Telecom Giants Still Have The Lines Tied Up

Arturo Artom was the first to dare. In 1993, his Milan-based Telsystem challenged Italy's state monopoly Telecom Italia for a piece of the phone business in private corporate networks. The European Union had declared this sector of the telecom business open to all comers. But Telecom Italia still refused to lease its phone lines to Artom. He says they even sent bullying letters to his clients. The 29-year-old entrepreneur took the monopoly to court. On Mar. 8, a Roman appeals court ruled in his favor. Telecom Italia is complying but still claims Telsystem wanted to "expropriate" its assets by piggybacking on its network instead of starting its own.

Italy isn't the only country where critics charge that monopoly telecom operators, owned or controlled by the state, still flout the law. While Europe marches toward a 1998 deadline for opening its telecom markets completely, monopoly phone companies are working overtime to block competition in the businesses that have already been liberalized, such as mobile services and private corporate networks. The newcomers charge the monopolies' obstructive tactics include sitting on license applications, charging exorbitant fees for leased lines, and using profits from monopoly services to subsidize savage price-cutting in areas that are already deregulated (table).

It's a war--and a clear sign that real deregulation will be a long time coming, even after 1998. Says Michael Potter, managing director of Esprit Telecom, a corporate network provider: "As long as monopolies are allowed to continue these dirty tricks, you can't talk about the European Information Superhighway in any meaningful way."

Most of the telecom giants don't see it this way, of course. Their executives say they are doing their best to wade through a confusing host of accounting and regulatory changes before 1998--and they intend to obey the law without giving rivals any more help than they have to. Yet the European Commission may be starting a crackdown on the governments that control the telecoms. Portugal is under investigation. Italy and Greece are charged with not following through on EU directives. Germany and Spain are accused of shutting out some competition by interpreting EU law too narrowly, a charge that Deutsche Telekom says is groundless, since the EU directives are too vague.

What's prodding the commission to action, insiders say, is an increasing number of cases of open defiance of EU law. In 1994, Spain's Telefonica de Espaa refused, after seven months' delay, to grant Amsterdam-based Esprit Telecom a leased line from Madrid to London for its private network services--even though Esprit had an operating license since 1991.

Telefonica also refused to supply lines to Sweden's 3C Communications, a phone marketer. 3C won a suit against Telefonica. But Telefonica is appealing--and also imposing a fine on 3C for using phones that meet EU standards but not Spanish ones. Although Esprit got its line through EU arbitration, it's still seeking a Spanish court judgment that Telefonica abused its dominant position. Telefonica declines comment on the Esprit court case.

PROFIT SWITCHING. Subtler means exist to thwart new entrants. Here's a favorite: using the hefty cash flow from monopoly operations to subsidize profitless marketing wars in the competitive arena. An EU law required monopolies to make their accounting transparent by January, 1994, so they could not cross-subsidize or charge excessively high rates. But private companies, lawyers, and market researchers say no state monopoly in continental Europe besides Sweden's has complied.

In 1994, German antitrust authorities ruled that Deutsche Telekom diverted $1.5 billion in monopoly profits to support its data packet-switching business, where it undercut competitors' prices by as much as 70%. But it's unclear how private companies will benefit from the ruling. The Post & Telecommunications Ministry and the Economy Ministry have simply ordered Telekom to prove its service was profitable from 1994 on. Telekom says it will, and that regulators misunderstood the complex accounting and regulatory rules involved in the case.

Such arguments are raging across Europe--even in Britain, where British Telecommunications PLC lost its monopoly years ago. Critics charge that BT has deployed a variety of tactics to slow down the inevitable erosion of its market share, which still remains quite high. Rivals, for example, think customers that switch from BT to a competing service should get to keep their old numbers--and that BT should help shoulder the costs involved. So far, BT has refused to pick up half the cost. Competitors also complain that BT retails its own equipment below cost. So on Mar. 21, four small equipment makers filed a complaint with regulator Oftel. BT declines comment.

At least an independent regulator exists in Britain. Except for Scandinavia, countries in continental Europe still have not created separate regulatory telecom agencies. Most countries still have ministries that hold the contradictory jobs of safeguarding the profitability of the monopoly phone companies while introducing them to competition. In Spain, for example, three members from the Public Works, Transport & Environment Ministry, which regulates Telefonica, also serve on the company's board of directors. Telefonica officials say they represent the state's 32% stake in the company. But privately, some admit there is a conflict of interest, and EU competition authorities are considering some sort of action.

The complaints keep popping up. Rivals believe France Telecom offers its own private network services at a deep discount through a division called Colisee International. But for the leased lines that France Telecom resells to competitors it's a different story. Toulouse-based Communications Telephoniques Internationales (CTI), for example, has to charge $918 to install a leased line profitably, while Colisee does it for $265. CTI manager Charlotte Polivka says whenever she asks France Telecom about the disparity, she gets an answer she cannot verify: that Colisee "has other means of amortizing its costs," which enable it to charge a low price. France Telecom explains the disparity by saying it can install lines at a deep discount for its high-volume customers.

Private industry could avoid these complications by building and operating its own alternative networks. Telecom competition officials in Brussels are pushing a new initiative to introduce competition on such networks beginning on Jan. 1, 1996. That might make a difference in Germany, where several utilities, such as RWE and Veba, already operate extensive fiber-optic networks. In other countries on the Continent, however, it will take years to build alternative networks, which cost billions to construct.

The EU has one more ace to play: its mandate to vet and approve telecom alliances. If Germany and France refuse to open their markets faster, for example, it's unlikely the EU or U.S. authorities will approve a proposed alliance between Deutsche Telekom, France Telecom, and Sprint.

"I DARE THEM." Germany recently removed a regulatory official from the board of Deutsche Telekom, fearing disapproval in Brussels and the U.S. And Spanish officials are discussing the creation of an independent regulatory body--following the announcement that the European Union will investigate Telefonica's proposed alliance with Unisource, a consortium of Dutch, Swedish, and Swiss phone operators.

Private industry may have another solution. Some companies are quietly breaching the monopoly by offering voice services over data-only networks. "No one can police the billions of gigabits of information flowing over vast networks," says one U.S. executive working in Germany. "I dare them to find me." Even if regulators can locate such underground operators, the only remedy is a court case, which would go on long after markets were fully open. The newcomers may yet learn to fight fire with fire.

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