Besieged Barons Of Telecom

As the free-for-all nears, upstarts are grabbing share

What happens when an $86 million upstart tackles a $37 billion behemoth--on the giant's own turf? Ask Mark Daeche, CEO of London-based First Telecom, who is taking on Germany's Deutsche Telekom. His company aims to grab a slice of Europe's $160 billion telecommunications market when it opens to full competition after Jan. 1. In the ensuing free-for-all, Daeche expects to double sales in the first year. But the opposition will be fierce. Deutsche Telekom has already hauled the smaller company into court twice, claiming its advertisements of radically lower prices are illegal. Daeche knows the fight is just beginning. "As we make more noise, we expect the legal opposition to step up," he says.

Dozens of other fledgling telecom companies will face similar challenges when they begin offering a wide range of services next year. National governments and the former telecom monopolies they have supported continue to put up obstacles to competition. But officials of the European Union in Brussels, who have spent 10 years designing the rules for an open telecom market to boost Europe's competitiveness, are cracking down. On Nov. 5, the European Commission charged seven member countries with failing to comply with EU directives to create a free market. The violators could be fined. That bodes well for new competition as next year unfolds. "The EU will get tough," says Nigel Deighton, research director at London-based Gartner Group.

Germany wins the best marks for creating an open market, and it is likely to see stiff competition in 1998. In September, regulatory authorities approved lower "interconnect" rates--the charges for those using Deutsche Telekom's network. (Unless they use wireless technology, even competitors building their own networks need to access those of the monopolies, in order to bridge the last critical mile to individual customers.) Deutsche Telekom is challenging the decision, but a lower court has sustained the ruling. Low access rates will help new competitors like Dusseldorf-based speed into the voice market come Jan. 1. has already grabbed a chunk of the private-network business at 800 large German companies, including television giant RTL and retailer Metro.

Throughout Europe, many new players are targeting the Achilles' heel of telecom monopolies--high-speed networks and the services that go with them. The London-based Telecoms User Assn. recently published a survey showing that many businesses feel traditional telecom operators no longer understand their needs. They are handing their business to companies on the cutting edge of information technology, such as U.S.-based WorldCom Inc.

WorldCom expects voice services, which represent some 80% of the company's business today, to shrink to 20% within five years, as data services explode to 80% from 20% today. "That's the business we think represents the future," says Colin Williams, chairman of WorldCom's international operations. Williams expects his company's sales growth in Europe will exceed 100% in 1998, as it begins offering 45-megabit leased lines to businesses--a service monopolies have been slow to develop.

In France, challenger Cegetel wants a slice of the classic phone business, but it aims to be No.1 in Internet and intranet services, offering voice over the Internet by mid-1998. Computer users with a modem and voice card will be able to call long-distance at local-call prices. "The only way to survive the coming price war is to move up the value chain," says Andre Meyer, general manager of Cegetel's enterprise services.

BIG BUCKS. New rivals will also use wireless technology to eliminate the need for piggybacking on monopoly networks. For example, by putting an antenna on customers' roofs, Germany's Viag InterKom aims to transfer calls via radio waves to a regional fiber-optic network without building connections to each home. Its shareholders plan to invest $4.2 billion over the next 10 years in fiber-optic lines. When the system is complete, Viag InterKom will largely be able to bypass Deutsche Telekom's network.

London's Colt Telecom Group PLC, with $59 million in revenues, is banking on better service to break the monopolies' hold on corporate clients. With its high-capacity fiber-optic rings around London, Frankfurt, Paris, Munich, and Hamburg, Colt caters to corporate customers with big data-transmission needs.

Despite the remaining barriers to free competition, new operators are expected to undercut monopoly tariffs by 20% to 30% next year. Leased lines from London to Paris or Frankfurt may drop from $50,000 a month today to as low as $15,000 in 1998. Riccardo Ruggiero, chief executive of two-year-old Italian challenger Infostrada, can't wait for New Year's Day. It's not that he expects a free market to happen overnight. But the date will mark when companies like his can begin to have true impact.

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