AMBASSADOR'S LUNCH WITH TELECOM ITALIA MANAGING

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. �A;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 ROME 00001312 002 OF 003 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, ROME 00001312 003 OF 003 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 NNNN 2003ROME01312 - Classification: UNCLASSIFIED