Following deregulation in 1998, competition in the pan-European
market has steadily intensified. Viatel is one of the new
entrants aggressively targeting the national and international
long-distance markets in Europe. The operator is currently
building its Circe pan-European network that will link over 30
cities in Europe.
Kevin Moore, a telecoms equity analyst at BT Alex. Brown,
believes that the operator is well-placed to boost revenue
streams: "Basically, they are building on a very attractive
opportunity which is Europe. They have embarked on a strategy
to build a pan-European network which will serve other carriers
in Europe as well as themselves. Europe recently deregulated
and is a very attractive market. Now, with the Euro there will
be even more cross-border business activity."
Their size is both a benefit and a potential disadvantage, as
Moore explains: "They are one of the smaller players out there,
so the upside is they have a lot of growth opportunity, but the
only point is, do they have sufficient scale and scope to take
advantage of it? I think that their strength comes from their
vision to pursue a pan-European network project and to
aggressively obtain licences in as many important European
countries as possible. Their network now has 30 points of
presence in 30 cities. They have a sales force in 120
locations, so I think that was a strength to deploy a
The fully-funded pan-European network, which cost $530 million
to build, is being completed in two stages. The first stage
links London, Amsterdam, Rotterdam, Antwerp, Brussels, Paris
and Amiens. It is scheduled for completion in early 1999. The
second phase connects the major cities of Germany, eastern
France and Belgium. It should be finished by the end of the
first quarter of the year 2000. The network will be one of the
largest, next-generation broadband networks in Europe.
Viatel has recorded impressive revenue growth. Moore believes
that this will continue in future: "They have achieved high
levels of growth. From 1996 through 1997, they achieved over
50% a year growth and roughly 60% over 1995 and they are
positioned to continue to grow." In 1998, annualized revenues
surpassed the $100 million barrier. The company aims to exceed
$1 billion in revenues by the year 2000.
In an exclusive interview with Global Telecoms Business, the
president & CEO of Viatel, Michael Mahoney, describes the
Circe network and the operator's competitive advantages.
As one of the new operators, how will Viatel compete
against the multitude of players to find a niche in the
Mahoney: Viatel is already a well-known and respected
operator, as it has been a licensed switch-based provider of
telecoms services in many European countries since about 1994.
Viatel's principal niche is in the provision of national and
international long-distance services and some data services.
Other operators are focusing primarily on local exchange and
wireless. Our principle market focus is on small and
medium-sized businesses - this is where much of the economic
growth is happening and will continue to be in Europe.
Everywhere else we provide services to individual customers, as
well as network services to other carriers.
What led Viatel to switch from its origins as a
call-back operator back in 1991?
Mahoney: Even in 1991 we realized that call-back was
an arbitrage opportunity. As is the case of all arbitrage
opportunities, over time the market finds a way to reduce the
attractiveness. We understood that our entry into call-back was
only a short-term business opportunity. We believed that Europe
would follow the outline for deregulation and liberalization of
the telecoms market. We knew that to compete effectively, we
would need to be first of all a switch-based and at some point
a facilities-based carrier.
We decided to build the Circe Pan-European network, because we
discovered with our initial switch-based network that there was
a critical shortage of cost-effective broadband capacity
between major European cities. There is always a shortage of
end-to-end cross-border circuits. Any available switch capacity
or circuit was not only over-priced relative to the US: it also
suffered from quality and reliability deficiencies. Most
cross-border circuits provided by the incumbent operators are
not provided on self-healing ring systems for example: they are
Can you provide some more details about the Circe
network? How much will it cost in total and when will it be
Mahoney: The 5,200km broadband infrastructure
currently under construction will cost about $530 million to
build. It is especially important to know that Viatel's current
construction plans are fully funded as a result of our
high-yield offering this past spring.
The Circe Pan-European Network, which is comprised of three
interlocking rings linking 30 major cities, will be completed
in two stages. The first stage, which will link London,
Amsterdam, Rotterdam, Antwerp, Brussels, Paris and Amiens, will
be finished at the end of the first quarter of 1999 or in about
80 days. The second stage, which links the major cities in
Germany, eastern France and Belgium, will be completed by the
close of the first quarter of the year 2000.
SDH is a very important component of Viatel's Circe
Pan-European network. SDH transmission increases network
reliability; the Circe network has a fully SDH and a
self-healing ring topology. The signals are transmitted
simultaneously bi-directionally around a ring.
If fibre cables are damaged or broken or some other
transmission fault occurs for whatever reason, the other signal
is automatically used to restore traffic. This typically
happens in significantly less than 50 milliseconds. Elsewhere
you have fibre running on a straight point-to-point line: this
is a cheaper network configuration which is deployed by many
other European network operators. If there is a fibre cut, a
fibre running from one point to another in a point-to-point
network, there is no other signal for the traffic. During the
restoration period, the data and voice transmission will be
How much support have you received from Nortel in
installing the network? Why did you choose Lucent Technologies'
Mahoney: Nortel Networks, Lucent Technologies and
Alcatel Submarine Networks are all important suppliers and
partners for Viatel. Alcatel Submarine Networks is the leading
supplier of submarine cable in the European market and is a
global leader in terms of submarine network manufacture and
installation. They will be installing the fibre for the 312km
of wet link in the Circe network.
Nortel Networks is a leader in the development and deployment
of SDH equipment world-wide. They have manufactured and
engineered tests and installed the equipment in related
management systems for the Circe network. The Circe network
utilizes lots of LAN topology repeater technology, which will
ensure seamless expandability to meet future capacity needs.
DWDM technology and STM-64 ready multi-wavelength optical
repeaters allow the Circe network to transmit multiple
wavelengths of data bi-directionally on each fibre strand at 10
Lucent Technologies has designed, built and delivered a wide
range of public and private communications systems and
software. Its research arm, Bell Laboratories, developed
Lucent's TrueWave RS fibre, which provides the lowest
dispersion flow of any commercially available fibre. Fibre
ensures enhanced transmission-cost effectiveness over wire
offerings. Circe is the first network in the world to utilize
Lucent Technologies' true wave fibre.
We also selected Lucent Technologies' OSS platform, based on
the ICU-TMN model for our two new state-of-the-art
international network operation centres (INOCs), located in New
Jersey in the US and in Egham, just outside London in the UK.
The INOCs are equipped with sophisticated management and
control capabilities, fraud detection and real-time
transmission quality enhancement. Each INOC will be capable of
acting as a full back-up for the other centre. They will have
the ability to perform remote diagnostic and testing on any
equipment and links within the Circe network.
It has been asserted that Viatel may not meet
established schedules for cable installation and therefore be
forced to delay payments. What is your view?
Mahoney: This assertion from some our competitors
that have opted to adopt an inferior approach, piecing together
a patchwork of leased lines and dark fibre, instead of building
a fresh network, could not be further from the truth. We are in
fact either ahead of or on schedule on all aspects of phase one
of the Circe network. We have almost completed construction of
the first phase, comprising about 1,800km, including 312km
undersea. We are confident that the first phase will enter
service in the first quarter of this year as previously
announced. In addition construction is well underway on the
second phase of the network.
What led Viatel to target small and medium-sized
businesses? What do you perceive to be Viatel's competitive
advantages in this market?
Mahoney: We decided to focus on the small and
medium-sized business market, because we felt that these
businesses were not being adequately served. We also recognize
the enormous revenue potential that it offers in view of the US
Our competitive advantage can be summed up as lower rates and
better services. Network ownership enables Viatel to maintain
its position as provider of high-quality, low cost transmission
products and services to its customers. By owning and
controlling key elements of our network, Viatel will be able to
improve service quality, expand our product and service
offerings and control our transmission and other operating
Recently Esprit Telecom was acquired by the main
shareholder in Hermes Railtel. How will you counter the
extended scope of such competitors? Surely you are
disadvantaged in terms of your size?
Mahoney: I would draw a significantly different
conclusion on this deal. Esprit Telecom was vulnerable, given
the internal strife among top management. We believe that GTS
now understands that their previous carrier's carrier strategy
was largely vacant. They must provide services, just as their
competitors, Viatel and MCI WorldCom do. However, unlike Viatel
and MCI Worldcom, GTS lacks focus, seeking to provide
simultaneously services in long-distance, business services and
Furthermore, this deal validates our strategy and our focus on
western Europe, our provision of retail and wholesale services,
in addition to carrier services and our decision to build the
Circe network. And finally, we expect the deal to reduce the
price pressure on the Circe Pan-European network, because we do
not expect GTS to undercut its own investment in Hermes by
selling its Esprit capacity lower than it sells Hermes.
How do you view competitors in Europe such as
Carrier1, COLT and MCI WorldCom? Who do you perceive to be your
Mahoney: Carrier1 may be a competitor in the future,
but it is now a partner of Viatel. Viatel, Carrier1 and
Metromedia Fibre Networks are together building a German
national network. As you may know, Colt is primarily pursuing a
CLEC (competitive local exchange) strategy. Accordingly we view
COLT as a partner in providing end-to-end service to our
customers. GTS-Esprit and MCI WorldCom are our principal
competitors in Europe. But we believe that our Circe network
offers significant competitive advantages over both Hermes and
Ulysses in terms of reserve capacity, the use of
state-of-the-art fibre and in other areas.
How do you view the German market? How important was
the recent decision by the German regulator to award you a
nation-wide Class 3 licence?
Mahoney: Germany is already a significant market for
Viatel and will continue to be so. It has significantly
exceeded our expectations. The nation-wide Class 3 licence
allows us to own and operate our own telecoms infrastructure
throughout Germany. This is critical to the build-out of the
What progress have you made in securing inter-connect
agreements with incumbents in Europe. How important was the
recent agreement with France Telecom?
Mahoney: We have made some remarkable progress in
securing favourable inter-connect agreements with incumbent
operators in Europe. We now have agreements with British
Telecom and Cable & Wireless in the UK, KPN in the
Netherlands, Deutsche Telekom and ECN in Germany, Infostrada in
Italy and now France Telecom. The inter-connect agreement with
France Telecom is an important first step. France is
potentially a very significant market for Viatel. Our
inter-connect agreement allows us to provide services
throughout the country.
A number of operators have been building cross-border
fibre-optic networks in Europe. Do you believe that actual
demand may fail to meet expectation and that there will be a
surplus of available bandwidth? What will be the impact on
Mahoney: Based on past experience in the US, Viatel
anticipates an explosion in European demand for bandwidth.
Numerous reports point to a manifold increase in Internet usage
among Europeans, not to mention a sky-rocketing jump in demand
for high-speed data communications. The result of the frenzy of
construction-related activity is that Viatel and others seek to
prepare for that demand with cross-border, high-bandwidth
networks of their own. While the supply of bandwidth will no
doubt increase significantly in coming years, we fully expect
demand to outpace them for the foreseeable future. We can
perceive no sign that the market will be unable to absorb all
the capacity that comes on line.
The sleeping giant is data communications. Of course, just as
in the United States, a premium will be placed on
next-generation networks such as Circe, which provides us with
an enormous competitive advantage over the incumbents. In terms
of pricing, I would like to stress that Viatel is and will
remain a price leader for capacity, as well as for retail and
Viatel is one of the first to market with significant
broadband capacity and should be able to cover most of the
network construction costs in the early years of network
service. As other networks become operational, Viatel will be
in a strong position to match, if not undercut, its
In 1997 your EBITDA loss increased to $26.6 million.
When do you think that Viatel will become EBITDA positive? Do
you plan to reduce SG&A expenses in 1999?
Mahoney: We expect to be EBITDA positive during the
second half of the fiscal year 1999. We continue to reduce our
SG&A expenses as a percentage of revenue quarter after
quarter and year after year. Once the Circe Pan-European
network is operational, our revenue streams should improve and
our costs will go down and EBITDA should be approaching
The European telecoms landscape is noted for different
regulatory frameworks, languages and cultures. As a
pan-European operator, how are you facing up to this unique set
Mahoney: Viatel has been a provider of telecoms
services in Europe for over five years. We hold licences as a
fully fledged provider in Belgium, France, Germany, Italy, the
Netherlands, Spain, Sweden and the UK. We are therefore neither
new to, nor particularly challenged by, the differences in the
regulatory framework, languages or culture. More importantly,
our customers, be they individual consumers or businesses, seem
pleased by and benefit from our comfort level. We can provide
billing in any currency, including the Euro.
How do you view demand for Internet traffic in Europe?
How do you view multimedia prospects?
Mahoney: Well, based on our experience in the US, the
value of the European market is likely to increase over time.
Demand for basic telephony services will increase, as
competition reduces prices. Demand for broadband-intensive
applications, such as Internet access, data transmission and
multimedia services, boosts the figure even higher.
As you may know, several European countries are beginning to
rival the US and Japan in accessing the Internet. In fact,
France, the UK and Germany are already among the top 10
countries in Internet usage. As the supply of bandwidth
increases and prices drop, I expect this Internet traffic to
increase exponentially. For the same reasons, I expect
multimedia applications to grow as well.
Do you think that Viatel will have to go back to the
financial markets soon for additional funding?
Mahoney: No. Viatel has a fully funded business plan
that sets us apart from many of our business competitors. We
have sufficient funds to complete the build-out and testing of
the Circe pan-European network.
Have you witnessed significant price declines when
purchasing switched minute capacity from domestic and foreign
Mahoney: We have. But more importantly we have seen
significant changes in the offerings of our competitors, since
we began to market and sell capacity on the Circe network.
While long-term IRUs - indefeasible rights of use - have been
common practice for submarine cable capacity purchases, Viatel
was the first and only company to provide them on terrestrial
cable. Two of our competitors in Europe and the US have now
begun to offer them.
How important is marketing to Viatel's success? What
share of expenditure does marketing account for?
Mahoney: Marketing is critical to Viatel's success.
But I would prefer not to discuss the amount that we spend on
marketing for obvious competitive reasons. Its importance is
demonstrated by the fact that we have about a dozen direct
sales offices and more than 125 indirect offices in Europe. We
will continue to expand both our direct and indirect sales
channels in those countries where we have the crucial elements
in place to compete effectively. Those elements are licensing,
infrastructure and inter-connect. You will see us continue to
ramp up our sales and marketing activity.
Will Viatel look to acquire companies to improve its
strategic position? How long do you think that the window of
opportunity will be open for a new player to make its mark in
Mahoney: At this point Viatel has primarily grown
organically. However, we are not averse to making an
acquisition, provided that such a relationship serves to
complement what we are doing. As for new players, suffice it to
say that the window of opportunity is closing rapidly, at least
in northern Europe.
But are you planning to make an acquisition?
Mahoney: I would prefer not to respond to this
question at this time. No comment.
How would you compare the regulatory framework in
Europe to the US?
Mahoney: MCI is the proxy for the beginning of
competition in the long-distance segment in the US: MCI was 30
years old this year. So at the end of 30 years we have in the
US what I think that any reasonable person would agree is a
fair and open and highly competitive market in long distance.
However, three years after the Telecom Act of 1996 we are only
beginning to see competition at the local loop level and then
only in urban areas, primarily for business customers. And
competition in cable in the US is virtually non-existent.
In contrast, it was the green and white papers of the late
1980s which set the framework for the deregulation that began
in the early stages of this decade in Europe. And just nine
short years into deregulation, some countries have forced open
competition that is beginning to take hold in local, long
distance and cable. So one could make an argument that
liberalization and deregulation is occurring more rapidly than
in the US.
Quite frankly, this is even more remarkable, when you consider
that just 10 years ago many of the incumbent operators were in
fact organs of the state governments.
So we think that deregulation in Europe is taking place in
line with the set framework, compared to the US. By and large,
it is happening well and we are pleased with the results. That
does not mean, of course, that on a market by market basis
there are not concerns. Liberalization and deregulation do not
necessarily mean that the incumbents are going to throw the
doors open to new entrant carriers. But I think that overall we
are very pleased with the pace of deregulation and the scope of
deregulation in Europe.
What are the main challenges for Viatel going forward,
as it prepares to step up its European operations? What are
your hopes and ambitions for the company over the next few
Mahoney: The immediate challenge in Europe is the
weather. As long as the weather co-operates, Viatel's
construction timetable for completion of the first phase of the
Circe network will be achieved.
Another concern is licensing. We are aggressively pursuing
telephony and infrastructure licences in western European
countries. Inter-connection. We would like to realize
favourable inter-connection rates and privileges with all the
incumbent operators. As for our hopes and ambitions for the
company, we aim to build Viatel up into a solid business with
established long-term relationships with our customers, provide
telecoms products and services in most European countries and
exceed the $1 billion revenue threshold by the year 2000.
Which markets do you think that you have the most work
to do in?
Mahoney: I would like to turn your question around
and ask which markets or countries need to step it up in order
to have an open and competitive environment. I think that
Germany has exceeded everybody's expectations in terms of the
effectiveness of the regulator, competition in the market, the
benefits to consumers and small to medium-sized businesses.
While other countries have moved forward at a pace that is
much faster than what we saw in the US, they are perhaps not
moving forward as quickly as Germany. I think that the
challenge for those countries is to press forward with
deregulation and liberalization, so that their consumers and
businesses can obtain the advantages of a competitive market.
How do you see the telecoms landscape in Europe
changing over the next five years?
Mahoney: We believe that because of new entrants such
as Viatel, Europeans will see a proliferation of resellers that
will offer services utilizing our network capacity.
We expect dramatic growth in data communications and
multimedia business, as the increased availability and lower
cost, access to high-speed bandwidth, enables them to offer a
plethora of affordable products and services.
We anticipate cheaper and cheaper phone calls for businesses
and consumers alike. We don't believe that we will have to wait
long before we see 10 cents a minute as the standard, at least
in northern Europe for cross-border and domestic long-distance
Following with the European Union and the Euro, we expect to
see significant business expansion across borders. Finally
cross-border companies will need to be supported by
cross-border networks, such as Viatel's.