TCS Daily

The British Are Coming

By Duane D. Freese - May 26, 2005 12:00 AM

When Richard Notebart, CEO of one of the remaining four regional Bell phone companies, wrote the Wall Street Journal in mid-May that the mergers of sibling Bell SBC with AT&T and sibling Verizon with MCI would create "two telecom behemoths" equaling "one duopoly," key questions emerged: Behemoths compared to whom? A duopoly where?

Timing is everything. And had Notebart made his remarks a couple years ago, they might have had more relevance.

But in the interim, the two long distance giants, MCI and AT&T, were effectively locked out of the local consumer market by decrees of the federal courts and the Federal Communication Commission under Chairman Michael Powell that have made it impossible for them to compete there.

At the same time, the value of local and long distance services has declined, thanks to convergence of voice and data, the advent of nationwide and international cell phone networks and the declining cost to rivals to duplicate their long-distance networks. It's hard to extract profit from a communications sector that others are bundling at bargain basement prices for the purchase of other services.

That's why these telecom competitors had announced they were getting out of the residential, individual consumer markets to concentrate on the enterprise markets of communications services for business and government.

In that market, though, they face competition not merely from each other but some international telecom carriers who can hardly be described as lightweights -- and all hungrily eyeing the U.S. market where they hope to gobble up business share.

Indeed, as a recent Red Herring article made clear, the British are coming -- and right on their heels, the Germans, the French and, more than likely the biggest telecom behemoth of all, the Japanese.

British Telecom (BT), Deutsch Telecom (DT) , French Telecom and Japan's NTT all have local market monopolies that no U.S. long distance carrier nor the regional Bells can match. And they've been deal-making to grow their shares at the expense of their eternally squabbling U.S. competitors.

BT, along with a near monopoly in its home residential market, has a global business network that operates in 200 countries over five continents, including owning points-of-presence in 14 major metropolitan areas in the United States, Toronto in Canada and Mexico City. In the past it had attempted to partner with AT&T in a venture called Concert that failed because of conflicts of interest between the two companies. Since then, it's been on a modest buying spree, picking up California-based managed services, voice and data provider Infonet for nearly $1 billion and New York City-based finance data communications company Radianz for $174 million. Last week, it reported that its profits had surged by 44 percent and revenues had grown by 1.7 percent -- about double SBC's growth.

Considering its own favorable circumstances and residential base at home, BT showed a lot of chutzpah in calling on the U.S. regulators to block the SBC purchase of AT&T while announcing how the merger will let it grow its business by $1.6 billion here over the next two years at both AT&T's and MCI's expense.

If BT is doing well, DT is doing even better. The largest European telecom company has a global presence in 65 countries on all continents. At home, it has 58 million residential customers, exceeding SBC's 54 million. It also has a huge U.S. presence. In addition to the 18.3 million U.S. cell phone customers through T-Mobile, which added nearly a million new customers last year, its T-Systems information and communications technology service for business partnered with Level 3 to give it 100 POPS in 68 cities. It posted a whopping 60 percent gain in first-quarter profits, driven mostly by demand for its services in the United States.

The second largest European telecom carrier, France Telecom, with 50 million fixed line customers in eight countries and 63 million cell customers worldwide, isn't sitting still, either. It's taking over Equant, which provides managed services, virtual private networks, Internet connectivity, security and consulting products in 220 countries and territories and 1,100 cities around the globe. It has presence in the United States in Atlanta and Boston as well as in Montreal, Canada, among other places. And it is looking to expand further.

And finally, there is Japan's NTT, the largest telecommunications company in the world with $102 billion in sales last year. It no longer is the protected monopoly it once was, but it never was broken up like AT&T was. And though it didn't have a good year last year, with profits growing only 10 percent, it was recognized as the Best Global Carrier at the World Communications Awards in 2004. And it is currently the world's largest operator of websites for business over a worldwide, state of the art network.

Duopoly? Maybe at the local level where Qwest operates. And that is something neither the AT&T/SBC merger and the MCI/Verizon merger would change, as AT&T and MCI were getting out of the residential consumer business anyway.

But on the world enterprise stage, there is no duopoly but a highly competitive field in which foreign behemoths could easily overshadow AT&T and MCI.

Indeed, BT, and the other international telecom giants, would love to not only have their cake but eat it too, by having a prolonged period of "merger uncertainty" during which they could lure more U.S. businesses into their systems and then have the mergers killed or substantial conditions imposed. This would result in BT and others gobbling up the pieces of the long-distance carriers' networks.

Former FCC Chairman Michael Powell, with whom I've had many disagreements in the past, had it right on one score when he said last week "a good decision made too late might as well not have been made." Regulators need to make their decisions quickly, and not let them be dragged out for years.

Otherwise the mergers needed to fend off a foreign invasion of less inhibited and bigger foreign telecom providers will leave American telecommunications pygmies scrambling to find niches from which they can gather the remaining business enterprise crumbs.


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