In May, 1993, a stream of corporate jets touched down at Edinburgh airport, bringing top executives from AT&T, Nynex, France Telecom, and dozens of other phone companies to a two-day conference at Gleneagles golf resort. Sir Iain Vallance, chairman of British Telecommunications PLC, was the keynote speaker. But the reserved Scotsman vanished after the first coffee break, slipping off to the Caledonian Hotel for a tte-a-tte with Bert C. Roberts Jr., chairman of MCI Communications Corp. A few hours later, the men shook hands on a megadeal: For $4.3 billion, the British phone giant would get 20% of the No.2 U.S. long-distance company and, together, BT and MCI would challenge AT&T in global telecommunications.
With that handshake, BT and AT&T were thrown into what looks to be a two-carrier race. Lots of other phone companies and computer-services firms vie for the same business: creating worldwide voice and data networks for top multinationals. And the proposed joint venture between Sprint, Deutsche Telekom, and France Telecom, has its eye on the same prize. But AT&T and BT are uniquely positioned, thanks to their financial strength, global reach, and deregulated status. Clearly AT&T, the industry giant with an estimated $45 billion in calling revenues, is focused on $22 billion BT. "The BT-MCI combination is the leading competitor--in our minds," says Victor A. Pelson, head of AT&T's global operations.
So what do these two powerhouses want? Selling telecom services to the multinationals, a profitable niche expected to hit $25 billion by 2000, is just the start. The ultimate brass ring is far more cosmic: to become the first truly global phone companies, serving households and businesses on every continent. "The real money will be made by providing basic voice and messaging services to large numbers of consumers around the world," says consultant Graham Johnson of Britain's Analysys Ltd.
A global phone company may sound outlandish in an industry still dominated by state-owned monopolies. But it's a concept whose time is coming--fast. Everywhere, nations are privatizing and deregulating their phone markets. Ending foreign-ownership restrictions is the next step. U.S. Vice-President Al Gore has proposed dropping the restrictions, which currently limit foreign ownership in U.S. phone companies to 20%, within a year, if other countries open their markets and do the same.
GAME OF RISK. And they surely will, under pressure from both business and residential customers. British Telecom, according to chief strategist Richard H. Marriott, plans to start with multinationals, move on to midsize and smaller companies, and then sign up consumers. BT and AT&T have already started creeping into foreign consumer calling markets. AT&T owns a stake in phone companies in the Ukraine and Venezuela and is expected to bid against BT for licenses to build local networks in India. Both companies are also eager to tap the huge Chinese market. "Everything kind of pales next to China," says AT&T Chairman Robert E. Allen.
Another route into the consumer market is via services pitched at international travelers. AT&T's WorldConnect program allows consumers to place calls to and from more than 75 countries over AT&T lines. WorldPlus lets travelers set up an AT&T account to pay for local calling in more than 40 countries, with the billing in whatever local currency they happen to choose. BT says Concert, its joint venture with MCI, plans similar services.
Stringing networks to all those distant places would be impossibly expensive. Therefore, AT&T and BT are squaring off against each other in what looks like a variation of the popular global board game Risk. Through various alliances, partnerships, and consortiums, each company is trying to get a presence in as many countries as possible. "The game is how you develop your pieces around the world," says Vallance. "For once the squares are taken by rivals, your options are constrained." Especially important are the countries that have the greatest concentration of large companies (see map).
Concert, the BT-MCI team, has signed up Norwegian Telecom, Tele Danmark, and Telecom Finland as partners or allies. On its own, BT has deals with partners in Germany and Spain.
AT&T's WorldPartners alliance, formed in May, 1993, includes Kokusai Denshin Denwa (KDD)--Japan's largest international carrier--Singapore Telecom, and several other Asian carriers. In December, it announced a plan to form a joint venture with Unisource, a consortium owned in equal parts by Dutch KPN, Spanish Telefnica, Swedish Telia, and Swiss PTT.
Both BT and AT&T are now courting Belgacom, the Belgian state carrier, whose government owners are seeking partners. Between them, AT&T and BT have also approached France Telecom, Deutsche Telekom, STET of Italy and others, in recent years. "What's important over the next four to five years is that we expand as quickly as possible around the world," says AT&T's Allen.
The two megacarriers have very different approaches, however. BT believes that a close partnership will allow each member to leverage the other's corporate contacts, and keep tight control over all aspects of the services offered. Concert is 75% owned by BT and 25% by MCI. There is speculation that BT might offer 25% to a large Asian partner, reducing its share to 50%, but that would be it. All other Concert carriers are local distributors with little say over the system's direction.
AT&T's WorldPartners is building a very different alliance, in which all members have a say. AT&T has a 50% stake, KDD 30%, and Singapore Telecom 20%. Some 10 other carriers are nonequity partners. It works something like a franchise arrangement, with each member agreeing to market AT&T's Worldsource services and software and use the same technical standards for their own networks. The arrangement has the advantage of size: Combined service revenues of AT&T and its global partners top $70 billion a year, nearly twice the amalgamated sales of BT and MCI.
But both groups have their fans. "We really liked how AT&T is partnering with the PTTs rather than building their own infrastructure," says the telecom director of a U.S.-headquartered manufacturer. "There are things that those countries and companies can offer that we can learn from." But Concert customer Jeff Marshall, telecom director at Bear, Stearns & Co., says he was skeptical of WorldPartners: "It doesn't come together like a single entity. That's where Concert is unique."
"SEAMLESS." Established in June, after a year of planning, Concert has other advantages. Lehman Brothers Inc. analyst Ravi Sarathy figures it is at least 12 months ahead of WorldPartners in winning approvals from European and U.S. regulators and six months ahead in meshing its parent companies' technologies. "If you want to buy seamless service, they're the only ones who have got it," says Nick White, vice-chairman of the International Telecom Users Group. "They're just going to have to make sure they exploit that lead."
WorldPartners, meanwhile, has a unique problem. AT&T may offer its partners access to the richest market in the world--the U.S.--but its sheer size causes local players, especially in Europe, to fear a loss of autonomy if they enter a joint venture. Analysts say AT&T is doing better lately at dealing with smaller fry, but it long resisted taking anything but a controlling interest in any deal. That stance caused talks with France Telecom and Deutsche Telekom to fail in late 1993. Now, AT&T has softened. In December, it announced plans for a joint venture with the Unisource group. This time, AT&T will take just a 40% stake. "We've learned to be more flexible," says Allen. "Sharing risk is very important."
Many multinationals would just as soon neither AT&T nor BT become the clear-cut winner. Customers are in the happy position of playing two wealthy suitors against each other. Reuters Ltd., for example, which has operations in 149 countries and spends some 10% of its budget on telecommunications, won't rely on a single carrier. "I like competition. I think competition breeds a better price and better products," says Ian A. McCurrach, Reuters senior vice-president for American operations. John Sale, European network product manager at Electronic Data Systems Corp., takes a similar view. He's also chairman of European Virtual Private Network Users Assn. (EVUA), representing 45 big corporations. "There's no doubt [BT-MCI] have the leading technology in Europe," he says. But AT&T and its partners have been more aggressive on price. In April EVUA signed up both companies and their allies.
HAMSTRUNG. So why aren't more phone giants competing? Nippon Telegraph & Telephone Corp. (NTT), France Telecom, and Deutsche Telekom would like to, but they're still state-owned--and hamstrung by regulations. "They can't operate like flexible commercial organizations," says Martyn F. Roetter, telecommunications analyst at Decisions Resources Inc. BT has "a 10-year head start," concedes Deutsche Telekom board member Carl-Friedrich Meissner. "They had Mrs. Thatcher to kick them early."
Allen and Vallance have both spent a decade in deregulated markets and now face hundreds of competitors on their home turfs--including each other. AT&T won a license to operate as a common carrier in Britain in August. And BT gained regulatory approval to offer phone services in the U.S. as of Feb. 2, 1995.
The two chief executives have plenty in common. Both are lifelong company employees who rose up in monopoly phone businesses. Vallance, 51, followed in the footsteps of both his father and mother as an employee of Britain's General Postal Office, BT's former owner. In fact, he was criticized for being a product of the old school when he became chairman in 1986. But he proved otherwise: slashing staff by 42%, importing new top managers, and adding needed marketing and strategic skills.
Allen, 60, an Indiana native who took over as chairman in 1988, has not only cut staff but also diversified with a vengeance--buying computer maker NCR Corp., investing in multimedia, and shelling out $12 billion in stock for McCaw Cellular Communications Inc. in September. That last acquisition briefly made BT the largest AT&T shareholder. Back in 1989, BT bought 22% of McCaw for $1.37 billion. It sold the shares in February for a profit of $318 million.
ANOTHER WALL DOWN? The dealmaking is far from over. Allen and Vallance have both been in Germany recently. Europe's largest telecom market remains closed, but regulators hint they may open it before the scheduled date of Jan. 1, 1998. In January, BT announced an alliance with Viag, a German conglomerate that has 4,000 km of fiber-optic cable laid in Bavaria. By April, the two companies plan to start a joint venture to offer Concert services. AT&T is holding talks with RWE, an electric-power company that also has 4,000 km of fiber in place.
Asia is another big battlefield. While BT has no Asian carriers as partners, AT&T has several alliances. But the top prize--Japan's NTT, the world's largest phone company--is nonaligned. BT has signed a deal with Nippon Information & Communications (NI&C), a joint venture between NTT and IBM, last July. And, in early March, AT&T announced that NTT would offer WorldSource products in Japan for a six-month trial. But neither deal indicates a long-term arrangement for BT or AT&T. In the end, NTT could even decide to pair up with both.
If that seems unlikely, remember that telecommunications and other high-tech markets are rife with competitors who are also customers and partners of each other. "The information-technology business isn't cola wars," says Barry W. Sullivan, head of market development at EDS. He should know: After being beaten by AT&T on a big contract for Delta Air Lines Inc., EDS turned around to join AT&T on a winning bid for a huge Xerox Corp. project. "This is a complex business: The idea is to have situational allies and no enemies," says Sullivan. Hmmm. Does this mean Vallance and Allen could eventually have their own tte-a-tte?
AT&T 1994 INTERNATIONAL
REVENUES $18.75 billion, 25.2% of total. Strongest in Asia and North America.
WORLDPARTNERS 50% owned by AT&T, 30% by KDD of Japan, and 20% by Singapore Telecom.
NONEQUITY PARTNERS: Telstra OTC Australia, Korea Telecom, Telecom New Zealand, Hong Kong Telecom, Unitel of Canada, and the Unisource consortium.
1994 INTERNATIONAL REVENUES $3.1 billion, 14.3% of total. Strongest in Britain, North America, and Nordic countries.
CONCERT 75% owned by BT, 25% by MCI.
DISTRIBUTION AGREEMENTS with Norwegian Telecom, Tele Danmark, Telecom Finland, and Nippon Information & Communication.