Foreign Telcos Are Speed Dialing Into The U.S.

And they're providing a viable alternative to domestic providers

It wasn't your typical promotion for long-distance phone service. In late September, Telefonos de Mexico organized a soccer tournament on several dusty fields around Tucson. As players on 14 teams from Mexico and 14 teams from Arizona squared off against each other, Telmex pitched phone service--not just to the Mexican fans but to the Americans as well. Thanks to the Federal Communications Commission's approval of its application in September, Telmex has started selling its service to U.S. customers and is attracting about 350 a week. That's a pittance compared with the tens of thousands of customers AT&T nabs weekly, but it's an attention-getting start for a 12-week-old business operating in just five cities. "Both AT&T and MCI are stinging over how well Telmex is doing here," says analyst Scott Cleland of Legg Mason Inc.'s Precursor Group.

And Telmex is just the beginning. The Mexican carrier is part of a wave of foreign telecom players that is crashing into the U.S. market and for the first time offering a viable alternative to U.S. providers on a broad range of communications services. Their collective market share is just 2% of the U.S. market, according to Dataquest Inc. But it's sure to rise: In the past year, the FCC has granted 48 licenses for overseas players to begin offering service in the domestic market, though only 25 are actively doing so today.

LOWER RATES. What the foreign players are gunning for is the biggest telecom market in the world--$200 billion in long-distance, local, data, and Internet service revenues. "It's not a full-scale invasion yet, but we'll probably see forays from most of [the major foreign carriers]," says Melinda Mullet, a director at consulting firm Arthur Andersen & Co. Among the most aggressive newcomers are Telmex, Japan's Nippon Telegraph & Telephone Corp., and Britain's Cable & Wireless PLC.

The implications could be profound. Foreign carriers are bringing a much needed dose of competition to the telecom market just as consolidation is whittling down the number of domestic players. Consider this: A month before Telmex started selling its low-cost service in the U.S. in conjunction with Sprint Corp., AT&T cut its rates from the U.S. to Mexico. Now, AT&T's rates to Mexican border towns are 25 cents a minute, down from 49 cents. "That makes it tougher for us to compete, but it's good for consumers," says Luis Lopez, chief executive of the Telmex operation in the U.S. AT&T says its rate changes are not in response to Telmex.

Corporate clients are likely to benefit even more than consumers from the foreign influx. Both NTT and Cable & Wireless PLC are focusing on the business market because monthly bills tend to be much larger--and profits fatter. In September, the British carrier, which has offered long-distance service in the U.S. for about 20 years, spent $1.75 billion to buy the Internet assets of the former MCI Communications Corp.

FCC CHEERS. Now, Cable & Wireless, with a $1 billion business in the U.S. already, will market a full range of data and voice services to its traditional customer base of small and midsize companies. It also plans to target large multinational corporations that can benefit from its assets in Europe and Hong Kong. "We're going to have a much stronger U.S. presence than we've ever had," says Carl Grivner, CEO of Cable & Wireless' operations in the Western hemisphere. "We are positioned to connect all the dots for our customers."

They're not the only ones. Very quietly, NTT is building a strong position in the U.S. After receiving FCC approval to offer a full range of telecom services in September, the Japanese carrier is marketing primarily to Japanese companies in the U.S. It has attracted close to 100 corporate customers and plans to win more by offering services far snazzier than plain-vanilla phone service, says Keisuke Nakasaki, CEO of NTT America. It invested $100 million in Net service provider Verio Inc., based in Englewood, Colo., so it can supply users with high-speed Net links. It put another $100 million in Teligent Inc., a Vienna (Va.)-based firm that's developing an innovative wireless service to provide speedy data hookups to customers who don't have access to fiber-optic lines.

Not that NTT is ignoring cost as a means to win customers. IHI Inc., a Tokyo-based manufacturer of heavy equipment such as machinery and aircraft engines, switched its New York office's telecom business to NTT cutting its expenses by 20%. Now, Hisakazu Eto, IHI's corporate secretary and treasurer, is studying whether to shift more U.S. business to NTT. "Their phone service is very good," says Eto.

The FCC is largely cheering on the arrival of the foreign carriers. The regulators want to promote as many alternatives as possible. "We welcome competition in this country from whoever wants to serve U.S. consumers," says FCC Chairman William E. Kennard.

But all is not rosy. The FCC is requiring that foreign markets be opened to competition before it allows telecom players from those markets into the U.S. What's more, it wants the costs of international calling to fall--so it's pushing for drops in so-called settlement rates. These are the charges that U.S. callers pay to have a call completed in, say, Mexico or France. They range from 5 cents a minute in Sweden to as high as $5 a minute in Afghanistan. The FCC has published its own benchmarks for all international settlement rates.

That sort of unilateral regulation doesn't sit well with some carriers. Telmex, for one, has argued that it needs to keep settlement rates high to fund improvements to the phone network in Mexico, where only 1 in 10 people have phones. It agreed to meet the FCC's benchmark of 19 cents a minute in January, 2000, but it wants to keep the rate at 34.5 cents a minute in 1999. On Nov. 24, Kennard called the 1999 rate "unacceptable" and asked that it be reduced.

What happens if Telmex and Mexico refuse to revise their settlement rates? Although it's the most extreme recourse, the FCC is considering revoking Telmex' right to offer phone service in the U.S., according to sources at the commission. More likely, Telmex will reach some sort of compromise with the FCC to continue operating in the U.S. That means Telmex' soccer tournaments--like the benefits of more telecom competition--are likely to continue in the future.