Failed Telco Alliances Create New Opportunities

The announcement last week that global telecommunications alliance Unisource NV will sell off all its assets raises the question of whether such loosely knit ventures are headed for the trash heap of history.

The three most visible alliances -- Unisource NV, Global One and World Partners Co. -- are floundering. However, analysts still see a strong need for players offering corporations broad-ranging telecommunications services that span continents.

Looking at the state of the three largest such alliances, the model for partnerships in which a financial commitment is small, but the number of participants large, seems headed for extinction.

Unisource's shareholders -- Royal KPN of the Netherlands, Swisscom AG and Sweden's Telia AB -- last week said that they will sell off the company's assets. The first step was the sale of Unisource Carrier Services (UCS) to U.K. carrier Energis PLC for 200 million Dutch guilders (US$96.7 million). UCS provides services to European Internet service providers (ISPs) and carriers of fixed-line and mobile networks.

World Partners, whose members are AT&T Corp., Kokusai Denshin Denwa Co. Ltd. (KDD) of Japan, SingTel Ltd. of Singapore and Unisource, also has announced plans to disband by next year. It lost its major partner, AT&T, after the U.S. carrier decided to enter into a $10 billion global joint venture with British Telecommunications PLC. That venture is considered a potentially powerful new competitor, particularly after its purchase of a 30 percent share in Japan Telecom Ltd. AT&T also separately has withdrawn from its venture with Unisource, AUCS, also due to a conflict of interest with its new BT venture.

The Global One alliance between France Telecom SA, Deutsche Telekom AG and Sprint Corp. is also troubled. Relations have soured between Global One's French and German partners, since Deutsche Telekom's failed bid in March to merge with Telecom Italia SpA. France Telecom has filed a suit for damages against its German partner, which is openly looking for a new international partner.

In spite of the bad press global alliances have received, some still get high marks among existing customers, however. A Yankee Group survey conducted in late 1998 found that European companies rated Global One as the best-positioned global network outsourcer, for example.

The service that these alliances have to offer European companies are still in great demand, according to Robin Bosworth, director of Schema, a telecom consultancy based in London. "These corporate customers are looking for a level of service that cannot be delivered by the domestic carriers," Bosworth said.

Companies still have a need for seamless voice, data and IP (Internet-protocol)-based services across many countries. That demands not only a high-speed network, but also services to go with it, such as virtual private network services or call center management.

No one carrier can offer companies a pan-European network with unified billing and linguistic support in each country, Bosworth said. "Global alliances solve a lot of problems for these customers." If, for instance, a leased line between offices in Rome and London goes down, the customer won't have to contact different carriers to get it fixed.

Existing global alliances, however, suffer from having members whose strategies are simply too different.

At Unisource, for example, alliance members are clearly going their own ways. [See "Unisource to Disband by Selling Off Units," Aug. 4.] KPN is building a high-capacity, IP-based network with U.S.-based Qwest Communications International Inc.; Telia has said it will build a pan-European network now that it is merging with Norway's Telenor SA; and Swisscom looks like it wants to focus on its regional strengths with its recent purchase of 58 percent in German telecommunications reseller Debitel AG.

"They (Unisource's partners) have different ways of selling their products and services, and even compete in some areas," said Theodor Berquist, chief executive officer of Intelligence AB, a Stockholm-based research firm.

Competition is also a problem, agrees Bosworth. Much of the international traffic carried for global alliance customers represents revenue that the parent carrier might have gained without the alliance. "We have seen a lot of conflict about account ownership," he said.

All the alliances are also targeting the same pool of multinational corporations, said Susen Sarker, a telecommunications analyst with Yankee Group in London. Competition is very fierce, cutting into revenue, and differentiating on service is costly, he said. Indeed, the three alliances are all still money losers. Global One, for example, is not expected make a profit before 2001.

The alliances have also had difficulty meeting growing demand because of a failure to effectively execute. "Networks are the easy part: the big problems have been in the operations, billing, customer care and sales management across multilingual companies," said Bosworth.

With customer demand high, the field remains wide open, according to analysts. Carriers such as WorldCom MCI or the AT&T/BT venture may have the most success sweeping up the multinational business, said Bosworth.

Mikael Sandberg, an analyst with London-based investment firm Regency Capital International, sees players such as Viatel as interesting competition. Based in New York, Viatel is building a pan-European, fiber-optic network called Circe, which has gateways in London and New York, network operations centers in Egham, England and Somerset, New Jersey, and network points of presence in over 45 European cities.

The jury is still out on which players will succeed in the market.

"There's a place for global players. How they come together in the end is another matter," says Yankee Group's Sarker.

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