WSJ article. WorldCom's European Network Is Finally Ready to Carry Data
[No ASND reference. Does anyone know about ASND business with the European "alternative network carriers" identified in this article?]
interactive.wsj.com
July 20, 1998
By GAUTAM NAIK
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Build it, and they will come.
That's the gamble WorldCom Inc. took four years ago when it began
digging up the streets to build a pan-European phone network powerful
enough to zap phone calls, Internet data and video images with equal ease.
Now the American phone carrier is about to show its hand.
WorldCom will announce Monday that its 3,200-kilometer network
linking London, Amsterdam, Brussels, Paris and Frankfurt is open for
business. The network snakes into 4,000 office buildings across Europe,
links with a new undersea cable, and then -- via WorldCom's nationwide
U.S. operations -- connects to 27,000 office buildings on the other side of
the Atlantic.
"Now a business customer can have a video-phone on the desk of every
executive in Chicago and Frankfurt," boasts Liam Strong, chief executive
officer of WorldCom's International unit, during an interview in the
company's frenetically busy offices in London. "We're breaking the mold."
Tall Order
Of course, WorldCom must first convince customers that its new network
will actually deliver the goods. Up to now, so-called seamless networks
have always sounded great on paper, but flopped in reality. Indeed, even
WorldCom won't carry every call entirely over its network: In places
where it hasn't built a local-phone network, it must still pass along the call
to a regional carrier. That could erode some of its price advantage and
introduce complexities into the system.
And then there's the competition. Three smaller carriers, Esprit Telecom
Group PLC, Viatel Inc. and Hermes Europe Railtel (the last is partly
owned by financier George Soros), are racing to build their own
pan-European networks. Like WorldCom, they no longer want to pay
high fees to piggyback off the networks owned by British
Telecommunications PLC, Deutsche Telekom AG and others. A fourth
European player, Colt Telecom Group PLC, which is 62% owned by
U.S. mutual fund giant Fidelity Investments, is also building local networks
in key European cities, and plans to link them eventually into a loose
pan-European system. Even giant BT is assembling a Europe-wide fiber
network by stitching together smaller networks owned by itself and various
European partners.
The arrival of these "alternative-network carriers" reflects a big change
working its way through the telecom industry: The surfeit of transmission
capacity a few years ago is quickly yielding to a perceived dearth of it. The
reason for this is that the volume of data being sent over phone networks is
growing far faster than the volume of voice calls ever did. The
phenomenon flows partly from the advent of linked desktop computers,
which allow corporations to easily send data between facilities. The other
big cause is the inexorable rise in popularity of the Internet.
"The Internet has made bandwidth demand of the past completely
obsolete," declares John Sidgmore, chief operating officer of WorldCom.
"The networks of old simply aren't up to delivering what Internet users
need."
Deep Impact
This shift will have an enormous impact on Western Europe's recently
deregulated telecom industry, especially in the realm of cross-border
transmissions. Such traffic accounts for roughly $21 billion in revenue each
year and is expected to double over the next five years. Trouble is, this
rich segment has long run according to an arcane and inefficient pricing
system created by the world's older phone carriers. Its centerpiece: a
cumbersome relay race in which international calls are handed from one
phone carrier to another -- leading to high prices, questionable quality and
complex billing problems.
Consider a call from Chicago to Frankfurt under the old system: The call
begins with Ameritech Corp., the local carrier in Chicago, which then
hands off to AT&T Corp. or some other long-distance operator. AT&T
carries the call to the East coast, passing it off to an undersea provider
(which may not be AT&T). The call may emerge in Britain, be picked up
by BT and finally dispatched via Belgacom SA of Belgium to Deutsche
Telekom -- which makes the final connection to Frankfurt.
There are six carriers involved and each charges a different fee. That's why
calls over the same distance, but crossing different international
boundaries, can vary in price by up to five times.
WorldCom hopes to do away with all that. As of today, a call originating
in one of the three 103 local-phone markets in the U.S. directly served by
WorldCom can travel over the carrier's own long-distance network in the
U.S. From there, it can cross the Atlantic via WorldCom's Gemini
undersea cable and slip over WorldCom's European network to a phone
in Frankfurt.
WorldCom has spent $1.5 billion on European infrastructure in the last
four years and its 3,200-kilometer fiber-optic system, dubbed Ulysses,
already covers areas responsible for 65% of Europe's telecom traffic. But
WorldCom isn't stopping there. It plans to stretch Ulysses to Milan, Zurich
and some regions of France outside Paris.
WorldCom's new European network is very fast and very powerful. A
typical data line leased from BT, say, can dispatch data signals at a speed
of two megabits -- equivalent to 40 pages of a 300-page book -- per
second. WorldCom's network can send up to 14 of those books per
second. WorldCom says it can also offer high-speed data service at prices
25% to 45% cheaper than those of BT and other dominant players in
Europe. And because WorldCom controls every centimeter of its own
network across Europe and the U.S., it can send customers consolidated
bills and provide uniform customer services in both continents.
Similar ideas are being hatched at the other challengers, which over the
next two to three years could together spend $5 billion in constructing new
telecom infrastructure across Europe. But each is pursuing a slightly
different market:
ESPRIT: Just a year ago, the game plan at this Reading, England-based
company was to lease lines from major telecom carriers, install its own
switches, and sell service to business customers as a "switch-based"
resellers. Trouble was, leasing prices on cross-border routes remained
stubbornly high -- six times the rate for leasing a similar line in a domestic
market. So Esprit decided to build its own network by leasing much
cheaper "dark fiber" -- or lines that lack power -- from big players, then
installing its own transmission system.
Esprit has built one major link, between London and Paris, which
increased its capacity along that route some 250 times. By the end of the
year, it hopes to expand the network to Amsterdam and Brussels. By early
1999, it plans to extend its reach within France and boost network
capacity in Germany.
"Unlike the big players who are positioned in their national domains, Esprit
will show the same face across Europe," says Jim Reynolds, chief
operations officer. BT, he adds, "was convinced that alliances would solve
their problems. But they don't show a single face."
HERMES: Investor George Soros owns a 17.5% stake in this
Belgium-based carrier, whose parent is Global TeleSystems Group Inc., a
telecom company based in McLean, Virginia. Hermes grew out of an
effort by Mr. Soros to provide telecom links between the San Francisco
and Moscow two decades ago, but it now hopes to spend $1.1 billion to
build a 18,000 kilometer network linking 34 European cities by the year
2000. Nine cities have already been linked; Dusseldorf, Stuttgart and
Munich will be ready within weeks.
Unlike WorldCom and Esprit, which focus on business customers, Hermes
aims to sell network capacity to other telecom players, partly by laying its
wires alongside railroad tracks. Customers include the big telecom
alliances, as well as resellers and other new competitors that don't own
their own networks.
Some 25% of Hermes's current crop of customers have been won away
from dominant carriers that also offer cross-border service. Last year,
Hermes posted revenue of $5.4 million; analysts say that could grow to
more than $60 million this year. "We are a carrier's carrier," says Jan
Loeber, managing director of Hermes. "People choose us because our
prices are 10% to 60% cheaper than [dominant providers]. And we can
offer capacity in whatever flavor or size."
Under the relay-race system of carrying cross-border calls, Mr. Loeber
says, the failure rate three years ago for international circuits 1,000
kilometers in length was a surprising 1.5%. That rate -- which measures
how many times a call fails to go through or is cut off -- has since
improved to about 0.5% on average. "But on our network we guarantee a
failure rate of 0.1%," he says.
VIATEL: While other players pursue multinationals or big carriers, Viatel
of New York is going after small and medium-size businesses, the
contributors of one-third of all telecom spending in Europe.
The initial pieces of the company's 3,600-kilometer Circe network will be
turned on in early 1999 and eventually link more than a dozen West
European cities. The first phase, along with Viatel's expansion into western
Germany, is expected to cost $530 million.
Fast growth is helping accelerate the company's plan. "We originally meant
to break even in the year 2000, but we now expect to do so in the second
half of 1999," says Michael Mahoney, Viatel's chief executive. Investors
are certainly optimistic: On Friday, the company's stock hit a 52-week
high of $20.50. And when Viatel approached the high-yield market in
March in an effort to raise $550 million, it actually wound up raising $890
million.
And how will Viatel fare against WorldCom? Well, Mr. Mahoney says,
Greek mythology has it that Circe and Ulysses were lovers. But Circe also
turned Ulysses' men into swine, he jokes.
COLT: This London-based provider doesn't fit in the stable of
cross-border network providers -- yet. So far, the company has built
fiber-optic networks in nine European cities, initially focusing on financial
districts. And Colt's primary goal is to serve the cities themselves, not to
connect them with the outside world.
Still, Colt is expected to eventually link those cities and broaden its reach.
For now, Colt dispatches cross-border calls between London, Paris and
Frankfurt via lines leased from Hermes; Hermes, in turn, uses Colt's city
presence to reach office buildings.
Thanks to new technology, many of these new telecom players can now
boost capacity some 40 times "just by a flip of the wand," notes David
Wheeler, telecom banker at Credit Suisse First Boston, in London.
But that may well bring the industry full circle, he warns: "There's now
nervousness creeping in, and the question is being raised: Are we going to
see a glut?"
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