Viatel to leverage pan-European network

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Viatel, an international telco providing international and long-distance telecoms services, primarily to small and medium-sized businesses, is building a state-of-the-art next generation broadband network. In an interview with Global Telecoms Business, the president & CEO Michael Mahoney talks about Viatel's pan-European ambitions.

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 European-wide network."

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 European market?

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?

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 point-to-point networks.

Can you provide some more details about the Circe network? How much will it cost in total and when will it be completed?

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 lost.

How much support have you received from Nortel in installing the network? Why did you choose Lucent Technologies' fibre?

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 megabits/wavelength.

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?

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?

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 experience.

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 costs.

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?

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 local exchange.

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 main competitors?

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?

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 Circe network.

What progress have you made in securing inter-connect agreements with incumbents in Europe. How important was the recent agreement with France Telecom?

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 pricing?

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 wholesale services.

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 competitors' prices.

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?

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 positive.

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 of challenges?

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?

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?

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 carriers?

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?

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 Europe?

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?

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?

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 years?

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?

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?

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 calls.

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.