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"The current technological disruption has no precedent"

 

* Interview originally published at El País on June 18th, 2017

 

José María Álvarez-Pallete (Madrid, 1963) is currently putting the finishing touches to his doctoral thesis that focuses on Big Data applied to the flows of balance of payments. Digital disruption has become the Telefónica president’s passion and obsession. An insatiable Twitter user, avid marathoner and protector of his privacy, Álvarez-Pallete is used to facing major challenges. He directly experienced Spain’s integration process into the EU because his father, a customs inspector, was part of the team that participated in the negotiations. This lead to him relocating to Brussels for a period of time, and it was there that he completed his education and where he developed his point of view regarding international relationships and the role that Spain should play in them. He came into contact with the financial world when he returned home, and in the mid-1990s he joined the Cemex group where, from its Spanish subsidiary Valenciana de Cementos, he had to deal with an exchange depreciation. Another depreciation while at Cemex lead him to Suharto’s turbulent Indonesia. It was in Jakarta that, as a consequence of another exchange storm he came into contact with Telefónica where he has been working since February 1999. From that moment he took over different group areas -especially in Latin America, territory that he knows perfectly- until he was appointed CEO in 2012, and then Chairman and CEO four years later on the 8th of April of 2016. Just a year later, Álvarez-Pallete grants his first interview to EL PAÍS.

 

Question: Telefónica is a very modern, large, ambitious company, but in the midst of a transformation. How do you see its future in this environment of constant disruption?

Answer: When measured objectively, the current technological disruption has no precedent. In terms of potential impact on the per capita GDP it’s four times greater than the Industrial Revolution and its changing everything from the economic and business order, society, culture, politics, or sports. In addition, there’s no precedent you can grab on to, no instruction manual where you can find what changes you have to make. Therefore, it requires you to sit down and take a look at where you are in everything that’s going on and where you think you can be in what's to come. A company like ours is at the centre of this revolution.

 

Q. How has that revolution transformed the company?

A. We're experiencing an explosion of technology regarding the world of data. In other words, this is no longer simply the Internet revolution and not even the smartphone revolution; the artificial intelligence revolution or cognitive systems revolution is coming. Everything connected, the Internet of everything; it’s also the Internet where you touch something here and something happens immediately, that very second, in Australia. Any company dedicated to telecommunications infrastructures has, until now, lived from voice. But we've now seen voice disappearing as a product because people believe that voice should be unlimited and included in the connectivity package. The world of data, for which we need to build different networks, has fortunately appeared. Adapting to this scenario demands reflection as a company. First regarding product: from voice to data; how do you make that transition? Last year, we billed more in data than in voice and access for the first time. There’s a philosophical change behind this. And that demands the company understand where it’s going because it’s also a cultural change within the company. And then we have to be aware that this is a step towards something even larger, which is the world of artificial intelligence and cognitive systems, where the potential information generated by a telecommunications network is unbelievable because the network never sleeps, it’s awake 24 hours a day, 365 days a year, and it’s always generating information. The attitude you adopt is also very important. It’s a new world that requires new values.

 

"Telefónica is in the middle of the digital revolution"

 

Q. There are some very important actors like Facebook, Google, etc., in this world of digital disruption. How do you design the relationship between Telefónica and these digital giants?

A. These are companies that have been born directly into the digital environment. We are companies that come from the analogue world and, therefore, to be able to compete, our level of transformation is very superior. We are a company of platforms. The first platform has to do with our physical assets, our fibre, our base stations, our call centres, our data centres, our stores; everything that makes us tremendously relevant in a society where, in the end, the lives of people are finally digitized. The second has to do with end-to-end systems. That means that all the information we generate is available in real time. The third platform has to do with the distribution of products and services: icloud, the Internet of Things, security, financial services. If we do the first and second platforms well, we’ll be the largest technology distributor of each of the countries where we're present. It took fixed landlines 75 years to reach 100 million users, but it took Pokémon Go just 23 days. Why? Because the capability of distributing a digital product is huge if the networks are digitized.

 

Q. You’ve mentioned three platforms, but you have a fourth underway. What is it about?

A. We believe that if a telecommunications network is sufficiently digitized it generates a lot of information about clients: what they’re like, how they pay, what  types of contracts they have, which applications they download, where they move around, etc. This is relevant information, but it is very fragmented. We propose centralizing the information generated by the network about the client into a single platform, and creating what we call a customer's personal bank.

 

"The analogue life, as we know it, and the digital life, are merging."

 

Q. So, the customer has a database on the platform and manages it...

A. Yes, it's the customer’s. Not only we want the customer to manage that platform, we also want the customer to manage the network, we want that data to help it make decisions such as optimizing the rate or whether it wants to use the information to share it with a bank in order to be granted a mortgage loan with better conditions. What we want is, and I’ll go even further, for the customer to be able to speak to the network; in other words, that the customer is able to access that information or the network services through Skype, Facebook, Twitter, Amazon Echo, Alexa, Google Home, or even a call centre; that the customer is able to go to the telephone network to solve doubts about the invoice or about what time a show will be aired on Movistar +.

 

Q. It physically operates on the network itself, but I understand that this isn’t a Telefónica commercial operation. No benefits are obtained?

A. The main competitive advantage in this is that the customer sees a simple and smart tool. If this happens, the client won’t leave Telefónica, thus lowering the rate of client rotation which is one of the greatest dangers to the profitability of a company. That’s the first advantage. But there's a second. From the shareholder’s point of view, the perception that the network is tremendously smart also provides the company with an advantage. Why? For any of the companies that we were talking about -Netflix, Facebook, or Twitter- it's vital to know that the network is smart and that products and services can be integrated. Telefónica gains value this way.

 

A social contract to channel the digital wealth.
 

Q. How does the digital world that you’ve described cope with this other world that’s becoming afraid, becoming afraid of foreigners, of people who are different, of those who think differently, and that takes refuge in populist phenomena?

A. Everything is a symptom of the technological revolution. Why? Take a look at what were the five or six largest companies in the world ten years ago, and what those companies are now. In the past there was only one technological company, Microsoft, and now there aren’t any that aren't technological. What’s happening is a change of business models that’s leading to a different generation of wealth. The key is in how this new generation of wealth is distributed, especially how it’s distributed quickly considering that this new wave is affecting the previous wealth. The question is, what is the new social contract that we want to develop with this new society? Because everything else is a consequence of this. If a person’s average income hasn't increased, hasn't changed in the last 10-15 years, or if it’s economic prospects aren't good, it’s political will is a certain one. Thus, the transcendence of the values that we want to have in this new environment. How we're going to distribute that wealth and how we're going to channel the progress that arises from technological change is a chapter that we need to write together. In the end, people want to belong to something, whether its a political idea, a movement, or a social network. And if you perceive that what’s happening doesn't benefit you, you won't perceive this technological revolution, which I believe is going to be good. The debate is what we’re going to do with that wealth, how we’re going to distribute it, how that transition is going to handled.

 

Q. What effects will this technological disruption have on the lives of people, on their behaviour, on their values?

A. What's basically happening is that the analogue life, life as we know it, and the digital life, are merging. What does that mean? That everything is going to be different. How we buy, how we drive, gas meters, water meters, power meters, the microwave, the refrigerator, the dishwasher, everything is going to be connected to the Internet and is going to be producing information. In addition, the capacity to process this enormous amount of information that’s going to be generated will increase exponentially. There’s already practically no restriction on storage or processing capacities. This means that problems that currently require huge simulation scenarios such as city traffic or the most complex diseases, are going to probably have a treatment or solution. We're going to be able to know the CPI in real time and not just a sample but of all of a country’s transactions; we're going to have a country’s social and political pulse in real time and not with surveys but with real data and in real time because we're going to have the capacity to process this information.

 

Q. How is this major social change organized?

A. The constitutional, legal, and of course regulatory frameworks have to be defined, and even regarding the more sectoral subjects. The biggest debate in the press sector currently has to do with post-truth. Journalism has ethics, a deontological code, a contrasting of sources. But how is this applied to Facebook, to Twitter or to medicine in the digital world?. What’s the highway code that you're going to apply to autonomous cars? What ethics are you going to apply to robots? All of this requires a new regulatory framework. That's why I often speak about the digital Constitution. We have a Constitution that’s designed for life, for an environment, but the environments are no longer the same. How do we adapt that, sector to sector? Because we don’t only need physicists, mathematicians, engineers or technicians. We also need digital lawyers, digital doctors, digital economists, we need digital ethics, digital philosophy. We need any profession that can be imagined and that requires a change of mentality.

 

Q. And how should this be faced?

A. The first thing is that we confuse the process of globalization with the process of technological change. I don't know if globalization can be stopped, but I do believe that it’s very hard to stop technology. Therefore, I believe that a conceptual framework, especially about values, is missing. There was a redefinition of humanistic values with the arrival of the Renaissance. There was redefinition of values in general with the arrival of the Industrial Revolution; the same thing happened with the arrival of electricity, or with the arrival of television, or even with the arrival of the Internet. Because this isn't the Internet; it’s much more. And until this moment we’re seeing the revolution of networks and the smartphone, but the revolution of artificial intelligence will give rise to new debates about what the code of limits that you want to place on automation is, because automation is no longer the typical robot. Robots are also programs on the Internet or in the world of software. The digital revolution needs a new framework of values and regulations.

 

Telefónica's Chairman, José María Álvarez Pallete, in his office, at the headquarters of Telefónica at Las Tablas. Samuel Sanchez ELPAÍS

 

Q. Which should be universal.

A. By definition, it has to be universal. If you look at history you see that revolutions always tend to become generalized. What changes are the rhythms. For example, the printing press. Fifty years passed between Gutenberg’s first printing press until there were 50 in total. However, each of the following technological revolutions has had increasingly shorter cycles of dissemination. The current trait is that the dissemination of technology is practically vertical. Therefore, the good thing that is already happening is that the dissemination of this technology in developed countries or third world countries is increasingly shorter. Whenever a disruption of this kind has occurred, the values that are later shared have been born somewhere or other. Europe has an opportunity because it has always been the birthplace of values.


Q. How should this debate be channelled?

A. In the end, the only way for this debate to develop is if it comes from the citizens. I believe it’s starting to appear in one way or another. In fact, Stephen Hawking or Bill Gates have made recent statements.


“I learn what isn’t in books on Twitter ”


Q. Have the shareholders asked you to not use Twitter, that it’s too much of a risk?

A. No. I learn what isn’t in books on Twitter. First, because it challenges me. In the mornings, I like to get up early, I read between 15 and 20 technology accounts. They're normally short posts and I learn a lot. I then try to retransmit things that I find interesting, without my own opinion. As for the risks, it's true that a troll will appear and insult you every now and then. But that's part of the game. Anyone who seriously insults you, eventually they’ll get over it, you know? You don't respond because that's just feeding the flame.

 

Q. What’s the reason behind Telefónica’s wager on e-sports? Is it a strategic decision? Is it to see what this phenomenon is going to lead to?

A. No, no. It’s part of what we were talking about before regarding disruption, regarding what’s seen, regarding what isn’t seen, and it also has a lot to do with the profiles or segments of the population and their behaviours. It’s very difficult to conceptualize e-sports if you don't see them; in other words, the thousands of people that already see e-sports events live. I’m not just talking about youngsters who are playing at the same time, but rather about the fact that the best of these youngsters organize themselves and organize competitions inside the different platforms that already exist. It’s not a fad, it’s not a passing fancy; on the contrary, it’s something that we have to keep our eye on.

 

Q. Some more personal questions. You’ve been at Telefónica for 18 years in positions with different responsibilities, but you’re now a media star.

A. I’m not a media star, because that’s just not who I am.

 

Q. Reporters are always seeking you out. You're a very discrete person but you belong to a group of businessmen that people at least listen to, ask about, and question. How do you live with this?

A. That's relatively simple. I do what I have to do; I do what I believe is good for Telefónica. If I think it's good for Telefónica that I go to Facebook’s developer event, I go; if I think it’s good for Telefónica that I go to the Economy Circle and give a lecture regarding what we see, I go. But I don’t do anything else. I value my family life a lot. If you want fame, you can have it; this is a good platform for fame. I continue to see my friends from Colegio Mayor; I don’t go to more dinner parties than is strictly necessary.

 

Q. You have no contact, social contact, with other major businessmen, other figures...

A. I do know them; they invite me to dinner or I invite them to dinner. But I continue to spend my summers in the same place; I continue to see my friends.

 

Q. You can’t spend a lot of time with your family now...

A. True, but it was worse when I was in Latin America. I’d leave on Sunday evenings and return on Fridays. But I always tried to make it back for the weekend. I greatly value being at home and with my family during the weekends.

 

Q. It seems to me that if a code of values isn’t elaborated we can fall into dangerous chaos.

A. I don’t believe in chaos theory. I think that when faced with these things society eventually reacts and places limits. I truly believe in the power of society to organize itself. And I think this is going to be good. But I do think there’s a moment of transition. But it’s not easy to realize this. My thesis is that we do see it. But we don't correlate it. You see things that are happening in different points, in different places, but you don’t tend to see a common underlying principle, which is technology. Many of the things that are happening in the world can't be explained without technology.

 

Q. Is the company that you head prepared for this challenge?

A. The answer is yes, without a doubt. In terms of scale, and within our scope, we're one of the ten largest companies in the world. In terms of geographical influence, it’s hard to talk about these issues in Europe or Latin American without Telefónica having something to say. The scale of the company is such that it can be a privileged platform to see what's going on in the world. We have 350 million customers that contact us practically on a daily basis, we know what they’re concerned about, what they like and what they don't like.

 

Q. One of the main objectives during your first 14 months at the head of the Company has been debt reduction. Is that still the case?

A. Yes. First, because we feel we’re able to do it. The thing is, the first year was a year of very hard decisions. I was appointed on the 8th of April of 2016. On April 11th , my first day in this office, we were informed that the sale of O2 in the United Kingdom was being blocked. Then that same week we had a major earthquake in Ecuador and I travelled there immediately. And in the first two months something that I was told would never happen, occurred: Brexit. We had to withdraw Telxius’ initial public offering from the Stock Exchange in order to prevent a bad sale. And we cut the dividend. What were we trying to do with this? To continue with the goal of debt reduction but not through having to sell assets poorly. What we’ve tried to do in these last few months is to gain control over our own destiny. Of course we’ll continue reducing the debt because I believe it's good to keep a good profile, or even a better profile. Now we have all of our debt maturities refinanced for the next two years. But I believe that the company is better protected at much lower debt levels. In addition, we’re on a path of increasing cash flow generation, with historically high levels of investment in the company’s life. Never in the company’s recent history have investments equal to 16%-17% of the revenues been made for four straight years, and we're heading for the fifth. We’ve gained control over our own destiny, and if I can make transactions that create value for the group and help me accelerate this debt repayment, such as an initial public offering in the Stock Exchange of the United Kingdom or other things that make sense, we’ll do so.

 

"Brazil is essential for us and a very long-term investment"

 

Q. How do you value the Brazilian operations, a country over which there’s a lot of pessimism?

A. We're not pessimistic. Brazil is essential for us. We have nearly 100 million clients in Brazil and we're the number one company of the sector. We've invested nearly 65 billion Euro, making us the country’s number one investor. In the middle of the Brazilian crisis, when the GDP fell 3%, our company grew in terms of revenues and we purchased GVT investing 7.5 billion dollars. What we see is the presence of political uncertainties, and situations like this can be found in many parts of the world. But as an economy, what Brazil has done in the last 20 years is very important and the nature of our investment is very long-term.

 

Q. There have been problems in Argentina.

A. I say the same thing about Argentina. In the long-term, we believe that Argentina's economy will grow. In fact, I was there last Monday and there are already some symptoms of improvement in growth. You can always have discussions with the regulator about one subject or another, but that has its own path to solution. This year, we're growing very strongly in Argentina. Argentina, Brazil and Latin American in general, provide us with growth, which is what interests us strategically for the capacity of our great platform. Telefónica wouldn’t be what it is today if it hadn’t made the investments it did in Latin America.

 

Q. There’s a special country in Latin America: Venezuela.

A. We’ve held on in Venezuela. From my point of view, we have the country’s best telecommunications company. In local currency, beyond inflationary effects, we're growing very strongly. We would like for the restrictions that we have regarding the incorporation of equipment or terminals to be less, but from a management point of view, the operation itself in Venezuela is spectacular.

 

Q. How do you tackle the Mexican market?

A. We have an extremely wide market in Mexico which also has growth opportunities. We have had to realize that we're not the incumbent company in Mexico, we're the emergent company. Therefore, we can’t follow the same strategy we use in Brazil, Argentina, Chile, or Peru. The regulatory environment in Mexico has changed, producing asymmetries that I believe are important for being able to grow. We were an extremely prepaid company and we have to evolve towards a more postpaid company; in other words, a more company with contracts.

 

Q. Do you compete on equal terms with Carlos Slim?

A. Yes. I think we can’t complain. We have to improve before we can complain about anything else.

 

Q. Are you satisfied with the company’s behaviour in Spain?

A. Yes, because as a company and sector we've also achieved something that I believe is worthy of a case study. In 2007-2008, Spain was thirteenth in Europe in terms of ultrawide-band penetration. Today, it’s the leader. There’s more fibre in Spain than all the fibre in the United Kingdom, Germany, Italy, and France together, and it’s not just Telefónica’s fibre, it’s the sector’s fibre. Orange has more fibre in Spain than in France. Vodafone has more ultrawide-band in Spain than in the United Kingdom or in Germany. In other words, Spain has taken a leap forwards in infrastructure quality in order to make this digital world we’re currently talking about possible, ranking third in the OECD in terms of fibre penetration behind Japan and Korea. We’re talking about more than 60% fibre penetration in Spain, and that opens up a world of possibilities to us. When you compare the offer that you're able to have not just in Madrid, but anywhere in Spain, with what you could have in any of Europe’s main cities, you realize that Spain’s offer is superior and at a more affordable price. If everyone else has done what they've done it's because Telefónica has invested and we’ve done so in the middle of a crisis, which has even greater value.

 

"Telefónica would not be what it is without Latin America"

 

Q. Telefónica is a shareholder of PRISA. How do you value that participation?

A. We don’t have Board representation and what we want is the company’s stability. We don’t have the ambition to grow that participation any more. We treat it as a financial participation and we’re there to provide stability as much as we’re needed. But there’s no intention of increasing or evolving that participation to anything larger.

 

Q. In the medium term, what should the logical evolution of Telefónica’s dividend be?

A. What we’ve proposed, and what was approved in the last shareholder’s meeting, is a dividend level of 0.40 cents per share for 2017. We want a sustainable dividend.

 

Q. How does a person at the head of a company that has such a major impact on people, on the economic activity of a country, feel?

A. I've been here for 18 years. I’m the first president of Telefónica to come from within. I've been in many positions in the company. I’ve been lucky to be in finances, in fixed and mobile operations, in Latin America, in Europe, and to also have been CEO. This gives you day-to-day knowledge that helps you a lot in terms of gaining perspective. Then, two years ago we launched a program called Choose It All that is very focused on the vision of the four platforms that I’ve shared. That was launched when I was CEO. Therefore, I feel very secure when it comes to the Company’s strategic vision. Now, after having seen many people, both within and without Spain, at all levels, in all kinds of companies, if there’s one thing I can confidently say it’s that the direction is correct. I feel very comfortable, very determined, very excited about the role that we can play in this and about the inertia that we have. The only thing that taxes me is that I would like to go even faster.

 

Q. Is your current management team adequate for facing these new objectives?

A. The in-house dynamic is that there are always changes. But if you're asking me if I believe we need a deeper transformation, I don't think so. And then if we analyse two or three levels below those of us who are currently in the first level, the people you find are just incredible. So you ask yourself, do you think a mass injection of talent is necessary for changing the company? No. But there will always be changes.

 

Q. And the Managing Director?

A. Time will tell.

Q. How has the transition with César Alierta been?

A. He’s supported me in everything. He’s the one who proposed me. He made the decision to leave and nobody saw that coming. He made the decision and carried it out. And during this year, which has been very hard, in which he was on the board until a month ago, he has constantly supported me.

 

Q. Why did he leave the board?

A. You’d have to ask him. He told me that he made the decision to leave and I respected it. I believe he is tremendously focused on the Telefónica Foundation, not just on ProFuturo. There’s a very exciting project in the Telefónica Foundation, and I’m working on it with him. Digital education needs to occupy a space and we feel capable of doing so, through the Telefónica Foundation.

 

Q. Have you been surprised by the latest political developments that have taken place in Spain?

A. I don’t think that our role is to have any opinion whatsoever about the political world. As in every country where we’re present, we’re here with very long-term investments. In other words, when you build a fibre network you don’t think about next quarter’s results or about the latest political news. You're thinking in a much longer period of time. What we’re concerned about is legal stability and growth and the respect for the rules of the game, for institutionality. My mission is for the company to be perceived as an actor that contributes growth to the GDB and nothing else.

 

José María Álvarez Pallete, in the gardens of the headquarters of Telefónica at las Tablas. Samuel Sánchez EL PAÍS

 

Q. But the political environment creates certain conditions for investors. From that point of view, how do you evaluate the political environment in Spain; is it a facilitator or blocker of economic activity?

A. If you ask me what attitude we have right now, we're continuing to invest, investing in Spain at historically high levels. Regulations condition us in the sense that how these regulations evolve will have an influence on whether we accelerate even more or if we slow down. But if the question is whether investing in Spain is attractive for Telefónica as a group, we're demonstrating that it is; we're maintaining historically high levels of investment.

 

Q. How is Telefónica’s relationship, or your personal relationship as Chairman and CEO of Telefónica, with the current political parties? Small, a lot, nothing?

A. Well, just what's necessary to explain Telefónica’s project. And with the respect that we are what we are: an economic actor and what we want is for our project to be heard.

 

Q. And the issue of Catalonia? It’s an important region in Spain, not just another region, and the challenge there is of a different nature. There is obvious concern among economic and business actors who have occasionally expressed this in public. How do you see it?

A. As I was saying, what we value is the stability to be able to make long-term investments. We respect all opinions; we have many clients in Catalonia, we have many workers in Catalonia, and we continue to invest. We observe the issue carefully, but what we value above all else is stability for the future.

 

Q. Sorry for my insistence. I know that as a businessman you have to measure your words...

A. I’m not going to take a position. Telefónica must stay out of it. We can’t get involved. Our role is to participate,that this be as stable as possible. Because any other role is misinterpreted; it’s misinterpreted by society, it’s misinterpreted by our clients, it's misinterpreted by our shareholders. What we have to be here for is to clearly transmit these messages: we invest, we're here to provide stability, not to give an opinion.

 

Q. But others give their opinion.

A. Not for me; they can give their own opinions.

 

Q. Pablo Iglesias quoted the company a couple of times during the debate on the motion of censure in Congress, in the seat of parliament. Obviously, there are those who try to use it...

A. My role is precisely the contrary. My role is precisely for Telefónica to stay out of it in the sense that we're here to provide stability, and we’re providing stability and contributing towards growth, doing what it is that we're supposed to be doing. Staying out of the political situation for me doesn’t mean that you can't explain what you're doing, what you believe is coming, what we’ve talked about regarding the technological revolution, about what we believe is good, of the opportunities that exist. Explaining it to the entire political spectrum so that it can understand what Telefónica’s mission is. We believe that we provide stability by doing this, that what we’re doing from the point of view of jobs, from the point of the service, is completely transparent. Why do I say this? Because in this world, transparency is going to be one of the most appreciated values, not only by customers or shareholders, but also by society as a whole. I’m responsible for what I say and for what Telefónica says, and that’s the mission. I’ve been trying to do this for a year, trying to make Telefónica be seen as a company that’s there to support, help, invest, to do things that mobilize the economy and not for other things. Because that's what society asks us to do.

 

Q. But that’s hard to do.

A. Of course it’s hard. I’m not naive. I can be many things, but not naive and I also know this Company. What I mean is that keeping the position that I’m transmitting isn’t comfortable, it isn’t comfortable at all. It requires you to make decisions and make decisions where you're the responsible party. I believe in this so much because I believe in this world I was talking about, transparency, coherence with what you say.

 

Q. Do you feel like a powerful man?

A. Fortunately I believe the company has plenty of balances to stop me from ever believing that. I believe it's a good thing to have balances, I believe it’s good for the Company to have somewhere to look, for there to be a direction, but I believe that there have to be limits.

 

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