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A Feeding Frenzy In European Telecom


International International Business

A FEEDING FRENZY IN EUROPEAN TELECOM

In Duisburg, in the heart of Germany's Ruhr valley, steelmaker Thyssen forges 10 million tons of flat steel sheets a year. But 25 kilometers away in Dusseldorf, the 103-year-old company with annual sales of $22 billion is trying its hand at something new--running a mobile-phone network. Chief Executive Dieter H. Vogel says that by 2010, telecom and related services may outstrip steel as the company's primary source of revenues. "We're putting our stake in the ground now," says Hans-Peter Kohlhammer, head of the new telecommunications division at Thyssen. "In 10 years, this industry could be bigger than autos. We'll invest whatever it takes."

Thyssen isn't alone. Old-line companies all over Europe are investing billions to transform themselves into tomorrow's telecom giants (table). They come with little high-tech background, from such mature, slow-growth, or even contracting industries as construction, water, chemicals, energy, rail, and steel. Yet they envision themselves as the future Sprints and MCIs of Europe, running circles around the soon-to-be-dismantled telephone monopolies. Above all, they want a stake in what's likely to become the world's largest industry. By the year 2005, market researcher Arthur D. Little Inc. estimates, telecom revenues will total $516 billion in Europe, vs. $390 billion for autos.

HUNGRY GIANTS. The size and deep pockets of the new players mean trouble for such protected monopolies as Deutsche Bundespost Telekom, France Telecom, and Telecom Italia. They aren't being challenged by thinly capitalized, unknown startups but by lean, new subsidiaries of Europe's industrial giants. Although they may be newcomers to the business, Europe's blue chips are partnering with savvy foreign telecom companies hungry to extend their global reach, such as the seven Baby Bells. "Whatever we do, it will be with knowledgeable partners," says Kohlhammer.

Already, Thyssen has teamed up with German energy conglomerate Veba, BellSouth, and Vodafone to build Germany's third digital cellular network. And computer maker Olivetti has Bell Atlantic, German machinery maker Mannesmann, Pacific Telesis, and Sweden's Telia on board to launch Italy's second mobile network. Besides money, what nontelecom partners bring to such ventures is their own customers and industry contacts, who may become private network subscribers, as well as expertise in areas such as engineering.

"We're talking about massive changes," says Kathy Burrows, senior industry analyst at market researcher Dataquest Europe Ltd. "It will be wrenching." Burrows predicts that existing monopolies will lose about 15% of their market share to rivals by 2000, and sharply more after that as competition heats up in markets scheduled to open in 1998. In Britain, where limited competition has existed since 1984, British Telecommunications PLC's overall market share is already eroding and is likely to drop from today's 83% to 75% or less by 2000, according to Dataquest.

The threat of losing a third of their business to nimble new rivals has finally begun to galvanize the monopolies. They are racing to cement international alliances, cut costs, and develop new multimedia services. None is running harder and sweating more than overweight Deutsche Bundespost Telekom as it gears up to start privatizing in 1996 by selling shares worth up to $12 billion. For starters, it is charging into the private corporate network market for multinationals via an alliance with Sprint and France Telecom. It has spun off separate units for such networks and for cellular phones, and it is leaping into multimedia with Europe's largest interactive TV pilot project. "We are not waiting until 1998," says management board member Carl-Friedrich Meissner. "We are ready for the competition."

Changes are long overdue. Graham Hanson, British Telecom's director of strategy in Europe, says Germany and France "missed the boat" by not deregulating sooner. For heavily overstaffed France Telecom and Deutsche Telekom, changing will be a slow process. As a result, they "will suffer a much greater loss of market share," says Hanson.

The battle has already begun in earnest in such new, less-regulated European markets as cellular and private corporate networks. In France on Oct. 7, construction giant Bouygues led an international consortium that won the license to operate the country's third cellular network.

The hottest competition is in Germany, where challengers such as Mannesmann Mobilfunk and Thyssen's satellite service Spaceline Communication are siphoning revenues from the monopolies where they can. And they are expanding networks that can be used to target the entire market for voice, data, and video traffic when full deregulation arrives. Even German city governments, such as Cologne's and Dusseldorf's, are building their own networks to bypass Deutsche Telekom. "There's a gold-rush mentality," says Volker Hoffmann, chief executive at RWE Unitel, a subsidiary of $6.6 billion RWE Energie, a huge German energy conglomerate.

There's room, analysts figure, for three or four new telecom companies in Germany. A wave of alliances is likely as the crowd of new operators seeks to establish national coverage via networks that rival Telekom's. The winners are likely to be those with the most extensive existing infrastructure, such as RWE Energie, whose internal telecommunications network already has 14,000 kilometers of phone line and can reach more than 50% of the German population. Now, RWE is investing $1 billion to become the No.2 telephone company in Germany by 2000.

For the slugfest with Deutsche Telekom, RWE has been preparing for more than three years. It has upgraded a third of its network with high-speed, fiber-optic cable ideal for new multimedia services. In October, RWE Unitel beefed up its telecom arm with the purchase of Preussag Mobilfunk for $259 million, thus bringing in 100,000 cellular customers as well as paging and satellite services. With Deutsche Bank and Mannesmann, it has launched corporate private network services, a venture that is expected to generate revenues of $60 million in 1994. RWE is also considering joining the $14 billion Teledesic project, backed by Microsoft and McCaw, to provide global cellular service via satellite.

Even more ambitious are the plans of German oil, chemical, and energy conglomerate Veba, which aims to invest $4 billion in telecom over the next 10 years. Veba, Germany's fourth-largest corporation, has signed an agreement with the German Federal Railway to lay fiber-optic cables along its tracks, creating a high-speed, land-based network to rival Deutsche Telekom. Both Veba and partner Thyssen already own 28% stakes in Germany's third cellular operator, E-Plus Mobilfunk. Veba is a partner of Bouygues in the consortium to build France's third digital cellular network. Leaving no base uncovered, Veba's telecom subsidiary, Vebacom, has also paid $160 million for a 10% interest in Iridium, a global satellite telecommunications group led by Motorola Inc.

STALLING. To defend their turf, Europe's monopolies have huge resources and global partners of their own--for example, the alliance between Sprint, Deutsche Telekom, and France Telecom. They also are stalling deregulation and using their clout to get a leg up in such new markets as cellular. France Telecom, for one, is using the high access fees it charges rivals to dominate the French mobile-phone market.

But once markets are truly open, the monopolies, saddled with a civil-service mentality, will be hard-pressed by the combative mindset of hungry new rivals. "We simply have to be better and more customer-friendly," says RWE Unitel's Hoffmann. In Europe, that battle cry is long overdue.

THE NEW PLAYERS

BOUYGUES: French construction company leads a consortium including Cable & Wireless, Veba, and U S West that will invest up to $3 billion in a new digital cellular phone network.

COMPAGNIE GENERALE DES EAUX: French water company invests $2.9 billion in a digital cellular network with partners Vodafone and Southwestern Bell.

RWE ENERGIE: German electric utility spending $1 billion to expand its telecom network.

VEBA: German energy conglomerate investing $4 billion in a land-based fiber-optic network, cellular services, and satellite services.

THYSSEN: German steelmaker will spend "whatever it takes" to become Germany's No. 2 telecom operator by 2000.

ENERGIS: British electric utility is investing $400 million to launch a telephone service on Britain's electricity grid.

DATA: BUSINESS WEEK

FOURMY/REA/SABAGail Edmondson in Essen, Julia Flynn in London, Karen Lowry Miller in Bonn, and Patrick Oster in Brussels


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