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East/West: Battered Western Telecoms Could Pull Out Of Eastern Europe

Governments in Eastern Europe and the former Soviet Union can no longer look to the West to fund improvements in their telecommunications systems. For the past 10 years, Western European telecom companies underwrote many of the region's improvements in fixed-line and mobile-telephone networks. But companies that led the investments, like Deutsche Telekom and France Telecom, are nearly broke -- the victims of lavish spending and misguided growth strategies. Companies are now rethinking those strategies, and analysts say a withdrawal from Eastern Europe for some of them is possible.

Prague, 30 July 2002 (RFE/RL) -- For the past 10 years, Western -- particularly Western European -- telecommunications companies have been among the biggest investors in Eastern Europe and the former Soviet Union.

The giant telecommunications companies of Britain, France, and Germany as well as Italy, Spain, the Netherlands, Greece, and Scandinavia have all been major players in helping the former communist countries rebuild dilapidated fixed-line systems and develop new wireless technologies. The total investment ran into the many billions of dollars.

Western companies like Deutsche Telekom and France Telecom invested in Eastern Europe not simply to increase business. The investments also brought prestige and formed part of a larger corporate strategy to build up global telecommunications networks.

But the telecommunications industry in the West is in shambles. Last week's bankruptcy by the American giant WorldCom -- which owned the U.S.'s second-biggest long-distance phone company -- is just the latest in a series of telecommunications failures on both sides of the Atlantic. Many companies simply don't have the resources to invest any more.

Analysts say the Western telecoms made two major mistakes. The first was expanding beyond their national borders into Eastern Europe and elsewhere. The second was overpaying for licenses to operate so-called "third-generation," or 3-G, wireless services.

Regarding expansion, analysts now say the strategy of national telephone companies growing beyond their national boundaries to create global networks was flawed in the first place.

Analyst Benedict Evans at the investment bank WestLB Panmure in London points to Deutsche Telekom as a case in point. The company is heavily involved in Poland, Hungary, the Czech Republic, and several other former communist countries. It made the investments as part of an overall strategy to create a fully integrated telecom, offering advanced voice and data-line services around the world.

In addition to massive investments in Eastern Europe, Deutsche Telekom two years ago paid more than $40 billion to buy the U.S. wireless operator VoiceStream.

Evans says, however, Deutsche Telekom is discovering that a model of offering all telecoms services across all continents does not make economic sense: "This is exactly the same thing that Deutsche Telekom and France Telecom and British Telecom and the various other people...have discovered. That providing the domestic voice service in Frankfurt doesn't really have a cost-saving benefit with providing mobile service in New York. You aren't actually saving money by having those two things in the same box. You are not actually an integrated [telecommunications company]."

Evans cites British Telecom as a company that, like Deutsche Telekom, once had a global vision, but which has since restructured and abandoned what Evans calls a "failed strategy." BT now has less debt than either France Telecom or Deutsche Telekom and has refocused its core business to offering fixed-line services in Britain.

Analysts say that with its earnings dropping and its share price under pressure, Deutsche Telekom may have to make the same choice.

Dalibor Vavruska is a telecoms analyst with ING Financial Markets in London and the author of a paper on Western telecoms investment in Eastern Europe to be published next week. He says plainly that Deutsche Telekom's strategy has failed and the company should take a look at selling its holdings in Eastern Europe and the former Soviet Union -- either individually or as a block. Other companies may follow Deutsche Telekom's lead. "I think now at the moment, [Deutsche Telekom] is in a situation where they urgently need cash and they need to make a strategic decision as to whether the original strategy of fully integrating the telecom investments into the Deutsche Telecom group -- which has not worked in any of these countries -- whether that should be abandoned and whether they should perhaps build a regional business [that could later be sold]."

The news is naturally bad for governments in Eastern Europe and Central Asia who are in the process of privatizing their phone monopolies but have not yet chosen a buyer.

Another problem lies in the area of 3-G wireless services. Three-G refers to advanced wireless applications such as accessing the Internet or conducting bank transactions on the phone.

The demand for such services was originally believed to be huge, but the technology has been slow to evolve. It's still not clear whether mobile-phone users will want to use the services at all.

Two years ago, at the height of enthusiasm for the Internet, the major European telecommunications companies paid national governments a total of around 150 billion euros for licenses to operate such services. The companies borrowed much of the money to pay for the licenses.

Vavruska of ING Financial Markets sums up the situation like this: "[The European telecoms companies] bought...they spent tens of billions of [euros] on these [3-G] licenses, which are essentially seen as worthless at the moment."

Vavruska points out that two major telecoms operators, Telefonica of Spain and Sonera Corporation in Finland, recently scrapped plans to develop 3-G services altogether, admitting in the process that the money they spent on the licenses in now worthless. Other telecommunications companies are expected to do the same.

Evans of WestLB Panmure says two companies hit especially hard by the overpayments for 3-G licenses are Deutsche Telekom and France Telecom -- who, again, are among the most active investors in Eastern Europe: "Deutsche Telekom and France Telecom each have about 65 billion euros of debt, which is more than they can comfortably support. Variously, other companies in the industry have a similar problem but to a lesser extent."

Regardless of what happens, ordinary phone users in Eastern Europe -- who have seen vast improvements in their phone service the past 10 years -- are not likely to notice any difference. Says Evans: "These companies are not going to disappear. This is the fundamental point. From the consumers' point of view, nothing much is going to change. Pricing may change, services may change, bits of the company may be called something else, but your [basic] service will still be there."

WorldCom's bankruptcy announcement on 21 July dramatically underscored the very weak state of the telecoms industry, though analysts point out the company collapsed because of problems that are different from those afflicting Europe's telecoms.

WorldCom's main business was carrying data along fiber-optic networks. It declared bankruptcy when it could no longer pay the interest on the billions of dollars it borrowed to build the new networks.

Evans says WorldCom was a victim of evolving technology. He says WorldCom was betting that because of the Internet, the demand for moving data along high-speed, fiber-optic networks would explode.

The demand certainly did explode, but what WorldCom did not foresee was that the capacity of fiber-optic lines -- how much data each line could carry -- would increase as well. This increase, in fact, greatly outpaced demand.

WestLB Panmure's Evans says: "The amount of data you can put through a piece of [cable optic] fiber that has already been laid has expanded exponentially in the last couple of years. It used to be thought that you could get 'X' down a piece of fiber. Well now you can get 100 [times] X down that fiber, and if you replace the equipment at both ends of the cable you could probably get 1,000 [times] X down that fiber. So, we've had vast over-capacity problems."

So instead of increasing prices because of higher demand, WorldCom was forced to cut its prices, eventually pulling the plug in the largest bankruptcy in U.S. corporate history.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.