US embassy cable - 04ROME1648

UNCLAS  ROME 001648 
 
SIPDIS 
 
 
STATE FOR EB/CIP - TFINTON 
 
 
COMMERCE FOR NTIA/SPECK 
UDOC FOR 4220/MAC/EUR/SED 
FCC FOR AGOMEZ AND ATHOMAS 
DOJ FOR WILNER 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, IT, ECIP 
SUBJECT: ITALY: Telecommunications Sector and Internet 
Market - 2004 Update 
 
SUMMARY 
------- 
 
1.  Italy's telecommunications market is highly developed, 
liberalized, and mature, particularly in the mobile phone segment. 
Limited problems remain in the sector, particularly with 
overlapping EU and national laws, and with regional environmental 
regulations.  Also of some concern is the GOI's continued 
involvement in the sector. The GOI owns WIND, the main competitor 
to former incumbent Telecom Italia (TI); and still exercises 
influence over now fully privatized Telecom Italia.  A powerful 
Communications Ministry often overshadows the role of the 
independent Communications Authority. 
 
2.  Telecom Italia is still the dominant telecommunications 
company, but its market shares in fixed, mobile, and Internet 
services are decreasing. Foreign participation, including U.S., is 
primarily in the mobile phone market; WIND's possible 
privatization offers a market opportunity for U.S. firms.  In the 
Internet sector, the number of Internet users is growing; and 
high-speed ISDN lines are systematically replacing traditional 
fixed lines.  Broadband is also rapidly developing.  End Summary. 
 
A FULLY LIBERALIZED TELECOM MARKET 
---------------------------------- 
 
3.  Communications Ministry and Communications Authority contacts, 
as well as industry representatives, argue that Italy has created 
one of the most open and competitive telecom markets in Europe. 
 
4.  Our contacts at the Communications Authority provided several 
examples of the competitiveness of the Italian market. 
Termination costs have decreased over the last five years by about 
30 percent, and are expected to possibly fall even further; number 
portability is working well, with more than 1.6 million numbers 
moved from one carrier to another by the end of 2003; and 
interconnection charges (fixed to mobile) are declining and were 
in line with the EU average in 2003 (EU average 17.45 cents; Italy 
17.47 cents.  In 2002, the EU average was 18.92 cents; Italy's was 
20.16 cents).  Moreover, local loop unbundling is complete; 
539,000 lines were "unbundled" at the end of 2003. 
(Communications Authority senior staff told us Italy's unbundled 
lines are among cheapest in Europe, and forecast that, as 
unbundling accelerates, TI and its competitors will increasingly 
offer advanced services.) Carrier pre-selection is now popular and 
widespread with over 3.5 million users that have opted for carrier 
pre-selection by the end of 2003. 
 
A FEW PROBLEMS REMAIN 
--------------------- 
 
5.  GOVERNMENT'S ROLE: In recent years, a constant concern has 
been over the GOI's involvement in the sector.  Although the GOI 
sold its residual three percent "golden" shares in Telecom Italia 
in late 2002, many industry experts believe that TI is still the 
de facto national communications operator, still receives 
preferential treatment from the GOI, and that its management 
decisions are still influenced by the GOI.  The Italian Government 
also owns WIND (Italy's second full-service  mobile, fixed line, 
and Internet - operator) through state-controlled energy 
conglomerate ENEL.  However, industry representatives' criticism 
has been muted recently, as the GOI has largely been "hands-off" 
in terms of its involvement with WIND and TI. 
 
6.  REGIONAL LAWS: A number of regional governments have passed 
restrictive environmental provisions that affect 
telecommunications infrastructure.  Each of Italy's twenty regions 
has, for example, the power to independently establish electronic 
magnetic emission limits, which can cause difficulties for 
operators trying to develop countrywide strategies.  Similarly, 
local authorities, at times, have been slow to grant rights-of-way 
to land they own to telecom companies interested in laying fiber 
cables or erecting necessary infrastructure.  Communications 
Authority and Communications Ministry officials have downplayed 
the problem of rights-of-way, and claimed that Italy's 
telecommunications infrastructure is highly developed and already 
can support the vast majority of services. 
 
7.  BUREAUCRATIC CONFUSION: The murky line of responsibilities 
between the Communications Ministry and the Communications 
Authority also remains.  A communications regulator (similar to 
 
 
the U.S.'s FCC) was created in 1997 to replace entirely the 
Communications Ministry.  However, the Berlusconi Government has 
not only kept the Ministry intact, but also has strengthened its 
role, especially in key areas as licensing authority. 
 
THE TELECOM MARKET IN NUMBERS 
----------------------------- 
 
8.  Four operators offer mobile services to approximately 
55 million subscribers (this includes individuals with multiple 
subscriptions), representing a 95 percent penetration rate, and 
with a total mobile market valued at 14.5 billion euros.  Ninety 
percent of subscriptions are through the use of prepaid phone 
cards.  Through its subsidiary TIM (Telecom Italia Mobile), TI 
owns the lion's share of the market, well over 40 percent, but 
declining with respect to its 50 percent market share in 2001. 
Other mobile operators include WIND, Vodaphone (Verizon is its 
partner), and H3G.  The latter is the only provider of 3G 
services, with approximately 400,000 customers.  Although 3G 
service has begun, market growth potential remains limited. 
Italian consumers are not convinced that the additional services 
offered are worth the additional cost.  Telecom operators have 
seen their overall revenues from mobile phone business growing at 
an estimated annual rate of 2.5 percent.  While voice still brings 
in nearly 85 percent of revenues, data transmission (e.g., text 
messaging) and other data applications are rapidly growing. 
 
9.  Forty fixed line operators (the vast majority being local 
operators providing business networks) service approximately 29 
million customers.  The number of fixed lines is still growing, 
albeit slowly, from 28 million in 2001 to 29 million in 2003.  The 
fixed line market was valued in 2003 at about 17.2 billion euros. 
Fixed line service providers are moving towards greater 
specialization with only the largest operators (TI, WIND, Fastweb) 
offering across the board services.  Voice still provides the 
greatest source of revenue (approximately 75 percent), but 
Internet and data transmissions are growing rapidly.  TI has a 60 
percent market share, which is down from its peak share of almost 
80 percent in 2001.  Traditional PSTN - Public Switched Telephone 
Networks - lines are being replaced with ISDN lines.  In 2001, 
there were 22.2 million PSTN lines and 5.9 million ISDN lines.  By 
the end of 2003, PSTN lines had decreased to 21.7 million, while 
ISDN lines were up to 7.2 million. 
 
INTERNET USE 
------------ 
 
10.  After a slow start in the late 1990s, Internet use has 
rapidly grown.  There are 23 million users (subscribers) 
(including business, residents, schools and public offices) 
compared to only 13 million in 2000.  Internet is driving 
broadband development.  According to the Communications 
Authority, broadband lines are growing faster in Italy than in the 
rest of Europe; Italy represents approximately 13 percent of 
Europe's broadband market.  The GOI has made significant progress 
in its goal of bringing broadband to 90 percent of the public 
sector by the end of 2005. 
 
11.  According to Federcomin (Italy's ICT industry association), 
the Internet is still used largely for e-mail/data transmission 
and research, with limited business conducted.  Italian consumers 
remain reluctant to put credit card information on the Internet, 
and still have a limited knowledge of English.  According to a 
recent study, only 20 percent of Italians have sufficient 
knowledge of the English language to be able to conduct 
transactions on the Internet.  Another significant factor is the 
Italian retail market.  Most Italians, including those living in 
smaller urban centers, have easy access to small/mid sized retail 
outlets, as well as banking and insurance services, which makes 
Internet use/purchases less necessary or desirable.  Regarding 
business-to-business (B2B), Italian small and medium-sized 
enterprises, the backbone of Italy's economy, reportedly still 
find it complicated, impractical, and often not economic to move 
away from traditional purchasing means.  Again, though, the 
situation is evolving. 
 
11.  Wi-Fi (Wireless Fidelity) is still in its infancy in Italy. 
Our contacts believe that it is highly unlikely the public sector 
will take leadership on Wi-Fi development, although Communications 
Ministry officials said that the GOI is investing approximately 
100 million euros in Wi-Fi development.  Communications sector 
 
 
contacts believe that it will largely be up to the private sector 
to promote, and invest in, Wi-Fi. 
 
FIXED LINES WILL NOT DISAPPEAR 
------------------------------- 
 
12.  Just a few years ago, most industry players would have said 
that fixed lines would become obsolete.  This is being 
reconsidered today.  The mobile market is viewed as essentially 
mature, with limited innovation opportunities and only relative 
growth potential.  On the other hand, with the advent of Internet 
and broadband development, fixed line applications are growing; 
and demand for fixed line services is increasing. 
 
Privatization of WIND 
--------------------- 
 
13.  Privatization of WIND had been suspended because of the 
downturn in capital markets, particularly for telecom operators. 
With improved market conditions, the GOI as well as ENEL 
management now seem to eager to sell off WIND.  ENEL and WIND 
senior management have informally approached us regarding possible 
U.S. interest in the purchase of, or some form of partnership 
with, WIND. 
 
14.  Communications Ministry/Authority officials, as well as 
officials representing communications industry associations, also 
have called for greater U.S. presence in the sector in Italy. 
They believe the size and sophistication of the market, with its 
open regulatory system in place, should attract foreign, and 
particularly, U.S. investment. 
 
COMMENT 
------- 
 
15.  There is an increasingly firm consensus here  among the GOI, 
the regulator, operators and sector associations - that Italy has 
a truly open market.  The GOI, although still present in the 
market, has promoted, not hindered, the market's openness, and has 
brought Italy into compliance with various telecom-related EU 
directives.  After having lagged behind other G7 countries, Italy 
is catching up in terms of broadband development and greater use 
of Internet.  The mobile telephone market, although a mature 
market with little room for growth, is among the most 
sophisticated in the world.  Italy is expected to be in the 
forefront of 3G use, once widespread public services are offered. 
Fixed network applications still offer, nonetheless, the greatest 
potential for growth over the coming years in Italy.  End Comment. 
SEMBLER 
 
 
NNNN 
	2004ROME01648 - Classification: UNCLASSIFIED