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The Death Of Europe's Cartels (Int'l Edition)


International -- European Business: MONOPOLIES

THE DEATH OF EUROPE'S CARTELS (int'l edition)

Coddled industries open up at last

When phone deregulation hit Germany on Jan. 1, things went wild at tiny, Frankfurt-based TelePassport. The company, which offers discount phone services under new rules allowing competition with Deutsche Telekom, signed up more than 19,000 customers in 20 days--and it won't even start advertising until February. Its 32-year-old founder quickly sold a 22.5% stake to an investor and plans to take the company public in the next few years. "We had expected a lot of interest, but this is way above our plan," says marketing director Volker Isenmann.

Surprising it is, especially to anyone who remembers how European governments once coddled monopolies such as telecommunications providers. But telecom is just one area in which Europe's monopolies are coming under fire. From energy to publishing, postal services to air travel, formerly closed industries are gradually opening to true competition. Progress has been uneven--for every success like TelePassport's, there are still horror stories of companies that can't break into a protected market. But the trend toward a more level playing field is unmistakable and promises to change life for Europe's companies and consumers forever.

Pressure on the monopolies has come largely from business. Companies striving for greater efficiency don't want to put up with the astronomical prices and outdated service that monopolies have gotten away with. The globalized economy is another factor. Fearful of lagging behind other regions in everything from profits to productivity, the European Commission is forcing reforms, with antitrust chief Karel van Miert leading the charge (page 16).

AIR WARS. With competition already heating up in telecom, van Miert is focusing on Europe's national air monopolies. The final stage of Europe-wide deregulation hit air travel last April. That has helped upstarts such as Ryanair and Deutsche BA take on flag carriers AerLingus in Ireland and Lufthansa in Germany. Deutsche BA, which is controlled by British Airways PLC, now claims a 14% share of the market within Germany, up from 9% two years ago. It and two other upstarts now have 22% of the German market. In Italy, several upstarts have cut Alitalia's domestic market share to 75%, down from 90% two years ago.

But van Miert wants deregulation to dig deeper. On Jan. 14, he gave the Frankfurt Airport, Germany's biggest, three months to allow competition in ground services such as refueling and de-icing planes. One reason: A study showed that handling a Boeing 747-400 costs $15,672 at Frankfurt vs. $8,197 at Washington-Dulles, the most expensive U.S. airport, and $9,825 at Singapore, the most expensive Asian one. "They've been milking airlines ludicrously," gripes Carl H. Michel, Deutsche BA's CEO.

Change is coming more slowly in the energy sector, until now one of the Continent's most regulated, but it's starting. Although Europewide deregulation will not kick in until 1999, Sweden and Norway already have open energy markets. And with more competition looming, companies such as General Motors Corp.'s Opel unit and Germany's Hoechst are already prying dramatically lower electrical rates from utilities.

For instance, Opel decided last year to close down an inefficient company-owned plant that provided heat and 40% of the electricity at its factory in Ruesselsheim, Germany. Some 18 companies bid for the right to build and operate a new one. German giant RWE won the bidding and kept Opel's business, but Opel says the utility had to cut its rates by about 35% to do so.

Another sign that the Continent's power business is about to undergo a shakeup: Last year, Houston-based Enron Corp. inked a joint-venture pact to build small, independent power plants with ENEL, the giant state-owned Italian utility. The initial goal will be to add capacity in Italy, but the two may move into other markets. In December, Enron also did its first power trade on the Continent, selling electricity generated in Switzerland to two customers in the Netherlands. Enron sees such deals as a wedge into the business before deregulation hits in force. "We have very ambitious goals for Europe," says Mark A. Frevert, president and CEO of Enron's European unit. He believes that eventually a Europewide energy market will develop.

NEWSPAPER BREAK. Europe's formerly protected giants won't give up their dominant positions easily. Even after 17 years of gradual deregulation, for instance, British Telecommunications PLC has held on to 90% of Britain's phone market. Deutsche Telekom plans major rate cuts this spring as part of its fight to hold onto customers. And new competitors gripe that the former monopolies still have the financial clout to fend off upstarts. For instance, when Deutsche BA introduced cut-rate fares on the Frankfurt-Munich route last Nov. 24, including a supercheap $109 round-trip fare, Lufthansa undercut it slightly. When Deutsche BA matched it--and reduced the advance-booking period to just three days--Lufthansa followed. They're still fighting it out.

Continental Europe, moreover, has a long history of undercutting true competition. United Parcel Service, for instance, gripes about the EC's recent decision to delay opening postal services to full competition until at least 2003. So far, only the parcel market is open. "The commission is putting down only one foot, not both," snipes Anton van der Lande, UPS's Brussels-based vice-president for European affairs.

Moreover, although pricing cartels have been technically illegal for decades, they have flourished until now. Even the Continent's most open markets are just getting around to banning price-fixing in sensitive areas. Britain, for instance, banned it in book publishing only last year. And Dutch authorities outlawed price cartels for the first time only on Jan. 1. Some Dutch industries are still exempt from the new rules. Newspaper publishers, for example, can continue to fix prices on subscriptions until mid-1999 and on retail sales until 2003.

Still, a world economy that increasingly rewards free and open markets is likely to force Europe to do away with monopolistic practices sooner rather than later. "Once the ball starts rolling, competitive pressures will make things move very quickly," predicts Enron's Frevert. That's the best-case scenario for long overdue change.By Thane Peterson, with David Woodruff in Frankfurt, Julia Flynn in London, and William Echikson in BrusselsReturn to top


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