Old World on Brink of a Telecom Revolution : Alliances: With a $200-billion market at stake, every player wants to be the AT&T; of Europe, including AT&T;.


From his base in a tiny rented office on the southern fringe of this commercial center, Cliff Stice is a small cog in a big revolution. An executive of the American regional telephone company, US West, Stice works with a group of Flemish cable television companies in a joint venture--called Telenet Flanders--that is developing an alternative telephone system for Flanders, the Dutch-speaking region of Belgium.

Telenet Flanders, and the $1.8 billion it is spending to upgrade the cable television network to take voice communications, are part of a major upheaval under way in Europe--one that, in a few short years, is destined to turn the Old World's lethargic telecommunications industry upside down, end age-old government monopolies and put telephone companies in private hands.

Some markets, including those for mobile telephones, data transmission and private corporate nets, have already been opened up to competition. Other areas, including the use of cable television systems for telecommunications, are expected to follow soon.

But the big bang--full deregulation of voice telephone services, which make up 80% of the European market--is set for New Year's Day, 1998. The changes will effectively open for all comers one of Europe's biggest, richest, fastest-growing markets, one that today generates $200 billion annually in revenues and which could double in the next 15 years.

"We are witnessing the collapse of a system of cartels," summed up Laurence Heyworth, who tracks the telecommunications industry for Robert Fleming Securities of London. "What is at stake is who will become the AT&T; of Europe. Everyone wants it, including AT&T.;"

Telenet, focused on a small niche of this impending free-for-all, is a modest player in a game that includes state-owned giants such as Deutsche Telekom (revenue of $38 billion), France Telecom ($28 billion) and British Telecom ($21 billion).

Yet in many ways, Telenet typifies the groups now challenging the established monopolies: Its partners have money, a network in place (97% of Flemish homes have cable television) and telephone know-how (in US West). Like many groups, it has an American partner and poses a direct challenge to the country's monopoly telephone company, Belgacom.

"We'll get a share of the business," Stice predicted. "But it's going to be a battle."

That may be an understatement. The Continent's biggest monopolies are preparing to fight, both against upstarts like Telenet Flanders and once-harmless neighboring monopolies that now loom as potential competitors.

Analysts expect the injection of competition in Europe will reduce prices and increase market volume, much as it did in the United States a decade ago. But advances in technology since the mid-1980s, coupled with the number of big European players, are expected to make deregulation in Europe a far more ruthless affair.

While MCI and Sprint went after a share of the American long-distance market using limited capacity microwave technology, analysts note the battle in Europe begins in an age where fiber-optic technology has a capacity that is virtually infinite.

"It's going to be much more brutal than the United States," Heyworth said. "It's all going to be about getting traffic. The fight for a customer base is going to be so important that we'll have massive price-cutting."

The implications of all this change are enormous.

For global players in telecommunications, it means access to what has historically been one of the world's largest, most profitable--and most protected--markets.

For Europe's state-owned monopolies themselves, it signals an end to fat, easily earned profits and the start of a new existence, in which they must compete to survive. For most of them, it will also mean privatization with the massive shedding of jobs that private ownership implies.

In the decade since then-Prime Minister Margaret Thatcher cut British Telecom free from government control, for example, the company has shrunk by 109,000 employees--to roughly half its original size. Others now face similar downsizing, with Germany's Deutsche Telekom alone expecting to shed some 60,000 employees before the end of the decade. Denmark's telephone monopoly Teledanmark's goal of cutting 4,000 jobs over a four-year period may seem small by comparison but it still makes up almost a quarter of the company's work force.

For European governments, the change means selling off lucrative cash cows for one-time windfall profits that could collectively total more than $50 billion by the time full deregulation begins in 1998. It also means confrontations with militant trade unions over the politically explosive hemorrhaging of jobs.

And for the beleaguered European consumer, the presumed beneficiary of the massive undertaking, deregulation heralds the beginning of an era of choice, with the prospect of better, cheaper service.

Yet that prospect has its downside, too. With new players certain to concentrate on lucrative, high-density markets between major cities, some are already asking who will serve customers in rural, outlying areas.

The origin of Europe's telecommunications deregulation is anchored in a 2-year-old European Union decision to open voice telephone services to competition in all but four member states by January, 1998. Access to the remaining countries--Spain, Portugal, Greece and Ireland--was originally set to come four years later in 2002, but that could now occur sooner as fears grow among the nations that delay could mean being left out.

The reason for the union's action was not hard to understand: costly, inefficient services provided by the region's telecommunications monopolies were becoming a drag on international competitiveness.

Karel van Miert, the EU executive commission member responsible for competition, claimed that, on average, Europeans paid five times more than Americans to telephone someone three miles away. "The differences become even more exaggerated over long distances," he said.

A 1994 study published by the European Round Table of Industrialists found that the monthly charge for leasing a standard (2 megabytes per second) telephone line over a distance of 200 miles ran about $2,400 in America--but about $24,000 in Italy.

While some EU states, including France, Germany, and Belgium, initially lobbied against deregulation, opposition eventually crumbled. "We can't hold up this process," argued Van Miert's EU commission colleague Martin Bangemann. "No one can."

To prepare for the new era, many of Europe's telecommunication monopolies have already forged their own multinational alliances. Others are still searching for partners.

"Everyone's looking for an alliance," noted Michael Denmead, co-author of a major report on deregulation published earlier this year by the Cambridge, Britain-based telecommunications consultants, Analysys. "Without biggies behind them, the smaller state monopolies won't be able to provide the services."

Among the major alliances formed so far:

* Atlas/Phoenix. The proposed Atlas joint venture would link Deutsche Telekom and France Telecom, effectively marrying the Continent's two biggest telephone companies, creating a mammoth competitor with more than 70 million lines in an area that forms Europe's industrial heartland. "The combination is so huge and so well-located, any multinational customer has to doubt whether it could do without this alliance," Denmead noted.

To boost their international muscle, the two earlier this year offered $4.2 billion for a 20% stake in the American company Sprint, a potential three-way partnership that goes by the name Phoenix.

The impressive nature of this lineup is clouded by one major problem: regulatory approval. After months of tough bargaining, EU Commissioner Van Miert Monday finally indicated he was prepared to sanction the Atlas joint venture, despite its enormous size, but the mechanics of approval will likely drag the case into next year.

Meanwhile, the Franco-German purchase of the stake in Sprint must still get a green light from a skeptical Federal Communications Commission in Washington. An FCC decision is expected within the next several weeks.

Some analysts believe further delay in approval could hamper the venture's competitiveness for 1998.

* Concert. A venture between British Telecom and MCI Communications formed in 1993, Concert began offering internal phone- and data-link service to multinational companies across Europe last June and has already signed up some big corporate customers, such as Unilever and Grand Metropolitan, the consumer goods company that includes Burger King and Haagen-Dazs.

Although smaller than its French and German counterparts, British Telecom has a decade-long head start as a privately owned company. Concert also has no regulatory problems. It has formal distribution agreements with Danish, Finnish and Norwegian national phone companies. "With over a $1 billion in orders, they're rolling," Heyworth noted. "They have a lead."

* Unisource/Uniworld. A venture of Dutch, Swedish and Swiss telecommunications companies, Unisource is about to add its fourth equal partner, Spain's Telefonica. Earlier this month, the group signed an agreement with AT&T;, Singapore Telephone and KDD, Japan's biggest international telecom carrier, to form a jointly held company called Uniworld that will provide a global dimension to the Europeans' venture. It is also concentrating on large corporate customers--for example, tying the global offices of Dutch electronics-producer Philips together in a single four-digit system. Unisource last year had revenue of $580 million and already has begun to position for deregulation elsewhere in Europe by signing agreements with non-telephone network operators in both France and Germany.

* IBM/Stet. This joint venture brings together the international transmission networks of the American computer giant and Italy's state-owned telephone monopoly, who together have a presence in more than 100 countries. Company executives say they plan to offer value-added services, including e-mail and electronic conferences to international customers. IBM is also expected to provide management services for Stet to enable it to better protect its own domestic market, already under attack from British Telecom. IBM Italy's spokesman Bruno Contigiani said additional partners were being sought. "We are looking to become the second and third carrier in a lot of countries," he said. "We'd like additional partners."

Besides these alliances, other European corporate entities--in effect, larger Telenets--including energy producers, national railroads, banks and steel companies are also jostling for position to become secondary carriers in a market they believe is poised for major growth.

For example, Mannesmann, the German heavy machinery producer, purchased a license to operate mobile telephones five years ago and with an American partner, AirTouch, became the first minor challenger to Deutsche Telekom's monopoly. As the mobile market grew, Mannesmann last year broke into the black for the first time. Now the company plans to team with north German electric utility RWE and the country's largest bank, Deutsche Bank, to establish its own telecommunications network that they claim could capture 15% of the German market over the next decade. "Telecom has already become one of our core businesses," said Mannesmann spokesman Manfried Soehnlein.

Indeed, if Europe's deregulated telecommunications market develops as foreseen, it will become the core business for many newcomers.

"In the U.S., competition brought lower prices and a bigger market," US West's Stice recalled. "AT&T; is bigger today with 67% of the market than it was a decade ago when it had it all. We think that will happen here.

"There is going to be healthy growth and that means opportunity for everyone."



Europe is home to four of the world's 10 largest telecommunications companies, but they will have to slash tens of thousands of employes to compete with more efficient U.S. competitors. The world's 10 top phone companies, by 1994 revenues, with number of employes:

Operator (country): NIT (Japan)

Revenue (in billions): $68.9

Number of employees: 248,000


Operator (country): AT&T; (United States)

Revenue (in billions): $43.4

Number of employees: 76,900


Operator (country): Deutsche Telecom (France)

Revenue (in billions): $23.2

Number of employees: 152,600


Operator (country): British Telecom (Britain)

Revenue (in billions): $21.3

Number of employees: 137,500


Operator (country): Telecom Italia (Italy)

Revenue (in billions): $18.0

Number of employees: 94,900


Operator (country): GTE (United States)

Revenue (in billions): $17.4

Number of employees: 69,200


Operator (country): BellSouth (United States)

Revenue (in billions): $16.8

Number of employees: 92,100


Operator (country): Bell Atlantic (United States)

Revenue (in billions): $13.8

Number of employees: 72,300


Operator (country): MCI

Revenue (in billions): $13.3

Number of employees: 40,700

Source: International Telecommunications Union

Collect Call

The massive European telecommunications market is being thrown open to competition, and U.S. firms, gambling that they can out-maneuver some of the Continent's bloated monopolies, are scrambling for a piece of the $200- billion prize. Europe's market revenues in 1995**, by country, in billions of dollars:

Austria: 4.67

Belgium*: 5.18

Britain: 33.58

Denmark: 3.07

France: 34.30

Germany: 58.20

Italy: 23.09

Netherlands: 9.34

Norway: 3.46

Portugal: 3.33

Spain: 12.48

Sweden: 6.50

Switzerland: 9.17

* Includes Luxembourg

** Estimates

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