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Europe's Markets Are Getting Rewired, Too


Cover Story: TELECOM'S NEW AGE

EUROPE'S MARKETS ARE GETTING REWIRED, TOO

The U.S. may be charging ahead in telecommunications deregulation, thanks to its broad new laws. But the forces pushing Americans to open up communications markets are sweeping the globe. Already, developing nations such as Chile, Malaysia, and the Philippines have dismantled state-owned phone monopolies and invited competition--and badly needed investment. They're beefing up communications infrastructures to leap into the information economy.

Europe won't be left behind. England, Sweden, and Finland have open markets now. On Jan. 1, 1998, 15 European Union countries and neighbors Switzerland and Norway are due to liberalize theirs. Across Europe, rules are already being loosened. Competition has intensified in markets such as corporate networks and mobile-phone services, which have been liberalized since 1990.

New players are investing billions of dollars in networks and in building alliances. Italy's Olivetti has a joint venture with Bell Atlantic Corp. to offer corporate network and data services. It plans to team up with France Telecom and Deutsche Telekom to challenge the monopoly Telecom Italia. In Germany, Mannesmann and Deutsche Bank are offering services through Communications Network International.

BACKBONE SYSTEMS. Starting in July, new competitors will be permitted to lease phone lines from cable companies, railways, and utilities, bypassing the monopoly of national operators. That paves the way for a potential heavyweight: Hermes Europe Railtel, a consortium of railway companies backed by financier George Soros. It is in the first phase of laying a $1.2 billion trans-European backbone network. The plan is to sell capacity to other phone companies, corporations, and new phone upstarts. Utilities such as Germany's RWE Group, Veba, and Viag, and smaller electric companies already offer private corporate network services on their backbone systems and are poised to resell more capacity.

As in the U.S., deregulation is creating lots of work for regulators. The European Union recently backed Esprit Telecom, a Dutch seller of corporate network services, in a complaint against Spanish monopoly Telefonica de Espana, forcing it to offer Esprit leased lines. In Germany, upstart operators cried foul when Deutsche Telekom aimed to slash rates for corporate networks by up to 35%. They complained that the state-owned giant--due to be privatized in November--wants to kill competition. "We will exhaust every avenue to protect our interest," says Ulf Bohla, managing director of Vebacom, which is owned by Veba and Cable & Wireless PLC. It plans to invest $2.2 billion over five years and aims to be Germany's No.2 phone company.

While consumer markets haven't budged much, the fight for lucrative corporate calling will be fierce. As a result, in five years, the monopolies could lose up to 40% of their markets--and 70% of their profits, says Steve Morgan, a consultant with London-based Logica. That's a wake-up call no one can miss.By Gail Edmondson in Paris, with Karen Lowry Miller in Hanover


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