The lure of foreign markets

After watching how slowly interexchange carriers have moved in the local telecom market, it's quite a contrast to observe how those same carriers have jumped at the chance to enter new markets internationally.

Since the beginning of this year, when a World Trade Organization treaty went into effect, IXCs have had the opportunity to build networks in many foreign lands. In doing so, they can pick up new customers in those countries and improve their margins on the calls that domestic customers make to those countries.

Recent domestic carrier activity in this area has been substantial. Carrier consortiums are installing trans-Atlantic and trans-Pacific fibers (see story on page 84). And several carriers-including MCI WorldCom and Global Crossing-are building pan-European networks.

To serve customers in other countries, IXCs encounter some of the same issues that they meet in entering local markets domestically. Building a link all the way to every customer is impossible anywhere, internationally as well as domestically, which means that any new carrier entering a market must rely on the incumbent telco to supply unbundled network elements. In some foreign lands, as in the U.S., incumbents are resisting change and making it difficult for competitors to obtain those network elements or to interconnect at reasonable prices.

But even if a U.S. carrier can't get the best deals from the incumbents, the international opportunity can be more lucrative than entering the local market domestically. An IXC that enters the local market domestically already may have a customer's long-distance, Internet and even wireless business. The investment required to pick up the additional local piece often can be difficult to justify. An international customer, on the other hand, is a brand-new prospect for a wide range of services.

MCI WorldCom has been one of the more aggressive and innovative carriers internationally, recently announcing end-to-end connections for multinational customers with its On-Net service. A unique aspect of this offering is that it has a domestic local piece. Through acquisition and its own deployment efforts, the company now has local and long-distance networks in the U.S. and Europe, as well as the trans-Atlantic links needed to support this type of offering. Because traffic never leaves MCI WorldCom's network-avoiding various access and settlement charges-the company can afford to offer discounts. And customers will surely like the fact that they have to deal with only one carrier, rather than with three or more as in the past. Perhaps the allure of such offerings will ultimately help IXCs justify investment in the domestic local market-specifically, the business market.

One group of carriers that has not shown much interest in building overseas is the regional Bell operating companies. Because RBOCs are not yet allowed to carry interLATA traffic, their international opportunities are more limited-for now. Many of them, however, have been investing directly in foreign telcos. Several analysts, including Arthur Andersen's Melinda Mullet and Price Waterhouse Cooper's Jennifer Taylor, point out that telcos tend to favor direct investment in foreign companies when a country's domestic markets display promising growth opportunities.

But once the RBOCs are allowed into long-distance, they should be able to leverage these foreign investments to deliver services along the lines of what the IXCs are offering. Given that Florida, with its large Latino market, is in BellSouth's territory, is it surprising that BellSouth has invested in telcos in several Latin American countries?

Foreign telcos, of course, now have the opportunity to build in the U.S. and a few-Swisscom, for example-are beginning to do just that. Because pricing here is low compared with many other parts of the globe, there is less opportunity to gain market share by undercutting prices. But the Swisscom example is a reminder that multinational customers may be seeking, above all, to deal with a single supplier-and the best strategy when going international may be to target the right niche.

Deregulation is an international phenomenon that is opening up opportunities for telcos at home and abroad. As we invite telcos to be more market-driven, we shouldn't be surprised if more lucrative opportunities abroad draw away funds that carriers might otherwise have invested in domestic local networks.