The Global Challenge: Building international networks

Rating reform: A report card on the state of telecom liberalization around the world, one year after a landmark global telecom reform agreement.

By IDG NEWS SERVICE REPORTS
Network World, 03/08/99

It's been a full year since a landmark World Trade Organization (WTO) agreement intended to sow the seeds for competition in global telecom markets went into effect. While oases of reform are springing up around the globe, many locations that appeal to U.S. businesses remain barren ground for carrier competition and service offerings.

What the buttons mean
Green: Liberalization laws have been in force for three years or more, and many competitive alternatives to the incumbent telco are available.
Yellow: Monopoly ownership rights to the voice network ended within the past two years, but only one or two reliable competitors challenge the incumbent.
Red: The market for local voice services is still closed, or the basic services market has opened only within the past year.

The WTO agreement, which took hold in February 1998, provides a blueprint for liberalization from the chains of monopoly national carriers and high rates. The accord covers voice, data, fax, leased lines and wireless services.

However, the WTO pact allows the 72 participating countries to open their markets at different speeds, according to different timetables. As a result, competition isn't scheduled to occur for at least another year in many markets, while others are already aggressively offering more choice of carriers and services.

To give you a sense of the level of competition you'll find around the world, we enlisted the aid of the IDG News Service, an international news-gathering organization run by International Data Group, the parent company of Network World. This report assesses the status of telecom reform in key countries where U.S. firms have a strong presence.

Competition takes root in Asia

Asia's telecommunications markets are losing their regulatory shackles more gradually than their Western European and U.S. counterparts, but the global move toward more open markets is driving change.

The region offers a range of market scenarios, from the free markets of Australia and the Philippines, to the largely government-controlled markets of China and Thailand, says Azra Moiz, senior analyst of telecommunications for the Gartner Group in Singapore.

Australia, for example, only became an open market in July 1997, when it had three carriers. At the end of 1998, the country had 25 registered carriers, Moiz notes.

At an intermediate stage in terms of market deregulation are places such as Hong Kong, India, Indonesia, Malaysia and Singapore. Taiwan is still a monopoly, but the country will license a new land-line operator next year.

China
Although China allowed China Unicom to begin operation in 1994, incumbent China Telecom still has a huge monopoly. According to Gartner Group figures, China Telecom had 101.6 million customers at the end of 1998, while Unicom had a little more than 3,000 users in October 1998. Both carriers are almost entirely operated by Chinese government departments.

Unicom faces an uphill battle because it has only been allowed to enter a few markets so far.

Analysts say it's unlikely the WTO will manage to pressure China into opening its telecom market to foreign companies because the country sees the industry as having great strategic national importance.

Hong Kong
Hong Kong Telecommunications (HKT) continues to rule the market, though local and foreign players are trying to make inroads into its monopoly.

Competition for local services was first allowed in 1995, but Hutchison Telecom, New T&T and New World haven't made much of a dent - HKT still has a 98% share.

On the international side, HKT last March lost its exclusive rights to provide international land lines. British Telecommunications (BT) and Singapore Telecommunications (SingTel) eagerly snapped up international simple resale (ISR) licenses in Hong Kong in January. ISR allows resellers to offer leased-line service over other carriers' networks. Licenses for the provision of international telecom facilities will take effect on Jan. 1, 2000.

Japan
Although opening Japan's telecom market to competition remains a sticking point for U.S. trade representatives, ongoing deregulation in Japan is making communications less expensive and easier for multinationals operating there.

Now that resellers may offer leased-line service over other carriers' networks, international rates are dropping. Over the past four months, for example, the average cost of a 3-minute phone call from Japan to the U.S. fell from roughly 450 yen to under 200 yen, or about $1.80. That basic rate should drop further in July when facilities-based carriers will be allowed to change their tariffs without consulting Japan's Ministry of Posts and Telecommunications.

"Corporate users now have more choice . . . and enjoy cheaper phone calls," says Toshiaki Iba, a senior analyst at Tokyo-Mitsubishi Securities in Tokyo.

Meanwhile, deregulation is breaking down a wall that segregated carriers by international and domestic markets. MCI WorldCom, for one, broke ground on its Japanese fiber-optic network last September.

Deregulation is also letting Japan's telecom giant roam unfettered. Prohibited earlier from offering full international services, Nippon Telegraph & Telephone (NTT) is trying to remodel itself into a full network provider to the world's corporations. Its bait is Arcstar, a set of network services targeted at businesses.

Singapore
Singapore's telecom market will get its first taste of competition in April 2000, when the international StarHub consortium will take on the SingTel monopoly.

StarHub is a joint venture between Singapore Power, Singapore Technologies, and overseas partners BT and NTT. Rather than lease capacity from SingTel, StarHub will build its own backbone by running fiber through Singapore Power's cable ducts. SingTel recently announced rate cuts of more than 40% in international and ISDN charges in anticipation of the new competition.

Thailand
Recent delays in changes to Thailand's telecom laws will likely hamper the country's already creeping pace toward liberalization, analysts say. Thailand has begun privatizing its two premier carriers, Telecommunications Organization of Thailand and the Communications Authority of Thailand, and hoped to have a new communications regulatory body in place by October. But few observers believe the government will meet that deadline, and until lawmakers push new legislation through, the market will stay closed to foreign carriers.

Orawan Karoonkornsakul, an analyst at Merrill Lynch in Bangkok, says he can't even hazard a guess as to when liberalization will start in force. Still, at least one industry official is confident that Thailand will have a fully open market by 2006.

Africa slowly makes inroads

African nations are taking a gradual approach toward market reform, typically by privatizing the incumbent carrier and assessing its performance before introducing additional competition.

C�te d'Ivoire, Guinea, Senegal and South Africa each used that method, awarding their privatized, previously state-owned operators a period of market exclusivity - usually between four to even years.

However, the respective governments also impose stringent deployment schedules for service rollouts, says Guy Engon Zibi, research analyst for Africa with Pyramid Research in Cambridge, Mass. He expects other African countries to follow suit because this would allow them to maintain some degree of control over carriers.

Foreign telecom firms see Africa as a vast, untapped market. There are only 1.88 phone lines per 100 residents across the 55 countries of the continent, according to the International Telecommunication Union. In contrast, the U.S. has 64.37 phone lines per 100 residents.

South Africa
Liberalization of the South African market is unlikely until the end of incumbent carrier Telkom SA's exclusivity period in 2002, according to Pyramid's Zibi. However, several players have already thrown their hats into the ring, including the state-owned electric utility, Eskom, and Transtel, the telecom division of South African transport firm Transnet.

Zibi believes Transtel will pose the biggest threat to Telkom SA and may well ally itself with a foreign partner when it tries to gain a license. In 1997, the South African government sold 30% of Telkom SA to the Thintnana consortium for 5.58 billion rand, or $927 million. The consortium comprises SBC Communications and Telekom Malaysia.

Europe is off to the races

Telecom markets in Europe fall primarily into three categories: the leaders, the pack and the laggards.

At the head of the class, the U.K. and Nordic countries have been open to competition for years. Countries in the middle pack are progressing steadily, with fierce price wars in Germany and protests over Internet connection charges springing up around Europe. Bringing up the rear, Russia and Greece lack a solid telecom infrastructure, and Greece has until 2001 to open its market to competition.

Aside from some mobile phone providers that charge special low rates for local calls, there are no serious challengers to the local-loop incumbents across Europe.

Cable networks might offer an alternative, but in Germany the incumbent telco owns a major stake in one of the larger cable companies. In Belgium and the Netherlands, the cable network is too old. "Cable isn't the access road in Europe that it is in the U.S.," says Bernt Ostergaard, a telecom analyst with Giga Information Group in Copenhagen.

When it comes to high-speed networks, however, telecom managers have options. "Frame relay and ATM have wide coverage in Europe, and they cost the same," Ostergaard says. "ATM is now affordable, dependable and available."

Whatever services you purchase in Europe, be sure to include a renegotiation clause in your contract so you can take advantage of the next round of price cuts.

Finland
Expect inventive services in Finland, the country that pioneered Internet banking and the one in which consumers can use their mobile phones to buy a Coke from a soda machine or pay for a drive-through car wash. The nation's data transmission speeds are among the fastest in the world, and the percentage of the population with Internet access also tops the charts.

Telecom liberalization went into effect in 1994, allowing new carriers to enter mobile, long-distance and international markets.

The incumbent Sonera still handles about half of all voice and data traffic in the country, and serves some 70% of the country's mobile users. Sonera's strongest competition in telephony comes from the Finnet consortium of local telephone companies.

France
While the regulatory structure for interconnection agreements is in place and 40 new fixed-line providers hold licenses, the French market today remains at best a duopoly between France Telecom SA and the second-largest telco, Cegetel.

During the first year of competition in 1998, France Telecom watched its revenue from international calls tumble and heard cries of protest from Web surfers who said expensive local calls were stifling Internet growth in France. The incumbent lowered international and corporate leased-line rates but has yet to cave to demands to reduce local rates.

Germany
Long-distance prices in Germany have plummeted as much as 70% since the market opened last year and incumbent Deutsche Telekom lost 20% of its market share. Deutsche Telekom still controls 97% of the local phone network, however. Early last month, the German telco authority set the rate Deutsche Telekom can charge competitors to lease the last mile of copper cabling into consumers' homes. Although the amount was lower than what Deutsche Telekom requested, rival carriers gripe that it's not low enough. Rivals say they can recover costs on ISDN connections - for which customers pay a premium - but still lose money on lower-cost analog connections, which account for roughly 90% of the connections to private households.

For its part, Deutsche Telekom complains that regulators' inexpensive interconnect rates give carriers that don't invest in their own infrastructures an unfair advantage. Carriers such as Talkline, Tele2 Telecommunications and MobilCom - which basically resell Deutsche Telekom's service - have had an easier time competing than larger competitors that built their own networks, such as Mannesmann Arcor, o.tel.o communications and Viag Interkom.

Greece
The Greek telecom market is characterized by a basic lack of infrastructure, and many rural areas lack phone service. The market isn't scheduled to open to competition until 2001. In the meantime, incumbent telco OTE is making big investments in basic infrastructure, says Scott Moore, a research analyst at International Data Corp. (IDC) in London.

Ireland
Although the WTO telecom pact gave Ireland until January 2000 to open its telecom market to competition, the Irish government beat the deadline and liberalized the market in December. The country's telecom regulator awarded 29 operators new telecom licenses: 21 general licenses for voice and data services to the general public; and eight basic licenses that let operators offer data services but not voice.

The incumbent, Telecom Eireann, already faced competition in the mobile telephony sector, but market liberalization opened the door for alternative fixed-line carriers to offer value-added services to domestic consumers and businesses. The challengers include East Telecom PLC, WorldCom and a joint venture between BT and the Irish power utility Electricity Supply Board.

Italy
As 1998 closed out, 10 companies had been granted licenses to operate nationwide fixed-line services in Italy, while 22 others were authorized to operate at a local level. Growth in the mobile sector continues at breakneck speed, and mobile carriers have long been offering a wide range of competitive pricing schemes.

As new players enter the market, telecom pricing looks increasingly attractive. Early this year, the incumbent Telecom Italia lowered long-distance and international tariffs in response to the increasing competition.

Russia
On average, only 18 out of 100 Russian homes have telephone lines. Telecom infrastructure is best in the country's largest cities - about 40% to 45% of Moscow homes have phone lines and around 30% in St. Petersburg - but penetration in rural areas can drop to as low as 5%, according to IDC.

Gutsy telecom providers see Russia as the land of opportunity, but the country's economic crisis adds to the risk of doing business there.

Russia's regional and national telcos were brought into one holding company during the 1990s. In 1997, the government sold 25% of the holding company, Svyazinvest, to the Mustcomm consortium. However, much of the $1.87 billion sale price for Svyazinvest went to pay back wages for government employees, rather than toward the improvement of the country's telecom infrastructure. A sale of an additional 24% of Svyazinvest has been delayed since last September.

"I would go with the western carriers who have networks in Russia," advises Giga's Ostergaard. "MCI and Sprint have had strong positions there."

Spain
Spain's telecom market only opened to full competition in December, but the country's latecomer status hasn't stopped it from spawning several aggressive start-ups. Retevision, for example, already has 5% of the long-distance market, while Airtel Moviles holds 30% of the mobile market.

Incumbent Telefonica de Espana has responded by lowering rates by 20% for international calls and up to 51% for Internet access. Businesses looking for value-added services will find a bevy of providers, as that market has been open for nearly 10 years.

Sweden
Reform came to Sweden in the early 1990s, and the market has been expanding ever since. Today, a host of rivals challenge incumbent carrier Telia in fixed-voice telephony, and the country has four mobile networks.

Feeling threatened by rivals, Telia announced plans to strengthen its services by merging with Telenor of Norway. The combined entity plans to go public by the end of next year.

Telia has been steadily losing market share to new entrants since liberalization. Today it retains about 65% of the long-distance market, about 90% of the local market and about 65% of the mobile market in Sweden. Among the many telecom players in the Swedish market, Tele2 (a division of Netcom Systems) is Telia's main competitor.

United Kingdom
The U.K. telecom market is arguably the most open and competitive in Europe, having started down the path of liberalization in 1982.

More than 200 telecom operators provide services, including long distance, voice, data, wireless and even local-loop fixed service, although BT still controls 80% of the fixed-line market. The rapidly expanding enterprise data, voice and mobile communication markets are the most fiercely competitive, with scores of aggressive new entrants. Along with BT, other major players include Cable & Wireless, Colt Telecom and mobile carrier Vodafone.

Latin America is in for a bumpy ride

By now, it has become evident to many countries in Latin America that lack of competition has resulted in inferior services. Even after being privatized, the dominant carriers continue to exert pressure against reform.

It's too late to turn back, however. AT&T, BellSouth International, France Telecom, GTE, MCI WorldCom, Telecom Italia and Telef�nica Internacional have all entered the Latin American telecom market. Smaller, lesser-known companies

have also jumped at the chance to provide service.

Brazil
Brazil started its reform process after many of its neighbors, but it has been making up for lost time. The country created a regulatory agency in 1997 and awarded licenses for cellular service that same year.

The government privatized the state carrier, Telebras, in July 1998 after breaking it up into 12 units - three fixed-line carriers, eight cellular operators and one long-distance company.

Competition until 2002 will be controlled and limited in most of those 12 markets to a duopoly - the former Telebras carrier competing against a newcomer.

An interesting situation is developing in Brazil's long-distance market. MCI WorldCom now controls the former Telebras long-distance carrier, called Embratel. In January, the government awarded a license to a consortium to create a long-distance carrier and compete against Embratel; Sprint is a member of this consortium.

Chile
Chile has widespread competition in all sectors of telecom services thanks to the government's unwavering commitment to encourage a free market since the 1980s.

Most agree that the country has the largest and most varied number of telecom services in Latin America.

Mexico
Mexico is in the process of boosting telecom competition. It opened the long-distance market to competition in 1997, and AT&T and MCI WorldCom entered the arena through separate joint ventures. However, the former monopoly Telmex still leads the market.

Competitors - AT&T and MCI included - have complained about the regulatory agency Cofetel, accusing it of being partial to Telmex and claiming it hasn't done enough to foster competition in the long-distance market. But observers point out that Cofetel's new chief, appointed several months ago, appears ready and willing to make Cofetel a more efficient entity.

Competition for local service is brewing; licenses have been awarded and carriers are getting ready to roll out their services in the coming months.

Venezuela
The dominant carrier, CANTV, has to surrender its monopoly over fixed-line local and long-distance service in 2000, 10 years after being privatized. Currently, there are only two cellular operators, although the government is considering awarding a third license this year. There is widespread competition, however, in the ISP market.

Canada is coasting

The state of telecom competition in our neighbor to the north is roughly the same as the middle-of-the-pack European countries.

Although competition in the long-distance and data markets has been around since the beginning of the decade, local competition just opened up on Jan. 1, 1998. But the incumbent local players that made up the former Stentor telecom group have not been forced to lease lines to competitors at wholesale rates, thus essentially forcing new players to develop their own facilities.

Nevertheless, local voice rates in some places in Canada are lower than those in the U.S., according to The Yankee Group, a consultancy in Boston. Competitive local carriers, such as AT&T Canada and Metronet Communications, recently began offering small businesses voice rates that are 15% lower than those of the regional incumbents.

Moreover, cable operators such as Videotron Telecom are preparing both local voice service and Internet access. And Lucent and Nortel Networks are partnering with a variety of carriers that are snatching up switches capable of carrying voice over IP networks - one sign that one-stop shopping for integrated local, long-distance and data services is on the horizon in Canada.