Europe's new age of cheap networks - Company Business and Marketing

CommunicationsWeek International, March 20, 2000 by Joanne Taaffe

This is the year that Europe's network builders become service providers, but it may take time before corporates replace their existing wholesale clients.

By the end of this year a large chunk of the pan-European networks currently under construction will have been completed.

Until now operators have been focusing mostly on the nuts and bolts of their network rollouts. But this year the network builders must become service providers for real.

"It is only this year that many services are becoming available," said Gail Smith, president of Level 3 communications Europe. "This is just the first stage of a business that will last for the next 20 years."

It is important to remember that the networks are merely the foundation for the services that will define operators' business.

"[The network] is the opening ante. It gets you into the poker game, but not winning the game," said Jack McMaster, chief executive of KPNQwest, of Amsterdam.

While the stakes will be high, the networks they are laying are designed to slash bandwidth prices to rock-bottom levels.

"I first wanted to commoditize bandwidth...The next step will be services," said Ohad Finkelstein, chief executive of London-based Interoute, whose company is building the pan-European i-21 petabit network.

But the new-build operators are unsure how quickly the corporate market will replace the wholesale market in which they already have a toehold.

While Internet service providers have dived in immediately to soak up bandwidth, enterprise customers need time to evaluate how the new services and cost structure can benefit their businesses, according to Michael Mahoney, chief executive of Viatel Inc., based in NewYork.

"It's naive to think that networks will be turned on and business will change," said Mahoney. "There was a paucity of bandwidth this time last year [and] it'll take a while for behavior to change. If one year ago an [IT or telecoms manager] suggested that a company connect all the remote mail servers to the network he'd have been booted out the door--It was very expensive."

There will certainly be plenty of competition to provide pan-European bandwidth. Among the leading contenders according to the Yankee Group Europe, of Watford, England, are the newer builders such as KPNQwest NV, Viatel, Global crossing Ltd., GTS Carrier Services, Level 3 Communications Inc. and Interoute Telecommunications Ltd. And they are up against companies such as MCI WorldCom Inc., of Clinton, Missouri, and BT-AT&T which have layered services over leased networks and moved ahead of the game in winning large enterprise customers.

Although pan-European networks will be welcome to users if they pass on the savings made from avoiding cross-border interconnect charges, Ewan Sutherland, executive director of the International Telecommunications User Group (INTUG) in Brussels, said few of the user group's members have made noises about switching to the large pan-European network builders (see basement story).

The network builders themselves, however, believe that the combination of an upgradeable IP network and the elimination of cross-border charges means they can offer more efficient and cheaper services than Europe's corporate customers previously have been offered.

The main trick KPNQwest has had to perform is to ensure that it sticks to tight construction schedules, according to McMaster. "We'll have seven rings in 46 cities, on time and on budget. We're slogging it trench by trench." he said.

The end game is in sight: to tie in corporate customers' supply chains with a more sophisticated suite of services than alliances Global One or Infonet Services Corp. ever offered. And this time, managed services are going to include applications hosting, digital signature certification for e-commerce, and voice over IP.

But providing and servicing managed data applications to enterprises is not a cakewalk. "With IP-VPNS, the alliances had very full order books. The problems were in the complexity of delivering the services," said Robin Bosworth, director of management consultancy Schema Associates Ltd., of London.

And demand has not yet been proven. Operators point to experience in the United States--where for example the ASP market is ahead of Europe--to illustrate just how much call for bandwidth-hungry applications there will be, but demand for pan-European services has yet to be realized.

To date, pan-European service offerings have not ventured much beyond VPN voice services from former alliances such as Global One and Unisource NV, notes Eddie Murphy senior analyst at Analysys Ltd., Cambridge, England.

He believes there is currently a dearth of pan-European service, and that existing services often run across a patchwork of national networks.

"I haven't seen a huge deal of real pan-European services. A lot of the activities of the alliances have been gauged at large corporates," said Murphy. He argued that even a company such as BT, which has been making some of the deepest inroads in Europe, has been doing so on a national level. "Pan-European services will probably be next year," he added.