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IN EUROPE, MANY PATHS TO THE I-WAY

The world's telephone companies have a problem. As phone service becomes a commodity, they must reinvent themselves as information and entertainment providers, channeling electronic shopping, Internet, and other services to their customers. If they don't do it, cable companies, data-networking companies, upstart telecom rivals, and satellite companies will eat their lunch. And offering big bandwidth is the key to success.

In the U.S., AT&T's(T) takeover of Tele-Communications Inc.(TCOMA) is a bet that cable-TV technology will dominate the U.S. market for delivering broadband, interactive services to the home. But most of Europe's giant phone companies are likely to take another tack. In Europe, different companies are likely to try various technologies to deliver high volumes of data speedily to the home. Enhanced phone hookups, satellite TV, and new digital and cellular services will go head-to-head with cable in the race to lay the Information Superhighway.

For starters, cable-TV is not as prevalent in Europe as in the U.S. Outside Germany, Belgium, and the Netherlands, cable-TV penetration is weak. In Britain, only 22% of homes that can receive cable have purchased it. Satellite pay-TV services dominate or compete heavily with cable in countries such as France, Spain, and Italy. And they are ramping up their own broadband interactive services.

URGED TO DIVEST. Unlike AT&T, Europe's former phone monopolies wouldn't need to buy cable companies because they own the ''local loop'' connection to customers. Indeed, countries such as the Netherlands and Germany already have nudged national phone operators to divest their cable-TV holdings to create freer competition in the pay-TV market.

Since they already have access to the local loop, Europe's phone giants will probably look to other technologies to boost bandwidth to the home. The main candidate is called ''x-DSL,'' which uses a bit of software in the central switch and hardware in the customers' home to expand the capacity of a regular copper telephone wire, allowing data transfer at speeds of up to two megabits per second. That's good enough for high-speed data graphics and video images. By 2000, several European countries should be offering affordable X-DSL services.

Scandinavia, where telecom deregulation already has produced a decade of fierce competition, will be among the first regions to get fat bandwidth to the home via x-DSL technology as a standard option. Helsinki Telephone Co., among others, expects to offer the Internet-loving Finns two-megabit connections via X-DSL by 2000. Company executives plan to launch a whole galaxy of high-margin services. With two megabits of bandwidth and about $6,000 worth of hardware, any Finnish teenager could create her own TV station and broadcast in real time over the Internet, Helsinki Telephone executives say.

To be sure, Europe's cable companies will launch interactive services of their own. And some of Europe's upstart telecom companies may snap up cable operators for the same reason AT&T has purchased TCI. Britain's Cable & Wireless, which like AT&T had only long-distance service, recently purchased three British cable operators. The move will boost C&W's telecom profitability by eliminating charges paid to market leader British Telecommunications PLC for accessing the local loop. ''The big opportunity for a return on the investment [for C&W] depends on being able to offer more than telephone service,'' says Kevin Duffey, international director of telecoms at market researcher Logica in London.

Europe's biggest wild card in the telecom shakeout is digital cellular technology, where it leads the U.S. by a generation. In 1999, European countries will begin auctioning licenses for the third generation of digital cellular service, called Universal Mobile Telephone Service (UMTS), to begin operations in 2002. This new standard will permit data transfer over cell phones at speeds that match cable-TV connections. Among those exploring UMTS as a gateway to the consumer: Deutsche Telekom and Britain's Vodaphone and Ionica. And by 2002, satellite networks such as Teledesic of the U.S. will also be competing with new broadband services. Indeed, the real battle for dominating the interactive future has barely begun.

By Gail Edmondson in Paris



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