Cuba Calling? Not So Fast

In late December when President Obama announced that he would seek to “normalize” relations with Cuba, he laid out a plan to begin the thawing of a long-frosty relationship.  While cigar aficionados and others have had stars in their eyes ever since the announcement, the fact remains that one of the areas where Cuba is most deficient is in its communications—both in terms of enterprise communications and the infrastructure necessary to support large and small scale communications.  According to the White House’s announcement, while the administration looks forward to the reopening of diplomatic relations for the first time in 54 years, it also recognizes that within Cuba there are significant hurdles to be overcome before more than the most basic of non-Cuban industries will be able to support the kind of communications that drives business.

According to the White House, internet penetration within Cuba is extremely limited, with less than 5% of the nation’s population having access to the web.  What web access does exist is limited to "a tightly controlled government-filtered Intranet, which consists of a national email system, a Cuban encyclopedia, a pool of educational materials and open-access journals, Cuban websites, and foreign websites that are supportive of the Cuban government, according to information provided by the National Statistics Office in Cuba posted on the website of Freedom House (https://freedomhouse.org/report/freedom-net/2014/cuba).  Unlike many other lesser-developed countries, both domestic and international communications services (both wireline and wireless) in Cuba are also extremely limited.  Deployment of such essential business tools can only come after the infrastructure necessary to support such services is in place, and while the door is open slightly, having that infrastructure in place remains elusive.

While China and Vietnam, also both Communist countries, have been more welcoming to foreign investment, Cuba has been a very reluctant and/or difficult partner, not just with American businesses, but with others as well.  It’s also important to remember that while China has 1.4 billion potential consumers and Vietnam has almost 90 million, Cuba has only 11 million, thus making the risk and investment of time and money considerably greater.

The issues of infrastructure may, in fact, be the second-most pressing. First, sadly, is the culture within Cuba that, according to a quote from Miami attorney Pedro Freyre that appeared in Bloomberg News, “in their heart of hearts, the rules of the country don’t believe in capitalism.”  The culture is so very different that despite the proximity and incredible interest in selling products and services within Cuba, non-Cubans have found doing business there extremely and often painfully difficult.   In many cases, when joint ventures are proposed, the Cuban government insists on holding a majority stake thus complicating an already-complex environment for starting and sustaining business.

And this is the starting environment before issues with the actual workforce are addressed. Such employment matters are often particularly sticky in an economy where workers are often paid in local currency with bonuses allowed either in U.S. dollars or other goods, and thus difficult to quantify.  Finally, returning to the anti-capitalist bent referenced earlier, according to Cuban scholar Andrew Zimbalist, “creating incentives and a work culture is ‘a very real problem.’”  In the previously cited Bloomberg article, Zimbalist said “Cubans live in a society that provides basic needs and little else. It’s not possible to get ahead by working harder so it’s not easy to motivate people.” In a word, “bummer.” 

Nonetheless, the door has been opened.  Through the present time, according to Canada’s Ivey Business Journal, Cuba’s largest trading partners have been Venezuela, China, Spain and Canada, with Venezuela and Canada being the largest two foreign investors.  Yet, while these countries have spawned more than a number of well-known telecommunications infrastructure companies (think Mitel and Nortel to name just two), penetration remains thin, thus keeping infrastructure very weak.  For many years, American telecommunications equipment manufacturers have essentially been  prevented from entering the Cuban market by FCC regulations which have not only limited carriers from providing services between the two countries, but have also limited the export of telecommunications infrastructure equipment including hardware, software and other products essential not only for Cubans to communicate with those outside Cuba, but, perhaps more importantly, with each other as well.

But here, change is coming.  It is anticipated, according to information provided by the White House, that the “commercial export of certain items that will contribute to the ability of the Cuban people to communicate with people in the United States and the rest of the world will be authorized. This will include the commercial sale of certain consumer communications devices, related software, applications, hardware, and services, and items for the establishment and update of communications-related systems.”  In conjunction with the U.S. Departments of State and Commerce, it is expected that telecommunications providers will be allowed to establish the necessary mechanisms, including infrastructure, in Cuba to provide commercial telecommunications and internet services, which will improve telecommunications between the United States and Cuba.

These changes in U.S. policy represent a significant—some might say “semi-seismic” shift. According to the White House, while five American carriers have been licensed by the FCC to provide wireline communications services between the U.S. and Cuba, not one of these five has been able to make an agreement with Cuba’s domestic carrier ETECSA (Empresa de Telecomunicaciones de Cuba S.A.) to enable the delivery of calls that originate in the U.S. to the intended destination within Cuba.
      American carriers who wish to offer services to Cuba must first meet the requirements of Section 214 of the Communications Act of 1934. This purpose of this section is to ensure that the American domestic telecommunications market is protected against potential anti-competitive behavior by carriers with market power in a foreign country. Section 214 approvals are required for all providers of international telecommunications services, including satellite transmissions. In most cases, carriers who complete the application are granted blanket authority for international transmission.

Cuba, has been on the exclusions list, thus subjecting those entities that seek to provide international connectivity to meet a higher level of scrutiny, both from the FCC and the State Department.  That’s not to say such approval is impossible to get but it is more difficult. (Note: As recently as January 1 when I went to check the most recent Exclusions List, I was redirected to the FCC’s International Bureau page.Further details can be found at 47 C.F.R. 63 et seq.

The bottom line is this.  Business opportunities with a newly opened market in Cuba exist.  But they’re not for the faint of heart, both because of American restrictions (albeit those are likely to loosen in this new year), and because of business conditions within Cuba which may post the greater challenge.