A Countercoup In Telecom

The news last June hit Paris and Bonn like a thunderbolt. For years the world's biggest phone companies had been cozying up to one another. But the landmark joint venture by British Telecommunications PLC and MCI Communications Corp. to capture multinational corporate customers seemed like the coup de grace for France Telecom and Deutsche Bundespost Telekom. The two companies, after 18 months of negotiations, thought they had MCI lined up as the critical U.S. partner for their own fledgling global venture. But the BT and MCI deal suddenly sent their plan up in smoke.

Or did it? Sources close to the German and French companies tell BUSINESS WEEK that they are negotiating an audacious plan that could reorder competition in the global telecommunications market. If the pact comes off, possibly by yearend, the Continent's first- and third-largest phone companies would merge a number of their businesses into a European supercarrier targeting business well beyond the top 300 corporate clients of their original plan with MCI.

BIG THREE. What's more, the scenario could pull in American Telephone & Telegraph Co. as a third partner. Separately, the companies are now the top three players in international traffic (table). Together, their global reach--totaling cross-border revenues of $15 billion--would extend farther than the next eight-largest carriers combined. "They're negotiating a very big, secret deal," confirms a France Telecom director.

Already France Telecom Chairman Marcel Roulet and Deutsche Telekom Chairman Helmut Ricke have broached the plan with European Commission President Jacques Delors to make sure it won't run afoul of EC competition law, says a Brussels official close to the talks. "My strong impression is that the French and the Germans are trying to sew up the market first, then get in bed with AT&T," he adds. Both telecom chairmen declined to comment.

No one is surprised that the state-owned French and German companies are drawing closer together, given the pressure from the BT-MCI deal and other liberalizing trends, especially thescheduled opening of mainstay voice services in 1998. For starters, the two European carriers might merge their data services operations. Other businesses, such as credit cards and leased lines that are used in building private networks, could also be combined. More important, the two could join forces to build Europe's first advanced multimedia network to carry data and, later, voicetraffic.

The French and Germans also have intensified negotiations with AT&T about linking their international networks. Since last summer, AT&T has been searching for one or two European partners to join its global corporate service called WorldSource. Now, while AT&T wouldn't invest directly in national carriers, it "might well take an equal equity participation in a new alliance" of the sort France Telecom and Deutsche Telekom are cooking up, says AT&T Vice-President Burt Wolder.

"INCONCEIVABLE." But obstacles remain. The Europeans fear they could lose more by handing over their big corporate clients to AT&T than they would gain in access to AT&T's U.S. accounts. "AT&T is demanding more than we can give," says one French insider. In the end, the deal may hinge on how much damage the French and German carriers think raiders like BT can inflict. Already, sources say, BT-MCI has offered discounts of up to 30% to many of their corporate clients.

Meanwhile, regulators in Brussels will have to weigh in. EC officials said last June, when setting the 1998 date for opening competition to foreigners, that they would look favorably on European cooperation. But any merger plan must pass several tests under EC law, including proving it would not "enhance a dominant position" in any important EC market. Given the size of Deutsche Telekom and France Telecom, "they're facing an uphill battle," says a Brussels competition attorney. BT, for one, would fight such a deal tooth and nail. Says a BT spokesman: "It's inconceivable."

But regulators may have a few cards to play. "Brussels could ask [France and Germany] to open their domestic voice markets to competition before 1998 as a quid pro quo," says Audrey Mandela, international vice-president for Yankee Group, a Boston market researcher. Such a step could even quicken the pace of liberalization. If so, Europe would see all-out war in telecommunications long before anyone imagined.