Bonn's Telecom Bombshell

Wolfgang Botsch, Germany's Post & Telecommunications Minister, is known in Bonn's corridors of power as a master of political ambiguity, a careful bureaucrat with a gift for the innocuous-seeming sound bite. But his mild public pronouncements--to those shrewd enough to read them carefully--can also signal policy shifts with big implications for German and European business and the pace of regulatory change on the Continent. It was such an announcement, on Jan. 31, that has many in Corporate Germany speculating about the chances of a major speedup in the deregulation of the country's $66 billion telecommunications market.

Here's what happened. At hearings to consider the best way to update Germany's telecom laws, Botsch said he would consider permitting limited competition against state-owned phone monopoly Deutsche Telekom well before the European Union's 1998 deadline for total deregulation. At the public level, at least, it was a simple statement that in no way seemed to challenge the status quo. Unions and other opponents of rapid deregulation could not be threatened by such a vague pronouncement.

ANOTHER STORY. But according to corporate executives, Botsch behind closed doors went much further. By as early as this summer, Botsch may well be throwing open the door wider than anyone imagined to competition in several segments of the German phone market. Botsch, say these insiders, will give the green light to powerful German companies that want to break Telekom's monopoly network. That would allow companies that offer private corporate network and other services to bypass Telekom and slash prices. Now they must lease costly lines from Deutsche Telekom itself to get the business. Botsch also assured industry leaders that they could soon start challenging Telekom with such high-tech services as multi-media and video-on-demand.

The implications of Botsch's actions could be far-reaching. For starters, German corporations will experience for the first time the benefits of low-cost, state-of-the-art service. "The earlier the better for German industry," says Gerhard Rist, the executive in charge of telecom services for chemical giant BASF Group. At present, Deutsche Telekom rates can run as much as 300% higher than those in Britain, where the telephone market has already been deregulated.

Big German companies are eager to take on Deutsche Telekom. Energy utility Viag, which already has 4,000 kilometers of fiber-optic network, is eager to wire the cities of Munich and Nurnberg. Veba, another energy company, is teaming up with Britain's Cable & Wireless PLC: It already has its own fiber-optic network, which it is seeking to offer to such third parties as corporate network operators at rates as much as two-thirds lower than existing Telekom prices. Veba board member Hermann Kramer says he already has one major customer ready to lease capacity on Veba's network to the tune of more than $65 million a year.

Steelmaker Thyssen, for its part, has teamed up with BellSouth. Herbert Brenke, chief executive of E-Plus Mobilfunk, a cellular-telephone operator, estimates if he can cut out the use of Telekom lines to his switching stations, he may be able to reduce fees by at least 50%.

The emergence of greater competition in the corporate sector could start a chain reaction throughout Germany that accelerates the whole process of opening markets Europewide. "Once there's a crack in the wall, you can't control it anymore," says Candace Johnson, founder of a private telecommunications trade association in Bonn and vice-president of Iridium, the global satellite-services company. France, Italy, and Spain could feel pressure to speed up their own planned deregulations in order to lower costs.

There's no doubt, as Botsch told BUSINESS WEEK, that "the climate for liberalization has substantially improved. Everyone realizes it is the next step. That makes my job easier." Still, deregulation remains political dynamite in Germany--especially now that regional governments, even those led by Social Democrats, will battle for licenses on behalf of their local utilities. Deregulation will force a radical restructuring at Deutsche Telekom, which already plans to eliminate 50,000 of its 230,000 workers by the year 2000 to become cost-efficient. Quicker deregulation could well generate more job losses.

But technology and global market forces are sharply undercutting the arguments for delaying competition. For starters, Germany's leaders have begun to understand that stalling is a dangerous game, especially with the U.S. leading in telecom technologies. "In 1998, Deutsche Telekom will be in an unbelievably difficult situation if it has no experience competing except in mobile phones," says former Bundespost Minister Christian Schwarz-Schilling. And unless Telekom proves that it can compete soon, investors may turn their backs on the planned sell-off of Telekom shares starting in 1996.

Given this volatile mix of politics and business, it comes as no surprise that in the past few months regulators and executives have been battling over the course of Germany's telecommunications policy. Outside pressure has also come from the U.S. Federal Communications Commission, which has threatened to block a $4.2 billion investment by Deutsche Telekom and France Telecom in Sprint Corp. unless deregulation in the telecom's home markets is accelerated. "Germany is the key market in Europe in telecommunications," explains FCC Chairman Reed E. Hundt. "They have got to go farther faster to get to the same conditions that characterize our communications market."

A loophole in European Union law has also given deregulation's champions an added advantage. Seldom-applied statutes state that a monopoly that does not serve a market adequately can lose its monopoly. Deutsche Telekom, strapped by its investment in eastern Germany over the past five years, has run short of cash to invest in up-to-date broadband networks throughout western Germany. Seizing on this law, several private companies including energy utility RWE threatened a legal challenge if Botsch failed to grant them licenses to operate alternative networks immediately. Bonn officials feared the impact a messy public suit over Deutsche Telekom's competence would have on investor confidence in Telekom's public offering.

"ON THE RECORD." In mid-January also came an encounter with U.S. regulators, who accompanied FCC Chairman Hundt to Bonn. At lunch in the embassy, a U.S. official asked point-blank if Germany would begin allowing competition in telecommunications before 1998. The question was fundamental to the FCC's pending decision to approve or block the Sprint deal.

All eyes turned to Gerhard O. Pfeffermann, state secretary at Posts & Telecommunications. German officials had given signals last year that parts of the market might be open to some competition by 1996. But no actions had followed. Pfeffermann answered "yes," according to one Washington official. "It put him on the record in a way that made him accountable," the official explained.

Botsch followed through on Jan. 31 with his private signal that he would pry open a piece of the market. To defend himself against the labor unions and the German left that is opposing deregulation, Botsch can still claim he has preserved Deutsche Telekom's voice monopoly. But the market forces he has unleashed may yet overturn his well-laid plans.


How deregulation will look


Partnerships between German companies and foreign telephone companies are gearing up to offer alternative telecom services to corporations, universities, and cities


Instead of leasing costly lines from Deutsche Telekom, the new ventures will seek to operate their own lower-cost fiber-optic networks


The joint ventures will increase the pressure for further market openings before the European Union deadline of 1998


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