Thompson's law: 'First is best' - Global Telesystems Group's H. Brian Thompson sees consolidation in telecom industry - Industry Trend or Event

CommunicationsWeek International, Oct 25, 1999 by David Molony

H. Brian Thompson is sore. He has little patience with investors and network builders who seem only recently to have discovered the potential of the European telecoms market, and are suddenly making a lot of noise.

In particular, he was less than pleased with the limelight-grabbing announcement at Telecom 99 by Global Crossing Ltd. that it was going to buy U.K. network operator Racal Telecom, especially when the arch-rival's chief executive Robert Annunziata got in the interview queue at the CNBC broadcast stand ahead of Thompson.

"Let's hear a bit less about who is buying this and that, and who is going to build their new network," says the chief executive of Global Telesystems Group Inc. (GTS), McClean, Virginia. "We have the network already, and we've got the business...That's money coming in the door. That's real cash flow."

Thompson has lots more advice for his competitors, who probably should listen carefully. A quick look at his curriculum vitae will reveal that he helped build companies such as MCI, and LDI Inc., now a part of Qwest Communications International Inc., before joining GTS in March 1999. He has experience of satellites, long distance, local and international telecoms. He is outspoken on regulatory issues, and has much to say on network yields too.

GTS is not the only new carrier in Europe banking account payments. But while MCI WorldCom Inc. and others stem their cash outflow with a bit of wholesale trading, Thompson's company has an end-user customer base of about 100,000 businesses, and is already moving on to the next phase of IP service development, based on Web hosting and high-speed networking right up to the customer premises.

Thompson thinks carriers should follow the GTS example and consolidate their own businesses before they consolidate others'.

"Acquisitions are serendipity," he asserts. "They are a function of what's out there. Too many acquisitions are being investment bank-driven."

Of course, other operators might well reply that GTS has been as opportunistic as anybody. Indeed, GTS is well ahead of the curve for U.S. carriers investing in Europe (see The Business p.47).

GTS put together the main part of its portfolio a year ago when it bought Esprit Telecom, a pan-European business telecoms operator based in Reading, England, and bought out minority shareholders in Hermes Europe Railtel BV, a fiber network owner.

Thompson agrees that the industry is headed for more consolidation, and that some big names could fall. "There almost has to be a merger of an incumbent with a new carrier in Europe," he says, pointing to the merger in the United States of US West with Qwest Communications Corp., Denver, Colorado.

But he is adamant that this will not mean that private monopolies will replace public monopoly.

"I disagree that consolidation will result in elimination of competition," he says. When the AT&T monopoly was broken, the FCC licensed 452 companies within a year. "Bernie Ebbers bought 50 and I bought a bunch. But today there are 550," he asserts.

But he warns that there's much worse in store for companies that try to grow too fast and are slowed as a result.

"When elephants mate they gestate for 24 months," says Thompson. "Diseconomies of scale is the natural state of events when companies get too big. The mega-mergers are going to have real problems. In telecoms now you don't see problems because of runaway growth patterns."

And what does this all mean? Not further consolidation, but a forced regeneration of new telecoms business.

Thompson thinks spin-offs of telecoms subsidiaries by industrial companies such as Mannesmann AG of Dusseldorf, Germany, will be succeeded by telecoms giants spinning off whole divisions from their core telecoms business.

As for GTS' own growth, Thompson claims 100,000 business customers, "from little guys using their homes as offices to international companies" connected to the GTS network, in more than 50 cities.

"Running rate revenue is closing in on $1 billion," he claims. "It will be between $900 million and $1 billion run rate by the end of the year. [And] we have a $520 million backlog with carriers for service."

But not everything this year is going exactly as GTS would like.

Analysts at Telecom 99 worried that the pricing model in European telecoms has become unhinged. They say never has there been an industry in which demand has outrun supply and still prices have fallen, as is happening in telecoms today. Analysts who work from price elasticity models do not like what is happening. They think operators are riding a runaway train.

Economic orthodoxy says that if prices are reduced by no more than 20%-30% at a time, demand will be stimulated and fill the revenue gap; then more price cuts can be made. But right now in telecoms, prices are falling at 60% per year, and analysts worry that demand cannot catch up fast enough to recover lost revenues.

Thompson admits the pricing model needs to be nursed. "Deutsche Telekom's [1998] price cuts were as close to irrational as anything we have seen," he asserts.