Brr Ring! America Calling

It was one wake-up call that Europe's phone companies won't soon forget. Last year, Anglo-Dutch food giant Unilever PLC opened bids for a three-year contract to run its 17-country European communications network: computer data, electronic mail, and possibly voice calls in the future. A few years ago, one of the home-team carriers, British Telecommunications PLC or Royal PTT Nederland, probably would have won it as a matter of course.

Instead, both were trounced by U.S.-based Sprint Corp., which promised lower rates, guaranteed service, and a bigger network. American Telephone & Telegraph Co. was the runner-up. It didn't even help that Royal PTT's chairman was a 22-year Unilever veteran.

Deregulation is hitting Western Europe's $110 billion telecommunications market. And a decade after overhauling the U.S. and Japanese telecom industries, competition is shaking up the Continent's hidebound post, telephone, and telegraph (PTT) monopolies.

To be competitive in the 1990s, local and foreign-owned businesses are linking operations across the Continent, and from there to points across the globe. To do it, they need low-cost, high-speed networks that they say they can't easily get from the PTTs. So Unilever and other corporations are turning to the Americans and some local upstarts. "European PTT operators have a long way to catch up," says Nick White, Unilever's telecommunications chief.

As huge employers and pillars of Europe's old economic structure, the PTTs still have clout. But support is eroding. The European Commission sees advanced networks as essential to make a unified Europe competitive. And it figures that competition will keep down costs. As it is, the EC says the bill for telecom services will jump from 3% of Europe's gross domestic product in 1991 to an estimated 7% by 2000. So there's little patience for slow-moving, inefficient monopolies. Says Jean-Charles Rouher, head of the Paris-based International Chamber of Commerce: "The pressures for change are irresistible."

As PTTs try to hold on to their monopolies, Brussels Eurocrats are opening the market, piece by piece. Since laying out deregulation plans in a 1987 policy road map, the European Community has ordered its 12 governments to abolish monopolies in such fast-growing sectors as data transmission and electronic mail. So far, Britain has done the most to deregulate, Greece the least.

`PLANTING THE FLAG.' Now, the EC is pushing for more. It's working on opening satellite and mobile communications and private data networks. It's even considering competition in the highly profitable international calling business--perhaps the first step in deregulating all voice service, which accounts for 90% of European telecom revenue. "There's no end in sight," frets Wim Dik, chairman of Holland's state-controlled Royal PTT.

Americans are jumping into these markets as soon as there's an opening. Along with a handful of local players, they're pushing into services the PTTs have been slow to enter (table, page 98). "We're planting the flag," says Joseph P. Nacchio, president of AT&T Business Communications. "This is an opportunity to provide Europe-wide leadership."

The Baby Bells have been particularly active: They're in cellular phones, paging, and cable TV. Several are seeking licenses to launch national cellular networks they plan to weave into pan-European networks. Pacific Telesis Group estimates that such networks could grab as much as 20% of Europe's total voice and data traffic in the next 15 years.

The newcomers say the biggest opportunity is in transborder communications, which have been all but ignored by the parochial PTTs. As a result, the far-flung, private data networks that U.S. businesses take for granted--to link a bank's branch offices, for example--are still a nightmare to arrange in Europe.

A handful of U.S. companies--General Electric Information Services, IBM, Infonet, and General Motors' Electronic Data Systems--have already launched private, pan-European data networks. Now, phone giant AT&T is rolling out a 17-country network for corporate data. AT&T will lease lines from the European phone companies, make sure all the transborder connections work, and submit a single monthly bill, rather than one from each PTT. When regulations loosen, AT&T says, it will add voice. Meanwhile, Pan American Satellite has won licenses in France, Germany, and Britain to beam corporate data communications from its satellites.

DATA JAM. At this point, out-competing the PTTs in data services isn't thatdifficult. A recent survey of customers who use public networks to transfer data across borders shows that 20% of connections fail. And even after recent price cuts, tariffs are sky-high. Average rates are as much as eight times as high as those in the U.S. for the private digital leased lines needed for computer networks.

High prices and poor service from PTTs can complicate the logistics of conducting business across a unified Europe. Just ask John C. Sale, network strategy director for Rank Xerox Ltd., which wants to save money by consolidating five European data centers into one in southwest England. But that would require lots more data traffic between Britain and the Continent. The cost: $25 million over the next seven years. That would nearly wipe out the projected savings. "At this point, telecom is a barrier to our quest of operating in a single market," he laments.

Americans aren't the only ones taking advantage of these opportunities. Electrical utilities from Scotland to Spain and a group of 11 national railroads all hope to open their private networks to public use. British Aerospace PLC and Daimler Benz plan to sell capacity on their satellites. And industrial giants in search of diversification, including Germany's Mannesmann and Sweden's Kinnevik, are developing cellular systems.

Still, American companies are the most aggressive. General Electric, for example, shocked Europeans in 1989 by threatening to sue the Belgian phone company for refusing to supply it with the lines for a data network. "Litigation is not in our European culture, so PTT abuses have been tolerated for years," says Hugh Small, head of telecommunications services at consultants A.D. Little in London. "The Americans are ready and willing to fill the vacuum."

ON THE OFFENSIVE. Americans can't expect clear sailing, however. PTTs have ways to impede the Americans. Candace Johnson, the American founder of Teleport Europe, complains that her private satellite service, based in Hannover, Germany, must pay exorbitant rates for capacity from state-owned Deutsche Bundespost Telekom. And she says Telekom is using her customer list to identify sales prospects. That, she says, is how Telekom snared a large German savings bank just as the bank was ready to sign a contract with Teleport last fall. Telekom doesn't admit guilt, but a spokesman says: "You can never say there's no fault in a company this big."

The European phone companies aren't just playing defense. Prodded by the new competition, many are investing in fiber-optic lines, adding services, and cutting prices. They're also forming alliances to create voice and data networks. The phone companies of France and Germany have joined forces, as have those of Sweden and Holland. France Telecom recently bought stakes in private data networks in Britain, Germany, and Italy.

Meanwhile, the Americans are happily watching bureaucrats chip away at the monopolies. "We must break up the major bottlenecks, especially in intra-Community competition," says Herbert Ungerer, head of EC telecom policy. That's music to the invaders' ears. "The PTTs realize there's only so much sand they can throw at the tide to hold it back," says Seth Blumenfeld, president of MCI International. That's the kind of talk Americans first heard 20 years ago when MCI's William G. McGowan predicted the demise of another ancient monopoly: AT&T. And look what happened.

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