Ten new ways of looking at Telecom Italia’s dysfunctional behaviour, past and present. 

The recent turbulence at Telecom Italia will come as no surprise to anyone who has studied the company over the last twenty years or so. It is amazing to reflect that it is still a functioning telco at all, such has been the degree of political and industrial intrigue surrounding it.

The fact that is appears willing to shed its fixed and wireless ‘telco’ operations in favour of a broadband media identity therefore comes as no surprise. The resulting row over this strategy has been another object lesson in just how the Italians work so hard to mess up an averagely respectable business in the name of the political and personal points that are there to be scored.

So, in no particular order, here are ten facets of the controversy to consider when seeking to understand the current situation and attempting to work out where it all might end.

1) Hard labour
TI is the product of a long gestation and a difficult birth. ‘Telecom Italia’ was born in 1994 after a decade-long argument over the optimum structure for Italian telecom operating. It was formed through the fusion of five state-owned or publicly-listed companies in the sector with distinct responsibility for local operation, trunk and European services, intercontinental services, satellite services etc. At its formation, the company was 42% state-owned. That left 58% potential for investor mischief.

2) Hard core
At its inception, Telecom Italia had in place a nocciolo duro (‘hard core’) of Italian industrial and financial investors whose role was basically to ensure that this ‘independent’ company did not stray from the path that the government laid out for it. These institutions typically accounted for roughly 15% of the company’s shareholding and accounted for a far higher percentage of effective voting rights and board representation. Their role is not that different from institutional investors in other countries; but in Italy, it’s just that they are more venal.

3) Hard ball
The nocciolo duro have held the key to TI’s fate as first Olivetti and then Pirelli assumed control of the company in 1998 and 2001 respectively. On both occasions they assented to the deals, which were also waved through by the government of then Prime Minster Silvio Berlusconi. Each takeover added another layer to the labyrinthine structure of holding companies and ownership interests that sit above the core business, thus multiplying the internal divisions and identity crises within the walls of TI itself. So while it is true that Telecom Italia has come to be regarded as an industrial plaything, it is also true that its treatment as such has been uncommonly rough.

4) Hard numbers
The situation is not improved by the fact that both Olivetti and then Pirelli were forced to take on dizzying levels of debt in order to complete what were in effect reverse takeovers. What has passed for strategy since then has rarely been focused on any point beyond this debt. The latest wheeze looks like just more evidence of this, rather than any joined-up strategic thinking. While the rest of the world dwells on fixed-mobile convergence, TI decides that it can do without its mobile business. Go figure.

5) Hard left
It is safe to say that TI’s initiative would have been controversial even under the political stewardship of Berlusconi. Since the election of the left-leaning Romano Prodi in May of this year, the market dynamics have changed. This is a fact that TI Chairman Marco Tronchetti Provera, who resigned in the initial furore over his plans, had either forgotten or miscalculated. In truth, Prodi is not quite the interventionist his opponents allege him to be. Still, it was the threatened use of Rome’s remaining ‘golden share’ in TI that precipitated Tronchetti Provera’s resignation.

6) Hard pressed
Prodi’s hang-up appears to be one of national identity. In the details of his discussions with TI’s management over the proposed spin-off of the mobile unit, TIM, his concern appeared to be that the last Italian-owned player in the wireless sector would fall into foreign hands. It has been reliably reported that Tronchetti Provera assured him this would not happen, but the likely bidders for TIM come from Germany and Spain and there are few serious Italian candidates to assume control of TIM.

7) Hard man
Apart from Silvio Berlusconi. Having used his extended time in office to promote his own interests while just occasionally bothering to run the country, he might be expected to take an interest either in TIM or, more likely, the newly forged media company. Since the latter would be forged on the anvil of a deal between TI and News Corp, it is hard to discount the idea that Berlusconi would view this as company to which he naturally belongs (and, therefore, a company that naturally belongs to him). Either scenario would make Prodi cringe and reach for the ‘golden share’.

8) Hard decisions
This sums up the dilemma facing TI’s new management (although don’t discount the influence of the old management) and Prodi’s government. TI and the political and industrial right have effectively pushed Prodi into an interventionist corner. So long as he’s stuck there, his opponents will continue to make political capital from it. Even talk of renationalisation – plainly ridiculous – hammers Prodi. But the situation at Telecom Italia is not so different. TI’s purchase of AOL Germany this week implied that it was continuing to pursue its media strategy, but it also met another of Prodi’s concerns for the future, namely the internationalisation of its business. While you don’t normally offer ‘olive branches’ to a self-styled ‘Olive Tree’ coalition, this certainly looked like one.

9) Hard nosed
Lurking behind of all this, to the delight of European conspiracy theorists everywhere, is Rupert Murdoch. Like any self-respecting media mogul he will have been delighted to wake up and find that his actions had thrown a company into turmoil and destablised a not-necessarily-friendly government along the way. In fact, he may have got the ‘bite-off/chew’ equation wrong. Sky Italia, TI’s proposed new media soulmate, is a trifling irrelevance whether measured by economic scale, rights to content or the quality of its output.

10) Hard rain
So where do we go from here? First, Telecom Italia must come clean over the fact that its ‘strategy’ is nothing more than a ploy to manage its own debt and ensure some sort of return for its owners and core shareholders. Second, Telecom Italia’s other shareholders should be given a chance to tell the company’s management that its ‘logic’ defies the common understanding of industry trends and demand an explanation that reaches further than the pockets of the vested financial interests. Third, Romano Prodi should take his hands and eyes off Telecom Italia.

If these conditions are met the company has a shot at survival as a functioning telco with all the risks and rewards of convergence and all the favours accrued from its former pivotal state industrial position. Far too simple… this is Italy, after all.
Jim Chalmers