Foreign Carriers Try to Crack the U.S. Market

Posted: 03/2000

Foreign Carriers Try to Crack the U.S. Market

The United States, whose citizens like to call their country the land of opportunity,
has become the land of necessity for international telecom carriers.

"It has been the case for a decade or more that any carrier around the world who
wants to be a world player needs some sort of presence in the U.S.," says John
Matthews, principal consultant for Ovum Ltd. (www.ovum.com).
"It’s the biggest national market in the world, and you can’t consider yourself an
active, international player unless you’re there."

So, Who’s In the USA?

Most international carriers are in the United States. It may be only because
they need somewhere to land traffic coming into the country from the rest of the world.

Much of the time, their presence is limited to a few gateway switches in telco hotels
located in cities like Los Angeles, Miami, New York or Washington. Carriers often set up a
U.S. subsidiary, usually called AnyCarrier USA Inc., or AnyCarrier North America Inc., and
staff it with the number of employees needed to maintain the switch.

Smaller carriers do this and advertise for "our New York facility,"
referring, often as not, to a Class 5 switch–or sometimes, a certain number of ports on a
Class 5 switch–at 60 Hudson St. or 111 Eighth Ave.

Being in the United States, however, is not the same as being in the U.S. market.

Nonetheless, a few of the international carriers have burrowed into warm and cozy nests
and made a business in the country. At least one of these has used its U.S. operation as a
base to spread throughout the world. Analysts say this will continue to occur for the next
few years, even though it isn’t easy and is not expected to get any easier in the future.

The Basics: Following the Multinationals

Imagine finding yourself in a strange, dark, foreign city. You stick out among the
locals like Billy Graham at the Playboy Mansion.

You can’t find anyone who speaks your language until, from the darkness, someone asks
if you’re lost.

You recognize the accents of home. You’re not lost any more, you think.

Trying to enter the U.S. market from the dark recesses of a telco hotel can be a little
bit like that. One of the first steps a carrier might take is to exploit whatever
connection it can among multinational corporations from its home country or among the
multinationals with a substantial presence in its home country and the United States.

Thus, Telstra Inc., the U.S. subsidiary of Telstra Corp. (www.telstra.com), the Australian telecom giant, provides
private line and other services to Australian firms with offices in the United States and
U.S. firms with substantial installations in Australia.

Before it entered into its joint venture with AT&T Corp. (www.att.com), British Tele-communications plc (BT, www.bt.com) provided service to British firms with
installations in the United States.

Telmex USA Inc., the U.S. subsidiary of Telefonos de Mexico S.A. (www.telmex.com.mx), takes full advantage of business
traffic back and forth across the Mexico border.

A carrier that does this may not be lost, but it certainly isn’t home free. It still
faces competition, even for customers whose executives carry the same passports and salute
the same flag.

Because every international carrier is in the United States, they all are potential
competitors for the traffic that originates in this country. Of course, this nation is the
home of AT&T Corp., MCI WorldCom Inc. (www.wcom.com)
and Sprint Corp. (www.sprint.com), all of which
compete for the same business.

Well, why not meet the big three (soon to be the big two, if the Sprint-MCI WorldCom
merger is approved) head-on, and compete for American business?

Say, Pilgrim, Don’t Reckon I’ve Seen You in These Parts

Carriers don’t know what they’re getting themselves into if they take that step, says
Ovum’s Matthews, who observes the U.S. market from London.

"It’s not just that the American market is large," he says. "In spite of
the fact that it’s large, it’s … well, how shall I say this? Well, it’s insular.

"It’s not as easy to crack as a lot of companies think–and I’m not just talking
about telecoms; I’m talking about everybody," Matthews says.

Map

Foreign carriers getting started in the U.S. market are sometimes hurt by their work
with their own multinationals.

"Americans have not necessarily heard of BT, or France Telecom (www.francetelecom.com), or Telecom Italia (www.telecomitalia.it)," Matthews explains.
"And it’s risky for them to do business with a carrier they’ve not heard of."

Swisscom North America Inc. (www.swisscom-na.com),
the U.S. subsidiary of Swisscom AG (www.swisscom.com), once competed for international
private-line business between the United States and Europe. It has given up the
private-line business to concentrate on its wholesale business.

Despite Swisscom North America’s status as a freestanding U.S. corporation, it’s clear
the decision to get out of its U.S. private line was made in Switzerland, with Swisscom
AG’s corporate interests in mind.

"As of January … we are no longer providing from here these private lines for
large multinational companies, which we initially did in a very limited fashion,"
says Konnie Schaeffer, president and CEO of Swisscom North America. "This will be now
handled directly out of Switzerland, and we will focus primarily on the wholesale
business."

Schaeffer and his colleagues, based in Washington, D.C., sell wholesale services to
long-distance carriers in the United States–the very people who once competed against
them for corporate business.

"That includes Tier 1 carriers, the usual suspects," Schaeffer says. "We
sell capacity to Europe, and through Europe, all over the world."

In other words, Swisscom North America is working to get traffic on Swisscom AG’s
network. Swisscom AG has decided its greenest fields are in the liberalized, familiar,
European environment.

"It’s clear that Swisscom’s primary focus, now that things have been liberalized
in Switzerland and the rest of Europe, is their own back yard," says Schaeffer, an
American. "They’re not likely to cross the pond and become active in the American
market."

Besides traffic on its network, Swisscom will benefit eventually from the expertise
Schaeffer and his colleagues have built up in the wholesale business–"a business in
its infancy, comparatively, in Europe," Schaeffer says.

The peculiarities of the U.S. market can be difficult to master, and the difficulty may
go beyond the extreme competitiveness and insularity of the place to what Matthews calls
"silly little things."

"For example, the size of mailing literature is different in the U.S. than over
here," he says. "And if you don’t change the spelling on the literature from
English to American, you can put people off. And then there’s the number of holes in
binders. In the U.K., they have two holes or four holes. In the United States, it’s
three."

There are subtler differences, too, even for carriers in countries with very similar
cultures.

Teleglobe International’s U.S. President John Cahill says differences exist in the
business cultures of Canada and the United States. Teleglobe International is part of
Teleglobe Communications Corp., which is the U.S. subsidiary of Canada’s Teleglobe Inc., (www.teleglobe.com).

"The Canadian culture is much more consensus-oriented," Cahill explains.
"There are more team, as opposed to individual, decisions."

Teleglobe recognizes the tendency on each side of the border to look across and say,
"They’re just like us," according to Cahill, which is why the parent corporation
hires local residents wherever it does business throughout the world.

A Nation of Niches

Competition remains the central problem. The market is vast, the people are various.

And as Peter Williamson sees it, there is no reason to be greedy. He suggests you find
your niche in a country full of them, and exploit it for all it’s worth.

Williamson is the CEO of Telstra Inc., the San Francisco-based subsidiary of the
Australian telecom giant Telstra Corp. While he lives and works in the Bay Area city, it
takes only five seconds of conversation with him (IT&T, meaning information technology
and telecommunications, sounds the same on his lips as AT&T) lets you know he is not
from the neighborhood.

Williamson, however, likes the locals and thinks he understands them. On the other
hand, he says he has no patience with international carriers who don’t take the trouble to
learn the market.

Too often Williamson says corporate pride goeth before a market fall.

"They don’t come with the proper humility," he says. "They’re going to
build the Taj Mahal next to AT&T. But I’m not building a Taj Mahal. I’m building a
nice little condo with a two-car garage and a Jacuzzi."

Williamson’s little bit of paradise consists of growing small and medium-sized
businesses interested in the Asia-Pacific market. He insists that is a market where
Telstra really has built the Taj Mahal.

"We’re [Telstra Corp.] the known incumbents in Asia, where 60 percent of the
world’s population lives," he says.

Telstra Inc. offers a full suite of services–voice, data and Internet products–to
companies in places like California’s Silicon Valley, where even small startups keenly are
interested in Asia, and can use Telstra Inc. as a gateway. "Also, another interesting
thing is that a lot of small and medium [-sized] companies, operating in five or six
states and doing well, will say, ‘Where do we go next?’" Williamson says. "They
look at California and see the economy overheating. They look at New York and say, ‘Too
hard.’ So we tell them they can open in Thailand."

It isn’t that Telstra doesn’t pay attention to large multinationals. Williamson numbers
Microsoft Corp. (www.microsoft.com), and others,
among his customers. However, he’s convinced the small and medium-sized companies are
waiting for Telstra to come along and help them leap across the water.

For Telmex USA, the niche is much bigger. From its base in Claremont Mesa, Calif., the
U.S. subsidiary of Telefonos de Mexico (Telmex), performs an interesting marketing
contortion: It sells service in Mexico to customers in the United States. Telmex USA’s
niche consists of Mexican Americans, and Mexican expatriates living in the United States.

Telmex USA’s flagship service was born in the days of its immediate ancestor, the
former Sprint Telmex USA, a joint venture between Telmex and Sprint. The service is Mexico
en Linea, meaning Mexico Online. Despite the "dot com" ring to the name, it’s
about voice telephony, POTS.

This is how it works: A customer in the United States with a relative in Mexico can
buy, on a prepaid basis, service for that relative. The relative never sees a bill,
because it is sent to the U.S. customer. Once the initial service limit has been reached,
he can buy more service on his own, or the U.S. customer can renew it.

Even though Sprint pulled out of the joint venture last year, Telmex USA has kept it
going and expanded it. Telmex USA has launched aggressive advertising campaigns over
Univision S.A. (www.univision.com), the Mexican
television network, and conducts hands-on marketing efforts at every large gathering of
Mexicans or Mexican-Americans in the country.

Last year, Telmex USA estimated it had 10,000 customers among the 5.6 million
Mexican-American households in the United States.

This is a big niche, and a comfortable one. However, Telmex USA’s marketing director
Javier Rosado, says the company is prepared to go beyond it. He says Telmex USA "is
preparing to offer new services," although he would not be precise about what or
when.

Applying for CLEC status in some states is "one of the things being
analyzed," he acknowledges.

"I would say the card market is exploitable," Rosado says. "Not only
among Hispanics, but there is a low-income bracket which is not being serviced in this
country."

Interoute Communications Ltd. (www.interoute.co.uk)
is an international carrier, but it isn’t in the Swisscom/Telmex/Telstra league. Starting
life as a carriers’ carrier, the London-based company is building a Pan-European network
in the United States and in Europe.

Like Telmex USA, Interoute Telecom-munications Inc. (www.interouteusa.com) wants to offer services to
Spanish-speaking customers in the United States. Unlike Telmex USA, Interoute
Telecommunications consists of U.S. companies acquired by its parent and assembled into a
new company.

"I’ve been with them since February [1999]," says Jim Sever, the company’s
American CEO. "My job was to take a look at these companies, take a look at product
lines and buy infrastructure. Our market focus, and it will probably continue at least for
the next year or two while we build out the Pan-European and global market, will be the
ethnic marketplace, mainly His-panic. It’ll be consumer and small business, purely niche,
just aiming to provide cost-effective marketplace."

Interoute Telecommun-ications is certified as a CLEC in New York and has applied for
certification in Florida. It expects to provide local service in both states in the second
quarter of this year.

Sever says Interoute will lead with a calling card product, because one of Interoute’s
acquisitions, Vista Telecom, sold phone cards and had achieved somebrand recognition.

"In the prepaid card business, which was the lion’s share of our business, our
customer is really the mom-and-pop store that you sell cards to," he says. "We
probably sell cards to seven or eight thousand stores throughout the country, and we have
a walk-in clientele, too."

This is a start, but Sever knows it won’t last. AT&T and MCI WorldCom, he says, are
planning card products for the same market.

Interoute offers some carrier service, too, and will offer more when its parent
completes its network in Europe. For all its products, Sever thinks, "our
pull-through will be our international rates. We’ll offer you very inexpensive rates, for
instance, to the Dominican Republic. We’ll start you with long distance and international
service, and then, in the second quarter, take those same folks and offer them local dial
tone."

And Then, There’s Teleglobe

"Teleglobe is unique, because they’ve transferred most of their international
operations here," says Swisscom North America’s Schaeffer.

Cahill disagrees only in detail. What Teleglobe Inc. has transferred from Montreal to
Reston, Va., is responsibility for all its international operations.

In fact, Cahill says, the tail has been wagging the dog since last summer: Operations
run from Reston now produce a greater share of Teleglobe’s corporate revenue than
operations in its home country.

Teleglobe’s hierarchy is a bit complicated, so it’s worth a moment to make it clear.
Teleglobe Inc., a wholesale long-distance carrier and the corporation’s holding company,
is headquartered in Montreal. Teleglobe Com-munications Corp. has its headquarters in
Reston. It is one of two U.S. subsidiaries. The other is Excel Com-munications Inc. (www.excel.com), a competitive long-distance and Internet
carrier that uses independent agents to market its services. Teleglobe International is a
business unit of Teleglobe Communications Corp.

Cahill, who spent much of his career at Sprint, was the third person Teleglobe
Communications hired. That was in 1995.

"Our mission was to start the business for Teleglobe outside Canada," he
recalls. It was a challenge, but it didn’t look like rocket science. "I thought I’d
build a nice business for the company in the United States, and then go work on my golf
handicap."

The parent company’s CEO Charles Sirois apparently looked across the border and did the
math. As Cahill explains, "There are only 25 million Canadians, and 6 billion people
in the rest of the world."

Teleglobe Communications focuses on carrier customers, and Cahill says it has garnered
200 of them since beginning its U.S. service in 1996.

The challenge in the United States, he adds, is that the market is so diverse.
"You need to be in 20 cities to be a player here. In Canada, you need five cities; in
Japan, two or three."

Ken Branson is business and finance editor for PHONE+ magazine.