Old World, New World

Led by COLT, Competitive Carriers March into Europe

Following a wave of privatization and moves to open the local loop in various markets abroad, competitive communications service providers are planting their flags in European markets.

COLT Telecom plc (www.colt.co.uk) was one of the first competitive carriers to set up shop in Europe. It began as a local telecom carrier dedicated to the financial services industry in the City of London. (In Britain, people speak of The City as Americans speak of Wall Street, not just to indicate geographic location, but because the stock, banking and finance companies are located there.) In fact, the company's original name was City of London Telecommunications. However, the name didn't fit the company's ambitions, so it was changed to COLT.

"First, we're a business provider, and a business customer in Europe is no different from business customers in the United States," says American Paul Chisholm, president and CEO of COLT. "They want the same services and have the same requirements."

However, the specific requirements for COLT and other competitors to offer services in Europe differ from place to place, although the European Union (EU) mandated local competition everywhere in its member countries beginning Jan. 1, 2000. (See "Unbundling Europe's Local Loop," page 20.)

"In Germany, there is equal access, either call by call or by preselection," Chisholm says. "Not true in the U.K.; there's a dial access code, or [users can access local competitors] through a dialer. Germany has an unbundled local loop; the U.K. and France do not, you have to buy from the [incumbent]."

Still, COLT has managed to make significant headway serving large businesses in the centers of many major European cities.

"If we're not the first, then we are the second CLEC in every market," Chisholm says. "We are, by far, the leader in terms of networks built, buildings connected and length of time it takes to connect them. We are in 20 cities, completed and operational right now, in nine countries. We will have 27 cities by the end of the year. We have the most buildings directly connected, 3,200 at end of the third quarter [of 1999]."

COLT is connecting its metropolitan networks with fiber, which it currently leases. The company is building its own network, partly in a joint construction arrangement with Level 3 Communications Inc. (www.level3.com). COLT's first 2,700 kilometers of fiber in Germany will be lit in June.

Certainly, the market has generally applauded COLT's efforts. Its stock price, though off slightly from its high of $210 7/16 per share at press time, began 1999 at just under $75 per share and has climbed upward with few interruptions since.

Other companies--notably, MCI WorldCom Inc. (www.wcom.com)--have followed a similar strategy in Europe.

"When deregulation happened in 1998, the first thing operators did was lease [fiber] and cherry-pick," says Sue Uglow, senior consultant at Ovum Ltd. (www.ovum.com), a London-based market research consultancy. "What's starting to happen now is that the corporate customer market is getting saturated."

Now a new group of competitors is coming into the market to target those beneath the radar of company's like COLT and MCI WorldCom.

"One of the least attractive places to go is to the same few places where COLT is," Gary Mesch says. Mesch is managing director, founder and CEO of VersaTel Telecom International NV (www.versatel.nl), which is carving itself a deep, dense niche in Belgium, northwestern Germany and the Netherlands, where it offers local and long-distance voice services, web hosting and dial-up Internet access. The company expects to add DSL to its palette of services this year.

There are 1.2 million businesses in VersaTel's region, according to Mesch, including such prominent companies as Heineken (www.heineken.nl), the KLM Royal Dutch Airlines (www.klm.com), and the great banks and financial houses. VersaTel is focusing on small and medium-sized businesses. Its 25,000 customers make their headquarters in places like Arnhem and Groningen, the Netherlands; and Ghent and Louvain, Belgium.

Jazztel plc (www.jazztel.com) is also steering clear of customers being targeted by COLT. Instead, it's offering integrated local, long distance and Internet services to small and medium-sized businesses in Portugal and Spain.

"COLT is the other CLEC, the only Euro CLEC in Spain," says Christoph Schmid, Jazztel's executive director of strategic planning. "It's a company we admire very much, a fantastically managed company. But they have very small nets in the financial districts. They're very good at connecting Madrid to Frankfurt and Frankfurt to London. If you take COLT and shrink it to Iberia, you get closer to Jazztel."

VersaTel is based in Amsterdam, which Mesch, a native of Colorado, has called home for eight years. He founded and launched a very small aperture terminal (VSAT) company, NovaNet Communications, in 1984, and later sold it to ICG Communications Inc. (www.icgcomm.com). Consulting then brought him to Amsterdam. "I came to consult," he says, "and never left."

VersaTel is in telecom heaven, as Mesch sees it. "The Netherlands is the third most populated country in the world," he says. "And northwestern Germany is at least as dense."

The company offers service in 20 cities, and expects to be in 29 cities by the end of the year. Having the good luck to operate in a region where cities were not flattened by bombing during World War II, VersaTel targets the growing business parks on the edges of those cities.

"In the Netherlands, they didn't bomb all the cities, so the cities are old," Mesch says. "Outside are high-tech centers, which in effect create a long distance and local hybrid. From Brussels to Amsterdam are 20 million people, but just two hours' drive apart."

The company has been busy buying other companies for most of the past year--a year that has seen its stock price on the Nasdaq National Market rise from about $10 to about $40 per share, and settle back to the mid-$30s at press time. Among VersaTel's recent acquisitions are Itinera Services (www.itinera.be), a Belgian ISP; SpeedPort Global Network (www.speedport.net), a Dutch IP networking and facilities management company; Svianed B.V. (www.svianed.com), a Dutch data carrier and VPN company; and--most recently--VEW TELNET (www.vewtelnet.com), a German telecom carrier from right across the border in northwestern Germany. (VEW TELNET, which brings with it a 1,400-kilometer fiber optic network, has about 4,000 business customers, which provides an annual revenue of EUR21.7 million, or a little more than $22 million.)

Jazztel's ambition is just as focused, just as aggressive. It competes for small and medium-sized businesses against the formidable Telefonica S.A. www.telefonica.com).

However, Schmid claims to be undaunted by Telefonica, and still less impressed with Portugal Telecom (www.telecom.pt), the incumbent telco with which it competes.

"They are rather old and slow and boring," he says.

COLT, as far as Jazztel is concerned, is welcome to the financial districts in Barcelona, Lisbon and Madrid. The small and medium-sized businesses in places like Bilbao, Spain, and Oporto, Portugal, are Jazztel's babies. "We've built 15 times as much fiber in Madrid, and we have much greater capilarity in Spain and Portugal," Schmid says. "We want to turn Iberia into a LAN. We have no ambitions to go international--to go to France or Italy, or wherever. We want to keep our focus on what we know."

Schmid estimates that telecommunications in Iberia will amount to $20 billion in 2000. "This is still virgin territory to CLECs," Schmid says.

It won't be virgin territory long, of course. Uni2 (www.uni2.com), a subsidiary of France Telecom (www.francetelecom.com), and Retenes y Visiones de Hoy (called Retevision, www.retevision.com), a subsidiary of Telecom Italia S.p.A. (www.telecomitalia.it), are offering local service in Spain. However, they resell Telefonica's lines and are committed to residential service. In Madrid, at least, Madritel S.A. (www.madritel.com), a cable company, is starting to offer residential telecom service.

Schmid says Jazztel had 80,000 residential customers in Spain at the end of 1999. (Competition only began in Portugal on Jan. 1.) He claims the company got between 15,000 and 20,000 calls a day asking about service. "We achieved 65 percent brand recognition by November," he says. "For comparison, consider Amazon.com (Inc., www.amazon.com). Forty-seven percent of Americans know who they are."

Latin America's Local Markets Heat Up
By Ken Branson

Latin America has become a hotbed for competition.

Privatization was the story in 1997 and 1998 in most Latin American markets. But local competition is the news in many of the key cities today.

Daniel Mazar, left, a network engineer with Diginet Americas Inc. in Lima, Peru, is visited by his president

According to a joint study by The Strategis Group (www.strategisgroup.com) and Pyramid Research Inc. (www.pyr.com), the switched voice market in the seven largest Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela) was worth $20.26 billion in 1998, and is forecast to be worth $44.65 billion in 2003. The broadband services market in those countries, according to the same report, will be worth $6.7 billion in 2003--up from a modest $2 billion in 1998. A study last year by Dataquest Inc., a unit of Gartner Group Inc. (www.gartner.com), estimated there were 8.5 million Internet subscribers of all types in Latin America in 1999. By 2003, the study says, there should be 32 million.

Brazil sold its government-owned telephone company, the former Telebras, to foreign carriers in pieces in 1997, to alternating choruses of hope and outrage. In 1998, it sold "mirror" licenses to still other foreign carriers.

Brazil's tough new federal regulator, ANATEL, insisted on tough service standards, and levied fines against the likes of Telefonica--whose majority-owned subsidiary ran the phones, none too well, in Sao Paulo--when those standards weren't met, potentially putting the incumbent at risk of losing customers to future competitors.

In Argentina, long divided between Telefonica de Argentina (from Buenos Aires south) and Telecom Argentina S.A. (www.telecom.com.ar), controlled by Telecom Italia (from Buenos Aires north), has opened to competition.

Mexico, which opened its long-distance market to competition in 1997, opens its local market this year.

That's all good news for David Schmieg and David Rutchik, the CEO and executive vice president-corporate development, respectively, of Diginet Americas Inc. (www.diveo.net). Diginet Americas, branded as Diveo, has secured local licenses in Argentina, Brazil, Colombia, Panama, Peru and just received a wireless spectrum license in Uruguay.

Diginet, says Schmieg, is totally dedicated to Latin America; it does business nowhere else. There is a "crying need for broadband infrastructure" in Latin America, says Schmieg, and Diginet expects to answer that need.

Unlike VersaTel Telecom International NV (www.versatel.nl) and Jazztel plc (www.jazztel.com) in Europe (see "Old World, New World," above), Diginet's Diveo goes after medium-to-large corporate customers and carriers.

"Brazil is our cornerstone," Schmieg says. Diginet has launched service in Sao Paulo, and was scheduled to launch last month in Rio de Janeiro and this month in Belo Horizonte. Later this year, he says, Diginet will launch local service to businesses in Campinhas, Curitiba, Joinville, Porto Alegre and Santos. Argentina is home to the largest single Diginet operation in Buenos Aires, where the company's network is accessible to most businesses, where its network operations center is, and where it provides wholesale service to carriers. In Brazil and Argentina, Diginet offers high-speed Internet access, local and long-distance service, LAN-to-LAN connectivity and dedicated private lines. "We're getting ready to be in the web-hosting and collocation business," Schmieg says. "We're going to be everything from a 'dot net' to a 'dot com.'"

Colombia, however, torn by civil strife and narcotics terror, is not the place you would expect to see foreign entrepreneurs. That's fine with Diginet, since it has committed 350 people to its operation in Bogota--"all Colombians but one, and he's a Spaniard," says Rutchik.

"We're really a local business in each country, so it wasn't really a stretch to think of Colombia," Schmieg says.

Diginet is not in Mexico, however. That's because Mexican law requires a Mexican partner for foreign businesses, and Diginet insists on owning 100 percent of its operations. "It's an interesting market, and we'll be there someday," Schmieg says.

Interesting is certainly the word. When Mexico opened its long-distance market, Telmex ran ads in television and newspapers, which suggested that using alternative carriers was unpatriotic because they were controlled by foreigners. Since then, Telmex, partly owned by SBC Communications Inc. (www.sbc.com), has taken a different tack, challenging the constitutionality of the Federal Competition Law itself. As the fight played out in the courts, Comisión Federal de Telecomunicaciones (COFETEL), the federal regulator, went on with the business of making rules to curb Telmex's dominance--the sort of rules familiar to American CLECs and ILECs. Just as COFETEL was to announce the rules, a Mexico City judge ruled in Telmex's favor. Though the legal argument was about long-distance service, it isn't clear that the same arguments can't be made about local service, since many of the players in long distance--Alestra S.A. (www.alestra.com.mx), partly owned by AT&T Corp. (www.att.com), and Avantel S.A. (www.avantel.com.mx), partly owned by MCI WorldCom Inc. (www.wcom.com), are also players in the local market.

Chart: Mexico's 20
Million Households

Targeting the Mass Market
By Ken Branson

While other competitive carriers in most of the world focus on business customers of one type or another, a handful of wild cards are attempting to provide alternative service to the masses.

One of those companies is Unefon S.A. (www.unefon.com), which aims to provide mobile phone service in working-class, urban Mexi-can neighborhoods.

The moving spirit and founder of the company, Ricardo Salinas Pliego, also controls TV Azteca (www.tvazteca.com), the broadcasting giant. More to the point, he controls Grupo Elektra S.A. (www.elektra.com.mx), a chain of electronics and appliance stores in just such working-class, urban neighborhoods--a very rough Mexican equivalent of Radio Shack, with a little Wal-Mart and a little Crazy Eddie thrown in. Reasoning that he already sold cell phones, and that many of his customers were buying them because they couldn't get service from Telmex, Salinas founded Unefon to provide that service. Wireless stations would be set up atop his stores and on the roofs of TV Azteca buildings in cities around the country.

In a country where 25 percent of the households have a phone, Salinas figures there's room for Unefon.

He purchased spectrum at auction, and is still struggling to raise the financing to pay for it, missing deadlines and being granted extensions by the Comisión Federal de Telecomunicaciones (COFETEL), the federal regulator. At the end of 1999, Unefon had paid fees and penalties totaling $341 million, but Salinas is determined to begin service this year.

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