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U.S. telecoms eager to break into Cuba, but much will depend on the fine print
CubaNews / May 2009

By Larry Luxner

Cuban-born Jorge Escalona is no stranger to the island’s telecom industry — having literally grown up in the middle of it.

“We were the first country in Latin America to introduce the electromechanical switch. I know this because my father installed that switch,” he told CubaNews recently. “It was one of the few places in Havana that had air-conditioning. When I was a kid, I used to go there on weekends and read my comic books.”

Escalona’s dad was engineering director for the Cuban American Telephone Co., then a subsidiary of ITT. No wonder the young man grew up with a passion for telephony — or that he ended up as a top executive with AT&T, brokering multimillion-dollar deals in the Virgin Islands, Puerto Rico and eventually Mexico.

Part of his job involved making contractual agreements with Cuba’s state phone monopoly, Etecsa, over international long-distance service. That experience has proven useful for Escalona, who for the past two years has been advising U.S. telecom firms how to do business in Cuba.

“Last summer, Hillary Clinton came to Miami and said that if elected president, she’d allow Cuban-Americans to travel to Cuba, and let U.S. companies sell telecom equipment,” he said. “It was the first time Democrats recognized the role telecommunications could play in the improvement of relations between the two countries.”

That’s why Escalona wasn’t too surprised when President Obama announced Apr. 13 that he’d let U.S. companies establish fiberoptic and satellite links to Cuba as well as license roaming agreements for cellphones on the island.

Radio and TV satellite firms may also soon provide services directly to Cuban citizens.

“Once Hillary became secretary of state, I knew it would eventually become part of the Obama administration’s Cuba policy,” he said.

Yet the nation’s telecom giants — Verizon, Sprint Nextel, AT&T among them — don’t have much to tell CubaNews about the potential opportunities that await them.

“At this point, we’re still reviewing what the changes would mean for business,” said Jon Taylor, a spokesman for Sprint Nextel. “Until we know a little more about what it actually means, we’re not in a position to talk about it.”

Added Fletcher Cook, a spokesman for AT&T: “We’re looking at the proposals, but beyond that, we don’t have any comment.”

Jon Gieselman, senior VP at DirecTV, told the Miami Herald: “We will look at any change in U.S. policy very closely, and should a new market opportunity arise in Cuba, carefully consider our options.”

CubaNews couldn’t reach Verizon for comment at all. Nor could we get a hold of Atlantic Tele-Network Inc., a Massachusetts-based conglomerate with telecom holdings in Guy-=ana, Bermuda, various New England states and the U.S. Virgin Islands.

But David Hall, former CEO of Digicel Jamaica and now a private telecom consultant, said Obama’s new policy “fantastic” for both the United States and Cuba.

“This is obviously the first step,” he told us by phone from Kingston, Jamaica. “The next thing that needs to be done in order to bring down costs will be the laying of fiberoptic cable between Cuba and Miami.”

According to Hall, who’s traveled to the communist island several times, “Cuba is now the 4th-most expensive country in the world to call from the States. That’s partly because of the embargo, but also because all the phone traffic is done by satellite. What you need is to roll out fiber. Having to go all around the world to get to Cuba is ridiculous.”

Hall said that Digicel — which in only eight years has amassed six million subscribers in 23 Caribbean and Central American countries — had always shown “huge interest in Cuba.”

But the Irish-owned company always ran into problems because the banks it usually deals with refused to be involved with Cuba for fear of running afoul of U.S. law.

Nevertheless, Hall told us, “the opportunity there is fantastic, once the market has been liberalized from the Cuban side. And secondly, the embargo needs to be lifted so that American banks can be involved.”

Cuba’s low salaries would hardly be an ob-stacle to Digicel, which since May 2006 has managed to rack up 2.2 million customers (64% of the mobile market) in Haiti, the poorest country in the Western Hemisphere.

Thanks mainly to Digicel’s generous give-aways and innovative marketing gimmicks, Haiti’s mobile penetration rate is now 26%.

That’s the second-lowest in the Americas after Cuba — which has only 480,000 mobile lines for its 11.2 million inhabitants, translating into mobile penetration of only 4.3%.

Yet that 480,000 represents a 60% jump over the 300,000 wireless lines that were in service in April 2008, when the Castro regime opened up mobile service to the general public.

Before that, cellphones were available only to tourists and government bigwigs. Etecsa says 8,000 people signed up for service with its mobile subsidiart, Cubacel, within 10 days of ownership restrictions being lifted — despite $60 activation fees and prices of 50-60 cents a minute for calls in a country where the average worker earns only $19 a month.

Etecsa also operates just over one million fixed lines, giving Cuba a fixed-line density of 11 per 100 inhabitants — quite low by regional standards. As for the Internet, Cuba has just 11.6 users per 100 inhabitants, compared with 21 in Mexico and 73 in the United States.

Since Obama’s announcement, interest in Etecsa itself has intensified dramatically. On Apr. 28, the Italian business newspaper Il Sole 24 Ore reported that Spain’s Telefónica had offered to buy Telecom Italia’s 27% interest in the Cuban phone monopoly.

Telecom hasn’t made as much money in Cuba as it expected, said the newspaper, citing Spanish financial sources — which is why it’s willing to sell its shares to Telefónica. The two European telecom giants have been talking since December 2008, when Telecom reportedly asked $780 million for its stake in Etecsa, and Telefónica countered with $500 million.

Last year, Il Sole said Telecom Italia’s holdings in Cuba had dropped in value from $329 million in 2005 to $297 million in 2007. No figures were readily available for 2008.

According to the Miami Herald, “industry observers suspect that a possible future relaxation of the U.S. trade embargo against Cuba and the interest in Cuba’s telecommunications industry expressed by Mexican magnate Carlos Slim [owner of América Móvil] have sharpened Telefónica’s appetite.”

Escalona said he doubts Etecsa will have trouble meeting its objective of adding another 250,000 wireless subscribers in 2009 — especially if it continues to slash activation fees and introduce more affordable handsets.

“Etecsa has been investing in its digital network, laying fiber on-island and expanding its coverage, but there’s lots of room for growth,” he said. “Cubacel already has more than 200 roaming agreements covering over 100 countries, but U.S. carriers have been conspicuously absent in this picture.”

Ever since the 19th century, AT&T has connected the United States and Cuba — first with telegraph cables, then via an underwater copper cable in the 1950s and 1960s linking Cojimar, just east of Havana, to West Palm Beach, Fla. But that cable had a maximum capacity of 144 simultaneous phone conver-sations and hasn’t been in operation for years.

These days, Cuba-bound calls are often routed through third-party carriers like Tele-globe Canada, ItalCable and other operators.

Escalona says telecommunications is one of the few industries singled out by both the 1992 Cuban Democracy Act and the 1996 Helms-Burton (Libertad) Act for special treatment.

“In the past, our government’s position has been ‘no, no, no.’ As a result, very few U.S. companies have received licenses to conduct business in the telecom sector,” Escalona told CubaNews. “The very limited business we’ve seen has typically focused on international long-distance traffic provided under very severe restrictions.”

Eight U.S. companies including AT&T and Verizon are licensed by the Federal Communication Commission to provide long-distance service to Cuba via cable or satellite.

Yet it’s not clear how many actually provide service, and when contacted by CubaNews, FCC spokesman Mark Wigfield couldn’t provide specific information on U.S.-Cuba phone traffic, market share or total long-distance revenues paid to the Cuban government.

Nor is it at all clear how Havana would react to a dismantling of current telecommunications barriers between the two countries.

Enrique Lopez, who runs AKL Group, a Miami-based global telecom consultancy, told the Herald “anything that attempts to bypass government control will be politely rejected.”

Even so, Escalona said he’s been waiting a long time for an opening from the U.S. side.

“We now have a policy, but the regulations are yet to be defined. An inter-agency task force is likely very busy developing the detailed regulations to support the administration’s position,” he told CubaNews.

“We expect these new regulations to be progressive, because it is clear that the president’s intent is to allow for the free flow of information. But until we see them, we won’t know the pace and full extent to which participation in these initiatives can occur.” In the meantime, suggests Escalona, “we need to avoid using telecom restrictions as a political tool. Person-to-person contact, by travel or by phone, should stay above the fray. The approach of the past does not inspire investor confidence.”

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