has been fighting Telmex the longest, will see its growth possibly curtailed by a re-emergent Telmex and Alestra's new system. Even

Unefon

, half-owned by

TV Azteca

(TZA) - Get Report

, Mexico's No. 2 television broadcaster, is moving into long-distance services.

What will emerge? Until the dust settles, it's up in the air. However, investors will be comforted by the potential growth of the Mexican telecommunications industry. Demand for all telecom services -- international and long-distance service, cellular communications and Internet -- is likely to grow for the next few years at least, meaning that there may be room for everybody, Goliaths and Davids.

Scott Grimberg is the emerging-market fixed-income strategist for Miller Tabak Roberts Securities. At the time of publication, he held no positions in the instruments discussed in this column, although holdings can change at any time. The opinions expressed in this article are Grimberg's and do not necessarily reflect those of Miller Tabak Roberts Securities. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.