A new (old) carrier goes global

In just a few years, Teleglobe has transformed itself from a Canadian monopoly into the operator of one of the world's largest and most modern networks. Will being early give it the edge?

Telcos far and wide have recognized that long-term survival will depend on their success in selling services beyond their own borders. Through a quirk in Canadian telecom history, Teleglobe already has experienced the full force of this imperative.

For nearly 50 years, the company - originally known as Canadian Overseas Telecommunications Corp. - was the monopoly international long-distance carrier for Canada, wholesaling service to multiple regional Canadian telcos. This was different from the structure that arose in most countries, in which a single monopoly carrier handled local and long-distance, including international service. AT&T, for example, played that role in the U.S. for many years.

Canada stood out because it always had a system of regional telcos. In some cases, the provincial government actually owned a province's phone company. Rather than requiring each of these telcos to act on its own in negotiating traffic exchange agreements with the rest of the world, the Canadian national government established a separate entity focused solely on international traffic, later privatizing it.

The wholesale nature of Teleglobe's business made it especially vulnerable when deregulation came to the Canadian telephone industry in the mid-1990s. The company had no direct ties with end users - no name recognition, no brand equity. When Teleglobe managers realized that the company's monopoly on international traffic to and from Canada was about to end, they realized that they had to develop new lines of business quickly to replace the business they would lose.

One maneuver was to buy up Excel Communications - the fourth-largest U.S. long-distance carrier - in late 1998 and expand that unit's retail operations into Canada, where now it has a base of 120,000 customers after seven months of operation.

Fortunately for Teleglobe, telecom deregulation was sweeping the rest of the world, too, and that meant the company also had new opportunities to build networks in other countries and expand its wholesale operations beyond Canada.

When former Sprint International president and data networking pioneer Paolo Guidi joined Teleglobe in 1995, "it became obvious that Teleglobe was facing two things: the loss of its monopoly in Canada and the opportunity to expand outside Canada and become a global operator," he says. Guidi is now president and CEO of Teleglobe Communications Corp., Teleglobe's networking and wholesaling unit.

Going it alone

Carriers have at least three methods for expanding outside their home turf, including investing in foreign carriers, creating joint ventures with foreign carriers a la AT&T/BT or building their own facilities in foreign lands. Teleglobe is focusing squarely on the last option.

"Most alliances are structured with a defensive objective - marketing to customers in the home market and supporting their offshore requirements," Guidi says. "Our goal was to capture new customers."

In the recent past, carriers had to create joint ventures to operate in foreign countries, Guidi says, but today, Teleglobe has operating licenses in 28 countries. Undersea fiber, satellite investments and leased fiber, interconnect these operations (Figure 1).

In just a few years, Teleglobe has built what financial firm BT Alex Brown claims is the world's third-largest network after AT&T's and MCI WorldCom's.

"Teleglobe was earning a return at home and could borrow money effectively," says George Karidis, associate director of The Yankee Group Canada. "It had access to capital because its core business was protected until now."

The company now has 700 carrier customers, including 300 U.S.-based companies, says Andrew Burroughs, vice president of global marketing and product management for TCC (Figure 2). Traffic outside Canada, which made up only 22% of TCC's total minutes in 1996, comprised 47% of total minutes in 1998 (Figure 3).

Teleglobe's carrier customers include long-distance resellers and conventional interexchange carriers (IXCs) that use Teleglobe for overflow traffic or for traffic between certain countries. Teleglobe is not alone in serving that market. A new crop of emerging carriers, such as Star Telecom and Pacific Gateway Exchange, also seized the opportunity to become global wholesalers by building intercontinental networks.

But Teleglobe's edge is that, in addition to operating through license agreements in the most open markets, it also has 150 interconnection agreements, some of which link the company to countries including Jordan, Kenya and Senegal that have not yet liberalized their telecom systems, Burroughs says. Emerging carriers will have difficulty replicating those agreements, which are a legacy of Teleglobe's monopoly days, he says.

Another differentiation point is that the company is willing to customize products for its wholesale customers. That willingness helped the carrier win contracts with several RBOCs for a calling service aimed at Americans travelling overseas, Guidi says. "We had no reservations about customizing prompts or creating the appearance that the service was provided by the RBOC," he adds. Teleglobe beat out domestic IXCs because of its flexibility, Guidi says.

Although switched and dedicated voice lines represent the majority of TCC's revenues - about 70% - the company has begun to emphasize other business lines, Burroughs says. Key areas include the Internet and broadcast TV.

To support this strategy, in May the company introduced GlobeSystem, a five-year, $5 billion network expansion that will put a point of presence (POP), dubbed a Globe-City, in each of 160 international markets and will interconnect those POPs. GlobeCity POPs will contain an Internet router, a voice switch and a transmission POP, Burroughs says. For markets where a broadcast offering makes sense, ATM equipment also will be deployed.

New directions

Teleglobe's legacy may provide an edge not only in the voice market but also in the Internet market. That legacy certainly has helped the company carve out a niche as one of the dominant global Internet backbone operators. Teleglobe has agreements to act as the backbone operator for numerous PTT-affiliate ISPs. In addition, it has had some significant wins with U.S.-based content providers - including RealNetworks and InterVu - based on its wide reach.

Although other former monopolies also could have leveraged their legacy agreements to pursue a similar strategy, Burroughs says Teleglobe's tight focus on the international market lets it act more swiftly. "We have to exploit every asset aggressively," he says.

The Yankee Group's Karidis has a different take. "Teleglobe has always had some advantage, particularly because no one thinks they're a threat," he says. "They're not there as a retail player."

But companies such as AT&T and BT may have been slow to act in the global Internet market simply because they don't see much profit potential there, says Tom Nolle, president of CIMI Corp. "The total revenue of the Internet is 0.6% of worldwide service provider revenue," Nolle says. "Public IP is going to be successful. The Internet isn't. The facilities-based carriers know any time they want that market, they can eat it."

Other concerns about Teleglobe's strategy center around its emphasis on wholesale services. The drawbacks of that approach are no secret: Margins are low and customer loyalty is non-existent. Although Teleglobe's customized offerings help minimize both of those problems, the carrier also is embarking on another method of addressing them - launching retail operations in Europe through Excel.

Excel's multilevel marketing strategy will be its differentiation point, Burroughs says. Although Excel will be the first telecom company to use multilevel marketing in Europe, Burroughs says companies such as Amway and Shaklee have had success there using a similar strategy to sell other types of products.

A multilevel approach entails few fixed costs and can be an appropriate vehicle if a company only seeks a 3% to 6% marketshare, says Dvai Ghose, telecom analyst for HSBC Securities. Such a strategy lends itself to Teleglobe's strengths, Ghose says. The company can target ethnic communities with its international long-distance offering by using leaders within those communities as independent representatives.

Multilevel marketers tend to succeed or fail based on their ability to expand their product portfolios - and Teleglobe definitely has that capability, Guidi says.

But whether Teleglobe's independent representatives will be able to sell that portfolio is a key question, Ghose says. "You can pick up anyone off the street who has more than three or four friends, and [he] can sell long-distance," Ghose says. But selling Internet connectivity may require more skill, and products such as wireless service would require Teleglobe to manage a handset inventory, which could prove challenging.

The fickle world of finance

Throughout its transformation process, Teleglobe has had a topsy-turvy relationship with Wall Street. Earlier this year, its stock - like those of other fiber network operators - was flying high. Investors that have embraced companies such as Qwest Communications and Global Crossing argue that a company can't go wrong building excess fiber capacity because demand will always expand to meet it. But this year, Teleglobe took two major dips and still trades at a substantial discount when compared with other carriers.

Excel's absorption into Teleglobe has not been easy. Scalability problems with its back office system initially prevented the Excel unit from meeting growth targets, Karidis says.

Plus, the company's multilevel marketing strategy magnified the problem, Ghose adds. "The people selling the product aren't employees," Ghose says, pointing out that many independent agents sell Excel as a supplementary source of income. "If they're signing up customers and customers are not getting into the system, these people just stop selling."

There is some indication that back office problems have been fixed, Ghose says. But the GlobeSystem expansion also worries some analysts, who have questioned whether the company is expanding too fast.

Ghose "vehemently disagrees" with such concerns. "The problems Teleglobe has today are largely the result of its traditional circuit-switched legacy," he says, citing price pressure on Teleglobe's voice rates between North America and newly liberalized markets. Growing data is key because Teleglobe's margins are better there, Ghose says, pointing to the 50% margin the company makes on Internet backbone connectivity vs. the 30% margin it makes on voice.

Burroughs concedes that the GlobeSystem investment will depress earnings for two years, but after that, he says, the company will begin to reap the benefits of its GlobeCity strategy.

Teleglobe's investor appeal may be hampered because, unlike Qwest or Global Crossing, it is not a "pure play" in the fiber network arena.

"As an incumbent, Teleglobe is valued in terms of earnings and cash flow: It's caught between being an incumbent and having the growth potential of a Qwest," Ghose says. This situation has some ironic consequences, as Ghose points out, "Other players can raise equity more cheaply, but they can't raise debt." Teleglobe's advantage is that it pays significantly lower interest rates, Ghose says.

"Teleglobe's asset base is extremely valuable and well in excess of the capitalization of the company," he adds.

At least one analyst is skeptical of Teleglobe's long-term prospects, however. "The technology and business changes in the industry favor people who have a strong local exchange position," CIMI's Nolle says. "Over time, it will be hard to sustain a purely interexchange mission. If you have local infrastructure to leverage, you have a captive audience you can exploit. Incumbent local carriers will always be able to acquire long-haul facilities."

Teleglobe may well find itself as a long-haul supplier to the RBOCs once they are allowed into the long-distance market. Bell companies have invested in numerous foreign telcos, and when the long-distance opportunity becomes real, the RBOCs will seek facilities to interconnect their domestic and overseas holdings. "They need someone like Teleglobe," Ghose says.

Teleglobe already has close ties with all the Bell companies, especially Ameritech, which owns 4% of Teleglobe through its investment in Bell Canada, the largest of the regional Canadian telcos.

Those ties could get even closer: Ameritech - or a merged SBC Communications/Ameritech - is Teleglobe's most likely suitor, Ghose says. Although no Canadian regulation prevents a foreign telco from purchasing Teleglobe outright, Ghose says the most likely scenario is that SBC/Ameritech would attempt to gain a commanding position of both Teleglobe and Bell Canada.

"To ensure its joint venture with Bell Canada remains a success, [SBC/Ameritech] will do it through Bell Canada," Ghose says.

Canadian regulations currently restrict foreign ownership of regional telcos such as Bell Canada, but those restrictions probably will be lifted in a few years, Ghose predicts.

Teleglobe's acquisition by, or merger with, an RBOC could validate another basic tenet of fiber network investors: Even if the company that builds a next generation network can't last long term on its own, often someone else will want to buy it or merge with it.