Is the EC telecom market catching up?

After some meandering, telecommunications in the European Community should stand at least partially liberalized by 1998. Shouldn't U.S. and Canadian executives be more than observers?

Forgive European telecommunications managers if they didn't greet January 1, 1993, with wild celebration. As free trade began among the European Community countries, most companies saw few near-term positives in European telecommunications services. The promise of a liberalized market that offers low-cost, flexible and easy-to-manage Pan-European voice and data networks seems far away. But, reminds the European Commission, the next several years will bring changes in European telecommunications -- changes that will favor businesses with operations in several European countries.

To understand the European telecom manager's past problems, imagine the United States without the Bell system and without postdivestiture AT&T, MCI or Sprint. A consortium of independent monopolies provided telecommunication services separately to each state, and each state's telephone services were "managed" by the same government agency that ran the post office. European networks and services weren't standardized across borders, were expensive and weren't user-friendly.

Fortunately, in the late 1980s, EC leaders recognized the detrimental effect the telecommunications system was having on the European economy. (Watching the pro-competitive moves of the United States, Japan and the United Kingdom helped.) They knew they had to act.

SLOWLY BUT SURELY

First, the Commission issued a 1988 directive that required competition among telecommunications-equipment vendors and separated regulatory functions from the operation of the monopoly government carriers. When complying with this directive, many governments decided to also "corporatize" their national telephone operators, separating that function from the postal service.

Then, in 1990, the Commission issued a directive that required member states to open all telecommunications services to competition as of January 1, 1993 -- with two important exceptions: public switched voice services and the network transmission infrastructure. (More on these later.)

Some countries, including France and those in the United Kingdom, had already liberalized value-added services, such as electronic mail and electronic data interchange. And European businesses have been taking advantage of these early changes in such areas as value-added networks (VANs), particularly those based on packet technology (in which data are broken into segments, or packets, that are individually routed over the network). Through its acquisition of Tyment, for example, British Telecom uses its own network's nodes to provide data services to Europe's major cities. Sprint also does this, through Telenet. France Telecom's Transpac has acquired an interest in VAN operators in the United Kingdom and Germany, also to provide data services to multinational customers. And AT&T's London-based Istel subsidiary is expanding its European packet service.

Also, after failing with data networking by integrating their national packet networks, France Telecom, DBP Telekom (in Germany), PTT Netherlands, Telefonica (in Spain), and Belgacom purchased an interest in Infonet, a VAN founded in the United States. (MCI currently owns 25 percent of Infonet.) And several carriers, such as British Telecom, are beginning to offer their clients "managed bandwidth" capacity using resold leased lines they obtain from foreign dominant carriers.

While introducing all of this competition into the EC telecommunications services market threatens a small portion of a national carrier's revenue, competition in the transmission-facility and switched-voice-services markets challenges a much more significant source of carrier revenue. Consequently, liberalization has come slowly.

In October 1992, the European Commission, wanting to finish the job it started, reviewed the options for complete liberalization of services and the infrastructure, beginning with competition for transborder services in 1996. But the Commission ultimately took a cautious approach: On June 16, 1993, the EC's Council of Ministers approved a policy statement calling for complete services competition by January 1, 1998, with an extended deadline of 2003 for the "less developed" countries of Ireland, Portugal, Spain and Greece. The Council also began establishing competition in the satellite-based private network market by permitting users to install their own satellite antennas and to (relatively freely) choose their satellite system operators, instead of being forced to use monopoly operators. In 1995, the Commission will study whether to allow infrastructure competition.

SCRAMBLING FOR PARTNERS

But businesses with Pan-European networks should be less concerned about delaying full-service competition to 1998 than about delaying the development of truly Pan-European network operators to replace the patchwork of national carriers providing services in only their respective countries.

From a legal perspective, the European Commission insists the only services that fall under the "public voice" service monopoly are services that access public networks at both ends. That is, competitive carriers can provide private networks, including switched virtual private voice networks (networks in which customer-specific numbering schemes and other features can simulate the benefits of a private network while offering the lower cost and reliability of a public network), for single users or closed user groups as long as at least one end of each call is directly linked to a customer's premises -- for example, to a PBX. (Regulators in some countries resist this broad definition of permitted private voice networks, and the Commission is working to resolve the issue.) For instance, an association of major banks in Europe could set up a closed user group to provide voice communications among all its European member banks.

However, merely liberalizing a market doesn't mean Pan-European services will become competitive. Carriers must act. Here are three possible scenarios:

* First, several national carriers may develop standardized, advanced network services for many countries, like "one-stop shopping" agreements that allow each carrier to continue to operate services in its home country. These services could include virtual private networks (VPNs) and advanced toll-free (800) services.

* Second, groups of carriers may form an operating joint venture to provide advanced network services in both their own and other countries using network nodes they control.

* Third, a few carriers may "go it alone" in offering Pan-European services.

So far, developing Pan-European services like VPNs or 800 numbers through cooperation among dominant national carriers is only in the planning stages. The European Commission is finalizing its "open network provision" directive for voice services, which requires European regulatory authorities to establish terms and conditions for network interconnection and access for voice services. The directive also details cost and tariff principles and designates the services that must be provided across Europe.

EC member states must implement the steps within one year from the date of the document's formal adoption. In the meantime, the newly established European Council of Telecommunications Regulatory Authorities (ECTRA) is devising a system for uniform Europewide toll-free numbers for 800 services, similar to how the United States and Canada use a single 800 number throughout the two countries. Indeed, much of the stimulus for developing uniform virtual private networks has been generated by AT&T and other U.S. carriers, as they try to connect their North American VPNs with those of their European correspondents.

Some European carriers are exploring forming an alliance, too. For example, PTT Netherlands, Televerket (in Sweden) and the Swiss PTT formed Unisource to help develop and manage private data networks. France Telecom and DBP Telekom still are trying to form Eunetcom to provide similar services. And AT&T, which recently formed its World-Source Partnership in the Pacific Rim to offer voice and data services to global companies, is recruiting members in Europe with traditional carrier-to-carrier agreements. According to AT&T's head of business communications, "In Europe, serving clients will require close collaboration with each country's telecommunications operators, and we're open to more formal partnerships with like-minded operators."

Unfortunately, users and carriers in Europe aren't completely satisfied with such arrangements as one-stop-shopping alliances, in which carriers rely on other carriers to coordinate service. "Each carrier would very much like to serve as its customer's one-stop shop for Pan-European service," one user points out. But the multinational customer's other carriers don't like to give up customer contact and account control to a carrier that wants to be the one stop, so they make sure they have ongoing, direct customer contact -- by coordinating poorly with the designated one-stop operator, for example.

In this environment, only British Telecom is trying to offer global voice and data services through worldwide service nodes it controls. By partnering with MCI in a 75-percent British Telecom-owned venture, the company will service areas outside the Western Hemisphere, which is MCI's territory. The venture will incorporate British Telecom's Syncordia out-sourcing subsidiary and a voice virtual private network service that uses switching systems in major business centers in Europe and elsewhere. Nevertheless, the company's European nodes initially will have to rely on the dominant national carrier's intercity and local transmission facilities, and this may mean more intercarrier coordination problems.

The EC's next big step is to introduce competition among network infrastructure providers. While full competition is unlikely until 1998, France, Germany, the Netherlands and the United Kingdom already support the adoption of an EC directive that would permit established infrastructure providers, such as railroads, to supply transmission facilities to operators serving private networks and closed user groups. If the EC issues this directive, true Pan-European networking may be possible.

MIRROR, MIRROR

According to a study by the Paris-based Organization for Economic Cooperation and Development (OECD) published in May 1993, the January 1992 monthly costs for a market basket of 1.5/2.0 megabits-per-second leased lines (from 2 km to 200 km) were as follows: United States, $194,638; United Kingdom, $228,462; France, $482,360; Germany, $2,154,488; and the Netherlands, $590,099. All of these amounts are in 1991 U.S. dollars to show purchase-power parity. (Note: Since these statistics were published, a release from DBP Telekom claims that recent tariff reductions in Germany have made that country's rates more comparable to those of France.)

If the U.S. and United Kingdom prices represent what's possible in a competitive environment, an alternative transport provider could mean significant savings for EC users, since the prices of competing service providers reflect the prices they pay to a dominant national carrier for transmission facilities.

So business executives should watch for Pan-European carriers to develop. As long as a consortia of national carriers provide network services, each obeying its traditional territorial boundaries, you'll see little progress. But if competing private network operators control the transmission and switching assets that aren't owned by the dominant carrier, then Pan-European services and private networks may begin. Once at least one Pan-European network operator develops, the dominant national carriers may be compelled to develop Pan-European network offerings, disregarding jealousies over account control and similar territorial disputes.

For example, look at the situation in North America: When the Canadian government licensed facilities-based Unitel Communications as a full-service domestic competitor -- reinforced by AT&T's purchase of a 20-percent interest in Unitel -- it had a direct impact on Bell Canada (which provides service to Ontario and Quebec) and the other provincial telecommunications operators. Before then, Telecom Canada, a loose confederation of these carriers, provided interprovincial services. This group is now Stentor Communications, with its own engineering and marketing staff. Through an alliance with MCI, Stentor is developing an intelligent network platform to deploy and market uniform services throughout Canada.

Perhaps the ultimate evolution for EC telecommunications would mirror the U.S. model. Several Pan-European carriers would establish service nodes in major European cities. These nodes would connect to major customer locations over short, high-capacity (2 mbps) circuits provided by dominant carriers or by competing local operators, as AT&T, MCI and Sprint do in the United States today. Then each Pan-European operator with national interconnections to the traditional carriers could offer intelligent, Europewide services.

Recently, the French and German governments proposed to partially privatize France Telecom and DBP Telekom as part of the liberalization. This may speed up the move toward the U.S. (or Canadian) model of competing, continentwide carriers. In the meantime, users should keep pressuring carriers and their governments -- and should take advantage of competition as it emerges.

The process will build upon the single market for goods and services. Large users are beginning to organize their businesses around products and customers rather than geography; for example, Major Accounts/Europe and Mass Markets/Europe replace Widgets U.K. Ltd. and Widgets France, S.A. The result is greater voice, data and image networking requirements for day-to-day operations and no more networking simply to facilitate financial reporting to headquarters.

At the same time, since more U.S-style discounts for volume and term commitments are available in Europe, product and market groups are aggregating their requirements for better deals. In turn, these increasingly organized and educated customers force carriers to be more responsive.

The bottom line for your company? U.S.-based telecommunications managers should educate their European colleagues about the North American environment. Educated European telecommunications managers of multinational enterprises then can become the biggest constituency to push for competitive Pan-European carriers. Corporate executives on both sides of the Atlantic should stimulate this dialogue so their firms ultimately benefit from better service at lower prices.

Mr. Levine is the associate national director for telecommunications services at Deloitte & Touche in Washington, D.C.