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Until the 1990s the government-controlled public company known since May 1988 as Telefónica de España, S.A. (Telefónica), was the dominant player in the Spanish telecommunications industry. Like many of its international counterparts, however, Telefónica was fully privatized in 1997 and became known as Telefónica S.A. the following year when basic telephony in Spain was deregulated. By 2001, Telefónica S.A. operated as the leading telecommunications concern in the Spanish and Portuguese-speaking regions of the globe. Acting as a parent company for ten major subsidiary companies, including the likes of Telefónica de España, Telefónica Latinoamericana, Telefónica Móviles S.A., Terra Lycos S.A., Telefónica DataCorp S.A., Atento, and Admira, the company had business interests in fixed telephony, mobile telephony, Internet content and services, audiovisual media content, and various other telecommunications and e-commerce-related services.

Early History: Late 1800s through the 1920s

Compañia Telefónica Nacional de España S.A. (CTNE), as it was officially called until 1988, was founded in Madrid on April 19, 1924, with capital of Pta1 million, divided into 2,000 ordinary shares. Until then, the Spanish telephone service had been a muddle, supplied since its inception in 1877 by private individuals and small French and Spanish companies holding government concessions. These companies operated incompatible and inefficient manual systems under severe government restrictions, paying heavy royalties to the state. In the first decade of the twentieth century, Barcelona, with 3,000 telephones, possessed the largest of such systems. Successive royal decrees from 1882 onward had failed to bring order out of the chaos created by these concession holders, so the Spanish government decided that the responsibility for Spain's telephones should be entrusted to a single body. On August 25, 1924, the government was empowered by another royal decree to sign a contract with the new Compañia Telefónica Nacional de España, conferring upon it the monopoly for operating the national telephone service. CTNE's task was to acquire the telephone operations and premises belonging to the existing private companies, or those that had reverted to the state, and to organize, integrate, develop, and modernize--in particular by a drive toward automation--Spain's urban and trunk telephone networks. One condition of the contract was that at least 80 percent of CTNE's employees must be Spanish nationals.

CTNE came into being as a result of a takeover by the International Telephone & Telegraph Corporation (ITT) of one of the existing Spanish telephone companies, created in 1899. The brothers Sosthenes and Hernand Behn, who had previously operated telephone companies in Puerto Rico and Cuba, set up ITT in 1920 as a U.S. holding company for their current and future enterprises. The companies were destined to become an international telephone system with corporate headquarters in New York. When in 1924 Spain was chosen for ITT's entry into Europe, local investors came forward, influential Spaniards were invited to serve on the board of the new subsidiary, and the goodwill of Miguel Primo de Rivera's authoritarian government was secured. As a private-sector company providing a public service, CTNE would be subject to tensions between nationally and shareholder-oriented strategies. Telefónica is still accountable to the Ministry of Transport, Tourism and Telecommunications, and a nonvoting government delegate sits on the Telefónica board. Although it is government controlled, Telefónica has benefited from a high degree of autonomy. The Spanish telephone service was never hampered by being linked, as in some countries, with postal services, or by being administered directly by the state civil service.

In CTNE's early years, its efforts were concentrated on the arduous task of extending and improving the existing telephone service. It was operating in a largely agricultural, undercapitalized economy, and its geographical context was a vast mountainous central region, sparsely populated and difficult to access, bordered by coastal strips and plains containing most of the population. Prosperity varied sharply between regions and classes. The political background was unstable and would eventually erupt into the Spanish Civil War of 1936 to 1939. The new company set to work briskly in September 1924 and by the end of 1925 had 1,135 exchanges and "centers," nearly twice as many as it originally had. Some that were very small were operated by a family or individual, and some village centers consisted of a single pay phone in a private house. In 1925, CTNE's first underground cable was laid in the Escorial Palace near Madrid, and the site of the company's imposing headquarters in Madrid's Gran Via was purchased. In 1926, new manual exchanges were built in 48 cities, and in 37 other cities existing exchanges were refurbished. When King Alfonso XIII opened the new Spanish intercity telephone network in December, its 3,800-kilometer circuit constituted a European long-distance telephone record. By then, the number of manual exchanges in operation had risen to 1,397.

In 1926, the company's long-term drive toward the full automation of Spain's telephone system was under way. The automation process, which had actually begun just before CTNE's time, in 1923, with an automatic exchange in Balaguer, would be finally completed in 1988. Between 1926 and 1929, automated rotary switching systems were installed first in San Sebastián--an L.M. Ericsson AGF type with 5,300 lines--and then in 19 other city exchanges. Rotary switching systems are electromechanical devices--at first semi-automatic, later automatic--using rotating shafts to effect telephone connections. They superseded manual operators. At the same time the company was extending the basic network by opening hundreds of large and small manual exchanges. In Madrid, one manual exchange and two automatic Rotary 7-A exchanges with 10,000 lines came into use at the opening of the CTNE main offices in July 1929.

In 1928, Madrid had acquired its first prepaid call token-operated telephones. In the same year, telephone communication had been established between Spain and Cuba, and the telephone link was made with Argentina and Uruguay in 1929. In 1930, the two main islands of the Canaries, Tenerife and Gran Canaria, were telephonically linked by underwater cable, while the next year a radiotelephone service was established between the Canaries and the Iberian Peninsula. Mallorca's telephone link with the mainland was also established in 1931. Between 1936 and the early 1950s, CTNE's development suffered severely, first from the upheaval and destruction of the civil war and then from Spain's political and economic isolation, both during World War II and after the defeat of the Axis powers, which had been favored by the government of General Francisco Franco. Until 1945, most of CTNE's capital was held by ITT. At that point, Franco's government (1939-75) nationalized the company, taking over its stock from ITT and retaining 41 percent of the share capital, the rest going to more than 700,000 shareholders. In 1946, the state renewed CTNE's contract. The company kept its monopoly over all civil domestic telephone services in Spain and was obligated to develop and extend them according to certain state requirements. This state contract remains in force, although it was extended and varied subsequently by governmental decrees and orders.

Expansion and Modernization: Late 1940s through the 1970s

Under the chairmanship--from 1945 to 1956--of José Navarro Reverter y Gomis, the Compañia Telefónica expanded its facilities and continued the modernization of its equipment. In 1952, Madrid and Barcelona saw their first in-city radio car phones. The next year the company installed its first pulse code modulation (PCM) radiolink, between Madrid and the Escurial, and in 1955 connected its millionth telephone. In 1957, a coaxial cable carrying 432 telephone circuits went into service, linking Madrid, Saragossa, and Barcelona, and the following year it became possible for Spaniards to telephone to ships at sea and planes in flight. The company's installations--telephone sets, lines and cables, switchboards, and exchanges--were meanwhile keeping pace with, and often pioneering, the industry's rapid technological advances. The company was no longer concerned only with telephones. Telecommunications technology was proliferating all over the world, permitting the transmission, emission, and reception not only of voice messages, but also of other sound signals, visual data, texts, and images via optical and other electromagnetic systems, including satellites, beginning in 1960. Noise and other interference with transmission of signals could be reduced by digital communications systems--PCM's--in which voice, picture, and other data were coded in binary form. International standard-setting and regulatory bodies had by this stage been set up.

From the early 1960s until the first oil crisis in 1973, Spain and CTNE enjoyed the años de desarrollo, or years of development. During most of this period, Telefónica was headed by Antonio Barrera, who was chairman from 1965 to 1973. There was a rise in the national standard of living. During the years from 1963 to 1964, the country passed the $500 annual per capita income mark and was no longer to be counted as a developing nation according to the United Nations definition. Industrialization gathered speed, and there was a shift of population from the country to the towns. The demand for telephone services rose steeply and with it, especially in rural areas, the large backlog of would-be customers waiting to be connected or put within reach of a public phone. The crossbar automatic switching system was introduced into the company's telephone exchanges in 1962. Crossbar systems are much faster than rotary ones and involve less friction and therefore less wear.

In 1964, CTNE took another pioneering step when it inaugurated Spain's first experimental earth station, designed to work in conjunction with international communication satellites Relay and Telstar. This was followed by other such ventures, notably in 1970 the company's earth station at Buitrago, to be used for telephone communication, data transmission, telegraphy, and black-and-white and color television, via the INTELSAT satellites (International Organization for Telecommunications via Satellites), or a combination of satellite and submarine cable. The goal of total automation was close to being accomplished. Automatic trunk dialing was introduced in 1960, and international trunk dialing appeared in 1972. In July 1971, a telephone service to the former Soviet Union was established, routed manually via Paris, and later the same year the company opened Europe's first dedicated public packet-switched data transmission network. Toward the end of 1978, the first computer-controlled electromagnetic network exchange was installed in Madrid. In 1980, the first digital exchange systems were installed, and in the early 1990s, the digitalization of lines and exchanges continued to advance rapidly. By 1985, Telefónica was providing a network for the transmission of national and international television.

Changes in the Telecommunications Industry: 1980s

As the range of products and services grew and competition increased, there was a tendency for European countries to deregulate their telecommunications industries. Spain began planning to depart from its protectionist tradition at the end of the 1950s. Events contributing to this liberalizing tendency and paving the way for a more outward looking policy for the Compañia Telefónica included the election of the first socialist government in 1982, the entry of Spain into the European Economic Community (EEC) in 1986, the 1987 EEC Green Paper proposing the deregulation of the newer parts of the European telecommunications market, and Spain's 1988 telecommunications law, the Ley de Ordenación de las Telecomunicaciónes (LOT). The LOT implemented some of the EEC proposals, but the Spanish government contested some of the Green Paper's provisions, being particularly reluctant to see inroads made on its revenue from data transmission services.

At the end of 1982, the new Socialist government brought in the energetic Luis Solana as president of the Telefónica board. His objectives were to float the company on world markets, reduce the formidable backlog of telephone customers waiting to be connected, and make the company profitable after the recession of the late 1970s and early 1980s. In 1983, net profits were up 11 percent over the previous year, and by 1985 Luis Solana could claim that Telefónica was recovering. By adopting a four-year purchasing plan aimed at procuring over 90 percent of hardware from Spanish suppliers, he helped save jobs in Telefónica's subsidiaries. He announced various projects for research and development and promotion of exports, as well as for cooperative agreements and joint ventures, Spanish and international, involving both industrial production and technology transfers. In 1984, Telefónica celebrated its 60th anniversary by adopting a new logo, ten dots arranged in the shape of a T within a circle. When in June 1985 the Compañia Telefónica became the first Spanish company to be listed on the London Stock Exchange, it was able to state that in the previous 20 years it had increased the number of telephone lines in service more than sixfold and the telephone penetration per capita more than fivefold. Spain, with 13 million telephones--35 per hundred inhabitants--and 8 million lines installed, had the ninth-largest network in the world.

In 1986, Luis Solana reaffirmed the company's international orientation, announcing initiatives that included strategic agreements and joint ventures with American Telephone and Telegraph (AT&T) Technologies Inc. of the United States for ATT Microelectrica España--application-specific integrated circuits, 70 to 80 percent for export; SysScan of Norway for Maptel (digital mapping); British Aerospace, Olivetti, Brown Boveri, Philips, Saab-Scania, and Telfin for European Silicon Structures ES2 (integrated circuits); and Fujitsu of Japan for Fujitsu España (DP hardware and software). Through the late 1980s, profits and development continued their upward trend. World financial markets were opening up to Telefónica, which had shares quoted in Europe, the United States, and Japan. In 1988, Telefónica increased the number of seasonal telephone booths--booths installed at resorts and in population centers during tourist seasons to meet increased telephone traffic--and prepared for the introduction of cardphones. In that same year, steps were taken to reverse the decline in the quality and efficiency of the telephone service arising from failure to keep pace with the surge in demand--there was 2 percent average growth in demand in the 1970s, rising to 12 percent in 1989. Telefónica invested in new ventures, including the pan-European company Locstar and Geostar (U.S.), set up to develop radiopaging via satellite in their respective continents. The first Spanish-Soviet enterprise was set up to produce telephones of Spanish design. International cooperation agreements were signed with other public networks operators, including France Telecom, British Telecom, STET of Italy, and, in the United States, NYNEX, Bell Atlantic, Ameritech, and Southwestern Bell. In May 1988, the firm officially adopted the name Telefónica de España S.A.

The year 1989, during the chairmanship of Cándido Velazquez, formerly head of the Spanish state-owned tobacco industry and the successor of Luis Solana in January, brought improved service quality, management restructuring (decentralization), and investment in the urgently needed expansion of the network infrastructure. The company set Pta582 billion aside for investment, 62.7 percent more than in 1988. Telefónica Servicios (TS-1) was created to provide VANS (value-added network services), including radiopaging, electronic mail, voice mail, electronic data interchange, videotext, and international corporate communications. Telefónica installed nearly 1.5 million telephone lines in 1989, more than 87 percent of them digital. Spain now had over 15 million telephones. The waiting list had been reduced under Cándido Velazquez, but it still stood at 600,000 at the end of 1989. At 30 lines per 100 inhabitants, Spain had a lower level of telephone service penetration than any other European Economic Community member. Telefónica's good financial performance culminated in 1989 in a 16 percent increase in annual revenue to Pta703 billion ($5.1 billion) and an 8 percent increase in profits to Pta68.5 billion.

During this time period, Telefónica ensured a strong hold over its supplies of telecommunications equipment, with an interest in Spain's largest manufacturers of telecoms hardware, a 21.14 percent share in Alcatel Standard Electrica S.A., and a 12 percent in Amper S.A., the main Spanish manufacturer of telecommunications terminals. Telefónica's Plan Industrial de Compras (PIC) put a severe limit on imports, thus protecting its native suppliers, which were largely its own subsidiaries.

Because of the government's controlling interest, Telefónica's policies were closely linked with those of the state, and its strategies were influenced by national unemployment and inflation figures. Government restrictions were evident in staffing policy--the company was obliged to maintain a larger work force than it otherwise would--and in the fixing of telephone tariffs which resulted, until the late 1980s, in a constant cross-subsidy from international calls to local ones. The latter were traditionally very cheap by European standards, with some private domestic subscribers never exceeding their allowance of free calls and paying only the rental charge. Local tariffs were raised--by 14 percent in 1990--but such increases required government approval. Governmental trends also had an effect on the company's funding, investment, and marketing policy. Telefónica had traditionally been able to rely on the Spanish Bourses for a large part of its funding, but until LOT it was inhibited from raising capital abroad by government policy, which constrained exports. Telefónica's tax liabilities were met by a government levy, based on its net profits, and were usually a set minimum of 6 percent of total revenue.

Until the late 1960s, the company had left most of its research to its main supplier, SESA. Once properly started, however, Telefónica's research and development took off and by 1971 was employing about 100 people in this area. In 1989, Telefónica, with the participation of Pacific Telesis and AT&T's Bell Communications Research, opened its new $53 million research and development center. This center, occupying 21,000 square meters and employing, at the end of 1989, a staff of 500, had developed a second-generation packet-switching system and was engaged in projects on optical communication, speech technology, and various European Economic Community and European Space Agency projects. Throughout its history, the company has been attentive to the quality and concerned for the welfare of its employees. In August 1924, the same month that its first contract with the government was authorized by royal decree, a company training department was set up. In 1989, over 43,000 of the 71,155 employees were given training or refresher courses, and over 55 percent of 1,930 new recruits were university graduates. Since 1925, employees were offered the opportunity of becoming shareholders in the company.

As well as maintenance and extension of the basic telephone services, Telefónica's activities in the early 1990s covered data transmission; VANS (value-added network services), including radiopaging, electronic mail, electronic data interchange, videotext, and international corporate communications; and satellite communications. There was also development of the supporting infrastructures--digitalization of transmission services, installation of optical fiber cables, extension of ISDN (integrated services digital network), and maintenance of Telefónica's position among world leaders for submarine cable networks. In the early 1990s, Telefónica was aimed at expansion into European and Latin American markets by acquisition. The telephone network also benefited from a program completed in 1993 that commercialized the first Spanish satellite, Hispasat, and saw the launch of an additional satellite as well. In Spain, Telefónica also made large-scale preparations to meet the extra calls on its telephone and telecommunications services that were made during 1992, the year Barcelona hosted the Olympic Games. The company also adopted the Cellular Access Rural Telephony system that year, which was designed to allow for cellular telephone service in rural areas.

During the 1990s, Telefónica continued to invest in international expansion as well as in developing technologies. In 1990, the firm acquired an interest in telecommunication network providers in Chile and in Telefónica de Argentina. The following year, it gained majority control over Telefónica Larga Distancia of Puerto Rico. The company also began to develop its mobile telephony service, the operations of which were organized under Movistar and eventually fell under control of the Telefónica Móviles subsidiary.

Privatization and Deregulation: 1990s and Beyond

During the 1990s, the landscape of the telecommunications industry began to change dramatically. As such, the business operations of Telefónica were deeply affected. Beginning in 1994, the company began to reorganize itself in preparation for privatization as well as deregulation of basic telephony. The following year, the Spanish government began the privatization movement, selling off 12 percent of its holdings in the company by offering 100 million shares on the market.

The company also began its foray into the Internet arena in 1995 by launching InfoVia. The firm's mobile service offerings also began to develop rapidly, and by 1996 had secured three million users--eight out of every 100 Spaniards. The government fully privatized Telefónica in 1997, selling off its remaining 20.9 percent interest in the company. The $4.4 billion offering--the largest in Spanish history--was followed by the creation of the Telecommunications Market Commission, which was developed to promote competition in the rapidly deregulating telecommunications industry.

Led by Juan Villalonga--elected chairman and CEO in 1996 by Spain's Prime Minister Jose Maria Aznar--Telefónica quickly began to create ventures that would ensure its stature in the competitive market. One such venture was formed in 1998, when the company teamed up with what was then known as MCI Communications Corp. to provide product and services to U.S.-based consumers and small businesses. This venture would ultimately lead to Villalonga's departure in 2000, after he was linked to a 1998 insider trading scandal relating to the MCI Worldcom Inc. merger.

During 1998, basic telephony in Spain was deregulated. As part of Telefónica's reorganization, its domestic telecommunications business was transferred to a subsidiary, which took on the name Telefónica de España. Telefónica S.A. was then created to act as a parent company for the firm's business lines. As a result of facing new competition in its home market, the company continued to focus its efforts on its international expansion. The company entered the Brazilian market when that country's telephone company, Telebras, was privatized. During 1998, the firm secured $18.2 billion in revenues with nearly 26 percent stemming from operations outside of Spain. By this time, over 50 percent of its 37 million fixed lines were outside of its home country, 54 percent of its 14.4 million cellular phone customers did not reside in Spain, and 86 percent of its 2.3 million pay-television subscribers were international. Telefónica had also invested nearly $10.9 billion in the Latin American region by the late 1990s and controlled nearly 40 percent of its telecommunications.

Along with its international phone operations, Telefónica was also focused on its Internet and media-related businesses. In 1999, the firm's Terra Networks S.A. Internet subsidiary went public. On the first day of trading on the NASDAQ, Terra's stock price increased by as much as 198 percent. The firm then strengthened its Internet holdings in 2000, when Terra acquired Lycos Inc. in a $12.5 billion purchase. After the deal was finalized, the company became known as Terra Lycos S.A.

Telefónica made several other strategic moves upon entering the new millennium. As part of its quest to become a leading global telecommunications firm, the company began purchasing additional shares in its Latin American holdings. Entitled Operation Verónica, the strategy allowed Telefónica gain stronger control of Telefónica de Argentina, Telesp, Telefónica de Peru, and Tele Sudeste. Telefónica Móviles S.A., the company's cellular subsidiary, went public in 2000 and also began marketing mobile Internet services. By March of that year, it had secured over 10 million customers and laid the groundwork to acquire four Mexican cellular companies owned by Motorola Inc.

Telefónica did not emerge from both privatization and deregulation unscathed, however. In June 2000, a popular Spanish newspaper, El Mundo, published articles that claimed Villalonga had used privileged information about the MCI and Worldcom merger to buy and sell Telefónica stock at an advantage in 1998. While both Telefónica and Villalonga denied the insider trading accusations, Cesar Alierta was named to replace Villalonga as chairman. The company also became target of a virus that sent email text messages to cellular telephones belonging to Telefónica customers. The message text claimed Telefónica was a ruthless monopoly. The virus, named Timofonica--timo means "scam" in Spanish--did not damage any phones and was deemed harmless by the company.

Meanwhile, an economic crisis in Argentina made investors wary of Telefónica's strong involvement in that country as well as the rest of Latin America. While its stock price fell, the company remained in a stronger position than other European telecommunications firms because of its low debt. In fact, a 2001 Business Week article claimed that "while investors are generally leery right now about European telecoms, Telefónica's basic business looks solid, despite current jitters about Latin America. The telecom is assured of revenues from its Latin American subsidiaries, thanks to their leadership positions in most of their markets." It was this leadership that left Telefónica management confident that its success would continue into the future. With a strong focus on remaining a leading global telecommunications firm, Telefónica appeared to be well positioned for continued growth.

Source: fundinguniverse.com;