Could This Be The Deal That Breaks Telecom's Chains?

Sprint Corp. Chief Executive William T. Esrey was exuberant. Not only did he beat AT&T at finding heavyweight partners in Europe to help tackle global markets but he also won an alliance with the very two companies AT&T had wooed for months. Using the teleconferencing service he hopes to sell worldwide, Esrey beamed his own image to Europe on June 14 to announce that France Telecom and Deutsche Bundespost Telekom would pay $4.2 billion for a 20% stake in Sprint.

The alliance plans to sell a wide array of voice, data, and video services to large corporations. Just as important, Esrey's deal may provide the best mechanism yet to pry open the tightly controlled European telecom market to competition. "If someone is looking for a reason to speed liberalization, this deal could be it," says one Deutsche Telekom executive.

ALL COMERS. In this scenario of accelerated deregulation, the American government plays a key role. The U.S. Justice Dept. and the Federal Communications Commission must approve the alliance, but they may dig in their heels unless Germany and France agree to open their telecommunications markets faster and more thoroughly than now planned. American officials have already held up the British Telecommunications PLC-MCI Communications Corp. linkup for a year, demanding proof that the British market is open to all comers. The U.S. finally gave the green light on June 15, after Britain granted some 35 operating licenses to new carriers, including Sprint. Says Michael Hepher, BT's group managing director: "We had to go to considerable lengths tm convince U.S. regulators. It will be interesting to see how the French and Germans manage to convince them that their markets are open."

The prospect of pressure from Washington comes at an opportune time for pro-deregulation forces in Europe. This summer and fall, European Union officials and telecom ministers will debate key measures to open markets. Although the European Union has agreed to allow competition in voice services in 1998, for example, no plans exist to let rival carriers build their own networks.

That means new operators will have to lease their infrastructure from the state-owned carriers, which could charge high fees for connections. Pro-liberalization forces in Europe, however, are pushing to allow new entrants to build their own infrastructure by 1998.

Sprint's move will also put pressure on AT&T to find a partner fast. "It's a coup for Sprint. AT&T still hasn't got a foothold anywhere in Europe," says Bryan Van Dussen, senior telecom analyst with Yankee Group Europe. AT&T has condemned the Sprint hookup with the protectionist French and Germans, but that doesn't mean it won't find itself a mate soon. One likely candidate is Unisource, a Swedish, Dutch, and Swiss consortium offering private network services to corporations, and perhaps Spain's Telefnica or Britain's Mercury Communications Ltd.

STILL ALIVE. AT&T and Unisource already have teamed up in a bid to provide private networks to the European Value-Added Network Assn., a group consisting of 30 of the largest companies in Europe, including Rank Xerox, DuPont, ICI, and Philips. Both AT&T and Unisource confirm they are talking about a partnership, and industry sources say the two already are bidding together on other corporate contracts. The BT, Sprint, and AT&T alliances are all likely to add Asian parters as well. AT&T, for example, already has signed up Singapore Telecom.

When the dust settles on these transatlantic telecom alliances, the three powerhouse consortiums are likely to augment their offerings through deals with computer-services companies. Instead of the two industries converging, as everyone assumed in the 1980s, telecom and computer companies have largely stuck to their own turf. As a result, they will need alliances to provide the kind of systems integration that customers want. Indeed, Esrey confirmed on June 14 that Sprint's talks with EDS, reported to be dead, are still alive as the two companies seek a way to team up without either making a formal investment.

If the Sprint alliance does go through, Esrey will have his hands full meshing the radically different cultures at France Telecom, Deutsche Telekom, and Sprint. He also will have to hammer out one universal network from three different systems. Hard work indeed. But Esrey's regulators and rivals are feeling the impact of this alliance before it even signs up its first customer.

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