Telecom users turn to traditional carriers

As the lights go out on the European network of KPNQwest NV and as WorldCom Inc. struggles to avoid bankruptcy, users of wide-area networking services in Europe are seeking refuge with the region's former monopoly telephone companies.

"The big winners emerging from the telecom meltdown are the incumbents," said Richard Elliot, chairman of the London bandwidth exchange Band-X Ltd. "Customers now see them with different eyes -- as companies that are able to offer greater financial security than the new players."

The former monopoly telephone companies, once part of Europe's network of national PTT (Post Telephone & Telegraph) public administrations, were criticized in the past for their high prices and poor service. The opening of the European telecommunications market over a decade ago opened the doors to a flood of new players, including KPNQwest and WorldCom, which promised lower fees and greater innovation.

Although incumbents, such as Deutsche Telekom AG (DT) and France Telecom SA (FT), are straddled with billions [b] of dollars of debt, "they continue to generate huge revenues from their cash-cow domestic telephone business and from their near monopoly of the local loop," Elliot said. "And even if some of these carriers have financial problems, their government owners aren't about to let them fold."

In fact, European governments are starting to show a greater interest in the partially state-owned telephone companies, now that their share prices have plummeted, along with their credit ratings.

Last week, rumors emerged that the French government was thinking about buying back shares in FT, to stabilize the French operator battling a debt of more than €60 billion [b] (US$58.5 billion). Although the government said it had no such plans, that denial has done little to stem speculation.

On Monday, the Financial Times Deutschland, Berliner Zeitung and Focus Magazine published reports based on inside sources that the German government is planning to fire DT's embattled chief executive Ron Sommer possibly before the national elections in September. The government, according to the reports, believes a change at the top would improve DT's share price, which recently sank to €8.14 from an all-time high of €104.

Talk of greater government intervention comes at a time of substantial uncertainty among corporate users, especially those that have done business with the numerous new players now in bankruptcy protection. The shutdown of the Ebone backbone network, owned by KPNQwest, helped destroy what little trust remained.

"If I've learned anything from the KPNQwest fiasco, it's not to trust anybody," said Dai Davies, president of Delivery of Advanced Network Technology in Europe Ltd. (Dante), a nonprofit organization in Cambridge, England, that operates a backbone connecting national data networks of universities across Europe. The organization leased transatlantic capacity and IP (Internet Protocol) bandwidth from the Dutch company, among others. Global Crossing Holdings Ltd., another supplier, filed for protection under Chapter 11 of U.S. bankruptcy law in January.

"We would never have signed a contract with KPNQwest if we had known of any severe financial difficulties," Davies said. "Although we routinely monitor the financial statements of our suppliers, it's really impossible to know what's going on inside a company if you're an outsider."

Last year, Dante had considered using Canadian service provider Teleglobe Communications Corp. but signed a contract with KPNQwest because the carrier appeared more financially stable than its rival, according to Davies. Teleglobe later filed for protection from its creditors.

Former telephone monopolies now appear to be the safest bet.

Frustrated by the downfall of so many new players, Dante has turned to incumbents for help. Although KPNQwest's international link is still operating, the organization has meanwhile signed a contract with DT to supply transatlantic connectivity. And for European IP bandwidth, it has turned to Swedish incumbent Telia AB in Stockholm.

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