The Playing Field Tilts In Deutsche Telekom's Favor

A regulatory ruling may clobber Germany's telecom upstarts

Until recently, it looked as if Deutsche Telekom was going to be routed by a raft of new competitors that have sprung up since telecom deregulation hit Germany full force a year ago. The former monopoly's challengers have already stripped it of 30% of its lucrative long-distance business. And they seemed ready to plunder its local market, offering lower prices and winning household customers by bundling voice service with features such as Internet access.

Now, things may have tilted dramatically back in Deutsche Telekom's favor. On Feb. 8, German regulators decreed that for at least the next two years, the upstarts must pay nearly $15 a month per customer to use Deutsche Telekom's connections to homes and businesses, the so-called local loop--on top of a one-time connection fee of as much as $194. Since Germans can order a connection directly from Deutsche Telekom for 16% less, rivals claim they now have no room to compete by undercutting its prices. Regulators deny critics' charges that they caved in to political pressure from the German government, which still owns 72% of Deutsche Telekom.

A BIG SHAKEOUT? The upshot is likely to be a shakeout among Germany's fast-growing new telecom companies. Analysts figure a few of the bigger upstarts may be able to keep going it alone. Mannesmann Arcor, a joint venture led by Mannesmann, will benefit from customer relationships built through the parent company's mobile-phone network, Germany's largest. But there probably will be mergers among the 50 or so companies now trying to grapple with Deutsche Telekom. The danger for Germany is that if competition slows, the innovation and rapid revenue growth telecom saw last year will slow, too. That would be painful: The sector created an estimated 40,000 jobs in Germany in 1998, important in a nation with a punishing 11.5% unemployment rate.

Deutsche Telekom's rivals are already cutting their spending. Otelo, a joint venture of giant German utilities RWE and Veba, is scaling back plans to invest $4 billion by 2005 to build a nationwide phone network. Now, it intends to concentrate mainly on serving big metropolitan areas such as Essen. Marburg-based TelDaFax, which came out of nowhere to become No. 3 among Deutsche Telekom competitors, says it expects to survive by offering specialized services such as "unified messaging," which allows customers to access E-mail, faxes, and voice mail by phone.

"HARDLY ANY CHOICE." The upstarts contend that the new ruling may hurt consumers, who have benefited from cuts of up to two-thirds in long-distance rates since deregulation hit. So far, companies such as MobilCom have prospered because regulators let them use Deutsche Telekom's network for long-distance service without investing in networks of their own. But the latest ruling makes it far more expensive than they had hoped to wire directly into the 90% of households that use an analog line. Says Thomas Geitner, CEO of Otelo: "Private users will have hardly any choice." Viag Interkom, a joint venture of Viag and British Telecommunications PLC, for one, plans wireless networks that bypass Deutsche Telekom. But the heavy investment makes that practical only for big buildings.

To be sure, Deutsche Telekom still faces considerable competition and an uncertain profit outlook. It had lobbied regulators for an even higher $21-per-month local connection fee in an effort to beef up margins. And the company is continuing to cut costs, reducing its head count by 22%, to 179,500, over the past five years. Still, investors are giving the edge to Deutsche Telekom. Its shares rose more than 10% in late January in anticipation of the ruling. By contrast, Buedelsdorf-based MobilCom, the top rival in long-distance service, saw its shares slip 3.7% after the decision.

Meanwhile, the era of red-hot growth in German telecom may be ending. Mobil- Com's 1998 sales more than quadrupled, to $840 million. With long-distance prices now about as low as they can go and a potential new market choked off, growth won't be as easy. For Deutsche Telekom, what once looked like a rout now looks more like just a hard slog.