By David Molony & Joanne Taaffe
CWI, 2nd April 2001
Business telecoms users in Europe are for the first time facing risks to network services supply, as the global stock markets crash bears down on telecoms companies and their customers.
Some users say they are worried that their contracts with failing service providers may be terminated at any time, leaving them to make alternative arrangements.
Last month's financial sector downslide was the worst since 1987 and was particularly hard on technology and telecoms companies, several of which issued profits warnings. The number of layoffs and redundancies in the telecoms equipment manufacturing and network services sectors has passed the 100,000 mark, based on a survey of forty major carriers and equipment suppliers.
Telecoms share prices have been falling since October at least, but only now are starting to force business failures among European and global service providers. The board of Viatel Inc., of New York - with 500 blue-chip businesses - has retained financial advisers, and Hamilton, Bermuda-based RSL Communications Ltd. - with over 1,000 mainly small and medium business users - has started insolvency proceedings as well as delisting from the Nasdaq high-technology stock market.
"I don't know what guarantees I have that services will continue," said the U.K.-based network manager of an international company which currently uses services of RSLCom. "This is not a situation we have seen before."
Previous failures - like those of local wireless operator Ionica or pan-European network builder Iaxis - were isolated and did not directly involve larger business users.
User contracts have been in question before, but not on such a scale.
And in most cases previously, contracts were in doubt because carrier partnerships came apart, as with BT/MCI and AT&T/Unisource. In those cases, the question was which service provider would keep which accounts, and whether the corporate customers were getting the deals they wanted.
Some analysts say the situation now is serious enough that corporate users without contingency arrangements should be making them straight away.
"Brutally, as a customer you don't want to be stuck with a loser," said John Allen, president of investment bank ARC Associates, of London. "They should get out fast."
Global services threatened
Many large corporates have contracts with several service providers, however, and only rely on competitive service providers for a small part of their networking services - typically, international voice or certain data applications.
But analysts say the latest failures and suspensions may indicate that the global services business model itself is in danger of failing, as the stock markets put back-breaking pressure on telecoms finances.
The Nasdaq composite market hit a low for the year on 22 March, dropping below 1,800 points. The following day, 5% of the technology stock index's value was scrubbed off. To deepen the market's depression, the Dow Jones Stoxx Europe Telecom Index fell by nearly 5% on the same day.
Among the main losers were Cable & Wireless plc, of London, which admitted a week earlier that its global business would miss its revenues target and leave the group profits short of analysts' expectations. Graham Wallace, chief executive of C&W, blamed the collapse of prices in the U.S. and Japan but would not have expected $8.95 billion to be wiped off the carrier's market capitalization and one third off its share price.
And some users reluctantly agree with the analysts. They say they have not had the competitive service they wanted and that consolidation between small operators has not improved things.
"I can't call direct to Portugal," said one London-based user of LDI Inc., now part of global carrier World Access Inc., of Atlanta, Georgia.
"I have to route calls through BT. And calling quality to the U.S. is never good."
Last week, World Access announced that it has appointed investment bank UBS Warburg to restructure its finances, a measure that includes finding supplementary funds and renegotiating the operator's debt obligations.
Should the restructuring fail, World Access will file under chapter 11 for protection from bankruptcy.
Will incumbents win out?
The largest corporate users' buying patterns may mean they will steer through the storm more surely than their medium-sized peers.
For example, members of Cigref, which represents 105 chief information officers of France's largest companies, still rely largely on France Telecom for services and tend to turn to smaller operators or less well-established operators for peripheral telecoms services.
"It becomes more difficult (for a competitive operator to do business) in a difficult (market) situation," said Allan Fischer-Madsen, a partner at Siticom Group, a Paris-based telecoms consultancy, and member of the International Telecom User Group, Brussels.
Large users are more likely than ever to rely on well-established operators for the bulk of their services, turning to newer and smaller operators only to top up services such as least-cost voice routing, said Madsen.
A report on the buying practices of large enterprises conducted by Pierre Audin, Conseil for regulator l'Autorite de Regulation des Telecommunications (ART), showed that 35% of companies give all of their business to France Telecom.
The other 65% of companies use a number of operators, but France Telecom was still the most often cited, followed by WorldCom and Colt Telecom.
Some operators have been making short-term financial sacrifices in an effort to assuage doubts over their long-term credibility. GTS, which is starting to target large corporate users with its Ebone division, last week announced a restructuring deal in order to resolve a debt crisis.
GTS ran into trouble with its Esprit Telecom purchase, which it made in 1999. In January, GTS defaulted on bond payments on GTS Europe Business Service, which includes the money-losing Esprit.
Last week, however, the bond-holders in the business service division agreed to exchange the division's obligation to repay $500 million of debt for 90% of a new company. Global TeleSystems will give the new company up to 35 million euros ($31.3 million) in financing, although this will be dependent on the completion of sales of assets by GTS.
Taking advantage of the crash
And some new operators are taking advantage of the current financial climate to add to their network assets.
"Assets have crashed in value," said Sean Melly, chief executive of Dublin-based Etel Group Ltd., which is targeting tier-one accession countries in central Europe. "And the expectations people have of them are lower."
GTS has 600 kilometers of lit fiber and 65 switches in the region, which Melly is understood to be negotiating to buy.
Reproduced from CWI®
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