Investing in Cuba: Telecommies

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Cuban-American counter-revolutionaries are unlike their Vietnamese-American counterparts who have used Hanoi’s geopolitical concerns over Beijing’s bullying (and fears of a second invasion) to constructively, subtly, and gradually engage and nudge Vietnam into the global mainstream.  (This has also encouraged decision-makers in Burma/Myanmar to consider counter-balances to China as well.)

In Cuba’s case, both its current leadership and its overseas communities seem to have anything but the best intentions for the island and its liberation will likely be quite different from the East German experience.  While armies of boisterous youth were the first over the crumbling Berlin Wall in 1989, platoons of lawyers are likely to be scrambling over the heads of tourists to be the first to breach the island’s decaying seawalls once the official go ahead is given.

For years, the Cuban government has been one of the worst business partners imaginable, as European companies with less scruples and less restrictions have been the first to learn.  Their experiences with Vietnam have been vastly different than with Cuba.

After Telecom Italia (NYSE: TI) pioneered mobile communications on the island, the Cuban state saw the great margins on the telecoms and reduced the Italians to a 27% share of the business (and largely left maintaining the network to them as well).  However, Telecom Italia’s experience with Cuba prepared it to operate more effectively in Argentina and Brazil (which by decade’s end will account for a larger portion of the company’s business than Italy itself).  In fact, the telecom’s recent success in Paraguay, a part of the map that has for years operated less as a sovereign nation and more as a large criminal enterprise might also prove useful in regaining market share in a post-Castro Cuba.

Similarly, when France’s struggling Alcatel-Lucent (NYSE: ALU) managed to win the contract to build the fiber optic cable from Venezuela to Cuba, the resulting public relations experience was a fiasco.  Alcatel did not suffer so much from its collaboration from the region’s most notorious regimes (Europeans have clearly demonstrated they are indifferent and even admiring of Castro and Chavez).  The French telecom had hoped the project would highlight the strengths of its recent merger with Lucent (which has continued to be disastrous) and allow it to demonstrate its relevance to a highly-skeptical market.  Moreover, diversifying Cuba away from Intersputnik (which is as dated a satellite system as it sounds) should not have been difficult, and could have easily shown vast improvements in Cuba’s telecommunications metrics.

Instead, after spending over a third more than had been originally budgeted, Cuba’s connection has sat dormant for over a year now.  When contacted, “Alcatel-Lucent now simply refers questions about the cable’s status to the Cuban-Venezuelan joint venture Telecommunicaciones Gran Caribe, and you can feel the hot potato whiz by…”

So, as Reuters reported, the reality remains that “Mobile phones are available only in a local dollar-pegged currency and sending even a Twitter message from a mobile phone can cost more than the average daily earnings of many Cubans.”  Moreover, calls outside the island (especially with VOIP services) can be more expensive by the minute than typical satellite phone connections to Somalia or remote Pacific islands.

Still, for those looking for a growth opportunity, with official estimates that one in five Cubans have Internet being a highly-misleading factoid considering the way in which the web can be accessed and that at least half the computers on the island are under government control, and currently, and with only one in ten Cubans having the most basic mobile access, the island of 11.2 million is effectively a wide open market when restrictions are lifted.  If similar privatizations occur like in Ecuador, the government service associated with the old state controls (and government abuses like the ones committed during the Pope’s visit) will be reduced to an immaterial percentage of the market (even if it provides lower rates).  While current direct investors in Cuba might advise Telecom Italia to start testing new logos and brand names in preparation for the glorious revolution many naively expect, the company’s experience with mounting pressure (and epileptic policy) from the US and an unpredictable Cuba have led the company to completely pull out of the Cuban market.

[continued in "Investing in Cuba: Havana Does Not Mean Business"]

 

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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