Telecoms firms net cyber market

Date: 25/09/1997

By Ciris Johnstone

“ACCESS to the Internet will become even more important and we have to be vigilant about the possibility of existing telecoms companies acting anti-competitively in respect to Internet telephony competitors.”

With these few words, Competition Commissioner Karel van Miert recently fired off a double-barrelled warning that the development of the Internet was one of his main priorities and that his officials had more than a watching brief if Europe's biggest telecoms companies abused their dominant position.

“We have already started to investigate the prices the telecoms companies charge for 'backbone' services to Internet service providers (ISPs). We will look at other Internet access issues should they arise,” he added.

Depending on who you speak to, Van Miert's concern is either premature and misplaced or well-intentioned but unlikely to have much effect. Where you stand on the issue depends very much on where you sit in the Internet hierarchy.

The owners and providers of the routes on which the Internet travels - companies with their own backbone services or telephone companies which can adapt their existing lines to take the booming Internet traffic - say the market is too youthful to be regulated.

But some of the smaller companies which have to rent lines from the 'big boys' say unfair practices are already pushing them out of a market which everyone is rushing to be part of.

On one point there is no doubt: telecoms companies are entering the Internet market at a rapid rate. A study by the UK-based consultancy Yankee Group Europe sees the market share of telecoms companies rising to 47&percent; by December 1999 from 36&percent; at the end of last year.

The reason for this enthusiasm is not hard to find. The same study predicts that the number of Internet subscribers in Europe will almost quadruple in the next four years to reach 19.5 million (around 13.4&percent;) of households by 2001. Revenues raised from Internet access, local call charges and second lines are seen increasing to around 12 billion ecu by the same date, up from the current 5 billion ecu.

Online Service Providers (OSPs) such as CompuServe, who provide Internet access with a bit of value added, and ISPs, who provide basic access, will see their market share squeezed as the telecom companies expand, the study says.

“Telecoms companies should invest heavily in the consumer Internet market ... [they] have unique strengths which are very hard for competitors to duplicate,” it adds.

According to some companies the squeeze has already started, with a price war currently taking place in the Nordic countries where Internet penetration leads the rest of Europe.

“We are seeing bloody wars throughout Europe, especially in the Nordic countries,” says Johan Helsingius, director of project development and marketing for EU net. Some Nordic companies are offering free Internet connection for up to six months as a loss leader. “They will not recover that money for years,” warns Helsingius.

Amsterdam-based EU net is active in almost all European countries, providing tailor-made networks for big and small companies which are heavy Internet users. It employs infrastructure provided by other companies, often dominant telecoms companies, and has lodged a complaint with Commission competition officials over the prices and service provided by Belgium's Belgacom.

“There is a real concern that telecommunications companies are in a very strong position. Regulatory pressure to push them out of the market does not exist,” says Helsingius.

He repeats a familiar complaint about subsidies being transferred from the phone companies' mainstream business to the new Internet units. “I don't think any of the telecom companies can be making money at the moment . They are investing a lot of money to dominate the new markets. A lot of the money is coming out of the proceeds from the monopoly areas,” he insists.

EU net says it is in something of a special position in being profitable from the beginning. “We never had deep pockets so we never had a choice,” says Helsingius.

But, fortunately for the firm, it is not chasing the main consumer market for Internet connections which most of the telecom company cash is being poured into.

UUNET, owned by US-based WorldCom, sees the situation quite differently from its perspective as the builder and operator of parts of the network on which the Internet runs. It is also in the market to provide Internet solutions for big business.

UUNET has been one of the most active Internet players in Europe, pursuing an avowed policy of buying up local market leaders. Its September acquisition, the Dutch company NL net, gives it a strong position in the UK, Belgium, Netherlands, Luxembourg and Germany. “We would like to be the leading performer in each country,” says European communications director David Barrett.

Barrett divides the Internet market up into three categories: the big sellers of band width to competitors; national suppliers of solutions to retailers and business; and the 'bottom of the pyramid' suppliers to households.

UUNET likes to build its own networks rather than rent from others, thus ducking the problem of paying high prices for line rental. It is investing around 300 million ecu in infrastructure this year.

Barrett regards the telecoms companies as essentially newly arrived amateurs in the Internet market. He says the realisation that much of their data transmission business will shift to the Internet is driving their precipitous intervention in the market and adds that the recent fashion for world-wide alliances among big phone companies is largely a reaction to the threat of the Internet.

“These are essentially defensive alliances. They are forming up into 17th-century pike squares to defend their revenues,” he claims.

But Barrett insists that a firmer regulatory approach is not a solution for the market or for the companies which feel they are being victimised. “You must rely on innovation rather than regulation,” he argues. “You may go out of business waiting for a regulator trying to prove an incumbent guilty.”

Although Barrett concedes that eventually there may only be a handful of Internet providers, he nevertheless maintains that the market is still too youthful for regulation, insisting: “In terms of regulation, what you should not do is go in too early.”