Telecom's Restless Giants

What makes the revolution in telecommunications so hard to grasp--let alone predict--is the fact that it's not one, but many revolutions. There's the Internet explosion, of which you've heard (perhaps too) much. There's the mobile-phone uprising, which has just about won the day in Europe and is fast gaining strength in the United States. There are also less obvious revolutions in almost every technical aspect of communications, as copper wire gives way to optical fiber and circuit switches cede ground to packet routers. Flinging themselves into various frays around the world are echelons upon echelons of acronyms and abbreviations, each representing a new technology and its backers. They aim to change the way your coffee pot gets turned on in the morning; whether you see, or virtually see, your boss at work; even the diagnosis of that headache you've had all afternoon and the way you buy a ticket to the movies tonight. We not only communicate through machines, but with them; and increasingly they're in touch with each other.

Let's just hope the damn things aren't laughing at us. As industry leaders, entrepreneurs and regulators congregate in Geneva this week for Telecom99, the quadrennial conference sponsored by the U.N.-backed International Telecommunications Union, they have much to celebrate--and at least as much to be humble about. A lot of them remember that the last session barely touched on the Internet. Big oversight, considering the hundreds of billions of dollars' worth of reorganization and rethinking that the Net (together with mobile technology and all the rest) has occasioned since then. It gets worse: How many of those who gathered in 1995 had more than the vaguest notion of the threat that packet-switching and Internet protocol telephony would soon pose to traditional telcos? Or of the fact that when next they met, one of the hot topics would be wireless Internet standards? The last four years have reintroduced many a regulator to the law of unintended consequences--and many a CEO to the fact that a grand, elegant strategy can come unraveled in a hurry.

Still, regulate and strategize they must. Consider the consequences of the industry's latest, greatest merger--last week's announced purchase of Sprint by MCI-Worldcom for $115 billion in stock (following story). The prospect of this mammoth combination not only got U.S. Federal Communications Commissioner William E. Kennard to warn that it faces tough scrutiny. It also severely shook many of the basic strategies big European telecoms have developed over the last few years.

The Atlantic Ocean may be getting smaller for some industries, such as autos. But it's looking wider than ever in the world of telecommunications. On the one continent, behold the big Americans, with their purely private ownership and longer tradition of deregulation. They're merging like crazy, using their highly valued stock as currencies for transactions that would otherwise be impossible--think AT&T and its new cable empire, or the $71 billion Bell Atlantic GTE combination, forged in 1998. On the other, check out the big Europeans, especially Deutsche Telekom and France Telecom, still mostly state-owned and, frankly, still trying to figure out how to make their way in a rapidly globalizing business. Sure, there are sluggish American companies (some of those old Bells) and dynamic European ones (such as British mobile powerhouse Vodafone-Airtouch). But when the next round of mergers comes, Americans will likely drive them. "It will be a lot easier for U.S. giants, with their often insane valuations, to acquire European companies rather than beat them in the open field," says Lars Godell of Forrester Research in the Netherlands.

Look at Deutsche Telekom's situation. CEO Ron Sommer had based much of his strategy on alliances with other major players. Four years ago that seemed to make sense for newly privatized companies in newly liberalized markets. They didn't have the money to start from scratch or make outright acquisitions. "Alliances were the right thing when the markets were slower moving," says DT spokesman Hans Ehnert. But in an environment where even small companies can turn to giants overnight, he says, alliances are too cumbersome to pay off.

Earlier this year, Sommer tried a bolder move--with disastrous results. He offered to buy Telecom Italia, Italy's former state carrier, which was trying to fend off a hostile bid from rival Olivetti. But TI's shareholders rejected Sommer; they didn't want to own the DT shares he was offering as payment. Sommer's surprise move infuriated his longtime strategic partner, France Telecom, and the two have since become bitter rivals. Last week FT made an aggressive foray into the German market by buying a stake in E-Plus, Germany's No. 3 mobile carrier and competitor of DT's cellular unit.

And the bad blood doesn't end there. Global One was a joint venture between DT, FT and Sprint. It was set up in 1995 as a one-stop communications vendor for multinational corporate customers. It boasts 30,000 clients and more than $1 billion in revenue. But it has always run at a loss, and it's been burdened with three independent owners. Global One was all but paralyzed by the rift between DT and FT, and now both are bailing out of Sprint, in which they each owned 10 percent shares. Sprint CEO William Esrey has said Global One is likely to be bought out by one of the European partners within the next two months. But which? "Global One is going to get messy," says Scott Moore, an analyst at International Data Corp. in London.

Where DT itself goes from here is no easier to predict. "Over the next few years we're going to see the emergence of a very limited number--maybe four or five--of global operators," says Moore. "Deutsche Telekom is likely to become part of one of the global units, but how it gets there remains to be seen." One possible route was to buy Sprint, but here, too, DT lost out in the bidding.

Right now, the German company is still dragging the weight of government, which holds 65 percent of its stock. (That's what worried TI's shareholders this spring.) "If Deutsche Telekom wants to become a global operator, it can't afford to be linked to a national government," says Moore. The German Finance Ministry has said it's considering moving up the sale of the next big chunk of DT stock from July of next year to as early as January. But with a majority of DT's stock finally in public hands, Sommer could see himself on the other end of the food chain, as prey instead of predator.

In business, as well as technology, it seems the real revolution has just begun.

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