A Heyday For Telecom Upstarts In Europe

Fledgling carriers are swiping the monopolies' customers

It's the kind of get-rich-quick story you don't often hear in Europe. Two brothers and a friend turned a couple of family-owned electronics stores in Cologne and Munich into an alternative phone company four years ago. On Apr. 22, they took Drillisch public, selling a third of the company on Germany's Neuer Markt for $28.7 million. The three partners, all in their 30s, pocketed $11.4 million and are pouring the rest into new gear to go on the attack against giant Deutsche Telekom.

What made the young founders so wealthy was the final stage of European telecommunications deregulation, which took effect on Jan. 1. Deregulation has touched off a competitive frenzy in Continental Europe. Indeed, experts say competition in the $200 billion Continental telecom market is building far faster than it did in the early stages of U.S. and British deregulation. "Change that occurred in a four- to five-year period in the U.S. and Britain is being compressed into 12 months in Germany and two years in France," explains Mark Daeche, chief executive of First Telecom PLC, a British alternative phone operator.

Why? For one thing, the biggest Continental phone markets have moved more precipitously into deregulation. Germany, for instance, has opened its telecom market much wider even than Britain, allowing upstart rivals cheap, almost unfettered access to provide services on Deutsche Telekom's network. Another factor: worry among regulators and government officials that without state-of-the-art telecommunications technology and services, Europe will be at an economic disadvantage.

The pace of change could yet be slowed. Governments could backtrack on planned market-opening initiatives if layoffs and losses pile up at big telecom companies, which are among Europe's largest employers. But if competition continues to expand at its current pace, it will mean dramatic growth for the whole industry, coupled with massive price cuts that will help consumers and companies alike. That, plus huge new investments in fiber-optic technologies, should give a major boost to European competitiveness.

In Germany, some three dozen rivals are nipping at Deutsche Telekom's heels. They claim to be undercutting the giant by up to 60% in the domestic long-distance market, despite Deutsche's price reductions this spring. "We're under very heavy competition," says Detlev Buchal, Deutsche Telekom's board member for sales and services. "We're fighting for every customer."

DARING RIVALS. Similarly cutthroat competition is likely to spread across the Continent. Prices already are falling nearly everywhere. Philip T. Barton, chairman of the European Virtual Private Network Users Assn., a trade group of big telecom users, says most members have saved about 15% so far this year as entrenched providers anticipate more competition.

Rivals from Britain and the U.S. sense major opportunities. The Anglo-Americans seem more daring than their big Continental rivals, partly because they have gone through deregulation before: At least a half-dozen of them, including WorldCom and Viatel Inc. of the U.S. and Britain's Colt Telecom Group PLC and Esprit Telecom Group PLC, are building fiber-optic telecom networks on the Continent. Although Esprit is taking heavy losses to fund expansion, its NASDAQ-listed shares have more than tripled since November.

So far, the telecom giants' profits seem to be holding up under the onslaught. They believe they can thrive by spreading out across the Continent and positioning themselves in growth markets such as Internet services and mobile communications. But they'll have to be nimble. "The market is in very rapid evolution," says Tommaso Pompei, CEO of Wind, a new rival to Telecom Italia. Wind, Drillisch, and a host of other phone pioneers will make sure of that.

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