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Marco Tronchetti Provera of Telecom Italia

He aims to deliver cost savings and growth by integrating Telecom Italia's fixed-line and mobile businesses.

In recent years Telecom Italia has been the vehicle for some of Europe's most creative financial maneuverings. The telephone operating company was acquired in 1999 by Olivetti in a record-breaking $65 billion leveraged buyout that showed no company was impregnable to a hostile takeover. Two years later tire maker Pirelli & C. wrested control of Telecom Italia by buying an 18 percent stake; Pirelli would subsequently tussle with minority shareholders over the terms of capital increases and debt restructurings.

Today Telecom Italia wants to build a new reputation -- for operational excellence. Since buying out minority shareholders in subsidiary Telecom Italia Mobile earlier this year, the company has reshuffled management and launched a three-year program to integrate its fixed-line and mobile businesses into a seamless broadband service provider.

Executive chairman Marco Tronchetti Provera believes the growth of new markets like digital terrestrial television and the sale of video clips over mobile handsets will more than offset declining margins on traditional voice telephony. The company grew its wireline broadband customer base by 44 percent in the first nine months of 2005, to 6.36 million, which includes 1.15 million users in France, Germany and the Netherlands. TIM's late entry into third-generation mobile is starting to pay off: Sales of 3G handsets reached 1 million in the first three quarters of this year.

Tronchetti Provera hopes that new businesses like these will grow revenues by 4 to 6 percent a year over the next three years and boost operating profits by 7 to 9 percent a year during that time. Some analysts and investors have their doubts. TIM is playing catch-up in broadband mobile with Hutchison 3G Italy, the market leader, while rivals Vodafone Group and Wind Telecomunicazioni are also entering the fray.

"It has clearly not been performing well," says James Golob, an analyst at Goldman Sachs International in London. "The question is how you can stimulate TIM at a time when the competition is strong and aggressive."

Telecom Italia also is struggling to strengthen its position in Brazil, the country that generates the bulk of its mobile growth. TIM Brasil is

the second-largest mobile provider in the country, with a 22 percent market share. Tronchetti Provera wants to merge the mobile unit with Brasil Telecom Participações, owner of the No. 3 fixed-line operator, but he has been blocked by a long-running dispute with Citigroup and three Brazilian pension funds, which control the holding company despite Telecom Italia's 38 percent stake.

During his 19-year career at Pirelli, Tronchetti Provera rose through the ranks to become chairman, gaining a reputation as a shrewd manager. He helped Pirelli bounce back from crippling losses in the early '90s by closing factories and shifting to high-performance tires and technology products before acquiring Telecom Italia. He recently discussed his plans for restoring growth at the telephone operator with Institutional Investor's International Editor, Tom Buerkle, in New York.

Institutional Investor: The mobile business is a lot more challenging these days. Can this be a growth business again?

Tronchetti Provera: Yes. Mobile, I think, is one of the most competitive markets. We have TIM, Vodafone and Hutchison 3G. H3G was focused on third-generation. TIM and Vodafone delayed investment because of their client bases. They didn't want to risk too much. Now the technology is quite fixed, and we are starting a new era of competition. TIM is running fast, Vodafone is doing the same, and the market is changing. I think there will be fast growth for 3G.

Is the reality meeting up with the hype in 3G?

There are some services that are starting to provide revenues. But there will be a new technological jump, to 4G. It's like looking backward in the history of narrowband. When we had narrowband, there were no transactions, little traffic. It's the same in mobile: At 300 kilobits, you do a little, but you do something. With 4G, one-megabit speeds will be ready. We believe that 3G and 4G represent the future. We are totally dedicated to this competition.

Providing both fixed and mobile services is the big bet behind the integration with TIM. Can you point to anything so far that shows that this is the right bet?

New platforms are able to deliver any kind of service on both fixed and mobile in a seamless way, which reduces drastically the cost. Then there are new products. We can sell through our sales forces, both fixed and mobile, a larger number of PC cards, new mobile phones, new fixed-line phones. We are very successful with Aladino, which is a handset like the mobile one. Then there will be the dual play and the triple play: We will watch TV on digital terrestrial television and also on the mobile with very high quality, thanks to DVB-H [digital video broadcasting-handheld] technology.

We can create a channel that is open to anybody that can deliver high-quality services and make transactions with fixed and mobile handsets. Having a single network doing it creates quite a competitive advantage. And we can duplicate this in other countries.

What is the outlook for the erosion of fixed-line traffic?

It's a steady erosion of traffic that is more than compensated for by the new products we sell. We are the only company growing top line in the wireline business, thanks to the portal we have and thanks to the launch of these new services and thanks to the growth of broadband. We are continuously growing in broadband.

When we talk about convergence, sometimes we make the mistake of saying there will be convergence between content and telco, which is wrong. The telecom company is no longer a voice company. It's a high-tech channel for the distribution of content that has to be open to any new content that makes it easy to make transactions, both for people and for companies. That is true both for fixed and mobile.

We've seen in a number of markets, particularly the U.S., that competing technologies are putting a lot of pressure on broadband prices sooner than expected. Does that pose a threat to your model?

No. Our competitors would like to leave prices where they are. We are the ones who are leading the price reduction, because we want to play on content that comes from the outside. We want to give broadband to all the country. For us, the larger the market is, the more transactions will be made and the more the revenue stream will be visible. That's why VoIP [voice over Internet protocol] is not an issue.

International has been a big driver of growth in recent quarters. How are you going to maintain that growth rate?

I think in the broadband service France and Germany are showing very interesting results. We have more than 1 million customers, and we are growing faster than anybody else. In Brazil, TIM has been growing fast and will continue to grow. We have to be careful to keep our eye on the market. Thanks to the GSM [global system for mobile communications] standard, we are doing well. In Turkey we partner with Oger Telecom in the mobile business. And we are looking for other opportunities.

The Italian economy has been moribund for a number of years. Do you see any prospect for an improvement in the business climate?

The only prospect I can see is for each single company to do its own job properly. We try to do our own job inside the telecom group. There are some signs in the last budget of attention to the priority of the economy and cost reduction for companies, which is the beginning of something. We hope they will continue to pay attention to the competitiveness of the country. We have lost competitiveness -- that is a fact. It is due to the high level of fiscal costs we have, the low level of productivity and the burden of a complex and costly bureaucratic system. And we have to rebuild confidence. We need leadership able to act in a way that people understand is the right direction. This is not yet the case, but we hope it will be so.

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