European Firms Aim To Cut U.S. Rivals' Lead In Telecom Equipment
Dow Jones Online News, Monday, October 05, 1998 at 10:46
By Kimberley A. Strassel, Staff Reporter of The Wall Street Journal
LONDON -(Dow Jones)- Europe's Internet sites are beginning to reflect
local culture in content -- but when it comes to hardware, it remains
solidly American.
Europe has long been home to some of the largest players in the
telecommunications-equipment market, among them Siemens AG of Germany,
France's Alcatel SA (ALA) and Telefon AB L.M. Ericsson (ERICY) of
Sweden. But the lucrative market to supply the nuts and bolts that run
the Internet in Europe has been completely dominated by U.S. firms such
as Cisco Systems Inc. (CSCO), 3Com Corp. (COMS), Ascend Communications
Inc. (ASND) and Bay Networks Inc.
Europe is fighting back. By developing partnerships, restructuring
their businesses and parlaying their longstanding relationship with
national carriers, European communications-equipment giants are
scrambling to obtain the advanced technology they need to compete in a
new data-driven world.
"This is becoming a very tough market, and the simple truth is that a
lot of technology is being generated out of the West Coast of the U.S.,"
said Chris Lewis, principal consultant at Yankee Group in the United
Kingdom. "The remaining bastions of European equipment companies are
going to have to reposition -- or form relationships -- or risk being
left behind."
Indeed, the market for new gear for data transmission and the
Internet is crucial for the future of Europe's equipment players. The
world's century-old phone networks are being made obsolete by the
Internet. The demand for voice-network equipment, something in which
companies such as Siemens and Ericsson have specialized, is being
superseded by the need for equipment such as hubs, routers and
high-speed cable that can handle large amounts of data. Analysts
estimate that by 2005, the volume of data traffic is expected to be 20
times the volume of voice calls.
The growth rate for Internet-equipment sales in Europe is set to
outpace that in the U.S. for the first time this year, and the total
European market for data-networking equipment is expected to top $13.6
billion this year, according to market-research firm Dataquest.
When Cisco first arrived in Europe in 1990, "we were the only people
that did this kind of work," said James Richardson, president of Cisco
Europe, Middle East and Africa. Companies such as Alcatel and Siemens
had fat contracts to supply traditional voice equipment to national
operators such as France Telecom SA and Deutsche Telekom AG, and the
Internet seemed a distant dream.
That gave U.S. firms an open playing field. The first targets were
corporations, which were looking for new ways to wire up far-flung
offices; the Internet seemed the most promising and inexpensive way to
do it. This "enterprise market" has become "the mainstay of our
operations," said Dave House, president of Northern Telecom Ltd., which
recently acquired Bay Networks. Ian Keene, an analyst at Dataquest, says
Cisco, 3Com and Bay Networks together hold 47% of Europe's corporate
market. U.S. companies also gained a foothold supplying the new --
albeit small -- divisions of national operators with equipment to run
Internet networks.
European rivals are racing to narrow the enormous gap. The most
popular strategy has been to build partnerships with U.S. firms that
already have the technology. Building Internet equipment is complicated
and expensive; Cisco alone spends more than $1 billion on research and
development annually. Rather than invest this type of money in-house,
European companies have realized it is smarter to find partners, and
then work to integrate products.
It is a strategy from which U.S. firms also benefit. These days "the
key to winning this market is being able to supply what is called
end-to-end solutions," explains Pim Bilderbeek, director of European
networking research at International Data Corp. "Operators want to be
able to buy both voice and data equipment from few sources, and be sure
it works together," she adds.
Siemens has partnerships with Internet suppliers Newbridge Networks
Corp. (NN) and 3Com. Alcatel has a loose alliance with Cisco, and just
agreed to jointly develop products with Ascend.
Some firms are buying their way into the field. Ericsson announced it
was looking at 10 Internet-product companies in the U.S., and has
already acquired one, Advanced Computer Communications, for $285
million. And the chairmen of both Finland's Nokia Corp. (NOKA) and
Alcatel said their companies were looking to acquire U.S.
Internet-equipment firms over the next year.
Siemens, for its part, is reorganizing its entire company to deal
with the need to have new Internet technology side by side with its
voice specialties. As of Friday, the German firm has one giant
networking division that deals with everything transported over
lines-voice, data, fax and video. "Converging technologies and
converging networks demand unified knowhow in one group," says Reiner
Schoenrock, spokesman for Siemens's public-communications network group.
Alcatel has found another niche. In contrast with the U.S., where
many Internet service providers, or ISPs, and companies build their own
networks, in Europe most firms lease their Internet space from bigger
telecommunications companies. To handle all these small networks,
carriers need special software. Alcatel has moved quickly in this field,
and some of the leading operators, including France Telecom (FTE) and
Italy's Infostrada, a joint venture between Olivetti SpA and Mannesmann
AG of Germany, now depend on its products.
"The plan is to take these core competencies of ours, build them up,
and convert them to the Internet world," said Martin Deprycker, vice
president of the Internet-access business unit for Alcatel.
Analysts say the Europeans are still low on the data-networking totem
pole. But they have strong relationships with the national carriers that
generate most of Europe's voice-equipment revenue. If Alcatel and
Siemens can cobble together an acceptable range of high technology, the
giant carriers may also turn to them for Internet needs.
"Saying that data will dominate implies that voice isn't important --
which just isn't true," said Lewis from Yankee Group, adding, "The
challenge for European companies is to take their knowledge of that area
and exploit it in the new Internet field."
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