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Alcatel-Lucent Says Europe Risks Becoming Digital Desert

Photographer: Balint Porneczi/Bloomberg

A worker walks past banks of computer servers in Villarceaux, France. Close

A worker walks past banks of computer servers in Villarceaux, France.

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Photographer: Balint Porneczi/Bloomberg<br><br>

A worker&nbsp;walks past banks of computer servers in Villarceaux, France.

Alcatel-Lucent SA (ALU) Chief Executive Officer Ben Verwaayen said Europe’s phone companies risk turning the region into a “digital desert” by shying away from investing in networks, widening the gap with the U.S.

“Five years ago in the U.S., you knew that leaving L.A. meant going into the desert, meanwhile Europe was ahead,” Verwaayen, who took over almost four years ago as CEO of France’s largest phone network equipment maker, said in an interview in Bloomberg’s offices in London yesterday. “Five years later that has reversed. The creation of value has come back to the U.S.”

Telecommunications companies in the U.K., Germany, Italy and France have been reluctant to invest as much as their counterparts in the U.S. and Asia in faster mobile-phone and fixed-line networks because of Europe’s sovereign debt crisis and regulatory decisions deemed unfavorable by Verwaayen. As a result, Europe is falling behind and Alcatel-Lucent is looking to the U.S., Latin America and Asia for growth, he said.

Paris-based Alcatel-Lucent, which competes with Ericsson AB (ERICB) and Nokia Siemens Networks in Europe, as well as Chinese vendor Huawei Technologies Co., yesterday announced a 100 million-euro contract ($125 million) with China Telecom Corp. (728) to build a fiber-optics wireline network. About 30 percent of Alcatel- Lucent’s revenue came from Europe last year, while the U.S. accounted for 36 percent of sales and most of Asia for the rest.

Photographer: Balint Porneczi/Bloomberg

An employee checks wiring on the computer servers at the Alcatel-Lucent Bell Labs facility in Villarceaux, France, on Thursday, 24 May, 2012. Close

An employee checks wiring on the computer servers at the Alcatel-Lucent Bell Labs... Read More

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Photographer: Balint Porneczi/Bloomberg

An employee checks wiring on the computer servers at the Alcatel-Lucent Bell Labs facility in Villarceaux, France, on Thursday, 24 May, 2012.

Falling Behind

In October, Neelie Kroes, the European Union commissioner for digital affairs, said the 27-member bloc would review whether companies charge rivals too much for access to old copper-line networks. The EU said this month it will cut roaming fees for mobile Internet services and reduce charges for making mobile-phone calls from outside a user’s home country from July. The legislation sets a price limit for data roaming for the first time and extends a cap on call charges imposed in 2007.

European politicians, keen to boost the use of faster Web services, aid economic growth and catch up with Asia, argue that profits from existing networks may make the phone incumbents less willing to invest in new technologies. The former monopolies, faced with falling revenue in their home markets from traditional voice calls, say the reverse is true as they need copper profits to invest in faster fiber networks.

“There is no incentive for our customers in Europe to make the necessary investments,” Verwaayen said. “We run the risk of a digital desert in Europe.”

Justifying Investments

Alcatel Lucent slipped 1.4 percent to 1.33 euros at 9:21 a.m. in Paris. The stock slumped 66 percent over the past year through yesterday and gained 12 percent since the start of 2012.

Most European operators are seeing profits stagnate or decline in their home markets because of competition and mounting investment needs. While former monopolies are calling for less state regulation, they’re also complaining about unfair treatment from U.S. technology companies such as Apple Inc. and Google Inc., (GOOG) whose bandwidth-hungry video services have supplanted phone companies’ own online offerings.

“My customers are saying ’How can I justify to my shareholders the investments that I am making?’” Verwaayen said yesterday. “If their ability to make money is reduced, then appetite to invest is also reduced.”

Speed Race

Vodafone Group Plc (VOD) Chief Executive Officer Vittorio Colao said in February that regulators “should stop having this continuous intervention on prices” to allow companies to invest in new technology. France Telecom SA (FTE) will lose about 1 billion euros of revenue in 2012 as a result of a “very heavy burden coming from regulation and tax policies” including roaming rules, CEO Stephane Richard said this year.

Europe has already fallen behind the U.S. in the speed of mobile-phone networks. While the fourth-generation LTE technology, which offers higher up- and download speeds and latency, or response time, is already widely available in the U.S., most European consumers are still surfing the Web on the previous technology.

The fast mobile-phone networks in the U.S. also create demand in Latin America, Alcatel-Lucent Chief Technology Officer Marcus Weldon said.

“People from Latin America try 4G in the U.S. and then they want to bring it home,” he said. “We’ve got the U.S. influencing Latin America, China influencing the rest of Asia and a strong trend in the Middle-East.”

Carlos Slim’s America Movil SAB (AMX) selected Alcatel-Lucent in February as one of its suppliers to upgrade its wireless network in Latin America to 4G. Telefonica SA, Spain’s largest telephone company, has said it plans to bid for airwaves in Brazil and Chile this year for building faster networks as it prepares for a boom in demand for mobile data in Latin America.

Sluggish Spending

The European debt crisis has made it difficult for Verwaayen to keep the company profitable after Alcatel-Lucent in February reported its first annual net income in six years, marking the end of his three-year turnaround plan.

The company -- formed by the 2006 merger of Alcatel SA and Lucent Technologies -- last month reported a first-quarter loss as sales missed estimates because European clients withheld spending. Alcatel-Lucent said first-quarter margins would be “a low point” of the year, after its operating loss, adjusted for some items, was 221 million euros.

“The shareholders see a company that has not made positive cash flow,” said Verwaayen, a former CEO of British phone company BT Group Plc who took over in 2008. “Clearly, investors have been voting with conviction price wise. And the message has been received.”

To contact the reporter on this story: Marie Mawad in Paris at mmawad1@bloomberg.net Jonathan Browning in London at jbrowning9@bloomberg.net Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net;

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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