Handelsblatt interview with Telefónica CEO José María Álvarez-Pallete:

Germany is strategically important to us

In one of his rare interviews, José María Álvarez-Pallete, CEO of the worldwide Telefónica Group, talks about the importance of the German market for the group, TV content, Big Data and Artificial Intelligence. The full interview was published in Handelsblatt on Monday, June 11, 2018. Mr Pallete, Telefónica is the seventh-largest telecoms group in the world. Your predecessor César Alierta’s term of office was characterised by acquisitions all around the globe and he accumulated a lot of debt. What will your term be characterised by? Pallete: With over 350 million customers, Telefónica has enormous selling power for mobile phone and network manufacturers. I want us to maintain this strength while also increasingly transforming into a technology company. Telefónica aims to lead the technological revolution we are currently experiencing. Does that mean that the period of acquisitions is over? Pallete: Provided we have the necessary economies of scale, we do not need to keep growing. We now want to consolidate our position and reorganise the company. But in Germany you are not making headway with this. Your network is the worst of all. Pallete: That’s not true. On the contrary, instead of closing as many base stations as possible and maximising synergies after purchasing E-Plus, we are further densifying the network. Even if two antennas were located close to one another, we kept them there if they mutually improved the usage experience. At the same time, we have upgraded both networks with state-of-the-art technology. Once the integration work is complete, we will have an outstanding network in Germany, especially for cities and suburbs. This mammoth task of network integration was the biggest in the northern hemisphere; only in China there has been comparable projects. [...] Telekom and Vodafone are both investing more in network expansion than Telefónica. This has led to rumours that you intend to divest your business in Germany. Pallete: If we wanted to sell, we would not have bought E-Plus from KPN for EUR 8.5 billion. We have invested more than EUR 25 billion in Germany since 2005. Germany is strategically important for us. It is the largest telecommunications market in Europe, and it is a stable, growing market. Owning the biggest mobile service provider there in terms of customers is extremely valuable. For this reason, we do not intend to sell our business in Germany. Do you intend to sell shares in the German subsidiary? Pallete: We do not plan to do this either. After all, we have twice bought shares in Telefónica Deutschland from KPN, which they had acquired as part of the E-Plus acquisition. I really don’t understand where these rumours are coming from. The way you describe it, it all sounds as though there is no problem. But Telefónica Deutschland’s share price is lower now than it was before the merger. This means that value has been lost. Pallete: The entire European telecoms sector has performed poorly on the stock market. The sale of the KPN shares didn’t help the share price either. But our figures add up: Quarter by quarter, we show how the synergies are developing and what impact this is having on profits. And we are fully on track here. New mobile communications licences for the fast 5G standard will be auctioned in Germany in 2019. Will Telefónica be bidding? Pallete: Yes. [...]
José María Álvarez-Pallete
What is your relationship with the German CEO Markus Haas like? Pallete: I have known him for many years and he is more than a colleague to me. I have a great deal of respect for his work. With his expertise, he also contributes to the business of Telefónica as a whole, and I personally like him very much. Telefónica has always had the reputation of setting tough specifications for the figures and dictating the strategy to the German CEO. Do you do this? Pallete: Telefónica Deutschland is listed on the stock exchange and has its own supervisory board that sets the rules. Our management model is based on the CEO having full responsibility. Markus must ensure that the German subsidiary is more successful as part of the Telefónica Group than it would be alone. With regard to restructuring the network, we use our group’s negotiating position with technology suppliers so that they give Germany priority. But we don’t get involved in day-to-day business. Vodafone wants to buy the cable group Unity Media in Germany. What does this mean for a pure-play mobile service provider like you? Pallete: The market structure is a concern because the transaction generates a duopoly of landline providers. Therefore, this transaction should be subject to strict remedies if it is to be approved. [...] But you are still just the dumb pipe on which others make money with data. Pallete: A lot of people believe that, which is why telecoms groups’ shares are performing so badly. But I see things differently: Our network isn’t stupid, it is extremely intelligent. A digital connection and fibre-optic cables up to the antenna – this is like the body of our company, muscular and with hard bones. A network like this delivers vast quantities of information in real time – like the nervous system. And on top of this we have artificial intelligence – the brain. So then we have an endless number of possibilities to offer new services. Your own services or just other companies’? Pallete: Our own services too. We launched our voice assistant Aura this year. When a customer gets home, he can tell his TV: “Show me the news programme from the start.” And if he appreciates this, he will stay with us. We can consequently reduce churn, which is the most expensive thing for a telecoms group. But an intelligent network is attractive for third parties, too. This is why we have just signed a contract with Netflix and are integrating its television and video content in our TV offer. You also produce TV series in Spanish. Are you aiming to become the Netflix equivalent for South America? Pallete: No, we can’t keep up with their budget. But studies show that customers like local content. For this reason, we want to distinguish ourselves from the competition. And we have made a good start here: The first episode of our series “The Plague” drew a similar number of viewers in Spain as a classic football match between Madrid and Barcelona. You generate almost 50 percent of your revenue in South America. Isn’t that a big risk? Pallete: We have been there since the end of the 80s, these growing markets have made Telefónica what it is today. Of course, the markets there are more volatile. But many of our expenses there are in local currency, so fluctuations do not directly impact our balance sheet. We have also offset the risk with acquisitions in Europe. This is why our business in Germany is so important for us, too. [...]
You are working on a doctoral thesis on big data. What exactly is it about? Pallete: Oh yes, I’ve been working on it for four years already but I simply don’t have the time to complete it. But for me, it’s not about getting the degree itself; what I want is to understand the technological revolution from an academic perspective. Science must contribute to defining the values that we need for this new world. Specifically, I am examining the connection between international calls from a country and that country’s balance of payments. I firmly believe that using artificial intelligence we can manage public spending much more precisely and efficiently. Since you are dealing with the future in so much depth, what will the next big thing be? Pallete: Artificial intelligence. Machines can already identify voices and faces better than humans can. With self-learning algorithms, a machine can not only recognise that it is looking at a pizza, but also that it is a vegetarian pizza. Combined with apps and an open developer platform, this will result in much bigger disruptions than the internet or mobile phones. This is fascinating. Finally, two more questions about the here and now: In Spain, there was a change in the {b}Pallete: government a week ago. Are you worried about the impact on economic growth?{/b} No. Spain has very sound institutions and a budget for 2018, and it is firmly committed to the euro. Furthermore, the country now has more fibre-optic lines than Germany, Italy, France and the UK combined. We are one of the EU countries that are best prepared for the new world. The strong broadband expansion was possible thanks to generous regulation... Pallete: The regulator did not require Telefónica to make very fast bandwidths available to competitors. So they also made investments. Orange now has more fibre-optic lines in Spain than in France – and this is a company that is partly owned by the French government. Vodafone has installed more broadband in Spain than in the UK and Germany combined. The Spanish model can serve as an example for other countries, including Germany.
The interview was published in Handelsblatt on June, 11 2018. Read on at handelsblatt.com (in German)