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Despite limited market, Cubacel monopoly rakes in profits
CubaNews / December 2002

By Larry Luxner

HAVANA — Cuba boasts the highest literacy rate and the lowest incidence of infant mortality of any country in Latin America.

But when it comes to telecommunications, Cuba remains stuck in the Dark Ages. Fewer than 600,000 access lines serve the island’s 11.6 million inhabitants, and a good percentage of its basic telecom infrastructure dates from the 1930s and 1940s.

Even worse is Cuba’s cellular penetration rate — barely 0.05 mobile lines per 100 inhabitants. That ranks well below that of the hemisphere’s poorest nation, Haiti (0.31 per 100), and is a fraction of cellphone penetration in nearby Caribbean countries like Trinidad & Tobago (2.99); Dominican Republic (5.02); Jamaica (5.64) and Puerto Rico (20.92).

One reason for this disparity is the exorbitant cost of mobile service. Cuba’s only mobile operator is Empresa de Teléfonos Celulares de Cuba S.A. (Cubacel), whose average tariff of $120 a month in hard currency is more than many Cubans earn in a year.

And at 28 to 70 cents a minute depending on the plan, talk is hardly cheap — even for foreigners who use the service regularly.

The other reason mobile telephony hasn’t taken off here is that it’s illegal for ordinary Cubans to have cellphones, unless it’s absolutely necessary for their jobs. Fidel Castro isn’t eager to have wireless technology fall into the hands of dissidents or counter-revolutionaries who could threaten the existence of his government; for the same reason, computers may not be sold to the general public, and Internet access is strictly limited.

That could change soon. But for now, virtually all of Cubacel’s 10,000 or so permanent customers are foreign diplomats, senior government officials and top executives of empresas mixtas, or joint ventures between Cuban state entities and overseas investors.”

Cubacel itself is an empresa mixta, created in December 1991 by the Cuban government and Mexican entrepreneur Luís Miguel Niño de Rivera. At that time, the company was granted a 20-year exclusive concession to provide both analog and digital service within the 800-MHz band throughout Cuba.

Today, the venture is still 50% owned by Cuba’s Ministry of Communications, but the other half is split between Canadian mining and energy conglomerate Sherritt Interna-tional (40%) and Niño de Rivera’s company, Telecomunicaciones Internacionales de Mexico (TIMSA), with 10%.

Cubacel’s president is Niño de Rivera, and its managing director is Cuban national Rafael Galindo, a Cuban national. However, all management decisions appear to rest with Sherritt, which paid $38.2 million to acquire its share of Cubacel in 1998.

During a recent visit to Havana, CubaNews attempted to interview Galindo at company headquarters on the fifth floor of the upscale Miramar Trade Center. But Galindo refused to meet with us, instead sending out a Sherritt official who patiently explained that it’s against company policy to speak to the press.

The reason Sherritt keeps such a low profile is because it’s already in big trouble with the U.S. State Department. Its various forays into Cuba’s nickel-mining, oil and gas, power generation and tourism sectors have caused it to run afoul of the 1996 Helms-Burton Act.

Sherritt’s executives are already banned from entering the United States because of pressure from Miami’s Cuban exile community, which accuses the Toronto-based company of “exploiting” its workers, “trafficking in confiscated property” and helping to keep Castro in power through Cubacel and other ventures with the Cuban government.

Interestingly enough, on the wall of Galindo’s conference room is a large framed poster and a quote from Darwin, in English and Spanish: “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.”

That — along with the Fortune magazines spread out on a glass table in the comfortable waiting room — hardly suggests a company guided by the principles of Marxism.

In fact, Cubacel’s 2001 annual report prides itself on its 36% average profit margin and 39% return on equity, which dwarfs the 8.2% profit margin and 21.8% average return on equity for the top 10 U.S. telecom firms.

Cubacel’s mission statement, according to the report, is “to be recognized as a leading company in communications and value-added services on an international level, based on total quality management and guided by the needs of its clients, stockholders and employees, and to contribute to the development of Cuba and its quality of life.”

On Feb. 24, 1993, Cubacel began operations in Havana and the tourist resort of Varadero. In March 1995, service was expanded to include the eastern city of Santiago de Cuba. In 1997, Cubacel began serving Cienfuegos, while Santa Clara was added in 1998 and Holguín the following year.

In 2000, Cubacel’s coverage area increased substantially with the addition of Pinar del Río, Cayo Coco, Ciego de Avila, Sanctí Spíri-tus, Las Tunas, Bayamo, Guantánamo, Camagüey and Nueva Gerona.

At the end of 2001, Cubacel said it had 7,643 permanent subscribers, up from 6,536 subscribers in 2000 and 5,100 in 1999.

But Cubacel has been growing quickly this year, and sales executive Dianelys Hernández Cárdenas says her company — which will soon mark 10 years in operation — today has well over 8,000 permanent subscribers. It also signs up 700 to 800 temporary “roamers” a month — usually tourists or business executives on short-term assignments in Cuba.

“At this moment, we aren’t prepared to offer service to the entire population,” said Hernández, one of several employees staffing the Cubacel booth at the recent U.S. Food & Agribusiness Exhibition in Havana. “But we have a project that is currently being studied, under which cellular service will be offered to anybody who wants it and can pay for it.”

Opening up the mobile market to anyone with dollars can only help Cubacel, already one of Cuba’s most profitable ventures.

Between 1993 and 2000, Cubacel’s reve-nues grew by an average 24.8% a year, and its profits increased by an average 23.9% a year. In 2001, the company recorded profits of $6.7 million on revenues of $24.1 million (which includes over $600,000 in sales of Nokia, Ericsson and Motorola phones and accessories).

That compares to profits of $8.1 million on sales of $23.1 million in 2000, and profits of $7.0 million on sales of $19.1 million in 1999.

“In spite of the slight decrease in earnings with respect to 2000, the company achieved its plan of allocating dividends to its stockholders worth $5.25 million, or 79% of earnings,” says Cubacel, noting that its profit margin has never climbed below 27%.

Cumulative investments in Cubacel have now surpassed $30 million, enabling the company to offer its customers a variety of services including caller ID, voice mail, call waiting, three-way calling and detailed billing. A new service known as Mensajes@ubacel offers e-mail, operator-assisted and online messaging.

Last month, Brazil’s Banco Nacional de Desarrollo Económico y Social authorized a $60 million loan to Cuba. The bank’s export chief, Renato Sucupira, said the funds would enable Cubacel to buy telecom equipment from the Brazilian subsidiary of Sweden’s Ericsson.

High on the list of Cubacel’s stated objectives is “significantly increasing national telephone density through the addition of 300,000 mobile phone lines, and achieving a minimum of $200,000 in annual revenues per employee.”

While Cubacel has a long way to go to reach the first goal, it’s very close to the second. The company has 144 employees, and average revenue per employee exceeds $167,000.

At present, the Cubacel network is composed of 35 radio base stations, three transmitting stations, two microcells and 23 “minilinks.” It uses Ericsson AMPS/D-AMPS technology and is divided into western, central and eastern divisions.

For the moment, all mobile phone numbers in Cuba begin with the “880” or “885” prefix, which is consistent with the country’s recent switch to a seven-digit format.

Over the past few years, Cubacel has signed international roaming agreements with at least a dozen foreign operators including Telcel (Mexico); TCP (Argentina); Telefónica Moviles (Spain); North-West GSM (Russia); Telecom Italia and several Canadian companies such as Bell Mobility, Telus Mobility, MT&T, Cell Express Plus and Newtel.

Because of the trade embargo, no roaming agreements have been signed with any U.S. telecom provider, though American visitors can use their own cellphones on the Cubacel network provided the handsets have dual-mode capability.

“The telephone equipment Cubacel uses is acquired from foreign suppliers and sold to the client for cellular use,” says the annual report. “The company continually offers technical seminars on quality to the entities that promote its image.”

One such entity is Havanautos, a state car rental agency that recently equipped 300 of its luxury vehicles with cellphones.

“In general, the most effective publicity is word-of-mouth, which represents more than 60% of all contracts,” says Cubacel, noting that between 1996 and 2000, it spent an average $12.70 to win over each new roaming client, $84 to sign up each new permanent client and $10.10 to retain each of those clients.

Such efforts have apparently paid off. Cubacel says its average monthly subscriber bill rose from $43.38 in 1997 to $81.42 in 1998. The following year it had climbed to $93.36, and in 2000 it jumped to $116.66.

Customers can choose from a dozen plans, all of which require a one-time $120 activation fee. The most basic is “Seguridad 30,” aimed at those who want cellular service strictly for emergencies. At $20 per month, this plan includes only 30 minutes of airtime, with additional minutes costing 70 cents each.

At the other end of the price spectrum is “Elite,” which costs $435 a month and in-cludes 1,455 minutes. Anything over that costs 28 cents a minute during peak time and 23 cents a minute during off-peak hours.

Cubacel says “churn” or client turnover has been kept at under 25% a year. Between 1998 and 2000, the main reasons for cancellation of service were a reduction in clients’ business operations (26%), non-payment (25%) or because the client left Cuba (15%).

For several years, Cubacel has been marketing its services via leading hotel chains and its website at www.cubacel.com. It even offers discount coupons on boarding passes and ticket jackets of airlines flying to Cuba in the hopes of securing passengers’ loyalties by the time they step off the plane.

Sales offices are located at José Martí International Airport, Havana’s Vedado commercial district and 14 other locations.

Yet Cubacel’s continued growth is almost completely dependent on a continued influx of foreign investment and tourism into Cuba, and this year, both are way down.

“Cubacel’s market is heterogenous and unstable, depending directly on an increase of foreign exchange in the country, which results from new investments or tourist activity,” the company concedes in its report. “As a consequence, all sales projections are based fundamentally on the behavior of these two sectors of the economy.”

What would really boost Cubacel’s bottom line would be a lifting of the U.S. travel ban. If that happened, several million tourists a year would soon be vacationing in Cuba — and many of them would conceivably want to stay in touch. Perhaps that’s one reason Sherritt is quietly lobbying to have the embargo lifted.

In the meantime, Cubacel has expanded into the Internet business through a new subsidiary known as ISP Conmutado Cubacel.

As is the case with mobile, these services are strictly controlled and open only to visiting executives, foreign embassies or Cubans who work for joint-venture companies.

Seven different plans are currently available. These range from an e-mail account only, costing $5 a month and $1.50 per hour of use, to an “executive package” that costs $55 a month and includes 80 hours of Internet access, with each hour costing an additional $1. The most expensive is a “premium package” which costs $150 a month and allows unlimited Internet access.

All plans include an e-mail address and up to 6 megabytes of storage space. Subscribers access the Internet by dialing into Cubacel’s dedicated server.

At present, ISP Conmutado Cubacel is only available in the Havana-Varadero corridor, though the company reportedly plans to expand Internet access to the rest of Cuba over the next few years.

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