Cisco's Telecom Two Step In Europe

It's bankrolling startups to build markets for its own gear

Two years ago, Stefan Krook faced a marketing challenge. The reed-thin Swedish entrepreneur, now 27, had launched a Stockholm-based company, Glocalnet, one of the first to offer telephone service over Internet technology. It was a tough sell, though. Voices sent as packets of data sounded distorted. Krook's solution was to focus on foreign workers living in Sweden, who soon made up 95% of his customers. "The sound was going to be bad coming from Somalia or Afghanistan anyway," he says. "They wouldn't care."

A wacky business plan? Not to Cisco Systems Inc. The world's No. 1 seller of Internet technology decided to woo the young entrepreneur. Last February, Cisco bought Krook's old equipment for about $800,000. Cisco then leased its own equipment to Krook at subsidized rates. This gave Glocalnet a run at the telecom market for measly financing fees of $1 million per year.

Now, Glocalnet has 40,000 customers, compared with 7,000 at the beginning of the year. And in mid-September, Swedish regulators granted Glocalnet equal access, making it the first Internet telephony company in the world that customers can simply subscribe to, getting Glocalnet access without dialing lengthy access codes. "Now we can start growing seriously," says Krook.

Notch up another success for Cisco in Europe. The Silicon Valley company, with $12.5 billion in sales and $8 billion in cash, is bankrolling telecom companies across the Continent and equipping them with the latest Internet plumbing. They range from the Wind consortium in Italy to Euromap, an affiliate of Germany's Mannesmann, based in the Hague. Cisco's moves in turn are pushing Europe's large telephone companies, from Norway's Telenor to the Netherland's KPN to make bigger investments in Cisco equipment to stay up to date in data communications. This telecom two-step is driving 55% annual growth for Cisco in Europe, where its sales now top $3.5 billion, some 28% of total sales. "Europe's our fastest-growing market," says Bill Nuti, the company's president for Europe.

But before Cisco can create an alternate Internet telephony network, it must master the voice technology. Hence Cisco's interest in Stefan Krook. The young Swede started looking into Internet telephony while working a summer job at NETnet International, a Stockholm-based telecom company. He concluded that by breaking voice down into packets of data, the company could develop telephones along an entirely different business model. Only one problem: voices that sounded as if they were coming from outer space.

PLUNGING PRICES. In 1997, Krook founded Glocalnet. Since then, trends have gone his way. Net voice quality has steadily improved, while deregulation has reduced voice call prices by up to 75%. Analysts think rates will continue to plummet and soon be nearly free.

At Glocalnet, Krook plans to make money selling services, which are much simpler to manage when calls are transmitted as packets of data on the Net. He sees the phone company packaging and transmitting people's data for them, from computers to remote answering machines, cell phones, and digital TVs. Analysts agree that value-added services will bring in revenues as phone tariffs plunge. But they say Internet technology is not ready to serve the big telecom companies. "It will be another year before the systems are ready," says Scott Moore, an analyst at International Data Corp. in London.

For Cisco, the Swedish startup is a valuable experiment. "They're our showcase," says Cisco's Nuti. The logic is that if Glocalnet makes money with Internet telephony in a tough market, scores of other European telecom companies will follow suit. With stakes that big, Krook can expect Cisco to answer his Internet phone calls--even if they sound unearthly for the next year or two.