BT Poised to Corner Big Share of World

British Telecommunications’ proposed $24.7-billion acquisition of MCI, if completed, would make BT the first of a handful of “supercarriers” experts believe will dominate the world telecommunications business in the coming decades.

“BT is the first out of the gate,” says Mark Kelsey, a director at Pyramid Research, a Cambridge, Mass.-based telecom consulting company. “They are really pushing the process.”

Although the MCI acquisition wouldn’t make BT the world’s largest phone company--AT&T;, Japan’s Nippon Telegraph and Telephone Corp. and Deutsche TeleKom are all larger--BT would be the first communications company to have a significant share of a major market other than its own.

Just as deregulation in America has driven the Baby Bells into mergers that promise access to larger markets and potential operating efficiencies, the pressures among the world’s telecom giants to consolidate are mounting.

For example, BT’s acquisition of MCI creates strong incentives for AT&T; to crimp BT’s profitability by aggressively attacking the British market. AT&T; currently has a small operation in Britain but quick expansion would require an acquisition, with Vodaphone, Britain’s primary cellular phone company, cited by analysts as a likely target.

In addition, AT&T; and WorldCom, a rapidly growing U.S. long-distance carrier, are both reportedly interested in acquiring Cable & Wireless, the British company that owns Mercury Communications, Britain’s No. 2 telephone provider, as well as a majority share of Hong Kong Telecom and a scattering of telephone operations throughout the former British Empire.

International mergers and acquisition activity will probably intensify in the run-up to January 1, 1998, the date the European Union has set for its members to open their telecommunications markets to competition.

So far, BT, which has faced competition in its local markets since 1991, is the strongest European player. The firm has recently inked joint ventures with major industrial partners to challenge monopoly phone companies in France, Spain, Germany and Italy.

As historic national monopolies find their markets under attack, say analysts, they will feel compelled to also seek growth elsewhere.

“Most countries can support no more than two telephone companies. The U.S. can support four,” argues Bill Davidson, a communications consultant for Deloitte Touche. “Since there is a limited number of spots available, that drives consolidation.”

The telecom monopolies in Germany, France and Italy all enjoy rich cash flows that they could pour into overseas growth. Deutsche TeleKom and France Telecom, which each hold a 20% share of Sprint, are expected to push for full control as soon as regulations permit.

Some believe Spain’s national carrier, Telefonica Espana, which has large investments in phone companies throughout Latin America, could emerge as a major regional provider there.

Still, international consolidation will not happen overnight: Deregulation in many European and Asian countries has proven to be an arduous process, and even liberalized regulations will not always mean that unfettered foreign investment will be permitted in such a large and politically sensitive industry.

Even U.S. approval of the BT-MCI deal could end up being conditioned upon further loosening of British regulations. Of the other major European countries, only Germany seems prepared to allow foreign investors to acquire shares in its telecom monopoly. The U.S. will be reluctant to allow France Telecom to acquire more of Sprint unless France allows similar investments in its own markets.

In many countries, the local telecom monopolies have long served as tools of industrial policy, allocating much of their tremendous profits to subsidize the development of local technology sectors and providing huge numbers of secure, well-paying jobs. Thus there is often considerable political resistance to altering the status quo.

Further, regulators are liable to be sympathetic to national monopolies even after the markets have deregulated. Asian countries, including Japan, South Korea and China have been especially reluctant to see foreign investors play a major role in operating communications networks.

Even in Britain, which deregulated its markets in 1991, British Telecom continues to control more than 90% of the market--and AT&T; complains it can’t compete fairly.

If such regulatory obstacles remain overseas, the U.S. could find its companies being hobbled in their move offshore even as the best of its own industry is gobbled up by the emerging supercarriers.

But broader forces work in favor of deregulated markets.

The fat profits that national telecom monopolies have traditionally enjoyed are increasingly vulnerable to attack as a result of new technologies. For example, callback services allow customers in high-cost countries to make international calls at U.S. rates by placing calls through a low-cost, U.S.-based telephone switch.

New cellular and satellite phone systems are often outside the control of monopoly carriers--and in many cases, especially in the developing world, are controlled by the foreign firms.

“These monopolies are so porous they are bleeding traffic,” says Fritz Ringling, a New York-based international telecommunications consultant.

Such pressures are leading even the most highly regulated countries to move toward open competition.

Masashi Kojima, president of Japan’s NTT, the world’s largest telecommunications company, recently argued that the Japanese market must deregulate and open itself further to foreign investment if NTT is to become competitive enough to survive as one of the five supercarriers he believes will dominate world markets.