Daily Report for Executives™

NUMBER 55 MARCH 23, 2015

Communications IDT was in contact with ETECSA for several years, but it only began to express genuine interest in the deal in the summer of 2014, Bill Ulrey, IDT vice president for Waylaid by Congressional Hearings, Wheeler investor relations and external affairs, told Bloomberg Misses Telecom Delegation Trip to BNA. ‘‘There was no formal change in policy that al- lowed us to do this’’ on the Cuban side,’’ he said. ad it not been for an upcoming string of congres- ‘‘What changed was ETECSA’s interest in it,’’ he said. sional hearings over his agency’s net neutrality Negotiations ended in February, when the FCC Inter- H rules, FCC Chairman Tom Wheeler would have national Bureau accepted the company’s waiver of the been talking policy on sunnier benchmark policy applicable to U.S. carriers seeking to shores. provide telecom services directly to Cuba on Feb. 12. Wheeler was invited—but won’t be going—to The deal is an indicator that the decades-long chill March 24-26, as part of a U.S. delegation led by Ambas- between the U.S. and the Cuba Communist regime, first sador Daniel A. Sepulveda to discuss increasing Cuba’s led by Fidel Castro, and later by his brother Raul Cas- capacity for greater Internet connectivity to support tro, may be genuinely thawing enough to allow the tele- better access to information by the nation’s people. com industry to enter a new market even in small ways. Sepulveda is the deputy assistant secretary of state and ‘‘We’re the first, but there will probably be many U.S. coordinator for international communications and more to come,’’ Ulrey said. The company hopes that as information policy. the two governments continue to move toward liberal- Mindel De La Torre, chief of the FCC International ization of the market, it will be able to offer other ser- Bureau, will travel in Wheeler’s place, an FCC spokes- vices, such as mobile air time ‘‘top up’’ which allows woman told Bloomberg BNA by e-mail. customers to purchase minutes in the U.S. and transfer ‘‘As the U.S. regulatory agency in charge of commu- them to a mobile device overseas. nications and responsible for authorizing communica- IDT already offers that service in other countries and tions links between the United States and other coun- believes that, if market conditions are right, Cuba could tries, the FCC would like to explore where we can work be ripe for a similar service. Communications costs are with our counterparts in Cuba to improve telecommuni- high in a country where the average monthly salary is cations infrastructure and connectivity between our just over $17, according to the Cuban National Statis- countries,’’ the FCC spokeswoman said. tics and Information Office (ONEI). The Obama administration announced Dec. 17 that it Sanctions Scare. What sets IDT apart from many would liberalize restrictions on trade and diplomatic re- other telecom providers are its prepaid services. lations with Cuba, with an emphasis on allowing tele- Telecom providers that offer post-paid services face com providers to establish the necessary infrastructure greater uncertainty due to banking regulations in enter- and mechanisms in Cuba to provide commercial tele- ing what is far from a free and open market. communications and Internet services (243 DER A-11, A key hurdle for investment is the risk-adverse na- 12/18/14). ture of the American banking industry and companies’ The talks represent just one in a series of meetings ability to remit money to ETECSA without running between government officials of both countries to help afoul of sanctions rules. propel that policy forward, a State Department spokes- The mere possibility of a sanctions action by the woman told Bloomberg BNA. Treasury Department Office of Foreign Assets Control The trip comes just weeks after the first U.S. tele- (OFAC) means banks’ traditionally conservative risk phone carrier, Newark, N.J.-based IDT Domestic Tele- departments are reticent to make direct payments to com, Inc., struck the first long-distance calling deal in Cuba, even though telecom activities are permissible, decades with Cuban government-run telecom provider Ulises R. Pin, a telecommunications lawyer with Mor- Empresa de Telecomunicaciones de Cuba S.A. gan Lewis & Brockius LLP in Washington, told (ETECSA). Bloomberg BNA. Since March 4, callers from the U.S. have been able ‘‘It’s a practical issue, not a legal issue,’’ Pin said. to directly connect to Cuba, rather than waiting for the Though the Commerce Department is working on call to be transferred through a third party. rules to implement the administration’s policy to autho-

COPYRIGHT ஽ 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0148-8155 2 rize the export of certain types of items, including tele- other tools and supplies for entrepreneurs presumes communications equipment, to Cuba, sanctions remain that the Cubans have the money to buy these things, in place, OFAC said in a Jan. 15 fact sheet related to re- and a financial system that’s going to work to get pay- cent changes in the Cuban Asset Control Regulations ments made,’’ he said. (CACR). The government’s experience in growing its tourism ‘‘Most transactions between the United States, or and hotel industry could serve as a model for encourag- persons subject to U.S. jurisdiction, and Cuba continue ing American telecom investment down the road as to be prohibited, and OFAC continues to enforce the laws and government policies in both countries evolve, prohibitions of the CACR,’’ Treasury said. he said. Under that model, the Cuban government generally Congressional Hurdle. While more U.S. carriers may retains control over the land, real estate and infrastruc- begin exploring the possibility of setting up other inter- ture related to a hotel operation, and allows private, for- national communications infrastructure between the eign investors to manage the property in a form of joint two countries in addition to exports, they will be limited venture, Epstein said. to such activities unless current U.S. law is changed. The Cuba Democracy Act of 1992 restricts U.S. carri- The government might consider allowing a U.S. pro- ers from investing in Cuba’s domestic networks, which vider to install towers and other infrastructure which means American companies aren’t likely to set up a would be owned by the state, but be subject to a long- Wi-Fi network in Cuba any time soon. term lease to the foreign provider, Epstein said. ‘‘It’s a ‘‘They can lay cable between Miami and Havana, but good way for them to build infrastructure cheaply.’’ they cannot invest within Cuba,’’ Pin said. An act of Eye on Infrastructure. ‘‘U.S. opportunities cover al- Congress would be necessary to change that law, and most the waterfront of telecom services in Cuba,’’ Pan- with Republicans in control of both chambers, it seems telis Michalopoulos, a telecom practitioner with Steptoe unlikely that would occur, he said. & Johnson LLP in Washington told Bloomberg BNA. Gauging Cuban Interest. Still, investment and regula- ‘‘Our understanding of the state in which the Cuban tory hurdles aren’t only on the U.S. side. With the fed- infrastructure is, that it’s rather outdated in many re- eral government signaling its interest in promoting spects,’’ in terms of broadband services, wireless Inter- greater communication with the island, the Cuban gov- net connectivity, and satellite or cable TV, Michalopou- ernment itself is the major roadblock, several telecom los said. and international trade practitioners told Bloomberg There is a strong potential for laying fiber, which BNA. would be ‘‘huge on an island of that scale,’’ as well as Industries will be watching how Cuba reacts to what- putting up cell towers to have enough bandwidth for the ever approaches are made by the American government delivery of enriched content via the airwaves. and businesses, said Jonathan Epstein, an international ‘‘They don’t have any of that right now,’’ said Mon- trade attorney in the Holland & Knight LLP Washington tero. office. How quickly such an approvals process would go on ‘‘It’s potentially a huge market, very close to the U.S., the Cuban side is nearly impossible to predict, Michalo- but a big issue is going to be how cooperative the Cu- poulos said. ban government is going to be in terms of allowing pri- ‘‘To the extent that there are some services that do vate development of the infrastructure and distribution not require Cuban government approval,’’ specifically of content,’’ said Francisco Montero, a telecommunica- for edge providers and Internet-based services, and ‘‘to tions attorney with the Fletcher, Heald & Hildreth PLC the extent they’re authorized by the U.S.—within the Arlington, Va. office. general U.S. license—that obstacle of receiving Cuban Recent Commerce Department rule changes have approval would not exist,’’ Michalopoulos said. lifted most licensing restrictions for certain types of As trade and travel restrictions loosen, the Cubans consumer electronics, and telecommunications and In- will be presented with the possibility of a massive influx ternet backbone companies, subject to certain limits, of tourists, leading to a further build-out of tourism- Epstein said. related industries: hotels, resorts and cruise ship facili- From there, the question becomes what the Cubans ties, Montero said. will allow to penetrate their markets, said fellow Hol- All of those are going to require telecom facilities to land & Knight trade partner Ronald A. Oleynik. support consumer demand for broadband, Wi-Fi and The very reason the telecom industry is at the fore- conferencing facilities, he said. If that happens, compa- front of the administration’s policies is because it has nies assume the government will loosen its restrictions, the capacity to bring new ideas and U.S. culture to Cu- said Montero. bans, Oleynik said. Whether or not the government al- ‘‘Something tells me we’re a long way away from that lows that door to spring open or remain closed may be yet,’’ he said. heavily driven by the Cuban economy’s need for foreign investment, Epstein said. Netflix, Google Explore Opportunities. For Cuban citi- ‘‘Part of the notion that there’s going to be this flood zens, expensive Internet access through an outdated in- of imports of personal communications devices and frastructure is compounded by one of the world’s most

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3-23-15 COPYRIGHT ஽ 2015 BY THE BUREAU OF NATIONAL AFFAIRS, INC. DER ISSN 0148-8155 3 repressive regimes when it comes to the free of in- though a company spokeswoman declined to confirm formation online. the details of the visit. International watchdog organization Freedom House Edge providers and online content companies will ranks Cuba as one of the least free countries for Inter- similarly be greatly affected by the way the Cuban gov- net openness, and Internet penetration is estimated at ernment opens itself up, Montero said. about 5 percent. ‘‘We are looking at what may be considered a genera- tional change in the current regime. Once we see a Regardless of those obstacles, American edge provid- passing of the baton from the Castro generation to the ers are already taking steps to move in, though their ef- next successor, I think you could see things start to re- forts appear largely symbolic. lax a little bit,’’ he said. Netflix, Inc. launched its standard $7.99/month BY LYDIA BEYOUD streaming video service on Feb. 9, though few Cubans To contact the reporter on this story: Lydia Beyoud in would be able to afford the service or have access to the Washington at [email protected] international payment methods necessary to subscribe. To contact the editor responsible for this story: Apple Inc. removed the country from its Global Trade Heather Rothman at [email protected] Compliance restricted country list Feb. 17, opening up the possibility of Cubans accessing a variety of its on- Text of the IDT waiver is at http://op.bna.com/der.nsf/ line services, such as the iTunes store. r?Open=tbay-9ustkl. Several Google Inc. executives were reported to have Text of the OFAC fact sheet is at http://op.bna.com/ visited with Cuban university students March 11, der.nsf/r?Open=tbay-9ustjb.

DAILY REPORT FOR EXECUTIVES ISSN 0148-8155 BNA 3-23-15