"Richard Li: Championing Asia telecom new alliance".

SYDNEY: The ability of the major Asian-Pacific telecom operators to form strong alliance agreements had faltered in the past year, largely because of mistrust among probable partners, a confused investment climate and concerns that some high profile joint venture proposals like the one between Australiaís Telstra and Hong Kongís Pacific Century CyberWorks (PCCW) are bugged by strategic faults.

But now that Telstra and PCCW have closed a deal on revised terms there is a good prospect that a regional telecom alliance will span the Asia-Pacific with a combination of national broadband, international cable and regional mobile technologies and services.

The renegotiation of the Telstra/PCCW deal demonstrates that forming telco joint ventures or taking investment stakes in another company based in another part of the world is tricky. This requires the complete understanding and trust of both partners and must be underwritten by determination to succeed.

ìFew of the global alliances that had been forged over the previous 10 to 15 years have been successful,î said independent telecom industry analyst, Paul Budde, based in Bucketty, New South Wales. ìThese alliances have in general terms created more frustration than goodwill among their multinational customers.î

But deals that led to full mergers, such as the Concert venture formed between AT&T and BT in 1998 with revenues of about $10 billion, ìhave been able to profit from the global market developments,î said Budde.

And that is one important reason for the renewed efforts of other regional operators to get together with new and more service-specific agreements.

Telstra/PCCWís alliance could in turn promote further consolidation. Most of all, the market is waiting for Japanese giant NTT ñ in 1998 itself a prospective founding member of the Concert global venture ñ to emerge as an alliance builder in its own right.

Analysts think that NTTís investment power is needed to sustain explosive growth in the regionís markets; to help the buildout needed in China and elsewhere.

In fact, NTT already has formed a partnership with AT&T to help operate the global data network AT&T has acquired from IBM.

Since the mid-1990s, Asia-Pacific telecom operators have been talking about regional alliances, global alliances and consequent supercarrier formations but little has come of it. At the last Asia Telecom in Singapore in 1997, there was a rush of public announcements about the desires of local players to join alliances.

The emergent Asian supercarrier indeed will have to contend with open structure technology developments such as the Internet and intranets: deployment of these technologies can be set up faster and done cheaper by individual telecom service providers.

But AT&T and BTís investments in Japan, and now the north-south Pacific alliance of Telstra and PCCW ishow that operator in many parts of the region are prepared to be more flexible and non-exclusive about partnering.

The AT&T-NTT agreement, for example, went ahead even though the Concert alliance partners had earlier acquired a 30% stake in NTTís domestic rival, Japan Telecom.

The biggest regional drivers to date for local alliances have been Singapore Telecom, Telstra and South Koreaís Korea.Tel. All three have been talking about alliance relationships for several years, but they recognised that for any major alliance to truly succeed they need more big telecom from the region ñ such as NTT.

The late 1990s Asian economic crisis, the international plunge in telecom stocks since May and the complicated legalities attendant with the formation of an alliance all frustrated the formation of a super-alliance.

Rather than work cooperatively, the major regional telecom operators have increasingly moved from pro-alliance formation mode to equity stake building in other telecom operators.

For instance in Australasia, Telecom New Zealand has almost completed swallowing up AAPT, Australiaís fourth biggest telecom service provider, while Telstra has expanded its presence in New Zealand.

Further afield, Singapore Telecom has signed service provider agreements with smaller telecom operators in regional countries so that it can service its multinational clients.

Suggestions that the Cable & Wireless group was interested in knitting together its platform of investments in the region to form an international alliance with partners from countries where C&W did not have a strong presence were thrown into doubt in late September, when it was reported that C&W wanted to quit or significantly reduce its stake in Cable & Wireless Optus ñ Australiaís second biggest carrier.

And just last month the company announced a  £1 billion direct investment in a fiber optical network in Japan, suggesting Cable & Wireless intends to proceed as a single service provider for the time being.

But central to any regional power play in alliance formation is Telstra ñ the worldís ninth largest telecom operator ñ which is 51% owned by the Australian government.

Telstra has had a pretty good record on infrastructural systems planning and development, service delivery system management and investment in the region for a considerable period.

Paul Budde said Telstra wants to gain îoffshore opportunities emerging as a result of the worldwide trend towards telecommunications deregulation ñ without necessarily investing in expensive infrastructure.î

As competition in its domestic market eats into its market share, the globalization of the company is seen as a way of taking up the slack.

ìTelstra is making its presence felt more and more in the global market,î said Budde. It has representation in 17 countries, of which 14 are in the region.

Telstraës offshore activities concentrate mainly on Asia. A so-called ëfour-nation-strategyí involves funding of around $500 million each in: Vietnam, Laos and Cambodia;South Asia (particularly India and Sri Lanka); Indonesia and China.

The companyís expertise in the Australian market gives it a distinct advantage in the Asia-Pacific region in terms of deregulation and competition issues.

ìWith all the empire-building going on in Europe, it is further proof that Telstraës focus on the Asian Pacific region is the correct one,î said Budde. ìIf Telstra is able to set up a strong, efficient network, it will be able to direct traffic from Europe to this region.î

A recent confidential management report from PriceWaterhouseCooper to Telstraës board chairman, ex-Optus chief Bob Mansfield, focused on the $5 billion deal Telstra signed earlier this year with PCCW.

This would  give Telstra a joint venture springboard into China while also building regional mobile phone and internet broadband service capacity networks. The management report argued that the days of major telecom companies as viable entities are closing and they need to broken up into profitable segments.

ìThe extreme logical conclusion of our argument is that todayís incumbents will ultimately find themselves broken up into enterprises focusing on specific positions in the world,î said the report.

In late September as international doubts grew about PCCWës ability to deliver success in the Chinese market, Telstraës share price fell and its executives began a month long renegotiation of Telstraës deal with PCCW.

The subsequent deal announced October 13, 2000 cut Telstraës debt exposure risk by reducing the level of Telstraës investment in the venture, gave it 60% of PCCW Hong Kong Telecomës (HKT) mobile business at a price per subscriber estimated at $2,950 ñ almost 25% lower than originally proposed, in return for PCCW being able to obtain $750 million from the dealës infrastructure company rather than the $500 million originally planned.

The tradeoff price per HKT mobile subscriber is about 50% higher than the per subscriber valuations of rival mobile companies.

But international investment banker, Merrill Lynch, rated the redone PCCW deal as ìbetter than expectedî and said it could lead to a long-term boost in Telstraís share price. The prevailing view in Australian telecom circles is that Telstra had overpriced the original PCCW deal and had been lucky to pull off the renegotiated alliance.