Connected Cuba Is Pipedream for U.S. TelecomsL

Connected Cuba Is Pipedream for U.S. TelecomsL
By Lydia Beyoud and Lenore Adkins

July 13 — The normalization of U.S. relations with Cuba has stirred
interest among tech and telecommunications companies such as Alphabet
Inc.'s Google and Verizon Inc. seeking to break into Cuba's nearly
virgin telecommunications market. Other industries, from agriculture to
transportation to hospitality, are also in hot pursuit of trade deals
with the island nation.

Internet connectivity and strong networks are a critical element for all
U.S. industries trying to access the Cuban market as they assess whether
to invest in a country that has been essentially closed to them for more
than half a century.

From an outsider's perspective, Cuba should be motivated to
aggressively upgrade its infrastructure. Telecom network improvements
would support its stated national objectives of further developing its
education, health care and transportation systems.

Cuba has "every reason in the world" to improve its internet system,
James Williams, president of Engage Cuba, a coalition of businesses
lobbying Congress to lift the decades-old U.S. embargo against Cuba,
told Bloomberg BNA.

But investing in a modern telecom network remains a pipedream as long as
the authoritarian Cuban government keeps a tight grip on its
communications infrastructure through the cooperation of the Ministry of
Communications and its state-run telecom operator, Empresa de
Telecomunicaciones de Cuba S.A. (ETECSA), telecom industry sources told
Bloomberg BNA.

Cuba's leadership continues to cast U.S. overtures targeting investment
in Cuba's telecom market as a slippery slope to U.S. dominance. Still,
dozens of U.S. industry groups continue to lobby Congress on
Cuba-related issues in an effort to increase bilateral trade and
business deals.

Among them is the Electronic Transactions Association, whose members
include major players in the financial technology industry, from banks
and mobile payment companies to tech giants such as Amazon Inc., Apple
Inc., Google parent Alphabet Inc., and Hewlett Packard Enterprise Co.

Progress Through Strong Networks

The internet is an essential component to open the door for U.S.
investment for the financial technology industry, which in turn supports
many other sectors. "To accept credit and debit cards, merchants need
access to the internet, and it has to be good, secure access to the
internet," Scott Talbott, ETA's senior vice president for government
affairs, told Bloomberg BNA.

While the fintech industry is interested in selling products and
accessing the Cuban market, progress is likely to be slow, given the
lack of strong broadband networks and the Cuban government's wariness of
foreign actors — especially U.S. ones.


Williams applauds what Cuba has done so far, but says it still isn't
enough to woo international companies to build offices, plants,
technology hubs, biotechnology centers or other facilities that operate
on internet-based systems. Telecommunications will play a critical role
in the island's ongoing development and its ability to attract major
investment from international corporations, Williams said.

"You can't do international commerce without the internet," Williams
said. "I don't know how you really grow your economy, how Cuba emerges
in becoming a leader—we think it could be a leading economic engine in
the Caribbean—we really do, but it can't do that if it's disconnected
from the Internet."

There have been a few notable deals in other sectors since the Obama
administration's 2014 move to liberalize trade with Cuba (2015 TLN 17,
1/1/15). The Department of Transportation granted tentative approval
July 7 to eight U.S. airlines to begin regularly scheduled flights to
Havana, including Alaska Air Group Inc., American Airlines Group Inc.
and Delta Air Lines Inc.

Starwood Hotels & Resorts Worldwide Inc. announced a deal in March to
manage three Cuban hotels. Google has tried to lay groundwork for
internet connectivity by opening up Wi-Fi hotspots.

Mistrust by Cuba of U.S. Telecoms

Those deals indicate the Cuban government is willing to let U.S.
companies operate in certain areas. However, when it comes to the
telecommunications industry, "they're not jumping up and down to do
business with us," Larry Press, an international telecom consultant and
professor of information systems at California State University,
Dominguez Hills, said.

That reticence stems from the historic mistrust between the two nations
dating back to the Cold War and the thawed but ongoing U.S. trade
embargo, as well as the Cuban government's view of communications
networks as a national security concern rather than a tool for economic
development.

"The telecom sector and the use of spectrum is considered by every
sovereign state to be a very important national interest. We need to
understand that Cuba has its own interests and visions as to what a
telecom policy should be," said Eduardo R. Guzman, a partner at Drinker
Biddle & Reath LLP, who specializes in telecom investment in Latin
America and the Caribbean.

Cuban President Raul Castro demonstrated that perspective at an
international summit in January, when he said the embargo would stymie
further diplomatic rapprochement.

"Neither can it be expected that Cuba would agree to negotiate aspects
mentioned with respect to our absolutely sovereign, internal affairs,"
Castro said, according to a transcript published by Granma, the Cuban
Communist Party's official paper.

Castro added that President Obama could do more to modify the Cuban
embargo significantly without congressional action. Castro said Obama
"could permit, in other sectors of the economy, all that he has
authorized in the area of telecommunications, with evident objectives of
political influence in Cuba."

Cuba ranks toward the bottom of U.S. trading partners for obvious
reasons. U.S. goods exported to Cuba in 2015 totaled $180 million,
according to the Office of the U.S. Trade Representative. The top export
categories came from the agricultural and chemicals sectors.

`Green Field' Market of 11 Million Awaits

Cuba first came online in 1996, but has been slow to roll out
high-speed, low-cost networks found in much of the world, even the sort
of tightly-monitored and controlled internet access seen in
authoritarian countries like China. The majority of the country's
wireless network is at the 2G stage, sufficient to support wireless
voice services but little more.

For countries such as the U.S., operating on high-speed mobile broadband
networks and rapidly pushing toward the next evolution of mobile
technology, the broadband speeds available in Cuba can seem antiquated.
But that lack of broadband penetration is what makes the Cuban market so
potentially attractive for the U.S. telecom industry.

An essentially untapped "green field" of more than 11 million people in
close proximity to the U.S. requiring massive amounts of infrastructure
and network upgrades could support a lot of investment, several sources
told Bloomberg BNA.

Better infrastructure could beget more demand from consumers hungry for
mobile devices. Given the Cuban population and low device penetration,
that could mean a market for potentially millions of new devices.

However, that market will also be contingent on the right economic
conditions for suppliers and Cuban consumers' ability to buy. The
average monthly salary for 2015 was 687 Cuban pesos, approximately $26,
according to the most recent government economic report.

But the Cuban government is likely to be skeptical about the prospect of
a vibrant telecom market, because it could open Cuba to the broader
world. Telecommunications attorneys are advising clients to temper their
expectations of how quickly business deals are likely to evolve.

T-Mobile US Inc. is the most recent carrier to announce an
interconnection and roaming agreement for its customers visiting in
Cuba. The third-largest U.S. provider's May 9 announcement followed
earlier, similar deals for Sprint Corp., Verizon and New Jersey-based
IDT Domestic Telecom, Inc., a prepaid calling company.

Those roaming and long-distance calling agreements with U.S. providers
were inked soon after the Obama administration announced its historic
Cuba policy change in late 2014. They are examples of American
businesses' desire to penetrate the Cuban market—but voice and roaming
services do not an internet make, Press said.


The deals should, however, crack open the door for other deals to occur
over the long-term, Guzman said. "If you are a U.S. carrier, given the
regulatory environment in Cuba, there's really kind of a limit to the
things that you can start doing to develop those relationships," Guzman
said.

Direct interconnection and roaming agreements are at the top of the list
of deals that U.S. carriers can do today without violating the embargo,
he said. They are also among the first steps carriers can take to start
the long process of developing commercial relationships in Cuba, he said.

Cuba Last in Region for Broadband Speeds

Cuba's connectivity plans appear to be modest network upgrades with a
near-term focus and cautious relations with potential American or other
foreign investors for the telecom sector. Significantly more
infrastructure to support wired and wireless broadband internet would be
needed to help grow other sectors of Cuba's economy.

While Cuba ranks high on the United Nation's 2014 human development
index—44th out of 187 countries evaluated on health, education and
income, and second for the Latin American and Caribbean region—it comes
in last for the region in terms of broadband speeds, according to a 2014
International Telecommunication Union report.

The Cuban government has ambitious goals to bring broadband speeds of at
least 256 kilobits/second to all banks, post offices and
government-related entities by 2018, and connect 95 percent of health
and education centers, scientific, cultural and sports institutions by
2020, according to the Ministry of Communications' 2015 strategic
development report.

But ETECSA's near-term goals are more modest. As part of its 2016
wireless goals, ETECSA plans to upgrade only 100 cellular base stations
from 2G to 3G wireless technology, which would allow for faster speeds
to carry voice and some data, according to an interview published Dec.
24, 2015 in an official Cuban Communist Party publication. But even
those improvements leave a lot to be desired.

"The idea that they're going to install 3G wireless is ludicrous," said
Press. "They should do what they can in the short term, but they should
really be planning for five years from now," Press said. Instead,
"they're rolling out what I had in my home 20 years ago."

Demand for Connectivity Grows

Cuba has also announced plans to launch home broadband services in
limited areas, installed at least 58 public Wi-Fi hotspots across the
island by the end of 2015, with 80 new hotspots planned for 2016, and
lowered connecting costs.

Without Wi-Fi, Cubans are limited to using smartphones to answer voice
calls and send text messages, unless they hold an official e-mail
account on the state's intranet system, Williams said.

Meanwhile, the Cuban population is hungry to connect to their families
overseas and the rest of the world.

According to the most recent figures from the Cuban National Office of
Statistics, the number of mobile phone subscribers increased more than
100 percent between 2014 and 2015, rising to 3.3 million.

The government is responding to that demand by moving toward its goal of
wiring half of Cuba's population by 2020.

But Press said that commitment has been broadly misunderstood outside of
Cuba. According to an ETECSA PowerPoint presentation, the service
provider only intends to upgrade the infrastructure in central offices
that can reach about 50 percent of homes with digital subscriber line
(DSL) service, not that half of Cuban homes will actually be able to
subscribe to those services, Press said.

Cuban officials have insisted that the U.S. must lift its embargo
entirely before Cuba will negotiate further with American telecom
companies, Timothy C. Finton, senior counselor for International
Communications and Information Policy for the U.S. State Department, said.

But Press said that demand could be a red herring to avoid discussions
on government control of freedom of speech and other policies.

"They'll add on Guantanamo the minute the embargo's gone," Press said in
reference to calls to close the U.S. detention facility on the island.

A Cuban government spokeswoman declined to respond to several requests
for comment on the government's broadband and telecom infrastructure
policies.

Technology Test Bed

The stage is set for a surge in Cuban economic growth, if the government
decides to allow it.

To do that, Cuban officials should think big about how to connect their
people with the world, Bill Belt, senior director technology and
standards, Consumer Technology Association, told Bloomberg BNA.

"It's time for Cuba to make bold moves, now," Belt said.

Belt said Cuba should leapfrog older technologies and craft policies to
put in place cutting edge 5G networks that promise to support connected
devices through higher speeds and lower lower lag time between when data
is transmitted and received. That technology has yet to be deployed in
the U.S. but companies such as Verizon Wireless are eyeing rollouts by
the middle of next year.. Cuba could provide a testing ground for the
technology, Belt said.

Such efforts could benefit both U.S. carriers and the Cuban population
in sectors targeted for national development, including health care,
agriculture, energy and mobile learning. Cuban officials, including
ETECSA, should also be bold in reshaping their regulatory structure,
Press said.

"They should be thinking about not just long run technology but also
long run policies for the ownership of infrastructure and the regulation
of infrastructure," said Press.

ETECSA hasn't shown any indication it plans to allow other providers to
offer services in Cuba. "If ETECSA remains the sole retailer of cell
phones, mobile connectivity, landline connectivity and telephony, it's
not going to go anywhere," Press said.

But the solution isn't to have U.S. telecom providers burst into a
newly-privatized marketplace, Press said. "I think there is a role for
the national government," such as running urban internet backbone
networks or for municipal ownership of infrastructure while encouraging
competition for retail telecom services, he said.

Cubans can also look to the example of other countries in Latin America
that have been able to rapidly deploy broadband infrastructure and
networks, Guzman said.

"Cuba will eventually benefit from standing on the shoulders of giants
and getting the best and latest in technology," Talbott said.

Impact of Future Leaders

Congressional action to end the embargo faces a high hurdle, but efforts
to take it apart in small chunks seem to be making progress.

A Senate fiscal 2017 appropriations bill (S. 1910) (2016 TLN 16, 7/1/16)
targeting the Federal Communications Commission and more than two dozen
other agencies included amendments to promote trade and travel to Cuba.
One sought to prohibit restrictions on telecom equipment exports to the
island .

But that measure faces opposition in the House, where a companion
appropriations bill (H.R. 2995) includes provisions that would make it
more difficult for U.S. businesses to work with ETECSA or other Cuban
entities.

That tug-of-war at the political level adds to the anxiety on both
shores about the future of Obama's liberalization efforts. The Cuban
government is also wary of who will occupy the White House next,
Williams said. While Obama's new Cuba policy allows for U.S. investment
in Cuba's telecommunications, another president could rescind the policy
in the middle of a major project—a risk for all parties. Building out a
more sophisticated broader network is expensive, a major commitment and
could take decades, given the capital investment required. That
complicates matters for Cuban officials seeking to establish
forward-looking telecom policy.

Unless U.S. telecom providers can build the sort of rapport necessary to
overcome the long-standing mistrust between the U.S. and Cuba and the
effects of the U.S. embargo, further investment and negotiations may lag
for now, several sources told Bloomberg BNA.

"Cuba is going to be a country with many sectors and many needs. There
will still be enough activity in the future," Guzman said.

Deals could take the form of collaboration with foreign telecom
companies on discrete projects rather than major investments, said Guzman.

After the political transitions to new administrations in the U.S. and
in Cuba — where 85-year-old Cuban president Raul Castro is expected to
step down in 2018 and his brother, 89-year-old Fidel Castro, is
reportedly in ill health — Cuban telecom policy could shift to a
longer-term view under new leadership, multiple sources said.

But for now, the only business activity likely to occur quickly will be
in the areas where the Cuban government has identified a project as a
priority and the U.S. government grants a company a license to do it.

"When the political will and interests align, I think things can
happen," Guzman said.

To contact the reporters on this story: Lydia Beyoud in Washington at
lbeyoud@bna.com ; Lenore Adkins in Washington at ladkins@bna.com

To contact the editor responsible for this story: Keith Perine at
kperine@bna.com

Copyright © 2016 The Bureau of National Affair

Source: Connected Cuba Is Pipedream for U.S. Telecoms | Bloomberg BNA -
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