U.S. Phone Firms Lay Stakes in New European Frontier : Telecommunications: A burst of deregulation has opened up vast new markets.

Europe has become the Wild West of the telecommunications industry. And the seven “Baby Bells,” the regional companies formed in 1984 by the break-up of AT&T;, are among the Daniel Boones and the Davy Crocketts who have flocked here.

Here’s a taste of what the sharpshooting regional U.S. telephone companies are up to in Europe, particularly Western Europe:

* Bell South is selling futuristic “wireless data” services--the use of portable computers to send and receive information without need of a telephone line--in Great Britain.

* Pacific Telesis, California’s regional phone company, is part of a consortium that is going toe-to-toe with the government-owned phone company for Germany’s cellular telephone business.

* US West and Nynex have bought cable television franchises in Britain and are using them to compete with British Telecommunications, England’s phone company, in the provision of basic local telephone service.

What has opened up the European market is a burst of deregulation.

“In just 10 years, many countries here have moved from an insistence that they must own telecommunications monopolies to a willingness to open up to competition,” says Andrew Harrington, a London-based member of Salomon Bros.’ global investment team.

In the United States, where regulators have barred the Baby Bells from long-distance service, cable television and electronic information services, the phone companies’ single-digit growth rates pale beside the double digits prevailing throughout Europe.

“We are saturating our market and looking for opportunities elsewhere to expand,” says Edgar L. Brown, president of Bell Atlantic International.

For the record, Western Europe’s erstwhile telephone monopolies welcome the competition from across the Atlantic. Privately, however, the Europeans--particularly in Britain, which has the most free-wheeling market of all--regard the competition as a bit unfair.

Despite the bust-up of AT&T; in 1984, the Baby Bells still profit from massively lucrative monopolies at home, notably in the provision of local telephone service. Especially in Britain, by contrast, phone companies’ monopoly powers are being eroded.

“Sooner or later,” says a British Telecommunications spokesman, “we would hope to have the same opportunities in the States that their companies have here.”

BT may ultimately get its way. Many analysts believe that it is only a matter of time before full-scale competition is permitted everywhere--throughout Europe, in the United States and even in Japan, as well as in the developing world.

“There is a general inevitability about global competition in telecommunications,” says Laurence Heyworth, an analyst with Robert Fleming Securities in London. Customers are demanding global services, he says, and global telecommunications companies can provide them most efficiently.

Indeed, the Baby Bells are active all over the world, not only in Western Europe. They are moving into Eastern Europe, which is desperate to bring its woeful telephone systems into the second half of the 20th Century. Governments still license national monopolies to provide local telephone service, but they have opened up cellular phone service to American companies: US West in Russia and Hungary, partners Bell Atlantic and US West in Czechoslovakia and Ameritech in Poland.

In fact, the “regional” U.S. phone companies--the word is becoming more inappropriate every month--are finding opportunities all over the world. In the biggest single deal to date, Ameritech and Bell Atlantic, in partnership with two local firms, bought New Zealand’s government-owned telephone company in 1990 for $2.4 billion. In that same year, Southwestern Bell teamed up with France Telecom and a local company to manage Mexico’s telephone system.

Western Europe still has its own special attractions.

“We’re here because we think there are significant opportunities in a market where growth is double digit and the politics are relatively stable,” says Terry Clontz, Bell South’s vice president for European business development.

Nowhere are the opportunities greater than in Britain. In all 12 European Community nations, a 1990 directive requires the introduction of competition in non-voice telecommunications services. Britain has permitted competition with BT, which is now only 22% government-owned, for local telephone service.

BT was still known as British Telecom and was wholly government-owned when its first competitor, Mercury Communications, began offering local telephone service in London’s financial district in 1983. British cable television companies got in on the act beginning in 1987; as they wired homes for cable, they also ran the wires necessary for local telephone service.

American-owned cable companies had the same right. US West was the first to exercise it, in 1989, followed by Nynex last February.

“Here they were allowed to do what they cannot do in the United States,” says Richard Hooper, an analyst with PA Consulting Group in London. “This was the first time anywhere in the world that there was competition for local telephone service.”

Joseph Timpanero, president of UK Cable for Nynex, the regional Bell company serving New York and New England, calls it “an absolute stroke of genius by British regulators to let us in.” Deregulation, he says, has attracted a network of state-of-the-art fiber-optic cable to Britain, much of it courtesy of U.S. phone companies.

Not all the Baby Bells have concluded that there’s gold in local British telephone service. Pacific Telesis has gained 14 cable television franchises but decided not to string local telephone wires along with its television cables. And at Bell Atlantic, Brown successfully recommended against going into cable at all.

“Will there be a real market that develops?” Brown asks. He still isn’t convinced.

Cable television and local telephone service are not the only markets opening up to the Baby Bells in Britain. Another is the receipt and transmission of data on computers, without benefit of telephone lines.

“Wireless data,” as this service is known, allows a company’s service representatives in the field to tap in quickly to a central database and find out, for example, whether a particular spare part is in stock. It allows sales representatives in the field to transmit reports quickly back to headquarters. All the user needs is a portable computer and a modem that communicates by radio wave, in much the same way as a cellular telephone.

In Britain, wireless data is the province of Bell South, in partnership with the French and Swedish telecommunications companies. “What we learn here we can use in the United States,” Clontz says.

Outside Britain, the biggest draw for the Baby Bells in Europe is probably cellular telephone services--car-mounted and hand-held mobile phones. Many European countries, having first allowed their government-owned phone companies to monopolize cellular service, have issued second cellular licenses to carefully selected competitors.

American companies have won a disproportionate share of the licenses. Heyworth, of Robert Fleming Securities, attributes that to their long experience, their reputation for efficiency and deep management strength.

In Germany, Europe’s biggest cellular market, the second license for mobile telephone service went to a consortium headed by the German company Mannesmann that included Pacific Telesis.

It has not been easy for the newcomers to find room at the table next to Deutsche Bundespost, which had been accustomed to having the bench to itself. “They were not prepared to make any concessions they felt they didn’t have to make,” says Vern Tyerman, PacTel’s vice president for Europe.

Deutsche Bundespost proposed charging what the consortium regarded as an exorbitant price to tie into its fixed-wire telephone system. German regulators stepped in and solved that problem to the consortium’s satisfaction.

But after nearly $1 billion in investment, the new system is still not operational because of a series of snafus involving the testing of its telephone sets. George Schmitt, a PacTel engineer and board member of Mannesmann Mobilfunk, figures that the system could have been up and running last October. Instead, it has been costing about $1 million a day with no revenue to show for it.

At least the Germans have the necessary technology. In Portugal, where PacTel is also licensed to provide cellular service, the company is worried that the interconnections provided by the local phone company will be too poor to make calls on mobile phones audible.

Europe is not for those who want to make a fast buck. Telecommunications services require large up-front investments, and none of the Baby Bells expects any of its new ventures to move into the black in fewer than five to seven years.

The 12-nation European Community, whose 1990 directive brought competition to all services but voice telephone over fixed wires, is now considering whether to take that final step.

“The process is only at an initial stage,” says Leon Brittan, the EC commissioner for competition policy, “and telecommunications users will continue to demand lower prices, wider choice and better services. These will only be supplied to the extent that the regulatory framework allows for competing firms to design new services, to try out new technology and to assess how to provide existing services for a lower cost.”

The Baby Bells in Europe U.S. regional telephone companies have moved into Europe’s deregulated telecommnications market in a big way. Here are some of their major ventures:

Company Country Venture Ameritech Poland Cellular telephone service Bell Atlantic Italy Software development Czechoslovakia Cellular telephone service Bell South Great Britain Wireless data services France Cable television Denmark Cellular telephone service Nynex Great Britain Cable TV, local phone service Pacific Telesis Great Britain Cable television Germany Cellular telephone service Portugal Cellular telephone service US West Great Britain Cable TV, local phone service Hungary Cellular phone service, cable TV Russia Cellular telephone service

Source: Communications Week International, company reports