Overview of Telefonica de Espana

Telefonica de Espana is a private company, but under state management. The government owns about 32%, with private investors owning the rest. In October 1995, the government, through Solomon Brothers, sold an additional 12% of Telefonica to private investors, effectively reducing its share to 19.86%. All shares to be sold are non-voting shares. A consortium of three Spanish banks owns about 8% of Telefonica and is expected to purchase additional shares, thus ensuring that Spanish investors control the majority stake in Telefonica. US investors, mostly pension funds, already own about 25% and are expected to purchase additional shares. Although, the offering was sold out, US investors did not respond as predicted to the offering because of the oversupply of international telecommunication companies selling shares in the marketplace.

The Ministry of Public Works, Transport, and Communications (MOPTMA), the ministry which controls the government shares, is against any further privatization of Telefonica because it feels that without a majority stake, Telefonica, would be forced by competitive pressures to reduce its services to rural and remote areas of Spain. As a result, any further selling of equity shares is unlikely. The Ministry claims that government control over management requires a minimum 20% stake.

Spain is one of the few EU countries that does not have a major domestic telecommunication equipment manufacturer. In 1994, US exports of telecommunications equipment totaled $164 million, resulting in a balance of trade figure of $154 billion. Telefonica de Espana is the sole provider in Spain of basic domestic and international telephone service.

Telefonica de Espana is a part of the Telefonica Group which consists of nearly 40 subsidiaries and various other companies that Telefonica has minority ownership in. Telefonica de Espana owns about 76.22% of Telefonica Internacional (TISA) with the rest owed by the government. There are unconfirmed rumors that either AT&T or GTE are seeking a 25% equity stake in TISA, but nothing has been announced.

The 1987 Telecommunications Act established the legal structure of Telefonica de Espana and continues to serve as the vehicle for continued market liberalization. Telefonica operates under a 1991 State Contract which guarantees Telephonica's monopoly over basic voice telephony as well as mobile telephony, videodex and telex for an additional 30 years. The contract also addressed a series of service standards and coverage area requirements. Additionally, the government also won veto privileges and the right to appoint new board members. Moreover, it required Telefonica to remove all cross subsidies between services.

In 1994, the MOPTMA reorganized the Telefonica Group into eight separate affiliates. Telefonica, however, remains an integral partner to each of these divisions. Moreover, it is actively searching for global partners to provide the capital required to exploit its cable and growing international operations. As a result, the path is open for US companies to create joint ventures with Telefonica. Telefonica is among the top 100 EU companies listed on the New York Stock Exchange (NYSE).

Spain has made great strides in bringing telephones into rural areas. The 1995 teledensity figures show a four percent increase in the number of households having telephones, 38.1% up from 34% in 1994. The 1994 productivity ratio (lines per employee) in Spain is ten percent higher than the average in Europe, up 7.2% since 1993. Telefonica's operating revenue is now at $12 billion, up 32%, and net income was $851 million, up 24% (TISA accounts for 14% or $1.7 billion). Additionally cash flow was $4.72 billion. Telefonica's main objectives are modernization and consolidation of basic telephony, conversion of cellular service from analog to digital.

About 2% of all calls entering the US are from Spain and 1.5% of all calls made from the US are made to Spain. The US is Spain's fourth largest telecommunication route; 8.3% of all calls from Spain are to the US. The top three telecommuncations routes are to France at 17%, the United Kingdom at 14.6% and Germany at 14.3%. In 1995, imports of US telecommunications equipment accounted for 14% of all imports in Spain. Imports account for 50% of the total market for telecommunications equipment. In the last few years, the market for telecommunications equipment and services has grown by 16% annually, and this was in spite of recessions and currency devaluations. The International Trade Administration expects Spain to jump from the 11th largest market of telecommunications equipment to the eighth largest market by the year 2000. Additionally, the Spanish government anticipates that the expansion and modernization of the country's telecom infrastructure will bring in over $50 billion in new investment over the next seven years.

Competitive Environment Facing Telefonica de Espana

Competition is slowly being introduced in mobile communications. In December 1994, a second mobile cellular license was awarded to the Spanish Consortium Airtel. AirTouch Communications, a US service provider, is the lead partner in AirTel with about 16% interest. However, actions by the Spanish government are hindering the process. The government granted Telefonica an automatic non-competitive license both in cellular and cable in an effort to maintain Telefonica's status in the marketplace. The EU's Competition Commissioner Karel Van Miert warned the Spanish Government that automatically granting Telefonica a non-competitive license violates EU Competition laws since it provides Telefonica with advantages that other companies do not have. The case is now in court awaiting settlement, however, Spain has stated that it might refuse to obey the ruling. Telefonica has refused to grant interconnection rights to Airtel. As a result, Airtel is seeking to build a new network infrastructure.

Airtel began digital service in October, but at a disadvantage because Telefonica was allowed to start digital service three months earlier. Airtel currently serves Madrid, Barcelona, and Seville but expects to extend that number shortly.

Spain has committed to meeting the European Union deadline of 1998 for full liberalization of basic telephony, both domestic and international; Spain originally had won an exemption until 2003 but has stated its intention to make the earlier target. Liberalization of Cable has been stymied because of the failure of Parliament to pass a new Cable and TV bill. In addition to awarding Telefonica a non-competitive license, the proposed bill protects Telefonica's voice monopoly until at least 1998 and limits foreign ownership to 25% for the US and non-EU countries.

The MOPTMA announced in July 1995 that even though the Cable bill has not passed Parliament, Telefonica and other competitors can begin providing service. This ruling surprised everyone, from regional governments to interested cable competitors. Moreover, it allowed Telefonica to have a significant head start (several months) over its competition since they are the only company with an existing national network. Companies that received licenses from MOPTMA are currently negotiating with Regional Governments for rights of way and infrastructure building. Once these issues are resolved, competition is expected to heat up both for service providers and for cable and fiber-optic manufacturers.

Although, Telefonica has a monopoly over satellites, two provisional licenses have been awarded recently. Complete Liberalization is expected shortly. Liberalization of data transmission began in 1994, already 21 licenses have been awarded in eight Spanish cities and more are expected to be awarded in the future.

Spanish laws limit the amount of foreign ownership in any of the affiliates of Telefonica to 25%. These rules do not pertain to other EU countries. The government, however, may authorize a larger foreign ownership for mobile operators of closed user groups or value-added services.

Although, EU Open Network Provisions require non-discriminatory interconnection both to the local exchange and to the domestic network for international traffic, Telefonica often violates these rules. Interconnection is often granted only after Spain has been ordered to do so by the Spanish Courts, as was seen in the 3C Communications case. In this case, Telefonica refused to provide voice resale and access to Telefonica's network to 3C Communications, until the Spanish Competition Court ruled that action violated Spanish competition laws. Consequently, licensees often seek authorization to build their own network infrastructure, or secure access through value added network providers, to avoid these problems. Telefonica is attempting to delay competition as long as possible, estimates are as high as one-third of its revenue base is vulnerable. Another problematic situation is that although EU rules insist that cost allocation rules be in place to prevent cross subsidy Telefonica often ignores these rules.

Telefonica Group Activities

Recently, TISA announced plans to integrate all of its Latin American subsidiaries into the Pan-American Network. TISA has the potential to become a leader in Latin American telecommunication, it has subsidiaries in nine countries with 1994 profits of $208.4 million. TISA has been successful in Latin America because of their policy of joining with local partners, often former State operators, to win telecommunication privatization contracts in many of the Latin American countries; this procedure allows TISA to maximize its management control while minimizing the inherent financial risks of investing in Latin American countries. TISA's subsidiaries are also building the infrastructure necessary for cable and cellular networks as well as joining with local or multinational partners to operate these networks. They are also active in creating Yellow Page directories for their subsidiaries.

TISA has purchased da 24.5% stake in Unicom, a Mexican telecommunication's consortium, from GTE; GTE still owns 24.5% of Unicom with 51% owned by two Mexican groups. Unicom has announced that it will spend $900 million to obtain an international license from Mexico.

Telefonica de Espana has purchased 25% of Unisource which in turn has joined with AT&T in July 1995 to create Uniworld. AT&T will own 40% with Unisource owning 60%. Uniworld plans on targeting European-based multinationals interested in seamless telecommunications services, it is expected to begin operations in early 1996. In addition to Uniworld, Unisource owns a 20% equity stake in AT&T's World Partners, a loose alliance of major telecommunications providers marketing seamless global services to multinational countries. Telefonica claims that Uniworld generates about $2 billion more traffic than other competitors.