Telecoms battle looms: UK firms monitor planned US-European alliance

A GROTESQUE proposal or a timely opportunity for full-scale liberalisation of Europe's protected telecommunications industry? The British telecoms industry has been left sharply divided by the talk of a link-up between AT&T, America's largest telephone company, and Europe's two biggest state monopolies, Deutsche Telekom and France Telecom.

BT is incensed by the idea and determined to nip it in the bud. Others see it as more opportunity than threat. Lord Young, chairman of Cable & Wireless, dismisses fears that a merger of French and German business telecommunications interests with those of the US operator would create a super- monopoly that would dominate the industry. 'Two monopolies do not a competitive animal make,' he said.

Though he concedes they would offer formidable competition, he also sees opportunity. 'If, as the price for that merger, the European Community can enforce competitive law, then it will be worth it. It would provide others with an opportunity to enter the market.'

His sanguine approach is dictated by the fact that Mercury, the C&W subsidiary, is not in head-on competition with the big state-owned operators. 'Companies will always dual- source,' he said, and Mercury would be in position to pick up some of that new business.

Iain Vallance, the chairman of BT, took a very different view when, earlier in the week, he hit out at 'this grotesque proposal'. BT believes it is a backdoor way for France Telecom and Deutsche Telekom to protect their existing business.

Both monopolies have been dragging their feet over plans to liberalise the telecommunications market in Continental Europe by 1998. Their main fear is that foreign telecoms operators, including BT, will make big inroads into their home turf. In a confidential 'memorandum for a strategic partnership', now with the European Commission, they emphasised the necessity of joining forces to guard against being squeezed on their domestic territory.

According to this document, they aim to expand their now limited co-operation into a 'global strategic partnership (to meet the needs) of European customers and improve their competitiveness in a market that is being increasingly liberalised and globalised'.

Short-term, they plan to offer a 'pan-European communications network for big business clients, and attractive rates and card services for smaller firms'. By 1998, they hope to provide a combined long-distance voice and data service across Europe, which would include all but domestic local calls.

The state-owned operators make it clear their combined strengths will not be enough to fend off other global players. To this end, they are courting AT&T to bolster Eunetcom, their joint venture to operate global networks for multinational customers. It is not yet certain how such a tripartite alliance would work, although one possibility being mooted is a limited cross-shareholding.

Another is the creation of a joint venture that would sub- contract to its three owners for services and capacity. Even if its structure were resolved, Project Atlantic, as the plan has been dubbed, faces huge hurdles.

'The Commission has a schizophrenic approach. On one hand it favours emergence of a strong European player to fend off the Americans and Japanese; on the other it cannot endorse linking two monopolies into a super-monopoly,' one industry expert said.

He added that the merger plan would almost certainly demand a trade-off, with France Telecom and Deutsche Telekom probably forced to relinquish the monopoly of their respective domestic markets.

All three operators would also risk becoming entangled in a complex web of European Union regulations. David Gillick of PA Consulting Group argues that while the Maastricht treaty broadly supports development of trans-European networks in transport, telecoms and energy, it is impossible to know how the EU would apply the numerous resolutions involved.

The putative alliance raises further questions on the future of European equipment suppliers, said James Golob, industry analyst at SG Warburg. He points out that powerful European suppliers such as Siemens would be extremely unhappy to see AT&T, which has been slow to break into the European equipment market, given any kind of a lever on their patch.

Most importantly, 'it is hard to see how any alliance between a commercial company - especially one as astute and aggressive as AT&T - and a state monopoly will not end up with AT&T on top,' he said.

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