US embassy cable - 03ROME1312

UNCLAS SECTION 01 OF 03 ROME 001312 
 
SIPDIS 
 
 
SENSITIVE 
 
USDOC FOR NTIA/GALLAGHER/SPECK AND 
4220/MAC/EUR/SED/DDEFALCO; 
FCC FOR AGOMEZ AND ATHOMAS; 
JUSTICE FOR WILLNER 

E.O. 12958: N/A 
TAGS: ECPS, ETRD, BEXP, EIND, IT 
SUBJECT: AMBASSADOR'S LUNCH WITH TELECOM ITALIA MANAGING 
DIRECTOR 
 
REF: ROME 1084 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY.  NOT 
FOR INTERNET DISTRIBUTION. 
 
1. (SBU) SUMMARY:  AT A MARCH 19 LUNCH WITH TELECOM ITALIA 
MANAGING DIRECTOR RICCARDO RUGGIERO, THE AMBASSADOR RAISED 
ADVOCACY CASES INVOLVING U.S. TELECOM FIRMS TERADYNE, LUCENT 
AND MOTOROLA.  HE ALSO STRESSED THAT MANY U.S. TELECOM FIRMS 
WERE INTERESTED IN SELLING TO AND WORKING WITH TELECOM 
ITALIA.  RUGGIERO ASSURED THE AMBASSADOR THAT TI HAD 
ELIMINATED THE BACKLOG IN MAKING FIXED LINES AVAILABLE TO 
U.S. FIRMS, AND WOULD CONTINUE TO BE RESPONSIVE TO SUCH 
REQUESTS. TELECOM ITALIA'S RECENT MERGER WITH OLIVETTI WAS 
NECESSARY TO RESTRUCTURE TI'S COMPLEX OWNERSHIP ARRANGEMENTS 
AND MAKE THE FIRM MORE COMPETITIVE.  TI PLANS TO REDUCE DEBT 
AND INVEST IN BROADBAND TECHNOLOGY OVER THE NEXT TWO YEARS. 
3G AND CABLE, IN RUGGIERO'S VIEW, ARE LESS VIABLE AND NOT 
AREAS IN WHICH TI PLANS TO INVEST MANY RESOURCES.  END 
SUMMARY. 
 
2. (U) ON MARCH 19, THE AMBASSADOR HELD A TOUR D'HORIZON ON 
TELECOM ISSUES WITH TELECOM ITALIA MANAGING DIRECTOR RICCARDO 
RUGGIERO.  RUGGIERO WAS ACCOMPANIED BY STEFANO PILERI, HEAD 
OF NETWORK AFFAIRS, AND SERGIO FOGLI, HEAD OF REGULATORY 
    AFFAIRS.  THE AMBASSADOR WAS JOINED BY COMMERCIAL MINISTER 
COUNSELOR AND ECONOMIC COUNSELOR. 
 
3. (SBU) A NUMBER OF U.S. TELECOMMUNICATIONS FIRMS ARE 
INTERESTED IN DEALING WITH TELECOM ITALIA, THE AMBASSADOR 
TOLD RUGGIERO.  IT IS IMPORTANT THE U.S. FIRMS BE CONSIDERED 
AS TI ASSESSES ITS EQUIPMENT, SOFTWARE AND SERVICES NEEDS. 
RUGGIERO RESPONDED POSITIVELY TO THIS, NOTING THAT TI ALREADY 
HAS SOME WELL-ESTABLISHED RELATIONSHIPS WITH U.S. FIRMS, SUCH 
AS LUCENT AND MOTOROLA.  ONE ISSUE, HOWEVER, IS IN-COUNTRY 
SERVICE.  RUGGIERO TOLD THE AMBASSADOR THAT TI -- AT LEAST 
FOR SUPPLIERS TO THE CORE AREA OF THE TI NETWORK -- MUST 
PROVIDE FULL IN-COUNTRY SERVICE. U.S. FIRMS, HOWEVER, SEEMED 
RELUCTANT TO ESTABLISH AN ADEQUATE STAFF IN ITALY.  THIS MADE 
THEM FAR LESS COMPETITIVE.  EVEN LUCENT, NOTED RUGGIERO, HAD 
DOWNGRADED ITS ITALIAN STAFF TO AN EXTENT THAT IT WAS 
STARTING TO COMPROMISE SERVICE. 
 
LUCENT 
 
4. (SBU) THE AMBASSADOR ASKED ABOUT THE RENEWAL OF LUCENT'S 
CONTRACT TO SUPPLY OPTICAL EQUIPMENT FOR TI'S BACKBONE. 
RUGGIERO RESPONDED THAT DISCUSSIONS WERE ONGOING, BUT THAT 
LUCENT'S SMALL NUMBER OF ITALIAN STAFF PUT IT AT A 
DISADVANTAGE IN RELATION TO OTHER BIDDERS.  AGAIN, RUGGIERO 
EMPHASIZED THAT TI HAD SEEN A DECLINE IN LUCENT'S PERFORMANCE 
SINCE THE DOWNSIZING OF THE LUCENT OPERATION IN ITALY. THIS 
HAD TO BE A FACTOR IN THE DECISION, HE STRESSED.  THE 
AMBASSADOR NOTED THAT IF LUCENT OBTAINED A MAJOR CONTRACT -- 
SUCH AS THE $100 MILLION TENDER FOR OPTICAL TRANSPORT NETWORK 
EQUIPMENT THAT TI IS EXPECTED TO CALL THIS FALL -- THE FIRM 
    WOULD BE ABLE TO INCREASE STAFF ACCORDINGLY.  HOWEVER, NO 
FIRM COULD KEEP A LARGE STAFF IN ITALY IF IT DID NOT HAVE 
CORRESPONDING BUSINESS.  RUGGIERO AGREED, BUT SAID THAT TI 
HAD TO CONSIDER THIS FACTOR. 
 
TERADYNE 
 
5. (SBU) TURNING TO THE U.S. FIRM TERADYNE, THE AMBASSADOR 
NOTED THAT THE FIRM HAD SUCCESSFULLY FINISHED A TWO-YEAR 
DEMONSTRATION OF ITS STATE-OF-THE-ART AUTOMATIC TEST 
EQUIPMENT AND TELECOM LINE TEST SOLUTIONS FOR BROADBAND.  THE 
EQUIPMENT SEEMED TO HAVE PROVEN ITSELF IN TERMS OF EFFICIENCY 
AND COST.  HOW SOON MIGHT TI BE READY TO CONTRACT FOR SUCH 
EQUIPMENT FOR USE ON ITS ENTIRE SYSTEM?  PILERI, THE TI 
NETWORK EXPERT, RESPONDED THAT THE TERADYNE EQUIPMENT HAD 
DONE VERY WELL, AND WOULD CERTAINLY BE A LEADING CONTENDER 
FOR A CONTRACT WHEN TI WAS READY TO MOVE TO THIS TYPE OF 
AUTOMATIC TEST EQUIPMENT.  HOWEVER, THIS WAS NOT LIKELY TO 
OCCUR UNTIL 2004 OR 2005.  FIRST, TI MUST EXPAND ITS 
BROADBAND CUSTOMER BASE SUBSTANTIALLY.  THE AMBASSADOR NOTED 
THAT TIMING WAS IMPORTANT.  HE EMPHASIZED THAT TERADYNE WAS 
READY TO MOVE FORWARD NOW WITH EFFECTIVE AND ECONOMICAL 
EQUIPMENT, WHICH COULD BE OF KEY IMPORTANCE TO TI AS IT 
 
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 WAS 
INTERESTED IN EXPANDING ITS RELATIONSHIP WITH TI IN THE AREA 
OF WIFI.  RUGGIERO REPLIED THAT TI ALREADY KNEW MOTOROLA 
WELL, AND WAS PLEASED THAT MOTOROLA WOULD BE WORKING ON A 
CONTRACT FOR PUBLIC SECURITY COMMUNICATIONS USING ITS TETRA 
TECHNOLOGY.  HE EXPRESSED A WILLINGNESS TO DISCUSS FURTHER 
JOINT EFFORTS WITH MOTOROLA. 
 
ACCESS TO TI LINES, EQUIPMENT, SERVICES, RIGHTS OF WAY 
 
7. (SBU) ACCESS TO TI LINES, EQUIPMENT, SERVICES AND RIGHTS 
OF WAY BY U.S. FIRMS HAS BEEN A LONGSTANDING PROBLEM, THE 
AMBASSADOR NOTED.  WHILE WE HAVE HAD NO RECENT COMPLAINTS, 
THIS WAS A KEY POINT FOR EXISTING FIRMS AND NEW U.S. 
ENTRANTS.  RUGGIERO RESPONDED THAT HE, PRIOR TO JOINING TI, 
HAD HIMSELF COMPLAINED OF THIS PROBLEM.  HE HAD MADE 
RESOLVING IT A PRIORITY, AND COULD FINALLY ASSURE THE 
AMBASSADOR THAT TI HAD ELIMINATED THE BACKLOG OF REQUESTS. 
THERE SHOULD BE NO FURTHER PROBLEMS FOR U.S. FIRMS IN 
OBTAINING SUCH ACCESS. 
 
    TELECOM ITALIA: RESTRUCTURING 
 
8. (SBU) JUST DAYS BEFORE THE LUNCH, TELECOM ITALIA HAD 
ANNOUNCED A MERGER WITH OLIVETTI.  RUGGIERO EXPLAINED THAT 
THIS MERGER WAS NECESSARY TO SIMPLIFY TI'S OWNERSHIP 
STRUCTURE AND MAKE THE COMPANY MORE ATTRACTIVE TO INVESTORS. 
SOME STOCKHOLDERS HAD CRITICIZED THE MERGER ON THE GROUNDS 
THAT IT WOULD INCREASE TI'S DEBT FROM E 18 BILLION TO E 42 
BILLION.  HOWEVER, RUGGIERO EXPLAINED THAT TI HAD PLANS TO 
RETURN THE DEBT LEVEL TO E 18 BILLION OR LESS WITHIN TWO 
YEARS. 
 
NEW TECHNOLOGIES:  BROADBAND 
 
9. (SBU) RUGGIERO ASSERTED THAT THE ITALIAN MARKET FOR 
TRADITIONAL HARD LINE AND MOBILE TELEPHONES WAS SATURATED. 
THE FUTURE WAS BROADBAND.  TI'S TOP PRIORITY WAS DEVELOPING 
BROADBAND IN ITALY.  THE COMPANY HOPES TO MOVE FROM TODAY'S 
ONE MILLION BROADBAND CUSTOMERS TO FIVE MILLION WITHIN TWO 
YEARS. 
 
NEW TECHNOLOGIES: 3G 
 
10. (SBU) WHAT, ASKED THE AMBASSADOR WAS THE FUTURE OF 3G IN 
ITALY? RUGGIERO REPLIED THAT THE FIRST 3G SERVICES WOULD 
BEGIN LATER THIS YEAR. HOWEVER, HE TOLD THE AMBASSADOR, 3G 
WAS UNLIKELY TO THRIVE IN THE ITALIAN MARKET.  ITALIANS PAY 
AN AVERAGE OF ONE EURO PER MOBILE TELEPHONE CALL.  3G CALLS 
WOULD COST AN AVERAGE OF FIVE EUROS EACH.  RUGGIERO FELT 
STRONGLY THAT THE ADDITION OF A PICTURE WOULD NOT PROVIDE 
SUFFICIENT INCENTIVE FOR ITALIANS TO PAY THE ADDED COST. 
    EVEN NOW, HE SAID, 90 PERCENT OF ITALIAN MOBILE TELEPHONE 
USERS USED PREPAID CARDS RATHER THAN CONTRACTING FOR SERVICE. 
 MOST OF THESE ONLY RECEIVED CALLS, BUT DID NOT MAKE (OR PAY 
FOR) THEM. 
 
11. (SBU) WHILE TWO COMPANIES, HUTCHINSON WHAMPOA AND IPSE 
000, HAVE ADVERTISED HEAVILY THEIR UPCOMING 3G LAUNCHES, 
RUGGIERO NOTED THAT THESE TWO FIRMS DO NOT HAVE EXISTING 
TELECOM SERVICES TO SELL.  THEY NEED TO PUT 3G SERVICES IN 
PLACE FOR REVENUES.  HOWEVER, TO DO SO, THE NEW ENTRANTS WILL 
NEED TO FIND AND RENT SPACE FOR AROUND 1,000 CELLS AND THEN 
BUILD EQUIPMENT.  THE OTHER 3G LICENSE HOLDERS (INCUMBENTS 
TELECOM ITALIA MOBILE, WIND AND VODAFONE OMNITEL) ALREADY 
HAVE LOCATIONS RENTED AND WILL ONLY HAVE TO ADD EQUIPMENT. 
NONETHELESS, SAID RUGGIERO, THE INCUMBENTS ARE LIKELY TO 
DELAY AS LONG AS POSSIBLE THE COSTLY INVESTMENT IN 3G 
INFRASTRUCTURE. 
 
COMMENT: 
 
12. (SBU) TELECOM ITALIA SEEMS FOCUSED THROUGH 2005 ON (1) 
PAYING DOWN DEBT AND (2) EXPANDING BROADBAND SERVICES.  WHILE 
U.S. FIRMS MAY CONVINCE TI TO PURCHASE CERTAIN EQUIPMENT, 
 
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K TO DELAY MAJOR PURCHASES. 
ON THE MORE POSITIVE SIDE, HOWEVER, RUGGIERO AND HIS TEAM 
SEEM WILLING TO PROVIDE U.S. FIRMS WITH ACCESS TO LINES, 
EQUIPMENT, SERVICES AND RIGHTS OF WAY.  WE WILL CONTINUE TO 
KEEP A CLOSE EYE ON THIS AND HOW TI TREATS U.S. FIRMS OVERALL. 
SEMBLER 
 
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 2003ROME01312 - Classification: UNCLASSIFIED