Europe's Cartels Are Finally Crumbling

As coddled industries open, upstarts and consumers cheer

When phone deregulation hit Germany on Jan. 1, things went wild at tiny, Frankfurt-based TelePassport. The company, which offers discount phone services under new rules allowing competition with Deutsche Telekom, signed up more than 19,000 customers in 20 days--and it won't even start advertising until February. "We had expected a lot of interest, but this is way above our plan," says marketing director Volker Isenmann.

Surprising it is, especially to anyone who remembers how European governments once coddled monopolies such as providers of telecommunications. Yet telecom is just one area in which Europe's monopolies are coming under fire. From energy to publishing, postal services to air travel, formerly closed industries are gradually opening to true competition. Progress has been uneven. But the trend toward a more level playing field is unmistakable and promises to change life for Europe's companies and consumers forever.

AIR WARS. Pressure on the monopolies has come largely from business. Companies striving for greater efficiency don't want to put up with the astronomical prices and outdated service that monopolies have gotten away with. The globalized economy is another factor. Fearful of lagging behind other regions in everything from profits to productivity, the European Commission is forcing reforms, with antitrust chief Karel van Miert leading the charge.

With competition already heating up in telecom, van Miert is focusing on Europe's national air monopolies. The final stage of Europe-wide deregulation hit air travel last April. That has helped upstarts such as Ryanair and Deutsche BA take on flag carriers AerLingus in Ireland and Lufthansa in Germany. Deutsche BA, which is controlled by British Airways PLC, plus two other upstarts now have 22% of the German market. In Italy, several upstarts have cut Alitalia's domestic market share to 75%, down from 90% two years ago.

But van Miert wants deregulation to dig deeper. On Jan. 14, he gave the Frankfurt Airport, Germany's biggest, three months to allow competition in ground services such as refueling and de-icing planes. A study showed that handling a Boeing 747-400 costs $15,672 at Frankfurt vs. $8,197 at Washington-Dulles, the most expensive U.S. airport.

Change is coming more slowly in the energy sector, until now one of the Continent's most regulated, but it's starting. Although Europewide deregulation will not kick in until 1999, Sweden and Norway already have open energy markets. And with more competition looming, companies such as General Motors Corp.'s Opel unit and Germany's Hoechst are already prying dramatically lower electrical rates from utilities.

Another sign that the Continent's power business is about to undergo a shakeup: Last year, Houston-based Enron Corp. inked a joint-venture pact to build small, independent power plants with ENEL, the giant state-owned Italian utility. The initial goal will be to add capacity in Italy, but the two may move into other markets. In December, Enron also did its first power trade on the Continent, selling electricity generated in Switzerland to two customers in the Netherlands.

Europe's formerly protected giants won't give up their dominant positions easily. Even after 17 years of gradual deregulation, for instance, British Telecommunications PLC has held on to 90% of Britain's phone market. Deutsche Telekom plans rate cuts this spring as part of its fight to keep customers. And new competitors gripe that the former monopolies still have the financial clout to fend off upstarts.

Continental Europe, moreover, has a long history of undercutting true competition. United Parcel Service, for instance, complains about the European Commission's recent decision to delay opening postal services to full competition until at least 2003. In addition, while pricing cartels have been technically illegal for decades, they have flourished until now. Even the Continent's most open markets are just getting around to banning price-fixing in sensitive areas.

Still, a world economy that increasingly rewards free and open markets is likely to force Europe to do away with monopolistic practices sooner rather than later. "Once the ball starts rolling, competitive pressures will make things move very quickly," predicts Mark A. Frevert, president and CEO of Enron's European unit. That's the best-case scenario for long-overdue change.

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