Telecom Italia S.P.A. 20-F 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended: December 31, 2010
For the transition period from N/A to N/A
Date of event requiring this shell company report
Commission file number 1-13882
Telecom Italia S.p.A.
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
Piazza degli Affari 2, 20123 Milan, Italy
(Address of principal executive offices)
Chief Financial Officer
Telecom Italia S.p.A.
Piazza degli Affari 2, 20123 Milan, Italy
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock
as of the close of the period covered by the annual report.
Ordinary Shares 13,245,746,691
Savings Shares 6,026,120,661
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ** Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statement included in this filing:
U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨
If Other has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
Telecom Italia S.p.A. is incorporated as a joint stock company under the laws of Italy. As used in this Annual Report, unless the context otherwise requires, the term Company means Telecom Italia S.p.A. the operating company for fixed and mobile telecommunications services in Italy and the holding company for various businesses, principally telecommunications, and the terms we, us and our refers to the Company, and, as applicable, the Company and its consolidated subsidiaries.
Unless otherwise indicated, the financial information contained in this Annual Report has been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (designated as IFRS).
Unless otherwise indicated, any reference in this Annual Report to Consolidated Financial Statements is to the Consolidated Financial Statements for the year ended December 31, 2010 of the Telecom Italia Group (including the notes thereto) included elsewhere herein.
Cautionary Statement for Purposes of the Safe Harbor Provisions of the United States Private Securities Litigation Reform Act of 1995.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Annual Report contains certain forward-looking statements.
Forward-looking statements are statements that are not historical facts and can be identified by the use of forward-looking terminology such as believes, may, is expected to, will, will continue, should, seeks or anticipates or similar expressions or the negative thereof or other comparable terminology, or by the forward-looking nature of discussions of strategy, plans or intentions.
The forward-looking statements in this Annual Report include, but are not limited to, the discussion of the changing dynamics of the telecommunications marketplace, including the continuing developments in competition in all aspects of our businesses from new competitors and from new and enhanced technologies, our outlook for growth in the telecommunications industry both within and outside of Italy, including our outlook regarding developments in the telecommunications industry, and certain trends we have identified in our core markets, including regulatory developments.
Such statements include, but are not limited to, statements under the following headings: (i) Item 3. Key Information3.1 Risk Factors, (ii) Item 4. Information on the Telecom Italia Group4.1 Business4.1.7 Updated Strategy, (iii) Item 4. Information on the Telecom Italia Group4.3 Regulation, (iv) Item 5. Operating and Financial Review and Prospects, (v) Item 8. Financial Information8.2 Legal Proceedings and (vi) Item 11. Quantitative and Qualitative Disclosures About Market Risks, including statements regarding the likely effect of matters discussed therein.
Actual results may differ materially from those projected or implied in the forward-looking statements. Such forward-looking information is based on certain key assumptions which we believe to be reasonable but forward-looking information by its nature involves risks and uncertainties, which are outside our control, that could significantly affect expected results.
The following important factors could cause actual results to differ materially from those projected or implied in any forward-looking statements:
The foregoing factors should not be construed as exhaustive. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
The following terms appearing in this Annual Report have the meanings set forth below.
means the European Union.
means the International Accounting Standards Board.
means International Financial Reporting Standards issued by the IASB. IFRS also include all effective International Accounting Standards (IAS) and all Interpretations issued by the IFRS Interpretations Committee (formerly called the International Financial Reporting Interpretations CommitteeIFRIC), comprising those previously issued by the Standing Interpretations Committee (SIC).
means the merger of Old Telecom Italia into Olivetti, which became effective on August 4, 2003.
Old Telecom Italia and Old Telecom Italia Group
means Telecom Italia as well as Telecom Italia and its consolidated subsidiaries, respectively, as they existed immediately prior to the effective date of the Merger.
unless otherwise indicated, means Olivetti S.p.A., the holding company and controlling shareholder of Old Telecom Italia.
unless otherwise indicated, means Olivetti and its consolidated subsidiaries, including Old Telecom Italia.
means the Ordinary Shares, 0.55 euros par value each, of Telecom Italia.
means Telecom Italia S.p.A.
means the Savings Shares, 0.55 euros par value each, of Telecom Italia.
means the entity which resulted from the Merger.
Telecom Italia Group and Group
means the Company and its consolidated subsidiaries.
Telecom Italia Media
Telecom Italia Media is the Telecom Italia Groups subsidiary operating in the Media business.
means Telecom Italia Mobile S.p.A., the Companys subsidiary which operated in the mobile telecommunications business, and merged with and into Telecom Italia, with Telecom Italia as the surviving company, effective as from June 30, 2005.
means the company deriving from the spin-off of TIMs domestic mobile operations, effective as from March 1, 2005. After the merger of TIM with and into Telecom Italia, Tim Italia became a wholly-owned subsidiary of Telecom Italia. Subsequently Tim Italia merged with and into Telecom Italia, with Telecom Italia as the surviving company, effective as from March 1, 2006.
In addition to the foregoing terms, certain technical telecommunication terms relating to our businesses are defined in the glossary of this Annual Report (see Item 4. Information on the Telecom Italia Group4.4 Glossary of Selected Telecommunications Terms).
In addition, due to the changing nature of our business, we now use the measure Accesses when considering certain statistical and other data for our domestic Italian business. Access refers to a connection to any of the
telecommunications services offered by the Group in Italy. We present our customer base using this model because the integration of telecommunications services in bundled service packages has changed the way residential and corporate customers contract for our services. Because a single customer may contract for multiple services, we believe it is more accurate to count the number of accesses, or services a customer has contracted for, as opposed to only counting the number of our customers. For example, a customer that has fixed line telephony service and BroadBand service represents two accesses rather than a single customer. In addition, we fully count the accesses attributable to all companies over which we exercise control. The following are the main categories of accesses:
Our Brazil and Argentina business areas compile their statistical data differently. Brazil, which primarily offers mobile telephone services, counts numbers of lines. In Argentina, mobile statistical data is compiled on the basis of customers.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Item 3. KEY INFORMATION
3.1 RISK FACTORS
In addition to the other information contained in this Annual Report, investors should carefully consider the risks described below before making any investment decision. The risks described below are not the only ones we face. Additional risks not known to us or that we currently deem immaterial may also impair our business and results of operations. Our business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks, and investors could lose all or part of their investment.
RISKS RELATED TO THE TELECOM ITALIA GROUP
Our business will be adversely affected if we are unable to successfully implement our strategic objectives. Factors beyond our control may prevent us from successfully implementing our strategy.
On February 25, 2011, we set out our strategic priorities for the 2011-2013 period. Our strategy confirms the strategic priorities that the Telecom Italia Group set in April 2010, and in particular that we will:
Our ability to implement and achieve these strategic objectives may be influenced by certain factors, including factors outside of our control, such as:
As a result of these uncertainties there can be no assurance that the objectives identified by management can effectively be attained in the manner and within the time-frames described. Furthermore, if we are unable to attain our strategic priorities, our goodwill may be impaired which could result in significant write-offs.
The global economic crisis adversely affected our business in 2009 and 2010 and continuing global economic weakness could further adversely affect our businesses and therefore have a negative impact on our operating results and financial condition.
The continuing effects of the global economic crisis which began in late 2008 continued during 2010. Although the global economy began to recover during 2010, such recovery varied between geographic areas and European economies, including Italy, were affected by the sovereign debt crisis and continuing concerns about the strength of certain economies, in particular Ireland, Greece, Portugal and Spain. The continuing economic weakness was reflected in the general contraction in consumer spending, with the impact on consumer spending varying between geographic areas and different markets. Economic weakness, particularly in our domestic market, is expected to continue for at least the whole of 2011.
In Italy, the recession has had the greatest impact on the demand for investments and on the purchase of consumer durable goods and items of mass-consumption, with Gross Domestic Product (GDP) declining in 2009. In 2010, GDP improved slightly compared to 2009. In 2010, in both Brazil and Argentina there was a recovery in GDP growth, which is expected to continue in 2011.
However, in Brazil, the contribution of raw materials to export growth increased in 2010; a fall in the price of raw materials may have a material adverse effect on Brazils economic growth. In Argentina, as has been the case in the last few years, the level of inflation has been high, and the expected growth of the economy may generate further inflation in the medium term. Such inflation may negatively affect the Argentina Business Units margins.
Although telecommunications has proven to be one of the industrial segments least affected by pro-cyclical trends since our society has an increasing need to communicate, recessionary conditions have weighed, and may continue to weigh, heavily on the development prospects of our domestic market, particularly with regard to the penetration of the next phase of value-added services and the volume of business, key elements of the Groups strategic plan. This applies particularly to the business clientele segment (professionals and small and medium-size businesses), where it is more likely that continuing weak economic conditions could have a negative effect on revenues. Declines in the growth in the economies of Brazil and Argentina could also reduce the demand for our products and services in those markets.
The continuing weakness in the global economy, and in particular the expected slow growth in GDP in our domestic market, creates significant uncertainty and may adversely impact consumer spending, including on telecommunication services. If we fail to successfully implement our plans to improve efficiency and optimize expenditures, our results of operations and financial condition could be adversely affected.
Our leverage is such that deterioration in cash flow can change the expectations of the Groups ability to repay its debt and the inability to reduce our debt could have a material adverse effect on our business. Continuing volatility in the international credit markets may limit our ability to refinance our financial debt.
Our gross financial debt was 41,230 million euros at December 31, 2010 compared with 44,397 million euros at December 31, 2009 and our net financial debt was 32,087 million euros at December 31, 2010 compared with 34,747 million euros as of December 31, 2009.
Due to the competitive environment and the current economic conditions, there could be deterioration in our income statement and statement of financial position measures used by investors and rating agencies in determining our credit quality. Ratios derived from these same separate income statement and statement of financial position measures are used by the rating agencies, such as Moodys and Standard & Poors, which base their ratings on our ability to repay our debt.
Although rating downgrades do not have an immediate impact on outstanding debt, except for outstanding debt instruments that specifically contemplate ratings in order to determine interest expense, or on its relative cost to us, downgrades could lead to a greater risk with respect to refinancing existing debt or higher refinancing costs.
Factors which are beyond our control such as deterioration in performance by the telecommunications sector, unfavorable fluctuations in interest rates and/or exchange rates, further disruptions in the capital markets, particularly debt capital markets, and, in a broader sense, deterioration in general economic conditions also as a
result of the continuing effects of the economic and financial crisis, could have a significant effect on our ability to reduce our debt, or the ability of the Telecom Italia Group to refinance existing debt through further access to the financial markets. As a result of the reduction of debt being a key element of the Groups strategy, the failure to reduce debt could be viewed negatively and adversely affect our credit ratings.
The management and further development of our business will require us to make further capital and other investments. We may therefore incur additional debt in order to finance such investment. Our future results of operations may be influenced by our ability to enter into such transactions, which in turn will be determined by market conditions and factors that are outside our control. In addition, if such transactions increase our leverage it could adversely affect our credit ratings.
We are continuously involved in disputes and litigation with regulators, competition authorities, competitors and other parties and are the subject of a number of investigations by judicial authorities. The ultimate outcome of such proceedings is generally uncertain. When finally concluded, they may have a material adverse effect on our results of operations and financial condition.
We are subject to numerous risks relating to legal, competition and regulatory proceedings in which we are currently a party or which could develop in the future. We are also the subject of a number of investigations by judicial authorities. Such proceedings and investigations are inherently unpredictable. Legal, competition and regulatory proceedings and investigations in which we are, or may become, involved (or settlements thereof) may have a material adverse effect on our results of operations and/or financial condition. Furthermore, our involvement in such proceedings and investigations may adversely affect our reputation. For information concerning the most significant legal, competition and regulatory proceedings and investigations in which we are involved, see NoteContingent liabilities, other information, commitments and guarantees of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
The Italian Collective Action for Damages for the Protection of Consumers Law (the Collective Action Law) was passed in December 2007 and, after undergoing substantial modifications by the Italian Parliament, entered into force on January 1, 2010. The law allows collective action lawsuits and is similar in many respects to common law class actions. Contracts between public utilities and consumers and the business practices of companies that provide public services (such as Telecom Italia) are covered by the Collective Action Law. Therefore there is a risk of claims against Telecom Italia by consumers associations on behalf of broad classes of consumers, although no such actions have yet been brought against Telecom Italia.
Operational risks could adversely affect our reputation and our profitability.
We face numerous operational risks inherent in our business, including those resulting from inadequate internal and external processes, fraud, employee errors or misconduct, failure to comply with applicable laws, failure to document transactions properly or systems failures. These events can result in direct or indirect losses and adverse legal and regulatory proceedings, and harm our reputation and our operational effectiveness. In recent years the Company has been the subject of a number of frauds, including matters relating to its Telecom Italia Sparkle subsidiary, which resulted in the restatement of our financial statements in connection with the 2009 financial year.
We have risk management practices designed to detect, manage and monitor at top level the evolution of these operational risks, and for this purpose we have recently established a group risk management committee.
However, there is no guarantee that these measures will be successful in effectively controlling the operational risks that we face and such failures could have a material adverse effect on our results of operations and could harm our reputation.
Risks associated with Telecom Italias ownership chain.
Telco S.p.A. (Telco)a company in which interests are held by the Generali group (30.58%), Intesa Sanpaolo S.p.A. (11.62%), Mediobanca S.p.A. (11.62%), and Telefónica S.A. (Telefónica) (46.18%)is Telecom Italias largest shareholder, holding an interest of approximately 22.40% of the voting rights.
The shareholders in Telco are parties to an amended shareholders agreement dated April 28, 2010 (as amended and supplemented from time to time the Shareholders Agreement) which is effective through April 27, 2013.
The Shareholders Agreement defines, inter alia, the criteria for drawing up the slate of candidates for the appointment of the Board of Directors of Telecom Italia:
The Shareholders Agreement provides that the Telecom Italia Group and the Telefónica Group are managed autonomously and independently.
Although Telco does not own a controlling interest in Telecom Italias voting shares, Telco may exert a significant influence on all matters to be decided by a vote of shareholders, including appointment of directors (in the Shareholders Meeting on April 14, 2008 12 out of 15 Board members were elected, as a result of the proposal by Telco, which has deposited its slate for the appointment of the new Board, to be resolved upon by the Shareholders Meeting to be held on April 12, 2011; other lists were proposed by Findim S.A., which is the second largest shareholder, with a stake of approximately 4.9% of the Companys ordinary share capital, and a group of asset management companies, with an overall stake of little more than 1%). It is expected that Telco nominated directors will make up a similar number of directors as those that are represented on the current Board of Directors. In principle, the interests of Telco in deciding shareholder matters could be different from the interests of our other Ordinary Shareholders, and it is possible that certain decisions could be taken that may be influenced by the needs of Telco.
In addition, Telefónica is the largest shareholder of Telco. Presently Telefónica and Telecom Italia are direct competitors in certain countries outside of their respective domestic markets; nevertheless, the agreement among the above mentioned parties provides that the Telecom Italia and Telefónica groups will be managed autonomously and independently. Such agreements provideamong other thingsthat the directors designated by Telefónica in Telco and Telecom Italia shall be directed by Telefónica to neither participate nor vote at board of directors meetings which discuss matters relating to members of the Group in countries where Telefónica and Telecom Italia compete. Specific additional matters have been agreed with respect to Telecom Italias operations in Brazil and Argentina. The presence of Telefónica in Telco could, however, result in legal or regulatory proceedings or affect regulatory decisions in countries where we may wish to operate if Telefónica is also an operator/competitor in such jurisdictions. For further information, please see Item 7 Major Shareholders and Related-Party Transactions7.1 Major Shareholders7.1.1 Shareholders Agreements and Item 10. Additional Information10.1 Corporate Governance. See also NoteContingent liabilities, other information, commitments and guarantees of the Notes to the Consolidated Financial Statements included elsewhere herein.
Telco is a holding company and the sole operating company in which it has an interest is Telecom Italia. Therefore, should Telco be unable to obtain funding from its shareholders, present or future, or from other sources, its cash flows would be entirely dependent upon the dividends paid on the Telecom Italia shares for its funding needs.
The Italian State, through the Treasury, is in a position to exert certain powers with respect to Telecom Italia.
Although no shareholder is in a position to prevent a takeover of Telecom Italia, the Italian State, through the Treasury, is in a position to exert certain powers with respect to Telecom Italia through the exercise of the special powers included in Telecom Italias Bylaws pursuant to compulsory legal provisions. The exercise of such powers could make a merger with or takeover of Telecom Italia more difficult or discourage certain bidders from making an offer.
On March 26, 2009, the European Court of Justice declared that Italy, through the special powers, failed to comply with its obligations under the EC Treaty. According to the Courts ruling, the alleged infringement of the EC Treaty arose due to the applicable Italian legal provisions not making sufficiently clear the conditions for the exercise of the Treasurys special powers, so that investors would not be in a position to know in what situations
the powers will be used. Through a decree passed on May 20, 2010, the Italian Government amended the criteria under which it may exercise such special powers. In any event, the ruling by the European Court of Justice does not have any immediate or direct impact on Telecom Italias bylaws.
For further information, please see Item 7 Major Shareholders and Related-Party Transactions7.1 Major Shareholders7.1.3 Continuing Relationship with the Italian Treasury.
System failures could result in reduced user traffic and reduced revenue and could harm our reputation.
Our technical infrastructure (including our network infrastructure for fixed-line and mobile telecommunications services) is vulnerable to damage or interruption from information and telecommunication technology failures, power loss, floods, windstorms, fires, terrorism, intentional wrongdoing, human error and similar events. Unanticipated problems at our facilities, system failures, hardware or software failures, computer viruses or hacker attacks could affect the quality of our services and cause service interruptions. Any of these occurrences could result in reduced user traffic and reduced revenue and could harm our reputation.
Our business depends on the upgrading of our existing networks.
We must continue to upgrade our existing networks in a timely and satisfactory manner in order to retain and expand our customer base in each of our markets, to enhance our financial performance and to satisfy regulatory requirements. Among other things, we could be required to:
Many of these tasks are not entirely under our control and may be affected by applicable regulation. If we fail to execute them successfully, our services and products may be less attractive to new customers and we may lose existing customers to our competitors, which could have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO THE TELECOMMUNICATIONS INDUSTRY AND FINANCIAL MARKETS
The value of our operations and investments may be adversely affected by political and economic developments in Italy or other countries. Continuing global economic weakness could reduce purchases of our products and services and adversely affect our results of operations, cash flows and financial condition.
Our business is dependent to a large degree on general economic conditions in Italy and our other principal markets, Brazil and Argentina, including levels of interest rates, inflation, taxes and general business conditions. A significant deterioration in economic conditions could adversely affect our business and results of operations. The continuing weak economic conditions in 2010 following on from 2009 had an adverse impact on our business, particularly in Italy. We may also be adversely affected by political developments in other countries where we have made significant investments. Certain of these countries have political and legal systems that are unpredictable. Political or economic upheaval or changes in laws or their application in these countries may harm the operations of the companies in which we have invested and impair the value of these investments.
Continuing uncertainty about current global economic conditions poses a significant risk as consumers and businesses postpone spending in response to tighter credit, negative financial news (including high levels of unemployment) or declines in income or asset values, which could have a material negative effect on the demand for our products and services. Although global economic conditions began to improve in 2010 such improvement varied in different parts of the world and recovery, particularly in Europe, remained weak. Economic difficulties in the credit markets and other economic conditions may reduce the demand for or the timing of purchases of our products and services. A loss of customers or a reduction in purchases by our current customers could have a
material adverse effect on our financial condition, results of operations and cash flow and may negatively affect our ability to meet our growth targets. Other factors that could influence customer demand include access to credit, consumer confidence and other macroeconomic factors.
Because we operate in a heavily regulated industry, regulatory decisions and changes in the regulatory environment could materially adversely affect our business.
Telecom Italias fixed and mobile telecommunications operations, as well as its broadband services and television broadcasting businesses, are subject to regulatory requirements in Italy and its international operations are subject to regulation in their host countries.
In Italy, Telecom Italia is also subject to universal service obligations, which require it to provide fixed line public voice telecommunications services in non-profitable areas. Telecom Italia is, to date, the only operator in Italy under this obligation.
As a member of the European Union (the EU), Italy has adapted its telecommunications regulatory framework to the legislative and regulatory framework established by the EU for the regulation of the European telecommunications market. The review of the EU common regulatory framework was approved at the end of 2009 and is expected to be implemented in Italy by May 25, 2011.
Included within the regulatory framework is the obligation on the part of the Italian regulator responsible for the regulation of the telecommunications, radio and television broadcasting sector (AGCom) to identify operators with significant market power (SMP) based on market analyses in relevant separate retail and wholesale markets, identified in an EC Recommendation, in which it is considered necessary to intervene to protect free competition. The framework established criteria and procedures for identifying remedies applicable to operators with significant market power in various markets.
The second round of market analyses was concluded during 2010. To date, AGCom has focused on wholesale obligations while relaxing retail regulations.
In particular, Telecom Italia was confirmed as having SMP in both call origination and termination services provided at a fixed location while Other Licensed Operators (OLOs) were confirmed as having SMP in wholesale call termination services. Telecom Italias wholesale voice services are therefore set by AGCom according to a price control mechanism. For the years 2010 and 2011 prices have been set on the basis of Telecom Italias regulatory accounting costs and at an efficient level. For the following years prices will be set according to the outcome of a bottomup long-run incremental cost (BU-LRIC) model.
OLOs termination prices also are set by AGCom according to a price control mechanism. For the year 2010, AGCom set the main (infrastructure-based) OLOs termination price symmetric with Telecom Italias termination price for the SGT (transit exchange) level starting from July 1, 2010. Non infrastructure-based OLOs will be subject to price regulation from the year 2011. The European Commission criticised AGComs Decision, noting, among other things, that the price symmetry could possibly be achieved with Telecom Italias local level (SGU), by applying lower fixed termination rates (FTR) for OLOs. Due to the lack of FTR symmetry between Telecom Italia and OLOs at local level, Telecom Italia has filed an extraordinary appeal to the President of the Italian Republic that is expected to be heard before the end of Summer 2011. On March 4, 2011 AGCom notified the European Commission of its draft decision concerning the definition of fixed termination charges for Telecom Italia and OLOs in the year 2011. AGComs orientation is to set 2011 prices at the same level of 2010, therefore maintaining OLOs asymmetric prices equal to Telecom Italias termination charge for the SGT level. The final AGCom Decision will be published in April /May 2011 following EU comments.
Following certain AGCom decisions as well as criticisms from the European Commission, Telecom Italia continues to pay a rate to terminate traffic on OLOs network which is equal to almost twice the rate paid by OLOs for terminating their traffic on Telecom Italias network. The lack of fixed termination rates symmetry between Telecom Italia and OLOs at local level increased Telecom Italias 2010 costs by about 30 million euros and will entail a similar negative impact also in 2011 if AGComs draft decision is confirmed.
The regulatory approach to Next Generation Access Network (NGAN) is still under consideration. With Decision 1/11/CONS of January 11, 2011, AGCom launched a public consultation on the regulation of access to the next
generation network. The proceeding is expected to conclude by the end of spring 2011 although implementing measures will not be published before the second half of 2011. As Next Generation Access will require significant investments, the regulatory uncertainty regarding the obligations which could be imposed on Telecom Italia could have an adverse effect on the Groups cash flows and financial condition.
On January 19, 2011, with respect to the annual contribution to the AGCom, AGCom commenced an audit of the Companys compliance with the requirements relating to the payments for 2006, 2007, 2008, 2009 and 2010. The AGCom audit on the annual contribution to the AGCom is part of a general audit of all companies in the Telecommunications (TLC) industry. AGCom released its findings on March 1, 2011, holding that Telecom Italia did not properly fulfil its obligation to pay the contribution in the 2006-2010 period. The estimated cost for the company is the payment of an estimated amount of more than 11 million euros.
In general, Telecom Italia is unable to clearly predict the impact of any proposed or potential changes in the regulatory environment in which it operates both in Italy and internationally. Regulations in the telecommunications industry are constantly changing to adapt to new competition and technology. Changes in laws, regulation or government policy could adversely affect its business and competitiveness. In particular, its ability to compete effectively in its existing or new markets could be adversely affected if regulators decide to expand the restrictions and obligations to which it is subject or extend them to new services and markets. Finally, decisions by regulators regarding the granting, amendment or renewal of authorisations, to Telecom Italia or to third parties, could adversely affect its future operations in Italy and in other countries where it operates.
There is also a general risk related to the possible imposition of fines by the competent authorities for violations of regulations to which Telecom Italia is subject.
For further information regarding the matters discussed above and other aspects of the regulatory environments in which Telecom Italias businesses operates, see Item 4.3 Regulation.
We operate under licenses, authorizations and concessions granted by government authorities.
Many of our activities require licenses, authorizations or concessions from governmental authorities. These licenses, authorizations and concessions specify the types of services permitted to be offered by the operating company holding such license, authorization or concession. The continued existence and terms of our licenses, authorizations and concessions are subject to review by regulatory authorities and to interpretation, modification or termination by these authorities. Although license, authorization and concession renewal is not usually guaranteed, most licenses, authorizations and concessions do address the renewal process and terms. Licenses, authorizations and concessions as well as their renewal terms and conditions, however, may be affected by political and regulatory factors. As licenses, authorizations and concessions approach the end of their terms, we intend to pursue their renewal to the extent provided by the relevant licenses, authorizations or concessions, although we cannot guarantee that we will always complete this process successfully.
Many of these licenses, authorizations and concessions are revocable for public interest reasons. The rules of some of the regulatory authorities with jurisdiction over our operating companies require us to meet specified network build-out requirements and schedules. In particular, our existing licenses, authorizations and concessions typically require us to satisfy certain obligations, including minimum specified quality, service and coverage conditions and capital investment. Failure to comply with these obligations could result in the imposition of fines or revocation or forfeiture of the license, authorization or concession for the relevant area. In addition, the need to meet scheduled deadlines may require us to expend more resources than otherwise budgeted for a particular network build-out.
Strong competition in Italy may further reduce our core market share for telecommunication services and may cause further reductions in prices and margins thereby having a material adverse effect on our results of operations and financial condition.
Strong competition exists in all of the principal telecommunications business areas in Italy in which we operate, including, most significantly, the fixed-line and mobile voice telecommunications and BroadBand businesses. The use of the single European currency and the liberalization of the Italian telecommunication market (since January
1998) have intensified competition by facilitating international operators entry into the Italian market and direct competition with Telecom Italias fixed-line and mobile telephony businesses, particularly in the local and long-distance markets, and for BroadBand services.
Competition has continued to intensify. As of the date of this Annual Report, there are a number of significant competitors offering fixed-line and BroadBand services and three other operators (in addition to Telecom Italia) offering mobile services in the Italian domestic market. Some virtual mobile operators have been operating in the Italian mobile market since 2007 as a result of commercial agreements reached with operators of mobile networks, some of which originated from fixed line operators.
Moreover, convergence creates economic links among the TLC, Information Technology (IT), Media and Devices/Consumer Electronic (Devices/CE) markets, enabling lateral competition for different participants in these markets (from competition within the same technology to competition on the whole value chain). The ability to compete will determine value transfer among markets and market participants.
This competition may further increase due to the consolidation and globalization of the telecommunications industry in Europe, including Italy, and elsewhere. We face competition from international competitors who have entered local markets to compete with existing operators as well as local operators, each of which has increased the direct competition we face in our Italian domestic fixed-line and mobile telephony businesses, in the local and long-distance markets, and BroadBand.
Competition in our principal lines of business could lead to:
Although we have taken a number of steps to realize additional efficiencies and to rebalance revenue mix through the continuing introduction of innovative and value added services to enhance domestic growth, and although our plans take into account that we face significant competition from a number of operators in all the markets in which we operate, if any or all of the events described above should occur, the impact of such factors could have a material adverse effect on our results of operations and financial condition.
Our business may be adversely affected and our revenues may continue to decline if we are unable to continue the introduction of new services to stimulate increased usage of our fixed and wireless networks.
In order to sustain growth in revenues despite increased competition eroding our market shares and lower prices, particularly in our core Italian domestic market, our strategy has been to introduce new services in our fixed-line, wireless and BroadBand business and in new addressable closely related markets (IPTV, ICT, Online advertising, Digital Home and Service Exposure). In recent years our strategy to reverse the trend which has led to continuing revenue declines has been to focus on increasing the loyalty of our customer base, increasing penetration of the BroadBand retail market and IPTV and fostering the growth of mobile interactive services. These markets have been growing in recent years in line with increased use of the Internet and the enhanced services offered by mobile operators. However, if these markets do not continue to expand and our other strategies to slow or reverse declines in revenues from our traditional fixed line businesses are unsuccessful our revenues may continue to decrease.
In addition, our strategic priorities have required, and will continue to require, substantial expenditure. Although these initiatives are core to our strategy, we may be unable to introduce commercially these new products and services and, even if we introduce them, there can be no assurance they will be successful.
Continuing rapid changes in technologies could increase competition, reduce usage of traditional services or require us to make substantial additional investments.
Many of the services we offer are technology-intensive and the development or acceptance of new technologies may render such services non-competitive, replace such services or reduce prices for such services. In addition, as the convergence of services accelerates, we make and will have to make substantial additional investments in new technologies to remain competitive. The new technologies we choose may not prove to be commercially successful. In addition, Telecom Italia may not receive the necessary licenses to provide services based on new technologies in Italy or abroad, or may be negatively impacted by unfavorable regulation regarding the usage of these technologies (for example, uncertainty on Next Generation Access Networks regulatory requirements). Furthermore, our most significant competitors in the future may be new entrants to our markets who do not have to maintain an installed base of older equipment.
As a result, we could lose customers, fail to attract new customers or incur substantial costs in order to maintain our customer base or to maintain revenues from such customer base.
The mobile communications markets have matured in recent years and competition has increased.
In recent years, mobile communications markets have been approaching maturity levels in our domestic market in the voice services segment although the data and value-added services segments continue to grow.
Further growth in the mobile telecommunications markets in which we operate will depend on a number of factors, many of which are outside our control. These factors include:
In addition, as our core domestic Italian market has become increasingly saturated, the focus of competition has shifted to customer retention from customer acquisition, and increasing the value of existing customers. Such focus could result in increased expenses to retain customer loyalty or if we are unable to satisfactorily offer better value to our customers our market share and revenues could decline.
If the mobile telecommunications markets in which we operate do not continue to expand, or if we are unable to retain our existing customers or stimulate increases in customer usage, our financial condition and results of operations may be harmed.
We may be adversely affected if we fail to successfully implement our Internet and BroadBand strategy.
The continuing development of Internet and BroadBand services is an important part of our strategic objectives and means to increase the use of our networks in Italy and abroad. Our strategy is to replace the mature, traditional voice services with value added content and services to consumers and companies. Our ability to successfully implement this strategy may be affected if:
Any of the above factors may adversely affect the successful implementation of our strategy, our business and results of operations.
We may be adversely affected if we fail to successfully implement our Information and Communications Technology (ICT) strategy.
We intend to continue focusing on IT-TLC convergence by addressing the ICT market, in particular offering network and infrastructure management, as well as application management. We expect to experience increasing competition in this market as additional competitors (mainly Telco operators through acquisition and partnership with IT operators) also enter this market.
There is no assurance that the services offered will be successful; as a result our revenues generation could be negatively affected.
Actual or perceived health risks or other problems relating to mobile handsets or transmission masts could lead to litigation or decreased mobile communications usage.
The effects of, and any damage caused by, exposure to an electromagnetic field were and are the subject of careful evaluations by the international scientific community, but until now there is no scientific evidence of harmful effects on health. We cannot rule out that exposure to electromagnetic fields or other emissions originating from wireless handsets will not be identified as a health risk in the future.
Our mobile communications business may be harmed as a result of these alleged health risks. For example, the perception of these health risks could result in a lower number of customers, reduced usage per customer or potential consumer liability. In addition, although Italian law already imposes strict limits in relation to transmission equipment, these concerns may cause regulators to impose greater restrictions on the construction of base station towers or other infrastructure, which may hinder the completion of network build-outs and the commercial availability of new services and may require additional investments.
Fluctuations in currency exchange and interest rates may adversely affect Telecom Italias results.
In the past, we have made substantial international investments, primarily in U.S. dollars, and have significantly expanded our operations outside of the Euro zone, particularly in Latin America.
We generally hedge our foreign exchange exposure, but do not cover translation risk relating to our foreign subsidiaries. Movements in exchange rates of the Euro relative to other currencies (in particular the Brazilian Real and Argentine Peso) may adversely affect our consolidated results. A rise in the value of the Euro relative to other currencies in certain countries in which we operate or have made investments will reduce the relative value of the revenues or assets of our operations in those countries and, therefore, may adversely affect our operating results or financial position.
In addition, we have raised, and may raise in an increasing proportion in the future, financing in currencies other than the Euro, principally the U.S. dollar and British pound. In accordance with our risk management policies, we generally hedge the foreign currency risk exposure related to non-Euro denominated liabilities, through cross-currency and interest rate swaps.
Furthermore, we enter into derivative transactions hedging our interest rate exposure to change interest rates in order to manage the volatility of our income statement, while remaining within predefined target levels. However, no assurance can be given that fluctuations in interest rates will not adversely affect our results of operations or cash flows.
3.2 EXCHANGE RATES
We publish our consolidated financial statements in euros. References to , euro and Euro are to the euro, the single unified currency that was introduced in Italy and 10 other member states of the EU on January 1, 1999. References to U.S. dollars, dollars, U.S.$ or $ are to U.S. dollars, the currency of the United States of America.
For convenience only (except where noted otherwise), certain euro figures have been translated into dollars at the rate (the Euro/Dollar Exchange Rate) of 1.00= U.S.$ 1.3269, using the last noon buying rate in The City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the Noon Buying Rate) on December 31, 2010.
These translations should not be construed as a representation that the euro amounts actually represent such dollar amounts or have been or could be converted into dollars at the rate indicated.
For the purpose of this Annual Report, billion means a thousand million.
The following table sets forth for the years 2006 to 2010 and for the beginning of 2011 certain information regarding the Noon Buying Rate for Dollars expressed in U.S.$ per 1.00.
The Ordinary Shares, par value 0.55 euros (the Ordinary Shares) and Savings Shares, par value 0.55 euros (the Savings Shares) of Telecom Italia trade on Mercato Telematico Azionario (Telematico), managed by Borsa Italiana S.p.A. (Borsa Italiana) in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of the Ordinary Shares and the Savings Shares and the price of the Ordinary Share American Depositary Shares (Ordinary Share ADSs) and the Savings Share American Depositary Shares (Savings Share ADSs), on the New York Stock Exchange (NYSE). Cash dividends are paid in euro. Exchange rate fluctuations will affect the U.S. dollar amounts received by owners of Ordinary Share ADSs and Savings Share ADSs upon conversion by the Depositary of cash dividends paid in euro on the underlying Ordinary Shares and Savings Shares. See Item 10. Additional Information10.5 Description of American Depositary Receipts.
On completion of the Merger, Telecom Italia (formerly Olivetti) became a successor registrant to Old Telecom Italia under the Securities Exchange Act of 1934, as amended (the 1934 Act) and, therefore, became subject to and continues to file periodic reports under the 1934 Act required for a foreign private issuer. Telecom Italia (formerly Olivetti) obtained a listing of the Ordinary Shares and Savings Shares issued at completion of the Merger, on the NYSE where such Ordinary Shares and Savings Shares trade in the form of ADSs.
3.3 SELECTED FINANCIAL AND STATISTICAL INFORMATION
The selected financial data set forth below is consolidated financial data of the Telecom Italia Group as of and for each of the years ended December 31, 2010, 2009, 2008, 2007 and 2006, which have been extracted or derived, with the exception of amounts presented in United States dollars, financial ratios and statistical data, from the Consolidated Financial Statements of the Telecom Italia Group prepared in accordance with IFRS as issued by IASB and which have been audited by Reconta Ernst & Young with respect to 2007, 2008 and 2009. 2010 has been audited by the independent auditor PricewaterhouseCoopers S.p.A., which replaced Reconta Ernst & Young as part of the normal required rotation of auditors. Due to the restatement of prior year financial statements in 2009 (which affected 2008 and 2007) the information included under the year 2006 in the selected financial data below is unaudited.
In 2010, the Group applied the accounting policies on a basis consistent with the previous year and did not elect the early adoption of any IFRS.
The selected financial data below should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report.
For the purpose of these calculations, the weighted average number of:
For diluted earnings per share the weighted average number of shares outstanding is adjusted assuming conversion of all dilutive potential shares. Potential shares are those securities that, if converted into shares, would increase the total number of shares outstanding and reduce the earnings attributable to each share. Potential shares include options, warrants and convertible securities. The Groups profit is also adjusted to reflect the impact of the conversion of potential shares net of the related tax effects.
The determination of our future dividend policy, and the amounts thereof, will depend upon a number of factors, including but not limited to our earnings, financial condition and cash requirements, prospects and such other factors as may be deemed relevant at the time.
The following table sets forth the dividends per Ordinary Share and per Savings Share declared by Telecom Italia with respect to each of the last five fiscal years and the aggregate dividends paid in such years. Actual dividends paid are rounded to the nearest whole cent.
Payment of annual dividends is subject to approval by the holders of Ordinary Shares at the annual general shareholders meeting, which must be held within 180 days after the end of the financial year to which it relates (pursuant to article 18, second paragraph, of the Companys Bylaws, as it will be amended by the shareholders meeting on April 12, 2011). In addition, Article 21 of the Companys Bylaws gives the Board of Directors the power to approve the distribution of interim dividends. Pursuant to Italian law, the distribution may be approved after the final approval of the preceding years financial statements, and the interim dividends may not exceed the lower of (i) the difference between profits from the preceding fiscal year and amounts required to be attributed to legal and statutory reserves and (ii) available reserves. Once paid in compliance with applicable laws, shareholders cannot be required to repay interim dividends to the Company if the shareholders collected such dividends in good faith. Dividends not collected within five years from the date they become payable will be forfeited in favor of the Company. If profits are not fully distributed, additional reserves are created.
According to the Italian Civil Code, before dividends may be paid with respect to any year, an amount equal to 5% of the profit of the Company for such year must be set aside to the legal reserve until the legal reserve, including amounts set aside during prior years, is at least equal to one-fifth of the par value of the Companys issued share capital. This legal reserve is not available for payment of dividends. Such restriction on the payment of dividends applies, on a non-consolidated basis, to each Italian subsidiary of the Telecom Italia Group. The Company may also pay dividends out of available retained earnings from prior years or other reserves.
Dividends in respect of Ordinary Shares and Savings Shares held with Monte Titoli S.p.A. (Monte Titoli) are automatically credited to the accounts of the beneficial owners with the relevant participant of Monte Titoli, without the need for presentation by such beneficial owners of any documentation. See Item 10. Additional Information10.4 Description of Capital Stock.
Arrangements between Euroclear or Clearstream and Monte Titoli permit the shareholders to collect the dividends through Euroclear or Clearstream. Holders of American Depositary Receipts (ADRs) are entitled to receive payments in respect of dividends on the underlying Ordinary Shares and Savings Shares, as the case may be, in accordance with the relevant Deposit Agreement.
Dividends payable on the Companys Ordinary Shares and Savings Shares may be subject to deduction of Italian withholding tax. See Item 10. Additional Information10.6 Taxation. Italian regulations do not contain any specific restrictions on the payment of dividends to non-residents of Italy. See Item 10. Additional Information10.2 Exchange Controls and Other Limitations Affecting Security Holders.
Pursuant to Italian law, in connection with the payment of dividends, participants of Monte Titoli are required to supply to the Italian tax authorities certain information concerning the identity of non-resident shareholders holding Ordinary Shares or Savings Shares. Shareholders are required to provide their Italian tax identification number, if any, or alternatively, in the case of legal entities, their name, country of establishment and address, or in the case of individuals, their name, address and place and date of birth, or in the case of partnerships, the information required for legal entities and the information required for individuals with respect to one of their representatives. In the case of Ordinary Share ADSs and Savings Share ADSs owned by non-residents of Italy, Telecom Italia understands that the provision of information concerning the Depositary, in its capacity as holder of record of the Ordinary Shares and Savings Shares, as the case may be, will satisfy these requirements.
The Depositary, in accordance with Telecom Italia, will provide information to beneficial owners of Ordinary Share ADSs and Savings Share ADSs, that are considered U.S. residents for purposes of applicable law. To the extent such owners wish to benefit from reduced withholding tax rates on dividends under an income tax convention, claims for such benefits must be accompanied by the required information. See Item 10. Additional Information10.6 Taxation.
Item 4. INFORMATION ON THE TELECOM ITALIA GROUP
The legal and commercial name of the company is Telecom Italia S.p.A.. Telecom Italia is a joint-stock company established under Italian law on October 20, 1908, with registered offices in Milan at Piazza degli Affari 2. Telephone number is +39.02.85.95.1. The company is recorded in the Milan Companies Register at number 00488410010, R.E.A. number 1580695, R.A.E.E. number IT08020000000799.
Our Depositary in New York (JP Morgan Chase) is presently located at 4 New York Plaza, New York, New York 10004.
The duration of the company, as stated in the companys Bylaws, extends until December 31, 2100.
On July 18, 1997, Old Telecom Italias predecessor company was merged with and into Società Finanziaria Telefonicaper Azioni (STET), its parent holding company, with STET as the surviving corporation. As of the effective date of the merger, STET changed its name to Telecom Italia S.p.A.. In November 1997, the Ministry of the Treasury of the Republic of Italy completed the privatization of Telecom Italia, selling substantially all of its stake in the Old Telecom Italia Group through a global offering and a private sale to a stable group of shareholders.
On May 21, 1999, Olivetti obtained control of the Old Telecom Italia Group through a tender offer where approximately 52.12% of Old Telecom Italia Ordinary Shares were tendered to Olivetti. Through a series of transactions which started in July 2001, Olimpia, whose largest shareholder was Pirelli & C. S.p.A. (Pirelli), acquired a 28.7% stake in Olivetti.
On December 9, 2002, the Italian Ministry of the Treasury sold its remaining stake in Old Telecom Italia Ordinary and Savings share capital.
On August 4, 2003, Old Telecom Italia merged with and into Olivetti (the Merger). Olivetti, as the surviving company, changed its name to Telecom Italia S.p.A.. Following the Merger, the proportionate ownership of Telecom Italias share capital by shareholders unaffiliated with Olimpia or Pirelli, Olimpias largest shareholder, increased substantially to approximately 88.43% of the outstanding Ordinary Shares. Following the Merger, Olimpia acquired additional shares through market purchases and, prior to the acquisition by Telecom Italia of the share capital in TIM that it did not already own (the TIM Acquisition), Olimpia held approximately 17% of Telecom Italias Ordinary Shares, making it the largest shareholder of Telecom Italia. As a result of a series of transactions in December 2004 and March 2005, Olimpia acquired additional Ordinary Shares reaching a stake of approximately 21.4% of the outstanding Ordinary Shares.
On June 30, 2005, TIM merged with and into Telecom Italia.
Following the issuance of shares of Telecom Italia in exchange for outstanding shares of TIM held by third parties, as a result of the merger of TIM into Telecom Italia through which the TIM Acquisition was effected, Olimpias stake was diluted to approximately 18%.
Effective as from March 1, 2006, Tim Italia merged with and into Telecom Italia, with Telecom Italia as the surviving company.
On April 28, 2007, a group of investors (the Investors or the Parties), made up of 1) Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A. (the Class A Shareholders) and 2) Telefónica S.A. (Telefónica), entered into a Co-Investment Agreement establishing terms and conditions for their participation in Telco, the vehicle through which the Investors purchased the entire share capital of Olimpia, from Pirelli and Sintonia S.p.A. and Sintonia (together Sintonia Sellers).
On May 4, 2007, the Investors entered into a Share Purchase Agreement with Pirelli and the Sintonia Sellers to purchase the entire share capital of Olimpia. The acquisition was completed on October 25, 2007 by Telco, to
which Ordinary Shares equal to 5.6% of the ordinary share capital were contributed on the same date by Mediobanca S.p.A. and companies of the Generali Group. The total investment held by Telco S.p.A. was therefore equal to 23.595% of Telecom Italias ordinary share capital, of which 17.99% was held through Olimpia.
Telco was held by Generali Group (Generali Group) (28.1%), Intesa Sanpaolo S.p.A. (Intesa Sanpaolo) (10.6%), Mediobanca S.p.A. (Mediobanca) (10.6%), Sintonia (8.4%) and Telefónica S.A. (42.3%).
With effect from December 18, 2007, Olimpia merged with and into Telco, with Telco as the surviving company and directly holding a stake of 23.595% in Telecom Italias ordinary share capital.
On March 20, 2008 Telco acquired a further 121.5 million Ordinary Shares and increased its ownership in Telecom Italias ordinary share capital to 24.5%.
Upon completion of the acquisition of the entire share capital of Olimpia, all the previous shareholders agreements concerning Olimpia and Telecom Italia ceased to have any effect, and the only existing agreements amongst its direct and indirect shareholders that Telecom Italia is aware of are the agreements among the Investors and Telco.
On October 28, 2009, Sintonia requested, pursuant to Article 11(b) of the Shareholders Agreement, the non-proportional de-merger of Telco, with the assignment of its pro-rata share of the assets and liabilities of Telco (comprised of Telecom Italia Shares held by Telco representing approximately 2.06% of Telecom Italias share capital).
On the same date, the Investors other than Sintonia, Intesa Sanpaolo, Mediobanca, Generali Group and Telefónica (collectively, the Non-Exiting Shareholders) acknowledged Sintonias decision and, by entering into a Renewal Agreement dated October 28, 2009, and effective as of April 28, 2010, (the Renewal Agreement), agreed (i) not to request the non-proportional de-merger of Telco, with the assignment of their corresponding share of Telecom Italia Shares at that time; and (ii) to renew the Shareholders Agreement for an additional term of three years until April 27, 2013, substantially on the same terms and conditions, except to provide that (a) the right of the Non-Exiting Shareholders to request the non-proportional de-merger of Telco not later than six months prior to the new expiry date will only be exercisable in the period between October 1, 2012, and October 28, 2012, and (b) for an early withdrawal right period exercisable between April 1, 2011, and April 28, 2011, (such Shareholders Agreement, as amended and renewed, the New Shareholders Agreement).
The Non-Exiting Shareholders also agreed, in the Renewal Agreement, to consider and evaluatetogether with Sintoniamutually agreed alternatives to permit Sintonia to exit Telco, other than through non-proportional de-merger.
The terms of Sintonias exit were approved on November 26, 2009, when an extraordinary general meeting of the Telco shareholders unanimously approved a proposal of the Telco board of directors to permit Sintonia to exit Telco in a single transaction consisting of two parts.
The transaction was concluded on December 22, 2009 when Telco and Sintonia executed a purchase and sale agreement pursuant to which: (i) Sintonia acquired the Sintonia Telecom Italia Shares from Telco for a consideration of 605,254,575.20 euros (equal to a price of 2.20 euros for each Sintonia Telecom Italia Share), and (ii) Telco voluntarily reduced its share capital by acquiring and cancelling Sintonias Telco shares (equal to 162,752,995 class A shares, constituting 8.39% of Telcos share capital) for a consideration of 293,461,160.95 euros (equal to a price of approximately 1.80 euros for each Telco share) which was equal to the pro rata net asset value of Sintonias interest in Telco as of December 15, 2009.
Currently Telco interests are held by Generali Group (30.58%), Intesa Sanpaolo (11.62%), Mediobanca (11.62%) and Telefónica (46.18%). See Item 7. Major Shareholders and Related-Party Transactions for a description of the new shareholder arrangements.
We updated our Strategic Plan for 2011-2013 in a presentation to the financial markets on February 25, 2011. The 2011-2013 Strategic Plan confirms our strategic priorities and objectives, which include:
Moreover, the Group will focus on a policy of an increasing dividend distribution.
For more details, please see 4.1.7 Updated Strategy.
The Group operates mainly in Europe, South America and the Mediterranean Basin.
The Telecom Italia Group is engaged principally in the communications sector and, particularly, the fixed and mobile national and international telecommunications sector, the television sector and the office products sector.
The operating segments of the Telecom Italia Group are organized according to the relative geographical localization for the telecommunications business (DomesticItaly, Brazil and Argentina).
On October 13, 2010, the Telecom Italia Group acquired control of Sofora Telecomunicaciones S.A. (Sofora)the holding company which controls Telecom Argentinafrom the Werthein group as fully described in Item 5. Operating and Financial Review and Prospects5.2 Results of Operations for the Three Years Ended December 31, 20105.2.2. Reorganization of Business and Note 3Business Combinations of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
Following is a summary description of the Telecom Italia groups principal geographical business areas.
Domestic Business Area
Telecom Italia is one of three mobile operators licensed to provide services using GSM 900 technology in Italy and one of three operators licensed to provide services using GSM 1800 (formerly DCS 1800) technology in Italy. It is also one of four operators holding a UMTS license and providing third-generation telephony services in Italy.
At December 31, 2010 the Telecom Italia Group had approximately 15.4 million physical accesses (consumer and business) in Italy, a decrease of 0.7 million compared to December 31, 2009. The Wholesale customer portfolio in Italy reached approximately 6.8 million accesses for telephone services at December 31, 2010, an increase of approximately 0.6 million compared to December 31, 2009.
The BroadBand portfolio in Italy reached 9.1 million accesses at December 31, 2010 (consisting of approximately 7.2 million retail accesses and 1.9 million wholesale accesses), an increase of 0.3 million accesses compared to December 31, 2009.
In addition, the Telecom Italia Group had approximately 31.0 million mobile telephone lines at December 31, 2010 in Italy, an increase of 162 thousand mobile telephone lines compared to December 31, 2009, after several years of decline.
Brazil Business Area
The Telecom Italia Group operates in the mobile and fixed telecommunications sector in Brazil through the Tim Brasil group which offers mobile services using UMTS, GSM and TDMA technologies. Moreover, following the acquisition of Intelig Telecomunicações at the end of 2009, the Tim Brasil group is now able to offer fiber-optic data transmission services using full IP technology such as DWDM and MPLS.
At December 31, 2010, the Telecom Italia Group had 51.0 million mobile telephone lines in Brazil (41.1 million at December 31, 2009).
Argentina Business Area
The Telecom Italia Group operates in the fixed and mobile telecommunications sector in Argentina mainly through Telecom Argentina and Telecom Personal, respectively, as well as mobile telecommunications operations in Paraguay through Núcleo.
At December 31, 2010 the Telecom Italia Group had approximately 4.1 million fixed lines (in Argentina) and 18.2 million mobile customers (of which 16.3 million in Argentina and 1.9 million in Paraguay).
4.1.4 DISPOSALS AND ACQUISITIONS OF SIGNIFICANT EQUITY INVESTMENTS IN 2010
For a description of disposals and acquisitions of significant equity investments in 2010 please see Note Form, Content and Other General Information, NoteBusiness Combinations, NoteOther Non-Current Assets and NoteDiscontinued operations/Non-current assets held for sale of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
4.1.5 RECENT DEVELOPMENTS DURING 2011
Increased stake in Telecom Argentina
On October 13, 2010, the Telecom Italia Group acquired control of Soforathe holding company which controls Telecom Argentinafrom the Werthein group. See 4.2.3 Argentina, Item 5. Operating and Financial Review and Prospects5.2 Results of Operations for the Three Years Ended December 31, 20105.2.2 Reorganization of Business and Note 3Business Combinations of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for a fuller description of this transaction.
On January 31, 2011 Telecom Italia International N.V. (a company of the Telecom Italia Group) finalized the purchase from Fintech Investment Ltd of 2,351,752 Nortel American Depositary Shares (ADS), representing Preferidas B shares for U.S.$ 66 million. Nortel is the holding company controlling the Telecom Argentina Group, and is in turn controlled by Sofora. The ADSs purchased represent 117,587.6 Preferidas B shares, which correspond to 8% of the total Preferidas B shares (without voting rights); taking into account the investment held by Nortel in Telecom Argentina, the Telecom Italia Groups economic interest in Telecom Argentina went from 16.2% to 18.3%.
On March 10, 2011, Telecom Italia announced that it had finalized the acquisition, through its subsidiary Telecom Italia International N.V., of a further 10% stake of Sofora Telecomunicaciones S.A.s capitalthe holding company which controls Telecom Argentinafrom its Argentine partner the Werthein group for a consideration of U.S.$ 145 million.
As a result, Telecom Italia increased its stake in Sofora from 58% to 68% of the companys capital, and the economic interest of Telecom Italia Group in Telecom Argentina increased from 18.3% to 21.1%. This transaction did not alter or modify (i) the governance rights of the Telecom Argentina Group set forth in the shareholders agreement between the Telecom Italia Group and the Werthein group, nor (ii) the commitments assumed by the Telecom Italia Group before the Argentine antitrust authorities.
Between January 7, 2011 and March 24, 2011, Telecom Italia Finance repurchased a part of the bonds denominated Telecom Italia Finance 7.5% April 2011 for 93 million euros and the bonds denominated Telecom Italia Finance 7.25% April 2012 for 187 million euros. In 2009 and 2010, the Telecom Italia Finance 7.5% April 2011 bonds were bought back for a total of 116 million euros.
For a description of other recent developments please see Item 8. Financial Information8.2 Legal Proceedings and NoteEvents Subsequent to December 31, 2010 of the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
4.1.6 OVERVIEW OF THE TELECOM ITALIA GROUPS MAJOR BUSINESS AREAS
Telecom Italia is the parent company of the Telecom Italia Group.
The following is a chart of the Telecom Italia Groups Business Units as of December 31, 2010:
Following the sale in February 2010 of HanseNet, formerly classified as Discontinued Operations, Telecom Italia exited the European broadband business. The other companies in the European Broadband Business Unit were included in Other Operations until their sale in October 2010.
Beginning January 1, 2010 the companies Shared Service Center and HR Services, previously included under Other Operations, were included in the Domestic Business Unit.
On October 13, 2010 we began to fully consolidate the Sofora group following the acquisition of a further 8% stake in Sofora Telecomunicaciones S.A., the Telecom Argentina controlling holding company. The economic interest in Telecom Argentina increased to 16.2% as of that date and at December 31, 2010 (increasing to 21.1% in March 2011). The Sofora Telecomunicaciones S.A. data represent the new Business Unit Argentina of the Telecom Italia Group.
For further details about companies which are a part of the various Business Units, please see Note List of companies of the Telecom Italia Group of the Notes to the Consolidated Financial Statements included elsewhere herein.
For the revenues, operating profit (loss), capital expenditures and number of employees of the Telecom Italia Groups Business Units please see Item 5. Operating and financial review and prospects5.2 Results of operations for the three years ended December 31, 20105.2.5 Business unit financial data.
4.1.7 UPDATED STRATEGY
Strategic Priorities and Objectives for the 2011-2013 Three-year Period (the Plan)
The updated 20112013 Plan was announced on February 25, 2011 and confirms the following strategic priorities and objectives for the Telecom Italia Group:
In the Domestic market, Telecom Italias strategic priorities and objectives are:
Brazil remains an important market, Telecom Italia will continue to exploit the pure mobile infrastructure operator approach.
TIM Brasils business plan is based on the following strategic priorities and objectives:
Argentina is also expected to be an important market and represents a further growth opportunity, Telecom Argentinas strategic priorities and objectives are:
There can be no assurance that these objectives will actually be achieved.
4.1.8 THE ORGANIZATIONAL STRUCTURE
The following diagram highlights the organizational structure of the Telecom Italia Group as of April 1, 2011:
The Domestic Business Unit operates as the consolidated market leader in Italy in providing telephone and data services on fixed-line and mobile networks for final retail voice customers and other wholesale operators. In the international field, the Business Unit develops fiber optic networks for wholesale customers (in Europe, in the Mediterranean and in South America).
The Domestic Business Unit is organized as follows as of December 31, 2010:
Telecom Italia implemented its customer centric organization for its domestic market in 2009. It now presents its revenues by customer group although 2010 revenues continue to be reported by fixed and mobile technology.
The principal operating and financial data of the Domestic Business Unit are reported according to two Cash-generating units (CGU):
As a result of the customer centric approach, Telecom Italia revised its sales structure as follows for each of its customer segments:
The sales structure is organized according to a vertical, multi-channel approach, in which different types of distribution channels are specialized in different customer segments of the market, based on clusters of customers and services. This approach enhances the focus and customization of our products.
Consumer customers are now managed by several channels focused on volume and value acquisitions, including:
In addition to these partners, distribution also is done through the Public Telephone channel, a network of approximately 16 partners focused on National and International prepaid card services and associated traffic packages.
During 2010, our Business Market Department reinforced the structure of the commercial channels, by introducing a Business Development channel focused on innovative products and services.
The business distribution channels are made up of:
During 2010 our Top Customers Department was revised by introducing two separate Units, one dedicated to Private Top Customers (Large Companies, Banks, Insurance, etc) and one to the Public Sector (Public Administration, Health, etc). Around 670 Sales personnel have a dedicated portfolio to supervise and develop, supported by structures focused on pre sales (e.g. offers design) and post sales processes (e.g. assistance). The main activities include:
The National Wholesale Services (NWS) division manages relationships with approximately 300 other TLC operators, which are both customers and competitors of Telecom Italia. These customers purchase Telecom Italia intermediate network services for resale to their customers.
To ensure complete management of the relationship with its customers the NWS Department is organized to cover all stages:
The NWS is set up as an independent department which allows Telecom Italia, along with other conditions (accounting separation, compliance with the resolutions of the Authorities) to manage transparency and fairness in its relationship with other operators as well as satisfying certain regulatory requirements.
The table below sets forth, for the periods indicated, certain statistical data of the Domestic Business Unit:
Telecom Italia is one of three mobile operators licensed to provide services using GSM 900 technology in Italy and one of three operators licensed to provide services using GSM 1800 (formerly DCS 1800) technology in Italy. It is also one of four operators holding a UMTS license and providing third-generation telephony services in Italy.
In its domestic market it has approximately 15.4 million physical accesses (consumer and business) in Italy. The reduction in the number of fixed lines was 233,000 in the fourth quarter of 2010 compared to in 2009. In total, line reductions for 2010 were 746,000, an improvement of 509,000 compared to 2009 (-1,255,000).
The Wholesale customer portfolio reached approximately 6.8 million accesses for telephone services at December 31, 2010, an increase of approximately 0.6 million compared to December 31, 2009.
Furthermore, the BroadBand portfolio in Italy reached 9.1 million accesses at December 31, 2010 (consisting of 7.2 million retail accesses and 1.9 million wholesale accesses), an increase of 0.3 million accesses compared to December 31, 2009.
In addition, the Telecom Italia Group had approximately 31.0 million mobile telephone lines in Italy at December 31, 2010, recording an increase of 162,000 lines compared to December 31, 2009, following several years of decline.
For the main regulatory events which occurred in 2010 that may have an economic impact on Domestic Business Unit, please see Item 4. Information On The Telecom Italia Group4.3 Regulation.
The Italian telecommunications market has been characterized for some time by strong competitive pressure both at the retail and at the wholesale levels which over the years has led to a marked reduction in revenues from the traditional components of service, in particular of the voice service. Key elements in the evolution of the market have been the increased penetration of broadband, initially over the fixed and, increasingly, now also mobile, and above all the progressive increase in bandwidth speed not accompanied, however, by a corresponding increase in average prices.
For some years, too, the competitive scenario for telecommunications, in Italy and at the global level, has been evolving under the effect of the convergence of telecommunications, information technology, media and the consumer electronics markets. This phenomenon causes lateral competition which extends the area of competition to include the converging markets and their reference operators, creating an opportunity for growth but also a threat.
In particular, for telecommunications operators (the Telcos), in addition to the core competition from the other historical Telcos in the sector, there is increased competition from Over the Top companies and the device producers, which take advantage of their full understanding of consumer trends, consumer electronics evolution and software environments and which, operating wholly in the digital world, base their behavior on a competitive rationale which is totally different to that of the Telcos.
Over time, therefore, the traditional players business models have had to evolve so as to meet the threat from the new entrants and to utilize the new opportunities:
Conversely, with regard to the positioning of the telecommunications operators in the converging markets, it should be noted that there are, at varying levels of development, initiatives to enter infrastructure services in the IT market (Cloud Computing, Machine to Machine, Mobile payment, Security etc.), a role as premium content distributor through IPTV and as facilitator of the consumption of online content on the living room screen through OTTV and a significant presence in online advertising and in the development of smartphone web 2.0 applications.
Competition in Fixed-Line Telecommunications
The fixed-line telecommunications market is characterized by strong competition between operators centered on their capacity to innovate service offerings through the introduction of voice/broadband packages (double play) and voice/broadband/IPTV packages (triple play).
This evolution is possible as a result of the competitors shift from an essentially reseller approach (carrier selection/carrier pre-selection for voice services and Wholesale for ADSL) to an approach based on control of the infrastructures (primarily (LLU) Local Loop Unbundling). There is also an increasingly evident trend of fixed/mobile convergence: many fixed operators are today also Mobile Virtual Network Operators (MVNOs) and offer integrated fixed-mobile services.
In 2010, there was a continuation of the migration of customers from fixed telephony to mobile telephony services and to alternative communications solutions (messaging, e-mail, chat etc.). For some years, for both private consumers and small and medium businesses there has been in progress a substitution of the mature traditional voice services with content and value-added services based on the Internet Protocol (IP), the spread of which is favored both by the use of the internet and by changes in customer preferences and by the penetration of BroadBand, of PCs and of other connected devices, as well as by the quality of the service.
The competitive scenario in the Italian market for fixed telecommunications is dominated by Telecom Italia and a number of operators with differentiated business models and with a focus on differing segments of the market:
At the end of 2010, fixed accesses in Italy numbered approximately 22.5 million, substantially in line with 2009. The growing competition in the access market has led to a gradual reduction in Telecom Italias market share of retail voice traffic volumes.
With respect to the BroadBand market, at December 31, 2010, fixed-line BroadBand customers in Italy reached a total of approximately 13.1 million with an approximately 58.3% penetration of fixed accesses.
In 2010, growth in fixed-line BroadBand suffered a slight decline compared to the growth of the preceding years due to a generalized preference of operators to increase the penetration of flat-rate plans (dual/triple play) with greater value-added. Broadband penetration is driven by the increasing demand for speed and for activation of new over IP services (Voice over IP, Content, Social Networking Services, Online Gaming, IP Centrex, etc.).
There was further decline in revenues from the Data transmission services segment which is the main component of the Top customers market. This market is characterized by the re-designing and upgrading of internet accesses with high or very high data transmission capacities and by medium and large sized private data networks and has felt the effects of competition, experiencing a fall in average prices although market shares of operators are substantially unchanged.
Competition in Mobile Telecommunications
The mobile market, while increasingly saturated and mature in its traditional component of voice services nevertheless continues to experience growth in the number of mobile lines, driven by the growth in multiSIM/multidevice customers and in non-human (machine to machine) lines (at December 31, 2010, mobile lines in Italy numbered around 94 million, a growth of 4% over 2009 and with a penetration rate of approximately 155% of the population).
Although there has been a progressive contraction in revenues from the traditional service, data and value-added services have recorded significant growth.
This is the situation of mobile broadband which in the past few years has been, and increasingly will be in the future, the main strategic and commercial opportunity for the mobile telecommunications industry, which may be able, to offset the erosion in some of the traditional components of revenues such as voice and messaging.
In 2010, in Italy, there was significant growth in mobile BroadBand customers, both large and small screen and at the end of the year they numbered in total more than 15 million, with a penetration rate of about 16% of mobile lines.
Alongside innovative services which are established and growing, such as mobile BroadBand, there are various other market areas with significant medium term growth potential, such as: mobile advertising, mobile content (e.g. social networking), mobile payment and location based services.
The competitive environment in the Italian mobile telecommunications market is led by Telecom Italia (through its brand Telecom Italia MobileTIM) and by the following operators who operate their own networks Each of these other operators are focused on different segments of the market or have different strategies:
Telecom Italias market share of total mobile lines was around 33% at December 31, 2010, down compared to December 31, 2009 (34.2%).
The Telecom Italia Group operates in the mobile and fixed telecommunications sector in Brazil through the Tim Brasil group which offers mobile services using UMTS, GSM and TDMA technologies. Moreover, following the acquisition of Intelig Telecomunicações at the end of 2009, the Tim Brasil group is now able to offer fiber-optic data transmission services using full IP technology such as DWDM and MPLS.
The Tim Brasil groups services cover an area containing over 172.9 million of Brazils 193.3 million inhabitants. Mobile operating subsidiaries have approximately 51.0 million customers located in each of the Brazilian states and in the Federal District. On December 31, 2010, its combined penetration reached approximately 104.7% of the Brazilian population and our combined market share totaled approximately 25.1%.
Since the Tim Brasil group began operating in the Brazilian market, its intention has been to provide its customers with state-of-the-art technology and services. This goal has been achieved through the offer of edge technology, that has allowed convergence between voice serviceseither mobile or fixed, internet access and data transfer. Management believes this convergence has been made feasible with developments under 3G.
The table below sets forth, for the periods indicated, the number of mobile lines of the Brazil Business Unit:
In the fourth quarter, Tim Brasil intensified promotional activity on voice plans and further expanded data services.
For voice, in the Consumer segment, TIM continued with the existing Infinity and Liberty plans. Voice customer gross acquisitions in the fourth quarter alone amounted to 9.1 million, an increase of 54% over the corresponding period of 2009.
In the Business segment, TIM continues offering the three plans launched in 2010. In the Company segment, TIM has intensified marketing activity, also with plans for fixed-line/data services from Intelig.
In data services, TIM has stepped up the plans of the TIM Web, Liberty Web and Infinity Web promotions in order to stimulate market penetration. With regard to equipment, TIM has continued its strategy of reducing the subsidy on handsets and promoting the use of the service.
The range of handsets is subject to continuous renewal due to the new iPhone 4 and the Nokia N8 and the increasing presence of WebPhones in this portfolio in accordance with our strategy to expand microbrowsing. TIM has also developed an applications virtual store for certain handsets, in order to encourage the use of internet from a cell phone.
In fixed line services, TIM is continuing the existing TIM Fixo Mais offering. With regard to Intelig, the Se Liga 23 promotion has continued. For the SME segment, the Sem Fronteiras 23 rate plan has continued; this plan offers free unlimited on-net calls.
Tim Brasils services are marketed through the largest distribution network in Brazil, with over 9,000 points of sale, among premium stores and dealers (exclusive or multi-brand), in addition to relying on the distribution capacity of a number of major retail chains. Tim Brasils prepaid service customers rely, in addition to traditional points of sale, on alternative recharge channels, such as supermarkets and newsstands, totaling about 398,000 points spread all over Brazil. Sales of Tim Brasils products and services are offered by Tim Brasils sales personnel, as well as by authorized dealers. Most devices are sold on credit card and in 12 installments.
For the main regulatory developments which occurred in 2010 that may have an economic impact on the Brazil Business Unit, please see Item 4. Information On The Telecom Italia Group4.3 Regulation.
In December 2010, TIM was awarded 8 lots of GSM frequencies for an amount of 65.5 million reais with a premium averaging 32% of the auction base price. The contract is scheduled to be signed in the first months of 2011. These frequencies will improve the coverage and the service quality of the TIM service. The total of 165 GSM and 3G lots auctioned were sold for a total value of 2.7 billion reais with an average premium on the auction base price of 31%.
On October 13, 2010 Telecom Italia acquired control of Sofora group with its acquisition of an 8% stake in Sofora, the Telecom Argentina controlling holding company. The economic interest in Telecom Argentina increased to 16.2% (which as of the date of this Annual Report is 21.1%). The Sofora data represent the new Business Unit Argentina of the Telecom Italia Group. Since October 13, 2010 the results of Telecom Argentina became fully consolidated with the Telecom Italia Group.
The Telecom Italia Group operates in the fixed and mobile telecommunications sector in Argentina mainly through Telecom Argentina and Telecom Personal, respectively, as well as mobile telecommunications operations in Paraguay through Núcleo. In particular, Telecom Argentina is one of the largest private-sector companies in Argentina. Telecom Argentina has a non-expiring license to provide fixed-line telecommunications services in Argentina, Telecom Personal has a non-expiring licence to provide mobile services in Argentina and Núcleo has a renewable license to provide mobile services in Paraguay. Telecom Argentina also provides other telephone-related services such as international long-distance service, data transmission, IT solutions outsourcing and Internet services.
Telecom Argentina has a non-expiring license to provide fixed-line telecommunications services in the Northern Region of Argentina. Telecom Argentina also provides other telephone-related services such as international long-distance service, data transmission, IT solutions outsourcing and Internet services, and through its controlled companies, Telecom Personal and Núcleo also provides mobile telecommunications services in Argentina and Paraguay, respectively.
Telecom Argentina pursues its business strategy focused on increasing its profitability and maximizing value generation for its customers, shareholders, employees and the broader community it serves. In order to promote the achievement of its goals the Argentine Business Unit continually adapts its business strategy through investments in product innovation and development of additional complementary services aimed at improving its customers user experience by adding content and interactivity to communication.
Personal customer base increased by 1.9 million in 2010, reaching a total of 16.3 million clients, 30% of whom use postpaid contracts. At the same time, high-value customer acquisitions and clear leadership in the Smartphone segment, resulted in ARPU improving approximately 7% over the prior year. A large part of this growth is due to Value-Added Services which, on the whole, accounts for approximately 40% of service revenues for mobile telephony services.
In Paraguay, Núcleo customer base grew by about 4% over the prior year and at the end of 2010 had 1.9 million customers, of which 15% were postpaid. Núcleo provides the 3G Internet service being considered one of the fasted Mobile Internet product in the market (in terms of speed), giving a boost to the number of the customer base.
The table below sets forth, for the periods indicated, the number of lines /customers of the Argentina Business Unit:
In the fixed line residential segment, Telecom Argentina increased its offering of packages comprising fixed charge, minutes of traffic and value-added services with the aim of stimulating both the demand for new accesses and the growth in ARBU (Average Rate Billed per User). Additionally, existing customers have been offered new Wi-Fi products and the supply of a second line using IP technology. For the corporate segment, services have been launched featuring an IP communications platform which gives customers new functionalities, ease of use and reduced costs. Offerings in this segment have centered on convergent ICT solutions.
With regard to broadband, in 2010 Telecom Argentina expanded its offering with the launch of services which combine an ADSL service with mobile internet.
The strategy for the mobile service has been characterized by the launch of new plans and packages aimed at further increasing the value added services content, supported by the continuing growth in smartphone penetration.
Further, Personal, as the first in Argentina, has experimented with fourth generation mobile (4G) services on a Long Term Evolution platform, achieving connection speeds of up to 50 Mbps.
Personal is taking actions to address adequately the important challenges associated with the introduction of Number Portability in Argentina at the end of 2011.
Núcleo, in Paraguay, has adopted a new pricing strategy aimed at improving customers perceptions and has strengthened its offering of 3G mobile internet services.
In the fixed telephony, during 2010 the growth of Internet access was accompanied by price actions and discounted promotional prices. The Arnet brand leadership was based on effective communication with a differentiated offering for each customer segment and competitive prices. The strategy in 2010 focused on developing a functional web site whose main target is to become a channel for the exploration of our products and services and for the improvement of the relationship with our customers. The main web site contents are focused on the description of our products and services, a digital experience with both the Arnet (Internet products and services) and Telecom (products and related voice services) brands, and an enriched self-management by the customer on the web site.
As regards mobile telephony, during 2010, Telecom Personals points of sale consolidated their position in selling value-added products and up selling. Also, during 2010 the authorized dealers showed a steady increase in customer acquisitions. In addition, this channel has consolidated its position in customer handset replacement, which resulted in higher satisfaction and greater customer retention.
This performance during 2010 is a result of a relocation of Telecom Personals point of sale in strategic locations with higher flow of customers and a reorganization of the structure by geographical allocation, which led to improvements in points of sale productivity and resulted in a substantial improvement in customer satisfaction ratios.
For the main regulatory developments on the Argentina Business Unit which occurred in 2010, please see Item 4. Information On The Telecom Italia Group4.3 Regulation.
The telecommunications market in Argentina and Paraguay continues to feature strong demand for new services and higher access speeds, in an environment which is highly competitive in the fixed and mobile businesses.
Competition is mainly focused on Internet, data and mobile services, including residential, corporate and government accounts while fixed telephony is characterized by market maturity. In particular, in the Argentina mobile business, Personal is one of the three operators which offer services at the national level, competing with Claro (America Móvil group) and Movistar (Telefónica group). In Paraguay, Núcleo operates in a market which continues to be characterized by a high level of competitiveness based on aggressive pricing and promotion and also on the launch of product and service innovation.
In the broadband business, the Argentine Business Unit, under the Arnet brand, competes both with the ADSL competitor Speedy (Telefónica group) and with Fibertel (Clarín group) which provides broadband access services by cable-modem.
During 2010 the Argentine Business Unit consolidated its market share position in the fixed services with a slight increase in the market share in mobile services.
The Telecom Italia Media group operates in the Telecom Italia Media, MTV group and Network Operator business segments. In particular:
In May 2009 Telecom Italia Media S.p.A. sold a 60% stake in Telecom Media News, which controls the APCom press agency, one of the major operators in primary national news, to Sviluppo Programmi Editoriali S.p.A. (E.P.S. group).
As of December 31, 2010, the Business Unit was organized as follows:
The table below sets forth, for the periods indicated, certain statistical data of the Media Business Unit:
For the main regulatory events which occurred in 2010 that may have an economic impact on Media Business Unit, please see Item 4. Information On The Telecom Italia Group4.3 Regulation.
The Olivetti group mainly operates in the office products and services for Information Technology sectors. As a result of its broad range of cutting-edge hardware and software, it offers solutions able to automate processes and business activities for small and medium enterprises, large corporations and vertical markets. The offering comprises digital printing systems, notebooks and personal computers, ink-jet office products, specialized applications for the banking field and commerce, information systems for managing forecast games, electronic voting and e-government. It also operates with a dedicated structure in the field of documental services (digital management of company documents), caring services (specialist help-desk) and technical assistance. Olivetti also manufactures products using silicon technology (ink-jet print heads and Micro Electro-Mechanical Systems (MEMS) and industrial applications. During 2010, Olivetti continued the process begun in 2009 of expanding and diversifying its products and services by concentrating on both the development of software solutions and applications services for businesses and public administrations, and also specialized devices.
The market of the Business Unit is focused mainly in Europe, Asia and South America.
As of December 31, 2010, the Olivetti Business Unit was organized as follows (the main companies are indicated):
4.2.6 INTERNATIONAL INVESTMENTS
The BBNed group consists of the parent, BBNed N.V., and its two subsidiaries, BBeyond B.V. and InterNLnet B.V.
At September 30, 2010, following the decision taken for its disposal, the BBNed group was considered as a disposal group under IFRS 5 (Non-current assets held for Sale and Discontinued Operations). A sale transaction was completed on October 5, 2010 after obtaining authorization from the competent Dutch authorities.
As of December 31, 2010, through Telecom Italia International we held a 27% interest in ETECSA, the monopoly provider of fixed-line and mobile telecommunications services, Internet and data transmission in Cuba.
Old Telecom Italia obtained an initial stake of 12.25% in ETECSA in 1995, when, prior to its privatization by the Italian government, Old Telecom Italia acquired, for approximately U.S.$291 million, a 25% stake in a Mexican telecommunications company which owned 49% of ETECSA. In February 1997, Old Telecom Italia converted its indirect stake in ETECSA into a direct investment and increased its interest to 29.29%. The acquisition price for such further 17.04% stake in ETECSA was U.S.$291.6 million. In connection with the merger of the local mobile operators into ETECSA to form an integrated provider of telecommunications services we participated in a series of capital increases proportionate to our share ownership.
These capital increases occurred during 2003 and through 2004; during this period we invested an additional U.S.$41.3 million in ETECSA through capitalization of dividends paid by ETECSA and, following these capital increases and the mergers, ownership increased to 27%. The other shareholders in the company include the Cuban government which controls 51% of the company and four other Cuban shareholders.
In addition to our shareholding in ETECSA, Telecom Italia International is a party to a shareholders agreement pursuant to which it has the right to designate certain senior executive officers and a majority of the board of directors of ETECSA on alternate years.
In addition to these governance arrangements, we entered into agreements to provide certain technical assistance to ETECSA with respect to its fixed line and wireless services.
In return for these services we received annual fees of 304,592 euros (for fixed line technical assistance) and 969,256 euros (for mobile technical assistance) under each agreement respectively and certain other fees for specific services provided equal to 1,527,823 euros. The level of the fees earned over the last two years is set forth in NoteRelated Party Transactions of the Notes to our 2010 Consolidated Financial Statements included
elsewhere herein. The technical agreement with respect to fixed line services, expired at the end of 2009, has been renewed for the period 2010-2011 and the technical agreement with respect to wireless services will expire at the end of 2011.
We do not believe that our arrangements with, and investments in, Cuba are material to the results of operations or financial condition of the Telecom Italia Group, taken as a whole.
At December 31, 2010, ETECSA, after the decision to proceed with its sale, which actually took place on January 31, 2011, was considered an investment held for sale. Consequently, at the end of the year, the entire amount of the investment, equal to 389 million euros, was reclassified to Discontinued operations/Non-current assets held for saleof a financial nature in the statement of financial position.
For further details please see NoteEvents subsequent to December 31, 2010 of the Notes to our 2010 Consolidated Financial Statements included elsewhere herein.
We face domestic competition in all of our businesses. Competition continues to have an adverse effect on our revenues as it resulted in lower tariffs for many of our products and services as well as the introduction of flat-rate pricing plans which have been used to enhance retention efforts but at the same time reducing revenues from such customers.
For details please see Item 4. Information on the Telecom Italia Group4.1 Business4.1.7 Updated Strategy, Item 4. Information on the Telecom Italia Group4.2.1 Domestic, Item 4. Information on the Telecom Italia Group4.2.2 Brazil and Item 4. Information on the Telecom Italia Group4.2.3 Argentina.
The EU regulatory framework
Business undertaken by Telecom Italia in the European Union is subject to the EU framework on telecommunications regulation which includes directives, recommendations and opinions. As such, as a member of the EU, Italy is required to implement directives issued by the EU, which directives may take effect automatically on a member state. Regulations adopted at the EU level also have general application and are binding and directly applicable on EU member states. Recommendations, on the other hand, are not legally binding although politically important.
The European Commission began opening the telecommunications market to competition with the adoption of directives in the late 1980s and early 1990s. These liberalization measures culminated in Italy, as well as in all the main member States of the EU, with the opening of competition in 1998 of public voice telephony and public network infrastructure.
The 1998 framework was reviewed when growing convergence between telecoms, broadcasting and information technology meant the rules had to be adapted. A new EU Regulatory Framework was adopted in 2002, covering all forms of fixed and wireless telecoms, data transmission and broadcasting and made up of a package of legal instruments, the most relevant of which are five Directives concerning the following topics: the common regulatory framework; access and interconnection; the authorization regime; the universal service and users rights; privacy and data protection.
A Recommendation adopted in February 2003, on relevant product and service markets susceptible to ex ante regulation, complemented the set of legal instruments relevant for the scope of the electronic communications market regulation. In December 2007, the European Commission amended this first Recommendation on relevant markets, reducing the previous 18 markets susceptible to ex-ante regulation to seven. The seven markets are: at Retail level: access at a fixed location (market 1); at Wholesale level: call origination at a fixed location (market 2); call termination at a fixed location (market 3): wholesale (physical) network infrastructure access (including shared or fully unbundled access) at a fixed location (market 4); wholesale BroadBand access (market 5); wholesale terminating segments of leased lines (market 6); and voice call termination on mobile networks (market 7).
The EU regulatory framework requires that market analyses be carried out by the National Regulatory Authorities (NRAs, in Italy AGCom) before regulation is imposed and that appropriate obligations are imposed on individual operators determined as having Significant Market Power (SMP) according to specific EU guidelines. A company is deemed to have SMP if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers. One of the criteria adopted to identify SMP, according to the EU Guidelines, is the operators market share exceeding 50%.
The market analyses carried out by NRAs are subject to the scrutiny of the EU Commission which, to a certain extent, can challenge the NRAs findings, having a veto power about market definition and identification of SMP operators but not about the choice of remedies.
The EU legal framework was further updated in November 2007 when the Commission adopted review proposals of the five directives defining the regulatory principles for the sector (i.e. the Framework, Access, Authorisation, Universal Service and E-Privacy directives), with the aim to define the new European regulatory framework.
New EU telecoms rules officially became EU law following their publication in the Official Journal of the European Union of December 18, 2009. The Reform Package was composed of the Better Regulation Directive (Directive 2009/140/EC, amending the Framework, Access and Authorization directives) and the Citizens Rights Directive (Directive 2009/136/EC amending the Universal Service and E-Privacy directives and the Regulation 2006/2004 on Consumer Protection Cooperation) that is to be transposed into national laws of the 27 EU Member States by May 25, 2011 and by the Regulationwhich was directly applicableestablishing the new European Telecoms Authority called Body of European Regulators for Electronic Communications (BEREC).
Telecommunication Regulatory Framework in Italy
The legal basis for the electronic communications sector in Italy is as follows:
Furthermore, the ECC confirmed the responsibilities attributed under previous legislation to the Ministry of Communications and AGCom:
4.3.1 TELECOMMUNICATION REGULATION IN ITALY
In July 2008, Telecom Italia proposed to AGCom certain undertakings relating to its access network (Undertakings) that would integrate and strengthen the existing obligations of non-discrimination between Telecom Italias own retail operations and other operators in the provision of wholesale access network services imposed on Telecom Italia by AGCom since 2002.
AGCom approved the Telecom Italia Undertakings which are divided into fourteen main groups and pursue four main goals:
Following the AGCom approval of the Undertakings, a number of sanction proceedings imposed on Telecom Italia were suspended and are expected to be closed when the actual fulfillment of the Undertakings is assessed.
At the beginning of 2008 Telecom Italia created the Open Access department, a separate business unit focusing its activities on the Undertakings implementation. In order to ensure equal treatment for its own retail operations and those of Operators (internal-external equal treatment) Telecom Italia took actions focused on three main areas:
The Undertakings implementation, their complexity and their impact on the stakeholders system, has required the creation of a governance system. In particular, the following bodies have been created: an independent body (the Supervisory Board) and the Undertakings Monitoring Group for the monitoring of the work in progress (Office of Telecommunications Adjudicator ItaliaOTA Italia), whose mission is to prevent and resolve disputes between Operators and the Next Generation Network Committee submitting proposed solutions on technical, organizational and economic issues for the transition to the Next Generation Network (NGN).
Two years after the formalization of the Undertakings, the results reached are positive, both in terms of formal and substantial fulfilment. As planned, Telecom Italia had fully implemented, as of March 31, 2010, the technical Undertakings concerning the new delivery process for SMP services, additional procedures for the management of co-location services, new procedures for the management of wholesale users and a performance monitoring system for SMP services.
Telecom Italia believes that the GoU n. 8 will be fully implemented during 2011, if AGCom publishes within a reasonable time its final Decision;
Telecom Italia is waiting the AGCom Decision with the formal evaluation of the results produced by the Undertakings. AGComs positive evaluation is necessary for the cancellation of the economic sanctions still pending on Telecom Italia.
During 2006 and 2007, AGCom concluded the first round of analyses of electronic communications relevant markets, as identified by the EC 2003 Recommendation, and designated Telecom Italia as SMP Operator in all wholesale (fixed (physical) access and (virtual) broadband access, fixed and mobile call termination, fixed call origination, transit services, terminating and trunk segments of leased lines) and retail markets (residential and non-residential fixed access, voice traffic, leased lines). As result of these findings AGCom introduced regulatory measures depending on the specific retail or wholesale market identified: access to network, carrier selection and pre-selection, transparency and non discrimination, including publication of Reference Offer, information for end users, advance notification to AGCom of new retail tariffs or change of existing ones, price control including cost orientation, price/network cap and price tests, cost accounting and accounting separation.
Since December 2007, AGCom has been carrying out the second round of relevant markets analyses to determine whether to maintain, amend or withdraw the obligations on Telecom Italia in force. In addition, markets not included in the revised Recommendation (with remedies in place) have been re-assessed in order to justify either the withdrawal or the keeping of regulation. AGCom has, therefore, reviewed all the 18 markets in its second round of market analyses. In 2008, AGCom concluded the market analyses of the wholesale mobile markets (call termination, access and call origination), with respect to international roaming the EU Regulation has been applied and AGCom did not review this market. Market analyses proceedings, for the fixed markets, were completed in 2010.
With Decision no. 670/10/CONS on December 17, 2010, AGCom started the third round of review of the mobile termination market in order to define the relevant market, identify SMP Operators and eventually define regulatory obligations on SMP Operators. In particular, AGCom will set the price control mechanism to be applied on mobile termination charges (maybe reviewing the current multiyear price control mechanism that ends in 2012) on the basis of the outcome of the new Bottom-Up Long-Run Incremental Cost (BU-LRIC) model (defined with AGComs Decision no. 60/11/CONS). The results of this cost model should lead to further reductions in call termination prices. The third round of mobile termination market review is expected to end by Autumn 2011.
The major developments in 2010 and in the first quarter of 2011 regarding markets in the electronic communications sector are described below.
As a result of the first round of fixed retail market analyses concluded in 2006, AGCom imposed on Telecom Italia as SMP operator, regulatory obligations, including a price cap mechanism and price control.
In particular, the retail fixed regulated markets were as follows: access to the public telephone network provided at a fixed location for residential and business customers (markets 1 and 2); local, national and fixed-mobile services marketsretention component onlyfor residential and non-residential customers (markets 3 and 5, removed from the revised 2007 Recommendation); international telephone services, for residential and
non-residential customers, provided at a fixed location (markets 4 and 6, removed from the revised 2007 Recommendation); leased lines market (market 7, removed from the revised 2007 Recommendation).
At the end of 2009, AGCom concluded the second round analyses of the international calls market and of the minimum set leased lines market and deregulated both such retail markets withdrawing all ex ante obligations for Telecom Italia from 2010.
In 2010 AGCom concluded the second round analyses of the national retail fixed voice services. AGCom decided on the withdrawal of all the regulatory obligations after six months from the publication of its final decision. In the transitional six months period (until January 12, 2011), AGCom maintained the obligation of prior notification of new tariffs. However Telecom Italia remains subject to an ex-post evaluation of the retail offers. Since January 12, 2011 Telecom Italia has been permitted to fix retail tariffs without prior notification or approval.
With reference to the price test methodology, with Decision 499/10/CONS of September 13, 2010, AGCom set new rules for the assessment of Telecom Italias retail offers, including non standard offers (public tender and personalized top business offers) and bundles (multiple-play offers). The new methodology is based on the application of a replicability test developed on the basis of the following key principles: reference to the most efficient technology and network architecture that could be used by OLOs to replicate Telecom Italias offers and, hence, to a mix of wholesale inputs (LLU, WLR, bitstream etc.); possible use of avoidable or long run incremental costs for the evaluation of network and downstream OLOs costs and, for bundle offers, application of the price test on the whole bundle taking into account the overall cost of provisioning without considering whether each component of the bundle may be replicated by alternative operators.
During 2009, AGCom also concluded the second round analyses of the retail and wholesale access markets, where it found lack of competition and designated Telecom Italia as SMP. In December 2009, AGCom issued Decision 731/09/CONS setting out the remedies to be imposed on Telecom Italia, including the Telecom Italia Undertakings.
As to the retail access market, AGCom reduced regulatory constraints removing, from 2010, the price cap mechanism used for controlling residential and business subscriber monthly fees, which are now subject only to a price test (see above for details) to ensure replicability by an efficient OLO. At the same time, AGCom maintained the obligation to notify prices and conditions 30 days in advance of the commercial launch (instead of the previous 60 days), but a clause of tacit consent at the end of the notice period has been introduced. As for bundling services, the previous prohibition has been withdrawn as a consequence of the increased demand for Telecom Italias WLR offer.
AGCom retained Telecom Italias obligation to provide WLR service, only in the areas where disaggregated access services are not offered, with a price calculated according to the network cap method, for the period from May 1, 2010 to December 31, 2012, based on a BU LRIC model, (see below the Wholesale fixed markets section for details), instead of the previous retail-minus regime.
The first round of market analyses for fixed wholesale markets concluded in 2006. In particular, the markets were as follows: Call origination (market 8); Call termination (market 9); Transit services (market 10, removed from the revised 2007 Recommendation); Unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services (market 11); BroadBand access (market 12); Terminating segments of leased lines (market 13); Trunk segments of leased lines (market 14 removed from the revised Recommendation).
As a result of this market analysis, AGCom imposed on Telecom Italia, as SMP operator, regulatory measures including price control in the form of a network cap (except for the wholesale broadband access market).
The network cap mechanism has been applied to calculate the prices of wholesale call origination, termination and transit services and of unbundled network-access services (i.e. Local Loop Unbundling and Shared Access). This mechanism has also applied to circuits, with the aim of ensuring that cost orientation is used to calculate the prices of the termination and long-distance circuit segments.
Following the conclusion of the second round of market analyses of the wholesale access market, in December 2009, AGCom confirmed the current regulatory system relative to the wholesale access obligations to the copper infrastructure (unbundling and bitstream), whereas, with regard to the determination of prices, it reintroduced for the period May 1, 2010 to December 31, 2012 a network cap mechanism, based on a BU-LRIC model. For the period from January 1, 2010 to April 30, 2010, AGCom set prices of LLU and co-location services and wholesale broadband services at the same level as 2009 values.
In light of adoption of the LRIC model, in November 2010, AGCom defined new wholesale rates for the period May 2010- December 2012 for the following wholesale services: unbundling, bitstream and WLR. In particular, for the LLU service, AGCom set the following monthly fees: 8.70 euro/month as of May 1, 2010; 9.02 euro/month as of January 1, 2011; and 9.28 euro/month as of January 1, 2012. Those rates remain subject to final verification by AGCom of their compliance with the improvement of the following indicators measuring the quality of the network: refusal percentage of OLOs wholesale requests due to problems related to access network, and fulfillment of TI quality plans and faults percentage with technician intervention on field. In particular, with reference to 2011, AGCom stated that the network quality improvements based on the above indicators proposed by Telecom Italia were compliant and as a consequence, price increases have been confirmed.
AGCom has also introduced certain obligations for the access to NGAN infrastructures and, in particular, introduced the access obligation to ducts and dark fiber at fair and reasonable prices under AGCom supervision and the bitstream access on Fiber To The x (FTTx), announcing the launch of a dedicated proceeding on NGAN regulation. On September 20, 2010, the EC adopted a Recommendation on NGAN regulation. A new regulatory model was proposed where NRAs are asked to examine differences in conditions of competition in different geographical areas in order to determine whether the definition of sub-national geographic markets or the imposition of differentiated remedies are warranted. AGCom launched a public consultation in January 2011 on regulation of access to the next generation network. The public consultation shows, on one hand, the introduction of a different regulatory framework for access to NGAN in comparison with the one highlighted on the wholesale access market. In this new proceeding, AGCom proposes to introduce not only new measures but also to expand/modify obligations already imposed on Telecom Italia. On the other hand, a positive aspect of this new framework is the introduction of the principle of geographical segmentation of the remedies among competitive and non-competitive areas. The end of the AGCom proceeding on NGAN services is expected by the end of Spring 2011 although implementing measures will not be published before the second half of 2011.
With respect to migration between operators, AGCom has revised fixed-line customer migration rules, substantially reducing times of the process where the donating operator verifies the recipients migration request (so called Phase 2) which has been reduced to five days as of March 2010. Moreover, in cases of unrequested migration, the user will have the right to re-establish, free of charge, the previous configuration within five working days. Finally, in order to prevent activation of services not requested by retail customers, fixed-line operators introduced an individual security code. The code is provided to the customer when the client signs the contract for the access service.
With reference to fixed call termination for alternative network operators, in May 2008, AGCom adopted a decision setting the new cost accounting model BU-LRIC and a gradual drop from 2007 to 2010 which led to symmetric termination rates with Telecom Italias SGT level beginning in July 2010 (at the maximum level of 0.057). In July 2008, AGCom designated additional network operators as having SMP in the wholesale market for fixed call termination, imposing on the bigger infrastructure-based alternative operators access and non discrimination and price control obligations.
The price control mechanism imposed according to the first round of market analysis on Telecom Italias call origination, termination and transit charges expired at the end of 2009.
AGCom concluded the second round of market analyses on April 28, 2010. The decision postponed the development of the BU-LRIC model, recommended by the European Commission for the definition of termination charges, to a further proceeding in order to set charges for the year 2012 onwards.
AGCom provided new wholesale tariffs for the year 2010 and for the year 2011 stated that the prices should be defined at an efficient cost level on the basis of cost accounting data. All the prices provided for call origination are equal to call termination. AGCom also confirmed its previous decision to impose infrastructure-based alternative operators FTR equal to Telecom Italias termination charge for the SGT level as of July 1, 2010. The
European Commission criticized the decision of the Authority, noting, among other things, that the symmetry could be possibly achieved with TIs local level (SGU), by applying lower fixed termination rates for the alternative operators. For that reason, TI has filed an extraordinary appeal to the President of the Italian Republic against the decision of AGCom which established the wholesale tariffs. TeIecom Italias appeal is expected to be heard by the TAR during the summer 2011. On March 4, 2011 AGCom notified the European Commission of its draft decision concerning the definition of fixed termination charges for Telecom Italia and OLOs in the year 2011. AGComs orientation is to set 2011 prices at the same level of 2010, therefore maintaining OLOs asymmetric prices equal to Telecom Italias termination charge for the SGT level. The final AGCom Decision will be published in April /May 2011, following EU comments.
With respect to transit services, in April 2010, AGCom identified the two following markets: (i) local conveyance and transit market (it includes the single transit service involving only one switch and the transit service between two or more switches located in the same telephone district and the transit services provided jointly with the originating or terminating service) and (ii) national conveyance and transit market (it includes transit services between two or more switches located in different telephone districts, also when provided jointly with the originating or terminating service). While the regulation for existing obligations has been withdrawn for the national conveyance and transit service market, AGCom has maintained the regulation for the local conveyance and transit market.
With respect to the wholesale markets for trunk segments of leased lines and for terminating segments of leased lines, AGCom in January 2010, concluded the market for trunk services was competitive and removed all the ex ante obligations. As to the terminating services market, AGCom defined the following two separate markets: (i) circuits provided between a Telecom Italia node and end users premises (Market A); and (ii) circuits provided between a Telecom Italia node and a mobile operators base station (Market B). AGCom decided to deregulate market B, removing existing ex ante obligations from December 31, 2010. AGCom decided to maintain SMP regulation for Telecom Italia in Market A keeping in place regulation under a network cap for the years 2010-2012. The starting values are the prices of Telecom Italia Reference Offers for the year 2009, approved by AGCom (published on February 11, 2010).
AGCom has concluded the second round of analyses of the mobile markets.
AGCom confirmed, in February 2009, that the wholesale market for access and call origination on mobile networks does not warrant ex ante regulation.
With respect to the wholesale market for voice call termination on mobile networks, AGComs decision adopted in November 2008, provided a four year gradual decline of tariffs setting the Maximum Termination Rate (MTR) for each SMP mobile network operator and elimination of the current asymmetry with the third entrant in 2011 (5.3 eurocents/min) and with the last entrant in 2012 (4.5 eurocents/min). AGCom has already developed a new cost model for MTRs, taking into account the EU Recommendation on the regulation of termination rates (approved in May 2009) which will be used in the third round of market review in order to update the values of the current glide path (multiyear mechanism of price control) set for mobile termination rates. This new AGCom proceeding is expected to end by Autumn 2011 and is expected to lead to further reductions of termination prices.
As of July 1, 2010, Telecom Italia reduced its termination rates in compliance with AGComs Decision which set a termination charge of 6.6 euro cents/min. for Telecom Italia and Vodafone, 7.2 euro cents/min. for the third player, Wind, and 9.0 euro cents/min. for the latest entrant, H3G.
As a result of the change in the mobile termination prices, Telecom Italia gave customers, from July 1, 2010, a reduction in the cost of calls from a land line telephone to all mobile telephone operators, diversified according to the corresponding reductions in the mobile termination prices.
The EC Regulation on international roaming, approved by the European Parliament and the Council in June 2007, introduced the following measures for roaming calls within the EU (extended to European Economic Area countries), for a three year period:
In June 2009, the EU Parliament and Council adopted a new regulation which provided for further progressive reduction of prices for voice call (retail and wholesale) and sets maximum prices for SMS (at retail and wholesale level) and data (at wholesale level), to be applied within the 27 Member States as of July 2009. The new regulation also provided for stricter transparency obligations on data (retail) such as the introduction of a cut off limit, from March 2010, in order to prevent bill shock. Since July 2010, customers have the cut-off limit by default (prior to July 2010 it was done on an opt-in basis).
The new rules apply until the summer 2012. The EU Commission is in the process of reviewing the regulation and launched a public consultation (concluded on February 11, 2011) to gather information from the market with regards to alternative solutions to continuing with the current regulation. The assessment of these alternatives should be concluded over the next few months and a proposal by the European Commission is expected by June 2011.
Mobile messaging and data services
The EU regulations for international roaming have exerted regulatory pressure on SMS and data (as to prices and transparency measures) even at a national level. In May 2009, AGCom and AGCM conducted a joint investigation on voice, SMS, MMS and mobile data services, following which operators, on a voluntary basis, introduced at least one offer with per second billing on voice and SMS tariff aligned with the Euro-SMS tariff. Moreover, following the above joint investigation, and a public consultation concerning harmonization measures with the principles of the EU Regulation on International Roaming and consumer protection, AGCom adopted regulations which have been implemented as if the end of 2010. These regulations provide for:
On December 17, 2010 Telecom Italia filed an extraordinary appeal with the President of the Republic with a request for cancellation, after suspension, of these regulations. The implementation of the provisions have significant impact on the systems in that it involves the introduction of mechanisms for real-time control of traffic.
In October 2008, AGCom issued a decision dealing with the procedure for the re-assignment and extension of the use of 900 MHz (the so-called refarming, i.e. the possibility that the 900 and 1800 MHz frequency band can be re-organized and re-used for the development of 3G mobile systems3G/IMT 2000-UMTSor of other possible technologies, equivalent and compatible according to the relevant applicable regulation) and the re-assignment of the 3 blocks of 2x5 MHz in the 2100 MHz band, returned to the Ministry for Economic Development by an UMTS operator who never entered the market (IPSE 2000). In particular:
In February 2009, the Ministry approved the plan submitted by Telecom Italia, Vodafone and Wind for the re-assignment of the 900 MHz band. The plan provides for two phases. The first phase which ended on November 2009, related to the re-organization of the 900 MHz band. Following the conclusion of this phase,
the Ministry released the new rights of use of such frequencies. The second phase to run between September 2011 and December 2013 will concern the release of one 5 MHz block to be assigned to the 3G only mobile operators. This block should be used for 3G technologies with the introduction of roaming obligations.
Regarding the so-called digital dividend i.e. the allocation of a portion of the broadcasting frequency band to other telecommunication services, AGCom has published guidelines for the frequency national plan which, according to AGCom, should foster the freeing of the digital dividend band as required by the European Commission Recommendation 2009/848/EC of October 28, 2009. This band is currently allocated to a large number of local broadcasters (about 600). On December 7, 2010 the government approved the 2011 Budget Law. According to this law, AGCom is to initiate procedures for the assignment of the frequencies in the 790-862 MHz and in other available frequency bands (i.e. the 1800 MHz and the 2,6 GHz bands) to mobile broadband services. On January 11, 2011, AGCom commenced a public consultation to be held on the spectrum. Following this consultation the Ministry of Economic Development will prepare the tender documents for the auction procedure in accordance with AGCom principles. The Italian government estimates that proceeds should be in the range of 2,400 million euros. The procedure for the assignment of the frequencies provides that the amount offered by the winning bidder should be made available to the government by September 30, 2011. Frequencies in the 790-862 MHz band should be freed by the broadcasters by December 31, 2012.
New numbering plan
In July 2008, AGCom issued a decision following its review of the national numbering plan for the telecommunication sector. The main modifications concerned new rules of network internal services numbering, introducing specific blocks for premium services mainly related to SMS/MMS data services, the introduction of new premium services numbering and of clearer numbering-premium services categories association, the revision of price thresholds of premium services and the updating of nomadic voice communication services, fixed-mobile convergent services and mobile virtual network operators numbering. In addition, the pan-European new social services numbering (i.e. 116XYZ codes) was introduced.
In March 2010, AGCom launched a public consultation (concluded in April 2010) on its proposal to amend the National Numbering Plan. The most important issue concerned the possibility to assign rights of use of numbers to mobile virtual operators.
AGCom decided in December 2010, that the assignment of rights of use of mobile numbering is to be extended to mobile virtual operators (MVO). In addition, considering the possible new numbering resources needed, if in the future MVO numbers in Italy should significantly increase, AGComs decision has imposed, by 2012, the modification of existing end users mobile number codes and Mobile Number Portability routing number codes length from 3 digits to 4 digits with relevant impacts and costs on infrastructured network operators.
Quality of services of broadband Internet access at fixed location
In November 2008, AGCom issued a decision stating that operators have to provide information about the service level of Internet access services at a fixed location:
In the autumn of 2010 the Company launched a tool with which customers can measure the quality of their broadband connections.
The decision also introduces a super-parties agency that verifies the operators measures.
Quality of services of broadband Internet access at mobile location
In February 2011, AGCom launched a working group that will give AGCom helpful suggestions on how to regulate the quality of services of mobile broadband access lines.
The Universal Service is a minimum set of services of a certain quality, which must be made available to all customers, regardless of their geographical location and, taking account of specific national conditions, offered at a reasonable price. To date Telecom Italia is the only operator charged with the obligation (the Universal Service Obligation or USO) of providing the Universal Service throughout Italy.
The net cost of providing the Universal Service is calculated as the difference between the companys net cost when it is subject to the obligations of providing the Universal Service and the net cost of the same operation if the obligation did not exist. It is AGComs responsibility to verify the net cost. A fund set up by the Ministry of Communications is used to finance the net cost. Companies in the sector contribute to it, including Telecom Italia.
In March 2008, AGCom published a Decision introducing a new method of calculating the net cost. Retroactive since 2004, it affects credits related to the Universal Service net cost for the years 2004, 2005 and 2006 which have been re-calculated and submitted to AGCom under the new terms. Telecom Italia has communicated universal service net cost for the years 2007, 2008 and 2009.
At the beginning of 2010 the TAR rejected an appeal of one mobile operator, on financing the Universal Service Obligation net cost for the years 1999, 2000, 2002 and 2003. More specifically, this operator took the position that the mechanism for sharing the cost should not be applied to mobile network operators, as the degree of substitutability between telephony services offered on fixed and mobile network was not sufficient to include such services in the same market. The TAR decided that the above resolutions did not sufficiently state the reasons why mobile operators were required to contribute to the net cost. Further, the TAR found the analysis of substitutability between fixed and mobile telephony services lacking because it focused only on potentially profitable areas, deciding on the contrary that the analysis should be national. Accordingly, the AGCom has reopened proceedings to renew the orders taking into account the factors criticized by the Court.
The proceedings were reopened by the AGCom in May 2010. Telecom Italia participated in the proceedings and presented a paper supporting the analyses with data demonstrating that in the years 1999 2003 there was market competitiveness for fixed and mobile telephony and a presence of some degree of substitutability Fixed- Mobile for the period under observation.
On January 2011 AGCom published public consultations about renewal of proceedings relating to the applicability of the sharing of the net cost of Universal Service for the years 1999, 2000, 2002 and 2003. In the public
consultations AGCom confirmed the same level of contributions defined before the beginning of proceedings. In February 2011 Telecom Italia presented a further paper with analysis and data demonstrating that in the years 1999 2003 there was market competitiveness for fixed and mobile telephony and a presence of some degree of substitutability Fixed- Mobile for the period under observation. Now Telecom Italia is waiting for the AGComs decision about the contribution of mobile operators to the USO.
In April 2010 AGCom confirmed that distribution criteria on the national territory of public telephones was no longer consistent with current social needs, and AGCom removed any quantitative obligations for Telecom Italia. As a result, Telecom Italia will be authorized to remove up to 30,000 public telephones per year after consultation with local municipalities and interested citizens. During 2010, about 7,500 public telephones were removed in line with this decision.
Accounting separation and fixed network cost accounting
Operators having SMP are required to have an accounting system showing their costs in a transparent manner. Such operators must provide AGCom annually with both descriptions and reporting of their cost accounting system to verify compliance with the provisions of the electronic telecommunications regulatory framework. Moreover, operators of fixed public networks and mobile networks with SMP must keep a separate accounting system distinguishing between the activities in each of the relevant wholesale and retail markets defined by AGCom according to market analyses carried out periodically.
The rules on regulatory accounting were updated in accordance with EC Recommendation of September 2005 on Cost Accounting and Accounting Separation, under the regulatory framework for electronic communications in order to comply with the new sector regulation, organized by relevant markets.
During 2009, the independent auditor appointed by AGCom to review Telecom Italias accounting separation of the fixed network services for the years 2005, 2006 and 2007 completed its audit and delivered the requested audit reports to AGCom.
Reports of the auditor were published by AGCom in January 2010; shortly after, in accordance with the law, the audited regulatory accounting reports and the methodology for the years 2005, 2006 and 2007 were also published by Telecom Italia on its website.
Telecom Italia has also produced and delivered to AGCom the regulatory accounts for the years 2008 and 2009. Regulatory accounting reporting for the year 2010, in accordance with the law, will be delivered to the National Regulatory Authority in 2011, after the statutory financial statements approval.
In the first months of 2011 the independent auditor appointed by AGCom to review Telecom Italias accounting separation of the fixed and mobile network services for the year 2008 delivered the requested audit reports to the NRA (AGCom has not published them yet) and started the review of regulatory accounts 2009.
Accounting separation and mobile network cost accounting
In connection with AGComs second round analyses of the market for the termination of voice calls on individual mobile networks, AGCom required SMP operators to produce economic and quantitative data related to regulatory accounting methodologies for the setting of new network cap values.
During the year 2010:
During the year 2011:
AGCom fee for 2010
In December 2009, AGCom issued a decision on the payment of its fee for the year 2010, (1.5% of 2008 revenues of the communications sector, to be paid by April 30, 2010). Telecom Italia paid a 20,362,264.08 euros fee.
On January 19, 2011, AGCom commenced an audit of the Companys compliance with the years 2006, 2007, 2008, 2009 and 2010. The AGCom audit on the annual contribution to the Authority is part of a general audit covering all companies in the TLC industry. On March 1, 2011, AGCom released its findings claiming that Telecom Italia did not properly fulfill its obligation to pay the contribution in the 2006-2010 period. Telecom Italia is considering whether to appeal the AGCom decision to the TAR .
Broadband and digital divide
Law 69 of June 18, 2009 introduced economic and legal measures to promote the expansion of broadband. In particular, this legislation provides a series of exceptions and corrections to the existing legislation to remove some legal obstacles and operationally facilitate the building of networks.
The process of simplification to promote the development of broadband in Italy continued with the approval of Law 73/10 in May 2010 which introduced:
In July 2010 a set of general rules called Segnalazione Certificata di Inizio Attività (SCIA) was introduced, which will allow activity immediately. The application of these general rules to the installation of network equipment for BroadBand could further reduce administrative constraints required for setting up networks.
SCIA has been utilized for setting up mobile networks.
4.3.2 PRIVACY AND DATA PROTECTION
Telecom Italia must comply with Italys data protection code (Legislative Decree No. 196/2003), which came into force on January 1, 2004.
The code is divided into three parts: 1) general data protection principles; 2) additional measures that apply to organizations in certain areas, including telecommunications; 3) sanctions and remedies.
The code applies to all processing within Italy and also affects organizations not based in Italy that use equipment located in Italy, such as computer-based systems.
According to the code, personal data shall be processed lawfully and fairly, kept accurate and up to date and must not be excessive or kept for longer than necessary. Therefore, information systems shall be configured by minimizing the use of personal data.
The data subject (any natural or legal person that is the subject of the personal data) shall receive a preliminary information on data processing purposes and modalities. Consent of the data subject is necessary to process personal data, except for specific cases (i.e. obligations imposed by law or by a contract with the data subject). Furthermore, the data subject has the right to access his/her personal data and to obtain information on the purposes and methods of the processing.
Italys Privacy Provisions Related to Specific Processing Operations of the Electronic Communications Sector
The above mentioned code has implemented the provisions contained in the E-Communications Privacy Directive of the European Union.
With respect to data retention, communications service providers (CSPs) are permitted to retain traffic data for a six-month period in order to deal with disputes over billing and subscriber services. CSPs are also required to retain telephone and telematic traffic data for the purpose of detecting and preventing crime. In the course of 2008, data retention terms were significantly reduced. At present, data retention terms for crime prevention and prosecution are: 24 months for telephony traffic (fixed and mobile); 12 months for telematic traffic; and 30 days for unsuccessful call attempts.
Traffic data must be kept and controlled in compliance with general provisions issued by the Italian Privacy Authority (Garante), which requires TLC operators to adopt strict security measures.
Customer profiling in the electronic communications sector is regulated by a provision adopted by the Italian Privacy Authority on June 25, 2009. CSPs must obtain the consent of the data subject for profiling based on individual and detailed personal data, while prior approval of the Italian Privacy Authority is necessary to process aggregated personal data without the data subjects consent.
With respect to direct marketing activities, the data protection code allows the processing of personal data taken from directories of subscribers, in order to carry out operator-assisted telephone calls for commercial purposes, in respect of any entities that have not exercised their right to object, by having the respective telephone numbers entered in a public opt-out register, which came into force on February 1, 2011.
4.3.3 ANTITRUST IN ITALY
Legislation on competition
Telecom Italia is subject to Italian competition law.
Law 287 of October 10, 1990 (Provisions for protecting competition and the market) created Italys Autorità Garante della Concorrenza e del Mercato, or Antitrust Authority.
The Antitrust Authority is responsible for:
In addition, article 14 of Decree Law 223/06, entitled Supplementary powers for the Antitrust Authority, converted into law by Law 248/06, established that the Authority may impose the adoption of precautionary measures and declare obligatory the commitments made and presented by businesses, in order to eliminate any anti-competitive practices, simultaneously ending the proceedings with the finding of a non-violation.
4.3.4 TELECOMMUNICATION REGULATORY FRAMEWORK IN BRAZIL
The activities of the Telecom Italia Group in Brazil are subject to the General Law on Telecommunications (Lei Geral de TelecomunicaçõesLGT) of 1997the legislative benchmark for the sectorand a comprehensive regulatory framework for the provision of telecommunications services promulgated by the Regulatory Agency for TelecommunicationsAgência Nacional de Telecomunicações (ANATEL).
ANALTEL has authority to propose and to issue regulations that are legally binding on telecommunications service providers. Any proposed regulation or action by ANATEL is subject to a period of public comment, which may include public hearings, and may be challenged in Brazilian courts.
Despite liberalization, which occurred in 1997, the Brazilian telecommunications market still faces persistent dominant positions held by fixed incumbent operators. In particular, broadband access is currently offered by operators over their own infrastructure and the respective regulatory framework is not always based on effective implementation of the wholesale access obligations.
Since the launch of GSM mobile services in 2002, four main players operate in the mobile market (Claro, Vivo, Oi and TIM) and compete nationwide. Third generation services deployment started in 2008.
ANATEL conducted the privatization of the former public monopoly (Telebrás) and gradually opened the sector to competition, in addition to fostering universal access to basic telecom services. According to the General Telecommunications Law and regulations issued by ANATEL, licenses to provide telecommunications services are granted either under the public regime, by means of a Concession or a Permission, or under the private regime, by means of an Authorization. Only certain fixed-line service providers are currently operating under the public regime (Telefonica, Embratel and Telemar commonly referred to as Concessionaires). All the other telecommunications services providers in Brazil are currently operating under the private regime, including all the mobile and data service providers.
The authorizations for fixed and mobile services give the companies of the Telecom Italia Group (which operate under the brand names Tim and Intelig) coverage of the entire Brazilian territory and include an authorization to offer fixed long-distance services.
In August 2009, ANATEL gave its approval for the acquisition of the fixed line operator Intelig, which operates as a national and international long distance operator in Brazil and provide local fixed service in a number of regions in Brazil. According to the regulations, Tim Brasil and Intelig are obliged to resolve the overlapping of the fixed service authorizations within 18 months from the acquisition (that is within the end of June 2011) keeping only one authorization per class of service.
For details please also see Item 4. Information on the Telecom Italia Group4.2.2 Brazil.
Telecommunication operators must publish a public interconnection offer on both economic and technical conditions and are subject to the General Interconnection Regulatory Framework promulgated by ANATEL in 2005.
The free negotiation process for interconnection charges has been extended and will proceed until a cost based reference interconnection value is set by ANATEL. Under a specific Resolution, ANATEL developed a new model to determine reference costs for the use of mobile networks by providers who have Significant Market Power. These values will be used in arbitration cases involving termination rates by ANATEL.
In 2005, ANATEL issued a ruling for Accounting Separation and Cost Accounting, introducing the obligation of presenting the Accounting Separation and Allocation Document (Documento de Separação e Alocação de ContasDSAC) by the licence holders and groups holding significant market power in the offering of fixed and/or mobile network interconnection and wholesale leased lines (Exploração Industrial De Linha DedicadaEILD). Starting from 2006 (for fixed operators) and 2008 (for mobile operators), operators (TIM included) are delivering the requested information to ANATEL. The effective application of cost oriented interconnection charges is expected in 2012.
Main regulatory developments in 2010
TIM, Vivo and Claro won blocks of spectrum in the 1700/1800 MHz band. Tim Brasil, in particular, won individual blocks of frequencies in 8 service areas, strengthening its presence in the North, Santa Catarina, Minas Gerais and Parana regions.
For the future, ANATEL intends to establish the reference tariffs of SMP (Significant Market Power) operators basing on fully allocated historic costs. The implementation of a cost model should be completed in 2012, and will imply a reduction of the mobile termination rate.
Other measures included in the plan are represented by fiscal incentives to induce the operators to offer broadband access to low income families, public investments in research and financial support to national industries.
4.3.5 TELECOMMUNICATION REGULATORY FRAMEWORK IN ARGENTINA
Telecom Argentina and Telecom Personal operate in a regulated industry. Regulation not only covers rates and service conditions, but also the terms on which various licensing and technical requirements are imposed.
The activities of Telecom Argentina and Telecom Personal are supervised and controlled by the CNC (Comisión Nacional de Comunicaciones, a governmental agency under the supervision of the SC (Secretaría de Comunicaciones), which is presently supervised by the Ministry of Federal Planning, Public Investments &
Services. The SC has the authority to develop, enforce and implement policies which are applicable to telecommunications services, to review the applicable legal regulatory framework, to approve major technical plans and to resolve administrative appeals filed against CNC resolutions.
The principal features of the regulatory framework in Argentina have been created by:
Other related laws:
Public Emergency Law. As a consequence of the severe and ongoing deterioration of Argentinas economic situation, on January 6, 2002 the Argentine government enacted the Public Emergency Law No. 25,561 and other applicable regulations. It introduced measures that have had and may continue to have a significant impact on the operations of Telecom Argentina, particularly on fixed telephony regulated rates (end of Convertibility US$ 1 = $Arg 1 and freezing rates).
Buy Argentine Act. In December 2001, the Argentine government passed Public Law No. 25,551 (the Compre Trabajo Argentino). The Act requires Telecom Argentina to give priority to national goods and services for the basic telecommunications services in any procurement related to the rendering of basic telecommunications services.
Regulatory Authorities abroad
Núcleo, Telecom Personals Paraguayan controlled company, is supervised by CONATEL (Comisión Nacional de Telecomunicaciones), the National Communications Commission of Paraguay.
Telecom Argentina USA, Telecoms subsidiary, is supervised by the Federal Communications Commission (FCC).
Licenses granted as of December 31, 2010
As of December 31, 2010, Telecom Argentina has been granted the following non-expiring licenses to provide the following services in Argentina: Local fixed telephony; Public telephony; Domestic and international long-distance telephony; Domestic and international point-to-point link services; Domestic and international telex services; Value added services, data transmission, videoconferencing and broadcasting signal transport services; and Internet access.
Revocation of the License
Telecom Argentinas license is revocable in the case of non-compliance with certain obligations, including but not limited to:
Liberalization of the Argentine Telecommunications Industry
In March 1998, the Argentine government issued Decree No. 264/98, introducing a plan for the liberalization of the Argentine telecommunications industry. The plan provided for the issuance of a reduced number of competitive licenses and established the liberalization of basic telephony and international long-distance services during the time between October 8 and November 8, 1999. The Plan also liberalized pay telephone services and telephone service in rural areas, during 1998.
Some provisions of this Decree and related resolutions were modified by Decree No. 764/00. This Decree established a new general regulation of licenses, interconnection, Universal Services and radio- frequencies spectrum control, provided that each licensed company was allowed to launch its services in November 2000 when the full liberalization of the telecommunications market began.
This Decree established a new Regulation of Licenses based on a single nationwide license for the provision of all telecommunication services to the public, including fixed-line, wireless, national and international services. Also, it established a new Interconnection Regulation that includes the obligation to give transparent networks interconnection and to publish a R.I.O. (Reference Interconnection Offer) with the infrastructure elements and services that the dominant operator is required to provide. The interconnection commercial conditions are defined by free agreement between parts, but cost for basic interconnection elements are established in this regulation.
The Decree 764/00 provides for the obligation to implement Number Portability, local loop unbundling; these regulations are not yet implemented. Particularly, Number Portability will be implemented for mobile services only, by the end of 2011.
Since the end of the Exclusivity Period the Regulator has granted a number of licenses to, among others, independent fixed line service providers, mobile and cable operators, cooperative operators, as well as individual licensees, some of which are affiliated with major service providers outside Argentina. As of December 31, 2010, more than 500 licenses for local and/or long distance services, payphones and Value Added Services had been granted.
The main licensees providing local and/or fixed long-distance telephone service are Telmex, Global Crossing, Comsat, IPlan, Telephone2, Telefónica (in the Northern Region), Telecom Argentina (in the Southern Region), among others.
The Pesification and freezing of rates for fixed telephonyContract renegotiation
The Price Cap was a regulation method applied in order to calculate changes in Telecom Argentinas basic services rates, based on changes in the U.S. Consumer Price Index (U.S. C.P.I.) and an efficiency factor. However, in October 2001 a preliminary injunction against Telecom Argentina prohibited Telecom Argentina from applying rate increases by reference to the U.S. C.P.I.
Finally, Public Emergency Law No. 25,561 explicitly prohibited rate adjustments. As of the date of this Annual Report, the pesification and the freeze of regulated rates remains in force therefore the price cap regime is suspended and it is unknown if and when it will come back into effect or be replaced by other rate regulation procedures.
In accordance with the Public Emergency Law, in January 2002, rates for Basic telephone services and long distance services were converted to Argentine pesos and fixed at an exchange rate of ARS1.00=US$1.00. The rates Telecom Argentina may charge in the future will be determined by negotiation between Telecom Argentina and the Argentine government. The Public Emergency Law has been subsequently extended through December 31, 2011.
On March 6, 2006, Telecom Argentina executed a Letter of Understanding with the Argentine government pursuant to which Telecom Argentina will be permitted to raise the termination charge for international incoming calls, the extension of the time bands for peak-hour rates applied to local and domestic long distance calls, and incorporate certain modifications to the current regulatory framework.
The Letter of Understanding 2006 contemplated the signing and effectiveness of the Minutes of Agreement of the Renegotiation upon the fulfillment of certain necessary administrative steps. As of the date hereof, such fulfillment has yet to occur. Although Telecom Argentinas Management believes that the contract renegotiation process will be satisfactorily completed they are unable to predict the outcome of the negotiations that are continuing with regard to further rate increases and the rate scheme which will be applied in the future. Also, they are unable to predict whether the Argentine government, as a result of the current rate renegotiations, will impose additional conditions or requirements.
Last relevant regulatory events
Universal Service (SU) Regulation. Regulations, published on April 4, 2008, approved a new Universal Service regime. As with the previous one, the regulations require telecommunications service providers to contribute 1% of their revenues to the SU Fund and this regulation keeps the pay or play mechanism for compliance with the mandatory monthly contribution to the SU Fund or, to claim the correspondent receivable, as the case may be.
The regulations established that the SC will review SU initial programs which were established under the previous regulation, guaranteeing the continuity of SU programs already being administered and implementing programs that had been under review. Also, the SC will create future SU programs while the telecommunications providers appointed to participate in such programs will be selected by competitive bidding.
New SU programs. In April 2009 the SC created a new program denominated Telephony and Internet for towns without provision of basic Telephone services that will be subsidized with funds from the SU Fund. This program seeks to provide fixed telephony services in 1,491 towns and Internet in its schools that currently dont have these services.
On December 1, 2010 the SC created two new programs called Internet for Schools and Internet for Libraries respectively, to be subsidized by the SU Fund. The goal of these SU programs is to provide BroadBand Internet access to this kind of official institutions, following a bidding process to select the future provider.
New SU contribution methodology. On November 11, 2010 the SC issued a resolution with a new deposit methodology for the contributions to the SU Fund. This resolution also defines that the operator must deposit in the SU Fund the amount owed for the period July 2007 to December 2010. The operators, mainly incumbent operators, have exempted of that obligation up to SC approve, valuates and audits SU initial programs provided for these operators.
At the date of issuance of this Annual Report, the SU initial programs are still pending of approval by the SC.
In January 2011, the SC established the procedures that allows licensees to present investments projects for development of its own network in areas of SU, to be subsidized with the amount of the contribution to SU for the previous period, January 2001 to June 2007.
SU In Telecom Argentina. Telecom Argentina has provided and continues to provide SU initial programs and have not received set-offs for providing services as required by the SU regime. As a consequence of that Telecom Argentina has filed its calculations for review by the regulatory authority and is waiting resolution.
SU In Telecom Personal. Since January 2001, Telecom Personal has been recording a provision related to its obligation to make contributions to the SU Fund up to June 2007. In addition, since July 2007 Telecom Personal has deposited the corresponding contributions up to November 2010 (amounting to 112 million Argentine pesos) into a SU Fiduciary Fund.
Spectrum. Telecom Personal understands that Telefónica Moviles S.A. has completed the return of frequency bands (850 MHz and 1.900MHz.) exceeding its 50 MHz. spectrum cap. These bands are now available to be reassigned by SC. Telecom Personal has presented successive requests to the SC demonstrating its interest in participating in the reassignment process of this spectrum bands, but the SC has not yet defined when the auction will be held.
4.3.6 BROADCASTING REGULATORY FRAMEWORK IN ITALY
Consolidated Act on Broadcasting (Legislative Decree 177, July 31, 2005) and Legislative Decree 44, March 15, 2010.
Broadcasting activity in Italy is mainly regulated by the Consolidated Act on Broadcasting (Legislative Decree 177, July 31, 2005), recently amended by Legislative Decree 44, March 15, 2010 (Decree 44), implementing the Audio Visual Media Services (AVMS) Directive, which entered into force on March 30, 2010.
Decree 44 introduced changes in the audiovisual legislation in the areas of advertising and product placement, promotion of European works, short extracts rights, protection of minors, and extends regulation to non linear audiovisual services.
AGCom is implementing the new rules through regulation, including adjustment of authorisation titles already released prior to the new rules.
With respect to advertising on linear services (TV channels) the rules on the positioning of advertisements have been relaxed, providing more freedom in the way advertising is inserted in TV schedules.
With respect to time limits for advertising, the Decree has substantially confirmed the hourly and daily limits for free to air TV channels, while it has reduced hourly limits for pay-TV channels which will have to gradually reduce advertising from 18% in a given hour applying in 2010 to 12% in 2012.
The Decree also allows for product placement, in line with the rules set by the AVMS Directive, which limits this opportunity to screening of movies, fiction, sports programmes and entertainment. The implementation of the rules is taking place through self-regulation.
Protection of minors has been reinforced, in particular as regards pay-tv services and on demand services. All audiovisual media service providers will have to adopt a Classification System of contents directed at protecting minors as well as specific technical measures in terms of parental control.
The rules on promotion of European works have been renewed and this has resulted in an update of the regulatory framework on transmission and investment quotas. Telecom Italia Media will maintain the exemptions it obtained under the previous regulatory framework, in particular as regards quotas on programs for minors and on recent Italian movies.
The Decree also amends the rule on secondary rights for independent producers. A new regulatory scheme has been approved and Telecom Italia Media considers positively this new scheme as it implies limited obligations towards independent producers.
Finally, in line with the AVMS Directive, Decree 44 extends regulation to non linear audiovisual services. An audiovisual media service provider is identified as one having the editorial responsibility of the contents provided in the catalogue. On the basis of the new regulation which became effective in January 2011, Video On Demand (VOD) service providers whose income is over 100,000 euros will have to apply for a general authorization.
With respect to digital terrestrial television, the plan for the implementation of Logical Channel Numbering (LCN) was implemented during 2010.
On the basis of the relevant criteria, Telecom Italia Medias generalist national channelsLa7 and MTVhave been given numbers 7 and 8, respectively, in the LCN.
Telecom Italia Media and MTV Italia have also obtained numbers for their only digital channels (La7D and MTV+), shifted channels, HD channels and catch up tv services, on demand and interactive services.
Two main local broadcasters have appealed the awarding of a one digit LCN to Telecom Italia Media and MTV, who have opposed such appeal in order to preserve the assignment of number 7 and 8, since the presence of their TV channels in the first ten numbers of the LNC is a significant commercial advantage pending the easiest access to the first 9 channels from customers. The discussion will take place in July 2011.
The complete switch-off of analogue TV and conversion will take place by December 31, 2012.
In 2009, complete switch off took place in the following Italian Regions: Sardegna, West Piemonte, Valle dAosta, Trentino Alto Adige, Lazio and Campania.
In the second half of 2010 complete switch off took place in East Piemonte, Lombardia, Emilia Romagna, Veneto, Friuli Venezia Giulia.
By the end of 2010 almost 70% of the Italian population was only digital.
The Regions Liguria, Toscana, Umbria, Marche, Abruzzo and Molise are expected to switch off in 2011, while Puglia, Basilicata, Calabria and Sicilia in 2012.
Digitalization of broadcasting networks and frequencies
In response to the EU infringement procedure 2005/5086 against Italy, the Government approved in June 2008, Law No. 101, which abolishes the special licensing regime for digital terrestrial network operators and introduces the authorization regime in line with the Code of Electronic Communications and the EU Directives.
As a consequence, the licenses granted have been converted to general authorizations lasting 20 years.
The European Commission has positively evaluated the changes introduced with law 101/08, but has asked that more spectrum resources should be assigned to new entrants (Digital Dividend). In response to these further requests, AGCom has established the criteria for the complete digital conversion of the television terrestrial networks.
AGCom has established that the National Plan of Assignment of the Frequencies (PNAF) which will provide for 21 national DVB-T (Digital Video Broadcasting- Terrestrial) networks with 80% coverage of national territory and 4 DVB-H (Digital Video Broadcasting- Handheld) national Networks. Out of the 21 National DVB-T networks, 8 are to be used for the conversion of existing analogue networks, 8 for existing digital networks, and 5 will constitute the Digital Dividend to be assigned on the basis of competitive bidding procedures.
The Ministry of Economic DevelopmentCommunication Departmenthas assigned to the Telecom Italia Media Group only 3 DVB-T Networks (out of the 4 Networks managed by the Group). The Telecom Italia Media Group has appealed against this assignment in order to safeguard its interests.