n the early 2000s, venturing into electronic payments. Over the past decade, it has signed up 30 million users – around 70 per cent of the total – to Italy’s digital ID system to access public services online. Serving 46 million customers across banking, insurance, telecommunications and energy, Poste also uses its branches, Italy’s biggest retail network, to provide access to public services, such as passport applications, to the less digitally savvy. The proposed deal with TIM fits into a broader sovereign cloud push in Europe, with domestic telecom and tech firms in Germany and France building cloud and AI infrastructure to serve strategic sectors such as defense and healthcare as well as other parts of the public administration. Building up tech capacity Poste argues the tie-up will create a larger state-backed group that can build distributed computing infrastructure across the country, a person briefed on the plans for TIM said. Even without the investment firepower and the scale of US tech giants such as Amazon, Google or Microsoft, Poste says the new entity could become a supplier for these companies, the person added. Big tech companies buy infrastructure services ranging from fibre networks to data center capacity from telecom operators, as well as local network access points close to end users. With 125MW of installed data center capacity, TIM is a top-three national operator. However, Italy has only around 15 per cent of Germany’s installed capacity. Alongside TIM’s existing data centers, Poste-TIM could boost computing capacity at broadly distributed telecom hubs and convert former postal sorting centers into local edge-computing hubs, bringing processing power closer to users, Poste argued, according to the person. In the future, TIM’s mobile network sites could also come into play, the person added. Poste and TIM both declined to comment. “As demand for data centers grows, the industry is increasingly looking at networks of smaller facilities located closer to users rather than just large, centralized sites,” said Antonio Capone, dean of the School of Industrial and Information Engineering at Milan’s Politecnico University. With assets spread across the country, telecom operators are well placed to develop such facilities, Capone added. “This is an emerging trend in the industry, and Poste is right to focus on it. Managing a distributed network is operationally more complex – think of maintenance, cooling or power management – but it is a challenge that makes strategic sense to embrace,” he said. Europe lags behind the United States in AI investment and infrastructure and Italy is further hobbled by much higher energy costs than France or Spain. Tim’s tough journey An ill-fated privatization three decades ago saddled TIM with debt and it has since faced cutthroat price competition that hammered profits and curtailed its ability to spend to upgrade its infrastructure. Despite halving its debt-to-core-profit ratio and almost doubling its revenue per employee with the 2024 sale of its fixed-line network to US fund KKR, TIM would struggle to sustain prospective 5G and cloud investments. Italy has made progress on basic 5G technology, but AI-powered services require advanced 5G networks. In the US these account for a fifth of total mobile connections but Spain is the only European country where the figure is above 5 per cent. “Building a 5G network is extremely capital intensive and you need scale to make it viable: you cannot sustain four mobile network operators in a market like Italy,” a leading TIM investor said, adding the investment case hinged on expected industry consolidation. TIM competes with Vodafone-Fastweb, WindTre and Iliad. WindTre, owned by Hong Kong conglomerate CK Hutchison, and France’s Iliad started exploring a tie-up, Reuters reported last year, but no deal has so far materialized. Poste already owns 20 per cent of TIM. A full takeover will allow Italy to reap the benefits of higher profits at the former phone monopoly were the number of operators to fall to three through long-mooted consolidation. Requesting anonymity and declining to say whether they would take up the offer, the investor noted that a rise in Poste’s share price since the announcement suggested the market thought benefits from the deal may exceed the targeted €700 million. As a state-backed operator, the new entity could handle sensitive communications, including in defense, the investor added, pointing also to Poste’s “low-leverage business with strong cash generation from payments, insurance and financial services.” Poste has said the tie-up would support TIM’s efforts to expand beyond its traditional consumer telecom business, which has been shrinking for more than a decade, into higher-margin services for corporate clients, including cloud and cybersecurity. “From a commercial standpoint the combination has a strong rationale: an even wider bundle of services could be offered to an even larger client base. That increases switching costs and helps customer retention,” consultancy AlixPartners partner Claudio Baretti said. Reporting by Valentina Za and Elvira Pollina. Editing by Keith Weir. All courtesy of Reuters.