Consumers reap the benefits as telecoms sector feels pinch

Date: 30/11/00

By Bruce Barnard

THE partying is over for Europe's telecoms business.

Barely six months ago the industry was on a roll, with share prices scaling fresh peaks in a spectacular bull market, investors stampeding for initial public offerings, multi-billion-euro mergers and acquisitions surfacing by the week, and European operators stalking their American rivals.

The industry barely blinked when it signed off on a 200-billion bill for third generation (3G) mobile phone licences and building networks that will offer high-speed Internet access, music and high-quality pictures and videos via mobile handsets starting in 2002.

Now the sector is in full retreat, just as the EU's liberalisation crusade, which began in the late 1980s, nears its climax.

Telecoms stocks have fallen 30% relative to the overall market since January, fuelling fears about how individual firms will meet their massive 3G commitments - and they are still being dragged down by a steady stream of bad news. Switzerland has cancelled its 3G auction; the UK has failed to sell 16 of its 46 licences to run high-speed Internet services; Telekom Austria and Telefonica Moviles of Spain have fallen flat on their market debuts; and credit rating agencies are downgrading the industry leaders, including Europe's biggest telecoms company Deutsche Telekom.

Sentiment has become even more bearish after NTT DoCoMo, Japan's biggest mobile phone group, warned that European firms are overestimating revenues from 3G services. The firm, which will be the first in the world to offer 3G services next year, says the technology is unsuitable for carrying large video or sound clips, one of the services which are expected to provide major new revenue streams for mobile operators.

The Japanese firm's analysis must be taken seriously. Its Internet mobile product, i-mode, is far ahead of European technology and has signed up more than 15 million subscribers since its launch in February 1999 compared with only two million users of the equivalent WAP (wireless application protocol) services in Europe.

European operators, however, say they will make a return on their 3G investments in the near future. Chris Gent, chief executive of the UK's Vodafone, says the firm expects positive returns within four to seven years and is "well on track" to generate 20%-25% of its revenues from data by 2004.

France Télécom chairman Michel Bon hopes to see returns on the company's 3G investment in less than seven years. But industry watchers say the jury is still out on whether 3G licences will turn out to be spectacularly bad investments.

The efforts by EU regulators and governments to liberalise European telecoms, which culminated in the opening up of voice telephony at the beginning of 1998, have been a sweeping success despite this current 'crisis'. An industry which was synonymous with monopoly power just a few years ago is now swamped by competition.

Deutsche Telekom's international traffic slumped 18.1% last year, and the firm has lost almost half of its long-distance market share and revenues since the introduction of competition two years ago, according to the latest report by US research group Tele-Geography. British Telecom's outgoing international calls are down 5.2% on the year, but Cable &Wireless's traffic is 20% higher.

France Télécom, however, bucked the trend, increasing its international call traffic by 12.2%. Europe also showed the fastest regional traffic growth last year, but price falls of up to 90% on some routes capped companies' revenues.

The downside of competition is coming into play for the industry but not for its customers, who are enjoying smaller bills and better service. Several alternative network operators in Europe are said to be close to bankruptcy as the high-yield or junk bonds they issued to pay for the construction of fibre-optic networks to wire cities across the continent are trading at a fraction of their face value. Their investments have led to growing overcapacity which is cutting into operating margins and delaying the break-even date.

Prices in some markets are in free-fall: leased transmission capacity on a transatlantic cable has crashed from €18 million in 1997 to below €4 million in 1999 and will cost less than €1.1 million for cables coming into service in early 2001.

The struggling alternative networks are finding it extremely difficult to arrange refinancing at a time when stock markets are falling and investors are sweating over their exposure to the industry. There is little chance the big players can bail them out as they are saddled with huge 3G debts and tumbling market capitalisations.

Even as former monopolies re-assess their 3G gamble, they are bracing themselves for a new blast of competition which will hit next January when EU rules will force them to open up the 'last mile' of their lines into residential homes to outsiders.

National regulators also are stepping up the pressure. Deutsche Telekom has been ordered to offer Internet service providers (ISPs) flat-rate access to its network by February. German ISPs have offered such subscriptions since June, but they are nursing mounting losses and have had to restrict their services on occasions because they must buy access to Deutsche Telekom's network on a per-minute basis.

Other former monopolies will also be forced to offer unmetered access, providing a major boost to surfing on the Web and allowing Europe to narrow the Internet gap with the US.

The numbers may look scary, but it is not all bad news for EU telecoms.

Major feature.