Telecom Networks Built For US, Sold Cheap To The World

Updated: Aug 27 2004, 05:30am hrs
Billions of dollars worth of global telecommunications networks bought or built by US investors now belong to Chinese, Indian and other non-American companies that have snapped them up for a fraction of their cost.

The shift in ownership of the networks, which are used to carry much of the worlds Internet traffic, comes less than four years after the telecommunications bubble burst. Asian companies in particular have taken advantage of the troubles at American companies, at a time when government monopolies on telecommunications in their countries are waning, access to capital is greater and consumer appetite for bandwidth is growing.

In retrospect, analysts say, American investors overpaid to set up the global networks and have ended up inadvertently financing them for foreign owners who bought at fire-sale prices when the companies fell on hard times.

The United States, with its capital markets and openness to outside investors, eased the shift in control. Foreign companies like Asia Netcom adroitly purchased the remnants of the overbuilt infrastructure at prices that should insulate them from the large losses suffered by the original owners, analysts said.

While the US is still smarting from the telecom catastrophe, it has awoken to find that it has significantly assisted everyone else, which was really sort of dumb, said Farooq Hussain, a former executive at Sprint and MCI who heads Network Conceptions, a consultant group in Chevy Chase, Md.

Some $30 billion in international telecommunications infrastructure owned by US companies was sold to foreign-owned entities from 2000 to 2004 for a total of about $4 billion, said Sam Paltridge, an economist at the Organization for Economic Cooperation and Development in Paris.

Because it bankrolled the networks, Wall Street has inadvertently financed more telecom infrastructure overseas than the World Bank and other international agencies, Paltridge said.

The new profile of owners has changed the business. The smaller companies that sought for years to be treated as equals by American rivals can offer their customers global end-to-end services, including access to the biggest market the United States over their own networks or others owned by partners they are better able to negotiate with.

Although American carriers like Sprint, MCI, AT&T and Level 3 Communications still carry a big percentage of the worlds Internet traffic, US carriers have lost their status as unassailable giants as more traffic is routed around them. Operators like T-Mobile of Germany, NTT of Japan, Telstra of Australia and France Telecom moved into the US market; Telmex, the Mexican phone company, snapped up AT&Ts Latin American network and MCIs share of Embratel in Brazil; and Telmexs largest shareholder, Carlos Slim Helu, took strategic stakes in MCI and Global Crossing.

And the shift continues. Tyco Internationals global fiber-optics network, 37,000 miles long and connecting three continents, is up for sale. Among the front-runners for the network are Videsh Sanchar Nigam Ltd of India, or VSNL, the former government monopoly for telecommunications and Internet traffic, and Reliance Infocomm.

A spokeswoman for VSNL, which is now controlled by the Tata Group and known as Tata Indicom, said the company would not comment on reports of its bid for Tycos network, which was valued at around $3.4 billion at the height of the telecommunications boom and is expected to be sold this autumn for around $200 million.

Bharti Enterprises in India and Singapore Telecommunications have teamed to build a cable called i2i that promises to offer the largest amount of bandwidth capacity of any undersea fiber-optic cable in the world, said Alan Mauldin, a senior analyst at the TeleGeography research division in Washington of PriMetrica, a telecommunications group.

At a time when everyone is thinking the telecom boom is over and the industry washed up, in India they are just getting ready to go, Mauldin said.

Other Asian carriers have suddenly become global or regional players by buying US assets. In December, a subsidiary of the government-controlled Singapore Technologies, paid $250 million to rescue Global Crossing, a bankrupt company based in the United States with a $10 billion global fiber-optic network covering an estimated 20 per cent of all undersea capacity leaving the United States.

The Asian portion of Global Crossings network was sold to China Netcom, a company that was split off from the China Telecommunications Corp., Chinas largest fixed-line carrier, and renamed Asia Netcom.

The same competitive and pricing pressures that hit the American telecommunications industry are expected to hit the new Indian and Chinese global players.

Carriers are finding ways to stay alive at the very low prices. The days of the monopoly when it was easy to make money, and the days of the bubble when we didnt have to look at costs, are over, said Falk von Bornstaedt, a vice president at T-Systems, a division of Deutsche Telekom. There is a good chance to be profitable and stay profitable, but it is no longer as easy as it was in the past.

When the Internet first began to gain traction, most traffic was routed through the United States. But with network-connecting exchanges in so many countries, that detour is no longer as necessary.

Deutsche Telekom, for example, used to route half of its Internet traffic through the United States; now it routes less than a third, von Bornstaedt said. The company sends more traffic through its home country and sets up partnerships with carriers in other big hubs like China, he said.

Selling global bandwidth capacity will never be the kind of high-margin business it was when carriers had monopolies, and many believe a shakeout of the remaining companies is coming.

But, von Bornstaedt said, the growing number of new applications that require more bandwidth like movies would ensure a respectable future, at least for a limited number of companies. Broadband is growing so I still see a future in this industry.