Abstract: With the day of the $1 trillion telco at hand, regulatory supervision is needed to solve the problems created by the European industry's accelerating wave of consolidation The recent battle between Deutsche Telekom and Olivetti for control of Telecom Italia bore witness to the triumph of the deregulation process now under way in Europe's telecom industry--and to the power of financial markets. This struggle, which Deutsche Telekom lost, was a response to a double challenge: the competition that has been unleashed since Europe liberalized its telecom industry last year and the expectations of shareholders since privatization began. Other deals among European operators will surely follow. But unless the consolidation is managed carefully, it will benefit neither the shareholders nor the consumers whose interests deregulation was meant to serve. The logic driving mergers in the industry is clear: established operators are under attack from hundreds of newcomers that, by exploiting new technology and focusing on specific parts of the business, are picking off the most lucrative customers and slashing prices. Standard long-distance prices, for example, have fallen by about 50 percent in France and Germany over the past two years. A merger is thus a means of defending margins, securing growth, and, ultimately, avoiding a takeover. Mergers can help incumbents defend margins because of the efficiencies that economies of scale deliver. When prices are falling, these are crucial. Moreover, there is plenty of room for savings given the way states managed telcos in regulated markets. Purchasing, overheads, and information technology costs can all be cut through economies of scale. There are also network efficiencies to be gained: traffic can be directed more efficiently; there are fewer interconnection fees (the fee paid to use another operator's network); and capital spending costs can be shared. The latter is particularly important at a time when established operators are being forced to update their networks to compete with the likes of MCI WorldOom and Qwest, which have built high-performing, low-cost fiber networks. Scale is also important in those parts of the industry that are globalizing and becoming commoditized. Long-distance and international voice and packet data services are already going this way. It is only a question of time before mobile telephony follows suit, with prices converging at a much lower level across Europe. The largely fixed costs of these businesses mean that high-volume sales will be a key profit driver. But the most powerful force driving mergers is the need for growth. A few years ago, most of Europe's state-owned telcos would have been content with a modest profit. Now, partial, full, or planned privatizations have exposed these companies to stock market pressure. Our analysis of stock prices and analysts' reports indicates that financial markets expect the profits of European operators such as France T[acute{e}]l[acute{e}]com, Deutsche Telekom, Telecom Italia, and Telef[acute{o}]nica to more than double in the next five years. How can such high growth expectations be met? The national operators are struggling to secure any growth in their domestic markets given the strength of the competition. Most therefore view international expansion as a quick means of capturing top-line growth. There are other benefits to mergers as well. The bigger you are, the more markets you cover and the greater your ability to attract the best partners in growing businesses: for example, multimedia and portal providers themselves want maximum reach. And the bigger you are, the less vulnerable you are to a takeover. The cost Yet mergers bring their own problems. Adapting management and business processes, as well as overcoming cultural differences, absorbs time and energy when managers should be focusing on customers and the competition. In addition, squeezing out inefficiencies can be difficult given the social contracts that exist in Europe and the fact that governments still hold a partial stake in most operators. …
Publication Year: 1999
Publication Date: 1999-06-22
Language: en
Type: article
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Cited By Count: 5
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