|
BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||
| |||||||||||
 |  | |
 | |
 |
||||||
Does He Hold a Key Piece of the Global Telecom Puzzle? The lengthening network of fiber-optic cable controlled by Viatel CEO Michael Mahoney could be a critical asset for one of Europe's giants Amid the monster booths, video shows, and razzmatazz of Telecom99 in Geneva in mid-October, the Viatel Inc. stand looked small and forlorn. For meetings, 40-year-old Viatel CEO Michael J. Mahoney set up chairs in a neighboring booth. But Mahoney seemed oblivious to his modest surroundings. The way he sees it, he's a key player in the shifting world of European telecommunications. In fact, he describes his company as the key piece that's missing in the international strategy of Deutsche Telekom -- and he cheerfully contemplates Viatel being acquired. "We have to do what's best for shareholders," he says. While Mahoney's company could make an attractive purchase for one of the European telecom giants, it's an aggressive player in its own right. The New York-based company is laying a $1.2 billion ring of fiber-optic cable, the so-called Circe network, that is now 3,500 kilometers long and links 20 cities in Europe's heartland. It should be double that size by next summer. While most of Europe's phone giants have taken only halting steps from their home markets, little Viatel, with half a million customers in Europe and regional revenues likely to reach $300 million this year, has a transcontinental network -- one linked through ocean cable to the U.S. But at the Telecom99 conference, Mahoney seems happy to dangle his company as takeover bait. Why so? He thinks the shuffling of the European giants is making networks like his more valuable. His proof: Just a five-minute walk from Viatel's booth looms the giant Global One pavilion, looking much like a Hyatt Hotel, complete with atrium. All year, the Global One partners -- Deutsche Telekom, France Telecom, and Sprint -- have been at odds over the future of the unprofitable international consortium. Now it's clear that the partnership will dissolve. Just as the Geneva conference started, MCI WorldCom gobbled up Sprint in a $129 billion deal. The French and German partners both say that one of them will buy up the consortium, which handles the international phone and data traffic for loads of Europe's multinationals. QUICK FIX. That's where Viatel starts to look very interesting, according to Mahoney. "The minute one of them buys Global One, the other one has a problem," he says. Both European phone companies have been building their international strategy on Global One. But the joint venture hit the skids earlier this year, when Deutsche Telekom CEO Ron Sommer made a $70 billion bid for Telecom Italia -- without warning his Global One partner, France Telecom CEO Michel Bon. Now, when one partner buys Global One, the other stands to lose important home-market accounts. DaimlerChrysler, for example, has been using Global One as a link for its European and transatlantic operations. But if France Telecom buys Global One, DaimlerChrysler and loads of other corporate accounts in Germany could overnight become France Telecom customers. The loser's quick fix for international business, says Mahoney, is to buy a challenger company like Viatel or GTS Group, a fellow American outfit. "The time it would take Deutsche Telekom to build a network outside of Germany and get the customers," he says, "they lose two years. Can they afford that?" France Telecom is currently putting together its own network -- stretching 20,000 kilometers of cable around 11 countries in Western Europe. But Deutsche Telekom's Sommer, DT sources say, is hot on the acquisition trail. In fact, his haste to make a deal cut short his participation in Telecom99, the nine-day fair that closed on Oct. 17. And with each deal announced in Europe, the pressure on Sommer grows. Mahoney won't say if he's in talks with Sommer but describes in detail Viatel's synergies with the former German monopoly. Analysts agree that the two make a good match. Mahoney has done a good job of building up bandwidth in Europe, says Scott Moore, telecommunications analyst at International Data Corp. in London. But he lacks corporate customers, DT's specialty. "Companies like Viatel are going to become increasingly attractive to the big players," he says. And it's proving to be a seller's market. Two months ago, Sommer bought Britain's money-losing cellular phone company, One2One, for a rich $13 billion. On Oct. 18, France Telecom CEO Michel Bon agreed to deal out $7.6 billion for 60% of E-Plus Mobilfunk, Germany's third-largest cellular-phone operator. A day later, Germany's Mannesmann disclosed that it was in talks to buy Britain's Orange PLC, a mobile-phone company. The price, analysts say, could top $25 billion. CRAMMED WITH CABLE LAYERS. Viatel, by comparison, could be a bargain since its market capitalization is about $1 billion. Mahoney started the company eight years ago as a New York-based call-back service for Latin American long-distance callers: When they phoned New York, the calls were rerouted through the U.S. and back to Latin America at much lower rates. That sounds like a niche business, but after two years, Mahoney had driven revenues to $20 million. Trouble was, deregulation in Latin America seemed likely to destroy the market. So Mahoney looked for new markets. In 1993, he saw an opportunity in European Commission proposals to pry open, over the next five years, the continent's telecom industry. With two junk-bond issues in the past two years, he has raised $1.2 billion -- enough to build the Circe system. His headquarters may be in New York, close to his financing, but his eye is also on European construction. "So far the weather has been good, and we're on schedule," he says, adding that he's itching to raise a similar sum and spread his network south into Spain and Italy. Still, rivals abound: The European market is crammed with companies laying cable. At least 10 such projects are under way, ranging from Britain's Colt Telecom to MCI WorldCom. The European market is so hot that French telecom gear maker Alcatel, which was already leasing seven ships, has just bought two more to lay transatlantic cable. The concern is that a glut of line capacity could drive down prices. "It's a scary industry to be in," says Nortel Network's Peter Newcombe, vice-president for optical networks. Such fears, in part, have driven down Viatel's stock from $58 per share last May to its current $32 -- despite the company's reported healthy overall revenue growth for the second quarter of 147%, to $68.7 million. Revenues in Europe grew 305%, to $54 million. Because it's in heavy investment mode, it lost $45 million. GOBBLING UP TERABITS. Mahoney pooh-poohs the glut worries. He says that Europe, with its overpriced phone service, will come up with plenty of content to fill whatever digital pipes he and his competitors lay. "Everything we know from the Silicon world is that the applications will fill the space," he says. He adds that capacity in data bit rates has risen by a factor of 1 million in the past 25 years, and he predicts a similar explosion in the next quarter century. He foresees networked homes, with communications links zipping back and forth between heaters, air conditioners, burglar alarms, and sound systems -- all of it managed from computers. And all of it, naturally, gobbling up terabits of digital information. For now, Mahoney is focusing on small businesses and consumers, and winning customers with bargain rates. In Geneva, the company unveiled a 5 cent-per-minute offer for calls throughout its six European countries, the U.S., and Canada. Such deals have built a sizable customer base of 500,000 homes and small businesses in Europe, a number Mahoney sees doubling as the system expands over the next year. By that time, he expects to be linking customers with superfast phone-line modem connections, known as ADSL. These should enable phone companies like his to offer, for each connection, two voice lines and data at a megabit per second. Within another year or two, the phone lines should be speedy enough to provide a fistful of voice lines along with full Web and TV access for the home. Once he gets into the TV and Internet business, Mahoney will find himself facing a slew of competitors. Cable powers, such as Britain's NTL Inc. and the Netherlands' United Pan-European Co. -- both with Microsoft Corp. as a minority investor -- are planning to sell the very same services throughout Europe, but through the TV cable. This approach is especially promising in Europe's heavily cabled north. Meanwhile, satellite-TV companies, from News Corp.'s BSkyB to France's Canal Plus, are looking to cash in on the same business from the sky. All the competition, Mahoney predicts, will fuel an information explosion in Europe. That should send loads of traffic through his network -- whether or not Viatel is running it. Baker covers technology for Business Week from Paris. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
| |
 | |
Viatel CEO Michael Mahoney WEB POINTERS Click here to visit sites mentioned in the story: Viatel International Data Corp. | ||||||
