THE GLOBAL FREE-FOR-ALL
If you buy a pair of tennis shorts from New Jersey-based Sportif USA Inc., chances are the label will say "Made in Sri Lanka." That's because in 1992 the late Sri Lankan President Ranasinghe Premadasa issued an edict outlining the steps his nation's garment factories would take to compete with other Asian producers. A top priority: In a country with only one phone line for every 200 people--among the lowest ratios in the world--Premadasa required that every factory have two: one for a phone, a second for a fax machine.
Fax machines in Sri Lanka, cellular phones in the Brazilian rain forest, satellite dishes in Russia, videophones in Manhattan--they're all part of a telecommunications revolution that, with blinding speed, is changing the way the world works. With high-capacity cables, digital switches, and satellites, a multinational corporation--or a tiny garment factory--can conduct business anywhere, anytime, searching out customers and suppliers around the world.
A good measure of the globalized economy is the explosion in international phone traffic. Overseas calling hit 47 billion minutes last year, up from 23 billion in 1988, according to the International Telecommunication Union (ITU). With each minute worth about one U.S. dollar to the world's carriers, that's a nice business to be in. International calling has been the fastest-growing segment of the telecommunications industry for a decade and will continue to be: The ITU estimates that, as voice and data networks expand to reach millions of new subscribers and deliver more services to existing ones, volumes will hit 80 billion to 100 billion minutes per year by 2000.
CONSTANT DRUMBEAT. To serve this massive market, the telecommunications industry is taking on a new form. An era of global business and global competition calls for carriers that can provide globe-circling services. "I don't want to have to talk to a bunch of different PTTs around the world," says William Donovan, vice-president of information technology for shipping giant Sea-Land Service Inc. "I don't want to have to go to one carrier in one country and a second in another just because it doesn't have a presence there."
One-stop shopping is only the start. From Paris to Beijing, businesses also are demanding state-of-the-art technology and reasonable prices--and they have an idea of how to get it: In the U.S. and Britain, nations that have gone the furthest in throwing off antiquated regulations, businesses see that competition has improved service and cut costs.
So liberalization, deregulation, and privatization are the watchwords du jour. "The customer is leaving regulators with little choice," says Lehman Brothers Inc. analyst Marianne G. Bye. "Some countries are moving toward free and open markets a lot slower than others, but they are all moving."
Phone companies, too, have little choice: Global competition is hitting them as hard as their customers. Even where governments still maintain protective barriers, the market is finding ways to skirt them. Around the world, businesses avoid high tariffs on outbound international calls by using call-back services, which reroute overseas calls so that they originate in the U.S., cutting costs by as much as 70%. Cellular phones are also grabbing business. "Wireless provides an opportunity for different operators to offer packages that provide the same services as the monopolies," says Pekka Ala-Pietila, president of Nokia Mobile Phones.
Alternative suppliers, and a constant drumbeat for better service by customers, are convincing national carriers that it's worth giving up monopoly protection in return for freedom to compete. From the U.S. regional Bell operating companies, which are seeking to offer long distance, to Telekom Malaysia, which is looking to build an information superhighway in Kuala Lumpur--all are clamoring for the right to stretch beyond government-defined boundaries.
In the process, an unprecedented free-for-all is redrawing the telecommunications map. Carriers everywhere are pushing overseas. "The guiding principle in the telecommunications industry right now is to grab territory," says Baring Securities Ltd. analyst Michael Jeremy.
Eventually, this could trigger massive consolidation and create an industry grouped around four or five superpowers. The list will almost certainly include AT&T; the alliance of British Telecom and MCI; the Sprint-Deutsche Telekom-France Telecom team; and Japan's NTT (tables).
In the meantime, it's every telephone company for itself: Nynex Corp. is building a cable-TV system in Thailand that will also carry phone calls. Telefnica de Espaa, Spain's state-owned carrier, is paying $2.02 billion for a 35% stake in two Peruvian phone companies. A Singapore Telecom affiliate is building a network in Manila's financial center. Tele Danmark paid $7.8 million for a stake in two Hungarian phone companies. AT&T is helping to run a phone system in Ukraine, GTE Corp. is building a cellular network in Argentina, and Sprint Corp. bought 25% of a Canadian long-distance carrier. "In the 1990s, the vast pools of national telecommunications traffic, once a country's patrimony as much as its forests or its mines, have become the subject of fierce multinational bidding," says Gregory C. Staple, head of the Washington-based consultancy TeleGeography Inc.
BOURSE DARLINGS. At the same time, state-controlled phone companies are moving to private ownership. Over the next two years, at least 36 nations will sell stock in all or part of their national carriers, an amazing rush to market considering that in 1993 only 17 international carriers had any private ownership. The trend is making telecom the hottest sector on bourses everywhere. Last year, for example, investors in most Latin American phone stocks doubled their money.
Governments also realize that selling the phone company is about the easiest money around. British Telecommunications PLC, the world's fourth-largest carrier, brought in a total of $19.3 billion from three separate offerings that started in 1984. Even Denmark raised $1.2 billion when it sold off a 48% stake in tiny Tele Danmark in April. Analysts say demand drove the stock price some three times higher than was expected for the $2.75 billion-a-year carrier.
Privatization is now sweeping Europe, where the European Union has mandated deregulation of basic voice service by 1998. Last year, there were just three publicly traded carriers in Europe. By the end of 1995, 11 others are scheduled to be at least partially privatized. Lehman Brothers analyst Evan Miller estimates that the offerings could raise as much as $13 billion. In 1996, says Miller, "we could see the mother of all privatizations--Deutsche Telekom." Deutsche Bundespost Telekom is the No.2 international carrier, with revenues of $35 billion last year.
Privatization and deregulation, though, don't guarantee market success. "Companies that have been monopolies for years find it very hard to change. We certainly know that," says Victor A. Pelsen, executive vice-president in charge of AT&T's global operations. Even if they suddenly sprout the gene for competition, most small carriers lack the resources to succeed on their own in a global market.
The quick solution: Partnerships, alliances, and mergers. "You really can't deliver a telecom solution to a multinational company without partners," says Peter Kaliaropoulos, head of U.S. marketing for the Australian carrier Telstra OTC Australia. Telstra is living proof of that tenet: It belongs to seven joint ventures or consortiums, including AT&T's WorldPartners, a loose alignment of Asian and European carriers offering common products.
Phone companies everywhere are clamoring to pair up with leading U.S. long-distance carriers. AT&T, MCI, and Sprint offer global partners access to the most lucrative telecom market, home base for 40% of the world's multinational giants. "No consortium can be effective without a major U.S. presence, unless they want to become the equivalent of a regional airline feeder," asserts Seth D. Blumenfeld, group executive of external affairs for MCI Communications Corp.
But alliances can be much easier to propose than to consummate. "Egos and economic self-interest always get in the way. Mostly egos," says H. Brian Thompson, chairman of U.S. long-distance company LCI International Inc. and a former MCI executive. He and everybody else in the industry are carefully watching MCI's deal to sell a 20% stake to British Telecom. The two plan to offer voice and data services across the world to corporations.
The MCI-BT link, as the first mega-alliance in global telecommunications, is a test case for the concept. Both BT and MCI are painfully aware of the risks. The two companies, with combined annual revenues of $33 billion, have been careful to spell out who gets to do what where. MCI will oversee marketing of the linked companies' services to businesses based in the Western Hemisphere, while BT will be in charge everywhere else. And MCI insists it will remain independent: BT has agreed not to increase its stake for 10 years, even if it were allowed to do so by a change in U.S. regulations, which now cap direct foreign ownership at 20%.
Whether the alliance works or not, it has inspired MCI's competitors to enter similar arrangements. Sprint has agreed to sell 20% of its stock to Deutsche Telekom and France Telecom, while AT&T has formed WorldPartners.
And everyone's waiting to see what Japan's huge NTT will do. It's currently shackled by regulatory constraints that bar it from carrying international calls and force it to keep local rates artificially low. But Japan is creeping toward deregulation, and once NTT is let loose, it is sure to be a powerful competitor--its $3 billion annual research budget alone makes it a star attraction. "All the global alliances are knocking on [NTT's] door," says Telstra's Kaliaropoulos. "They can be a very, very key player."
Despite these telecom titans, the free-for-all will provide opportunities for small players, too. The global market could very well wind up looking like the U.S. long-distance market--in which three carriers have 85% of the traffic, while another 1,000 or so small fry make good money servicing the rest. "Technology is no longer a barrier to entry in this business," says Gabriel A. Battista, president of Cable & Wireless PLC's U.S. operation. "Third-party suppliers with some leased lines and specialized software could easily customize services for a tiny segment of the market and make money doing it."
For the moment, telecommunications does seem like a license to print money. The world's carriers raked in $535 billion in revenues last year. The average net profitability of the telecommunications industry rose from 10.5% in 1988 to 14.9% in 1992, says the ITU.
CRYING NEED. Of course, profits could drop once phone companies feel the full effects of competition. But if the highly deregulated U.S. long-distance market is any measure, they won't. Soaring calling volumes have enabled U.S. carriers to rack up record revenues and profits, despite a 63% drop in the average price paid per minute over the past decade.
Around the globe, exploding demand should keep profits healthy. Industrialized nations are using more phone time each year, conducting business by voice, fax, computer network, and, soon, via videoconferencing and other multimedia methods. The rest of the world simply needs more phones. The ITU says 71% of the world's phone lines are located in countries with only 15% of the people. In Latin America, only 7% of the population has access to a phone line. In most of Asia and Africa, it's more like 1%. In the U.S., though, it's 56%.
Throughout the developing world, governments are recognizing what Sri Lanka grasped: A modern telecommunications infrastructure is essential for economic progress. In the former Soviet Bloc, Hungary is jump-starting its decrepit phone system by licensing three cellular carriers, with the idea that they will get phones to a demanding populace now, while the newly privatized national carrier works on a long-term network upgrade. Vietnam is another good example: Despite a per capita income of $220 a year, Hanoi is ordering 300,000 fiber-optic phone lines a year, routed by advanced digital switches. Leap-frogging to the latest technology could give it a big edge in attracting business. "Companies want to set up where the infrastructure is the best," says Lloyd Kubis, Motorola Inc.'s regional director for Asia.
There's still one big monkey wrench in the works, though. Digital technology may make it possible to send a fax halfway around the world in seconds. But government regulations can stop the transmission dead. In many places, the wheels of deregulation are grinding slowly. "One of our biggest problems [overseas] is that competition is still not prevalent in many markets," says AT&T Chairman Robert E. Allen. "Countries like France and Germany may talk about it a lot, but their markets are still closed to us."
SLOW PROGRESS. Old habits are hard to break. Ever since the invention of the telephone, the nations of the world have grown accustomed to controlling the way the instrument is used, owned, and profited by. State-owned phone companies, service monopolies, and artificially high tariffs have slowed the implementation of affordable, advanced telecommunications in all but a few countries.
But the high rates and slow technological progress that are the hallmark of state-owned carriers are now too taxing even for advanced economies. Companies in France, Germany, and Spain find it hard to compete when their phone bills are 15% to 50% higher than those of U.S. rivals. "Competition in telecommunications is today more urgent than European monetary union," says Bruno Lambroghini, head of research and strategy at Olivetti, one of Europe's largest companies. "Ask industry which they prefer. Industry is demanding a level playing field in telecoms above all."
It's easy to see why. A company doing business in Bonn spends an average of $1,240 per month on telephone calls, while its London-based competitor spends only $687, according to one industry study. A British survey found that in Germany the high-speed leased lines favored by businesses cost five times the going rate in the U.S. and twice the British average. Telecom fees for an international bank headquartered in Frankfurt can equal 30% of revenues, twice the amount a similar bank in New York shells out, the study found. That can make the difference between a successful global competitor and a loser.
European businesses are mad as hell and aren't taking it any more. Some of the continent's largest companies have banded together to press the EU for faster liberalization. A separate group of 30 large European companies, including Rank Xerox, Philips Electronics, and ICI, is taking matters into its own hands. It has hired a consortium composed of British Telecom, AT&T, and several smaller carriers to develop a private trans-European network. With combined billings of some $2 billion a year, the group's defection will be sorely felt by the region's national operators. "Any country with its head screwed on right can advance the pace of deregulation [before 1998]," says BT Chairman Iain D.T. Vallance. "The alternative is to fall further and further behind."
Europe, in other words, can no longer afford to pay lip service to liberalization. While the European Union has ordered competition in basic voice services by 1998, it hasn't decided when competitors can start building their own networks. Says U.S. Federal Communications Commission Chairman Reed Hundt: "Europe has been a laggardly convert to privatization and remains a laggardly skeptic of liberalization."
Not for much longer. The state-owned carriers will soon be surrounded. Utilities, railroads, and cable-TV companies are all proposing to develop phone services. In Britain, the electric industry strung up phones lines between its pylons to form the country's third-largest long-distance network. On the Continent, Europe's railways are planning a similar network.
The regulators are beginning to get the message. In Germany, one of Europe's most notorious deregulation laggards, government ministers and industry executives are preparing to discuss a faster timetable for telecom liberalization at a Sept. 22 meeting--in preparation for a similar meeting of European telecommunications ministers a week later. German Posts & Telecommunications Minister Wolfgang Butsch just announced that he is inclined to end Germany's infrastructure monopoly in 1998, when the voice-service monopoly expires. Once Germany goes, so goes the continent: Since it is the largest economy by far in the EU, the other member nations will likely follow its lead.
WATCHING WASHINGTON. It is a sharp turnaround for Germany: The Posts & Telecommunications Ministry had resisted the EU on telecom deregulation for years. Why the change? Deutsche Telekom itself wants to be free of burdensome regulations. For one thing, its proposed alliance with Sprint may not go through unless the U.S. wrings some concessions from Germany to allow outside competitors. For another, the German carrier could soon be up against a powerful inside competitor: A consortium led by Deutsche Bank and Mannesmann, a leading industrial conglomerate, plans to lay private phone lines and bypass Deutsche Telekom altogether. The carrier can ill afford to lose its German-based multinationals at a time when it is laying the groundwork for its own place at the top of the global telecommunications heap--through its alliance with Sprint.
Besides, Deutsche Telekom need only look at Europe's own test case on liberalization to calm any fears it may have. Britain privatized British Telecom in 1984. It is arguably the most open telecom market in the world (sidebar), but BT still carries 90% of Britain's phone traffic and is flourishing: fiscal 1994 profits rose 40%, to $4.2 billion. Deutsche Telekom, by comparison, has had losses three years in a row, including $1.85 billion last year. "I don't mind swapping a monopoly for a highly liberalized market where our share is a `horrible' 60-80%," says Deutsche Telekom Chairman Helmut Ricke.
The world's phone companies are also keeping a close watch on the U.S., which is about to embark on a bold new chapter in its own liberalization. Congress is expected to pass a bill by early next year that will open up local and long-distance markets. The seven Baby Bells will be able to offer interstate services, while AT&T and its long-distance competitors will get to own local networks. Cable-TV operators, wireless-communications services, and low-powered-satellite networks will be nipping away at both.
While all that is going on, the Clinton Administration is pushing hard for the telecom industry to build a national Information Superhighway that will carry interactive video and data as well as voice. That's something no other country is even close to developing. "The rest of the world is watching the U.S.'s infrastructure projects even more closely than the telecom legislation," says James E. Graf, vice-president for government relations at BT's North American operations. "The world's carriers are very concerned that it will position the U.S. to move even further ahead on key facilities and services."
LATIN BONANZA. Meanwhile, local phone companies in the U.S. are pushing harder than ever overseas. Bell Atlantic Corp., for example, has made over $2.5 billion in equity investments outside the U.S. since 1990, and its foreign cellular-phone networks cover populations 21/2 times larger than its domestic systems. GTE generates about 11% of its revenues from overseas operations, most in South America, and plans to double that within the next five years. South American nations have been liberalizing their markets at a head-spinning pace, with five national carriers privatizing in the past four years. Now, the second stage is under way: allowing in competitive carriers. "We think Latin America is one of the great opportunities," says GTE Vice-Chairman Michael T. Masin. "The rate of growth exceeds significantly that in the U.S."
Ditto for Asia and the Pacific. Many Asian nations resist privatization but are opening up their markets to additional service providers, often foreign. It can be a great deal for the out-of-towners: Back in 1990, Ameritech Corp. paid $1.2 billion for a 50% stake in Telecom Corp. of New Zealand, the island's main carrier. Even after selling half its share--for a $136 million aftertax profit--the investment is still worth about $1.2 billion.
Less-developed Asian countries are even more eager for foreign investment. With only 25 million phone lines for 2.8 billion people in Asia's underdeveloped nations, "a new pragmatism has emerged," says TeleGeography's Staple. "Governments generally recognize that they can't leave it up to [national carriers] to bring the network up to speed." It doesn't hurt that the World Bank, a major source of telecommunications infrastructure funding in the developing world, recommends open markets.
The biggest potential prizes in Asia are China and India--the world's two most populous countries, with the lowest penetration of phone lines. Both countries have ambitious modernization plans. In 1991, India said it wanted to add 40 million lines by the end of the century, at a projected cost of some $32 billion. Beijing's goal is even grander: China says it will allocate $100 billion to quadruple its phone network, to 80 million lines over 10 years.
CHINA DREAMS. Getting a piece of this action may not be easy. More than 60 foreign, local, and joint-venture firms have submitted proposals to help India expand, but not a single one has been accepted. Nor is there any indication when they will be. "And nobody among us is willing to wait forever," says a New Delhi-based executive of a U.S. telecom firm.
China is almost as bad. The powerful Ministry of Posts & Telecommunications is fighting to keep its monopoly, and again, no foreign operators have been licensed. But, as in Europe, the customer is beginning to force the issue. A second telecom network, Liangtong (China United Telecommunications Corp.), is now being formed with the backing of 26 state industries and the city governments of Beijing, Shanghai, and Tianjin.
Liangtong is testing the ban on foreign investment in telecom service by signing a "consulting" agreement with AT&T to produce equipment locally. Industry executives in Beijing say there are now indications that the foreign-equity ban may be lifted within six months or a year. That has telecom executives salivating. As AT&T's Allen says: "Next to China, all other opportunities around the world pale."
By now, it appears that nothing can stop the Big Mo toward liberalization. The only question left: How will the telecommunications map be configured once the dust clears? Any guesses made now wouldn't be very reliable. "If anyone can tell you what this business is going to look like five years from now, I want to find out what they've been smoking," says Allen. "I certainly don't know, but I'm sure it's going to be fun."Catherine Arnst in New York, with Gail Edmondson in Paris and bureau reports