- The Washington Times - Monday, December 18, 2000

The last few months have seen a painful, at times wrenching shakeout in the Washington-area telecommunications industry, ranging from layoffs to bankruptcies.

But the troubles in the sector at home have not stopped major area players, like XO Communications and Teligent from moving full steam ahead with their international operations.

These companies, which compete against the Baby Bells by using optical and other technologies to build systems that carry data, long-distance and local phone traffic, are taking special aim at Europe.

The Old World, with the exception of Britain, has been slow to embrace deregulation of the telecom industry. But markets there are now bursting with opportunity, analysts and executives say. And revenues from across the Atlantic could prove a crucial cushion if the American economy tips into recession next year.

"The potential in Europe is conceivably greater than in the United States," says Michael Read, president of XO Europe, a subsidiary of the Reston-based company. "And none of [the European companies] have yet gotten it quite right."

Mr. Read estimates potential annual revenue from Europe at $165 to $185 billion when the market becomes fully competitive in the next few years.

"A couple years down the road, people will be asking why they didn't get in now," says Daniel Ernst, a telecommunications specialist with Legg Mason Wood Walker in the District.

Despite the optimistic tone toward overseas operations, the last six months have not been kind to Washington-area telecommunications companies. And Wall Street has dragged their stocks to record lows.

One company, D.C.-based NET-tel Communications, has gone bankrupt. Others, such as Herndon-based Network Access Solutions Corp., have laid off large chunks of their work forces. And even Vienna's Teligent, though it is already a publicly traded company, had to pay a premium when it raised fresh capital this month.

"These companies are being whipsawed by the capital markets," says Scott Cleland, head of the Precursor Group in the District.

But area firms still see plenty of dollar signs when they look east across the Atlantic.

XO Communications, considered by analysts to be one of the strongest companies in the sector, already owns a network in five of Europe's seven largest markets: Britain, France, Germany, Belgium and the Netherlands. In the third quarter of this year, five percent of its revenue came from Europe.

XO focuses especially strongly on the "last mile" that connects customers to its optical network.

Teligent, with its focus on business customers, has a web of joint ventures that give it a presence in Europe, though it will collect no revenue during this year's ramp-up phase. In France, for example, it has teamed up with LD COM, the telecommunications arm of the well-known conglomerate Louis Dreyfus Group, and Artemis, an investment holding group.

The 600-pound gorillas of European telecommunications remain the lumbering former state-owned monopolies, all of which must now face the refreshing but often bitter wind of competition.

These companies, such as Germany's Deutsche Telekom, still set the pace in Europe, and their dominance ensures that prices remain higher than in the United States.

But there is an upside, say executives of American companies. Provided foreign competitors do not have to lease lines from the former monopolies, a costly proposition by any standard, they can take refuge under this "pricing umbrella."

"The margins in Europe are very attractive when you own your own network," says XO's Mr. Read.

Mr. Read estimates that the absence of full competition lets American companies enjoy a 10 to 20 percent premium over the rate they would charge for similar services in the United States.

"Competition has brought lower prices in the United States," says Michael Kraft, Teligent's senior vice president for marketing and investor relations. "That same competition is not there outside the United States."

The move by American companies into Europe is now "early in the second round," according to Legg Mason's Mr. Ernst, with old-line companies like the Baby Bells having been the first to move overseas. The emergence of wireless technologies will also drive American investment in Europe, Mr. Kraft says.

Wireless capabilities will render moot the need to physically install networks in smaller cities, he points out. Since Europeans are less amenable to roads with utility trenches than, apparently, the D.C. government, wireless will make possible what was before highly improbably.

"You don't have as much openness to tearing up streets in Europe," Mr. Kraft says.

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