Connected Cuba Is Pipedream for U.S. Telecoms

Bloomberg BNA

By: Lydia Beyoud and Lenore Adkins

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.