VENEZUELA, learns to diversify after turbulent political times LATEST REPORT April, 2002
Venezuela emerging from a difficult decade
DIGITEL
Interview with
Mr William Nazaret, President
November 29th 2000
Let's begin by explaining to our readers what Venezuela represents as your regional strategy?
It is almost odd, but we are one of the last pieces to fall into the puzzle. In reality, Telecom Italia has always seen three attractive reasons for coming here. Number one was the country, and I actually made a presentation on this to the employees before the deal was signed. I remember before I came to Digitel, the owners invited a number of people to look at the company and to tell them, if the business plan was fine and Telecom Italia was there, I was there, I was an employee. I remember reading the numbers of the commission's study before even coming in; one of the things that came up was that this is an attractive country. This country has the demographics, the economic factors, the industry attractiveness, I mean the specific role that telecommunications plays in daily life, which makes it a very interesting market for them, much better than the markets they were in earlier, like Argentina and Brazil. There is a higher cellular penetration here than in Brazil. So obviously Telecom Italia Mobil saw something interesting here. That by itself would have been a good reason for them to come and invest.
Then came the change in government, which was, as you know, more than a change in government. I mean, there was a whole political establishment that crumbled. And obviously responsible investors took a break to examine the transition and in the meantime they kept looking at Digitel and other opportunities here. If it had only been because of the macroeconomic factors, they probably would have taken a side position where they looked and waited, but interestingly enough, the second thing that they saw was the target opportunities being Digitel, it was a very strong, interesting, enticing investment group. The local investment group here, in my opinion and I am not part of it, is a dream for any foreign investor. These are people who are committed to this; these are people who do not have property to walk away into a next one. They have excellent relationships within the industrial sector because of the history as investors. Mr. Waldman and Mr. Heery and the other investors locally, BBO and so on. This is a group that has had a history in the country and a way of doing business that has allowed them to survive the cataclysm, which many economic interests did not survive. This is because the way of doing business was essentially tied up to political interests. This is a group that has excellent relationships as industrialists with everyone that has ever done business with them and as such the transition of the new government found them in a very amiable position. These are people who were not known to corrupt anyone and that is very important these days. Because as you know, this is how you are measured these days. So Telecom Italia saw that and that was a big plus for them.
Then there is reason number 2. The local investors of this company were very attractive to any foreign investor, including Telecom Italia. Now as you start gathering steam and the train starts going down the track, the third thing would be that Telecom Italia saw that it was even more attractive than some of the properties they had developed in other Latin American countries. They had the opportunity to dispose some normal questions that you have as an investor when you are buying into an existing company that normally you cannot wait for the answers, because if you wait for the answers, somebody else comes and takes it away from you. They saw a company that was capable with limited resources, to do a local product, this is what Digitel has done and that is very important. Because as you notice now, essentially what we did was, apart from coming and installing a new board of directors which is a normal state of affairs when a new majority owner comes in, is basically to say 'this is a company that knows how to run itself.'
They could have brought a new CEO if they wanted. They brought in one temporary and that is a signal that what they see in place is exactly what they want to see.
The fact that they have seen a company that is capable of running itself, means that they have not or they are not changing the corporate philosophy or even the long-term strategy?
Well, the long-term strategy and I tell you this as I was not a part of Telecom Italia, the long-term strategy should be changed and indeed we wanted to change. I mean, for us, the importance of this deal is that we are looking for Telecom Italia to allow us to develop a solid long-term strategy. They have done this, we have not done this, not even me, and I came from the American market. There is a limited successful history in mobile telecommunications in the U.S. They have done this successfully in other places, so I would take friendly exception to your comment. We want the long-term strategy to change because now we are part of a worldwide group.
So the long-term strategy would not be the same the one we had when we were planning to run this company with our money. There will be a capital infusion, which is already affecting our business plan. And surely our Digitel customers, Conatel, our commercial allies, everyone will see that this will be a different company, because as I say to the employees, if we were able to win the way we have with local and limited resources, we can only do better now that we do not have the resources problem. I remember that at the end of August we had a very significant celebration to mark 110,000 users. Tomorrow we are having a 200,000 users celebration. I was joking that these parties have to stop, because at this rate, there will be a party every week or every month. This has been a spectacular accomplishment in terms of looking at a company that basically has gone so far that you can now call it self-sufficient. Now we are moving into a new stage.
We will have no problem with resources, at least not to the point we had a year ago. We are part of the second largest mobile operator in the world and the most successful one. I could claim that Telecom Italia mobile has been more successful than Vodafone, because Vodafone has hiccups, which is normal. I do not know a single place where Telecom Italia mobile has gone in and has not won ground, as for instance Chile, Brazil to name just a couple. In Spain, they were not expected to do well. They were told "you're late!". This is a very interesting picture and personally I would add that I think the country deserves this. Telecom Italia should be commended for seeing through this dark cloud that seems to accompany the image of Venezuela overseas these days, and Digitel deserves this because it is a company with staff that averages 28-29 years of age. You cannot get any older than that for a company of this size. I think these groups of young people deserve the experience, the support and the financial backing of a worldwide winning group.
Can we talk about financial issues, now that we are speaking in financial terms. What are the figures that made the operation attractive for Telecom Italia?
The growth. I think this deal accelerated tremendously since the union, we passed from 100,000 to 200,000 users in two and a half months. When you start having that kind of momentum, any investor has to look. Before that, we were a healthy company but right now, this takes up on more dramatic terms. This is not to take away any merit from the local employees and the management, but this is typical of what Digitel has done everywhere in competition with other technologies. Once it proves itself as viable, the commercial operation is in place, there is something about it, that makes it irresistible for people. I do not think it has anything to do with the technology, it has to do with how the system works and how people adapt to it and how people quickly incorporate features of it into their own lives.
Why did you initially choose GSM as the technology to use, as compared to your competitors?
Well, this is not a choice we made. Conatel made that choice. Conatel chose the 900 band for GSM. This is handing merit to who deserves it, Conatel made that choice. Now, having said that, anybody could have come in. I will twist your question around a bit. How come other people did not come? It was open to everybody. As in the case of Argentina and Brazil, Chile, Peru, Bolivia, this is the continent that traditionally has taken the goodness of American solutions for granted, and I say that as an American citizen. It is an interesting story, lately because the European unification on the one hand, the globalization and desires of players like Alcatel and Siemens to be more global competitors with the AT&T's, the MCIs and the IBM's of the world. It has become acceptable and, in some cases obvious, that the best solution to our daily problems may not necessarily be the American. Even the GSM came late into the game. I think it came into the game at a point where players and investors realized the limitations of the American mobile technology.
I think GSM has benefited from not being the first company, because they have things going on that is very difficult to achieve. One, you have a track record and a European nation, and then you have the competitors locally, having stopped them so you can compare the best of what you have got and the worst of what they have got, and then at some points it becomes as if it were irresistible as a proposal. The group TELCONSUL which initially won the award for this license in the central region is a group that has done already GSM projects, so my point is that they wanted the central region for all these reasons, that is where 75% of the industrial output is. Why was this operation so successful? Mr. Heery, his son and partners have done these developments before. I do not know, if this is a well-publicized point but the first GSM in Russia was done by them; it was then sold to the Dutch telecom and the Russian government.
They came with experience in GSM and what they did basically was capitalize on the opportunity and take it where it is right now.
Right now there is a wireless local loop license auction taking place and you are participating in the process. What do you expect from this process?
I expect that all 15 bands will be allocated. I think we will get from this process a very important and interesting market. Because remember that one of the important things about the opening of the telecommunication market is the learning process that will occur here. It will occur both within the industrial sector and among the customers.
The average Venezuelan citizen has no idea what is a fair rate for a minute's call to Spain. It may be the cheapest, like in the U.S., or it may not be. In the U.S., it quickly became a commodity. You went to the cheapest minute and period, there was no consideration for logo or company names. Here it may be the same, maybe not. Within the industrial sector, we are going to have to learn how to tighten things up. Because this is an industry where the integration of the interconnection solutions are very important. Players have to learn what is acceptable to charge for a thing so the whole system moves along. When people are unreasonable, everybody becomes a stumbling block for everybody else and then there is no growth. This auction is very important, because I think that already within the second day everybody's learning what things are worth, from this process we will learn what the quality of the spectrum that comes with it is worth. What people will be willing to pay for that. It is a very interesting process. It is the first time that it has happened and every time something new will happen and the next thing will be that somebody will lose one license, will be absorbed or will merge with another and that will be another learning process.
If we look at what has happened in England and Germany, it is worth a lot of money.
It is interesting because one comment I made here was picked up immediately. That is, quality only makes sense in countries with no penetration of copper wire. You saw the results of the LMDS auctions in England. It was a disaster. They said they were going to get half a billion dollars for the thing. Why would LMDS be so attractive in a country that is filled with fiber copper? That was the point I was making. Here the question will be very different because these technologies provide last mile to people that will never have it. I mean if you are going to come here as a new player like Genesis, and you want to reach homes and businesses, you are either CANTV or else. The interesting thing is we will know how much this is worth in one week when the auctions are closed. There is a learning process going on. So World Investment News Ltdrs will learn that maybe they take too much, losers will learn that maybe they should have taken a little bit more. It is a learning process, but I don't think there will be World Investment News Ltdrs and losers, because in the spectrum there are so many different solutions I think that eventually everybody who wants to play will find a way into the homes, into the businesses.
Now that you mention LMDS technology I want to ask you what your approach will be, what you specialize in, what are your expectations in the bidding process?
We will participate in both WL and LMDS. We do not know, because we are in competition with other companies. We hope to get a presence in all five regions but I mean, in the bidding process we could very well lose.
I know that before Telecom Italia took over you had announced plans to invest 610 million dollars over the next six years.
This figure was necessary to quote when the award for the license was made three years ago so you had to give, if not a commitment, a picture of how much you planned to invest in order to achieve the goals that you presented in your tender.
Could you perhaps update that figure?
I can tell you that we are actually now in a position to reiterate that figure. If I tell you as an independent company, this is a local investment group doing a responsible study of what it takes to get to in two or four or five years, you come out with a figure. The situation before was that every six months you have to go to the banks and get the next one hundred million. The plan has not changed. What has changed is that we now have a rational way to achieve those numbers based on a majority investor that understood and bought into that.
In fact, telecommunications opening processes have inspired in the Brazilian way of life, but here in Venezuela projects are more limited both geographically and economically speaking. Do you think Conatel adopted the right decision?
They have probably gone through the best learning process of all of us, because they have the responsibility to set the rules. I do not think it's unfair to say they have done extremely well, even though they may not made the perfect decision one hundred percent of the time. I go back to what I said this is a learning process for this country.
Don't you think that regionalization will set up an obstacle for integration and if so, when do you expect this integration to happen?
Not really. Look at the case of Digitel. This is something that said a year and a half ago and a lot of people did not take me seriously. Look at the case of Digitel, the number one hindering factor according to the analysts for Digitel's growth was the fact that it was a regional license. How do they explain the fact of Digitel's growth doubling the business plan that they themselves gave. The answer is maybe that it was not such a big deal at all. I do not particularly see, for instance, that in the awarding of these licenses, global versus local is going to make a big difference.
For example, today and yesterday the most active auction was region number three which is Maracay, Valencia, Guarico, Apure, and it is going all the way up to six million dollars. Caracas is at one. Either somebody is trying to play pranks in this project with his own money or somebody believes that they can actually pay top money for a license that does not even include Caracas. So maybe there's somebody out there who thinks like me. But I do not think this is a big deal.
They believe that normally significant expansion of roaming .
In this case, it does not apply. People bid for the basic telephony. The MDS is a interesting case. I could ask you the following question, how many people bidding for an MDS are actually bidding for an MDS as a wireless carrying mechanism or as a delivery last mile mechanism? I cannot give you our position before a bid, but it is a valid question and no one knows the answer to that. If you look at an MDS from each one of these points of view, the picture is entirely different. A regional license may make tremendous sense if you are looking for one or the other.
Is the logistic expertise that you have acquired in developing basic telephony on a regional basis, definitely an asset when you have taken the decision to enlarge and penetrate urban areas?
Yes, this is an interesting comment because, for instance, Telcel has already announced big plans to do basic telephony over that platform. They have not installed a single line. It does not say anything good or bad about them. They have not done it yet. I do not know if they know exactly what it means to install a local loop set. We have being doing Rio De Janeiro for a year and a half now and we know the good and the bad.
So initially you are a regional player?
In this type of scenario, we will play what it makes sense to play. The only thing that it is obvious is that all these services will be available to existing customers. What will happen in other regions is still to be decided in this process.
You have expansion plans on a geographical basis as well as for the services you are already providing to customers, could you tell us something about those plans in terms of services, data and investments?
One of the things that Digitel has managed to do with its tiny size, compared to the established operators, is to create and define new patterns in the market, because we already took about six months to put our voice out. Immediately after that we started services that no one else was offering. They will, but the emphasis has been not on selling minutes in the air but selling services and it makes a tremendous difference. You can talk about that, but when you look at the offer, the only thing that matters is voice. That is obviously not the approach of Digitel. We believe that, if you want to play the game of what we call improving the lifestyle of the users, you have got to do something more than asking them to be on the phone all day and charge for the air time.
Today a product that has spread like wildfire in the Caracas region is e-mail, you can receive and send e-mails from your phone, and it does not use WAP. If every customer of Digitel can use that we do not have to spend a penny more on that area. If you want to do that on Movilnet or Telcel the first thing that you have to do is to buy a new phone, because the old ones do not work. And you have to be in the right place, because not all the BDS support that. This is a part why everywhere where GMS has gone in Latin America, the penetration has been very quick. When GPs came into Chile they probably had a regional license with 200 thousand users, I think it's not even two years and we have already captured the first place in the market, this place with Telefonica and Bellsouth. I do not have the same pattern, but once you start putting out services at the speed we do it, I mean you really start beating the hell out of the competition. Do you know how difficult it is for one of the two platforms to put a chatting application out, I mean we put a trial out and we were stupid not to close the gates. On the first day we had four hundred thousand messages.
We told a thousand users 'use this, tell us what you think about it'. And then everybody told a friend and then a friend told a friend and the next thing we know we had to shut it down, because we had about ten thousand people using it. When you can do things at that speed with that success and the other ones can't, you understand why a new platform like in Chile can capture 41 percent of the market in two years. You present customers with solutions that they like and make it difficult for the others to compete.
It will also depend on how the bidding process will come out but I understand you also have expectations regarding the market share. What is your goal for coming years?
I've been talking about that already for three months, because we expect to have 15 percent of the mobile market by the end of next year. That will probably be about a million users which is a bit aggressive but given that in Venezuela this market behaves aggressively by nature, I think we'll find it. I have my own opinions. I think all the things are important but when it comes to communications percentage or data, I think mobile will be king. I think in Latin America it's a bit too late for traditional telephony to catch up. I mean, the game is mobile. It may very well be that at the end of the day the same phone that you have in your home is the one that you carry in your pocket when you go out. We introduced something in June or July that has been a smashing success - I'll give you a phone that works as a fixed phone when you need it in your house and if you walk away pick up some other phone. So who needs a fixed phone anyway.
In Mexico Telmex has been accused by its competitors of using monopolistic actions, I would like to have your assessment of the legal framework here in Venezuela. Do you think we may see the same situation repeated?
It has nothing to do with Telmex or Mr. Slim or anything. It's a different country, I assume you've been to Mexico. If you compare our system to Mexico it looks almost perfect. Mexico is changing with Mr. Fox but there's a long history of almost dictatorial managing of the economy and the rules, so Mexico is not a good case for comparison. The current track record of this government in telecommunications is what it is and to be honest with you I don't lose one hour of sleep.
We have realized that people in the telecommunications sector in this country are probably the happiest with the way the government has dealt with all the processes.
I'll tell you something that happened to me this week which is significant because it is concerning us and the people who live around the street. The day before yesterday, Globovision, which is a channel which is all news, they, as good as they are, they managed to have, they stole every one of us away from the rest of the rest of the TV channels. So we were alone in the room, they had champagne and food and very remarkable, Mr. Rossen was there, Mr. Garcia was there, everybody was there - and so we took turns going on the air, talking about the process. Macarenas, who is the host, when she finished the first half - the second half was more talking to the public than to the leaders - she came into the room to share with us and she made a comment that was as natural, I mean, it was not prepared. She sat down and took a zip of champagne, and she, a woman who is constantly in front of problems - 'cause that's what goes in the news, problems with this, problems with that and so on - she said "you know, it is strange, I feel happy for the first time in years!" So you know this is like one real story within this big mess here. It is significant. You know, that this happening is almost like as if this was not the country we are witnessing.
You said at the beginning of the interview that if it would have been for the general macroeconomic situation of the country, the investors wouldn't come to Venezuela. Do you think, or do you expect the situation to change? Are you positive regarding the policy the government has adapted?
There are certainly catastrophic scenarios that will affect any industry, even the telecommunications industry. And I, given that I'm not a government person, I can't, I'm not willing to bet any money that catastrophic situations will not occur. I mean if you recall, six, seven years ago in Brazil was after difficult times coming out of a long crisis then the Asian crisis came over and that affected the economy enormously. So you know, I tried not to worry about those things. I'm the sort of a cautions type of person, but I can only predict so much. I will tell you something on the contrary, and that is that it may very well be, and I've been talking about this to our employees, to their families, to people in the press, to students, to people who invite me to forums. And that is that it may very well be that the telecommunications sector will be the first sector to develop, to prove that the government matters only to an extent. Which is what happens in many other countries.
Imagine what would have happened in almost any other country in the world to go through the constitutional crisis we went through in the US two years with Clinton. What is the lesson from that? In the US, the government matters only so much that the economy has a way of working that is not totally dependent on the government. And I think that that will be a big growing up, a step for this nation, if there is at least one instance where it can be proven that regardless of what government you have and so on, you can develop, you know I'm talking about normal business going. And I hope my Italian friends will forgive me for the comment - I always have to make jokes about what happens in reality - it is almost ironic and maybe providential that Italian telecommunications are a partner because they can change three times a month the government and the economy keeps going. Maybe they will come in to teach us that.
Well finally I would like to ask you about your professional background. I know that you have been involved in telecommunications for many years already.
Yes. I studied in telecommunications in 1984, working for AT&T. I studied in AT&T as a technical resource, which includes everybody who is working on everything other than selling, and I left At&t in 1989 and I went with a group of AT&Ters to found another company that was successfully taken public in 1993. That was my first non-corporate entrepreneurial type experience. And then I remained for all the years up to now around either as a telco person or as a person selling to telco people. So it was either one of the roles. I went to work for Sun Microsystems as a large account manager for telco accounts. I had AT&T as my account, that was enough! I would have given up the rest. I'm almost coming back to telecommunications to be honest with you. When they contacted me, I was very involved with digital contents, which I am still very interested in. Digital contents working for Time Warner cable in the US. This has been a good experience, because I always worked in fixed telephony and cable, wireless is an entirely different ball game, it's amazing.
There are some things that are the same but there are things that are very different. Especially marketing. As I tell people when they ask me about the strategies for marketing I tell them because in wireless there is something very precise and already a minute makes a tremendous difference. That is when you have mobile customers, you are always with the customer. See, when I used to work for AT&T, I only had the customer next to me when the customer came home because the phone was in the house. So there was this sort of like time and separation when my customer was away from my table. Now, my customer is always with me. So it lends itself to very interesting marketing techniques which we have been applying here successfully.
Well we've used that very successfully here to an extent that we don't even predict, it just happens, but I think the success of digital is still today based on the fact that the behavior of this company towards society and its customers is something that this country has never seen before.
NOTE: World Investment News Ltd cannot be made responsible for the content of unedited transcriptions.
VENEZUELA
