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Global & Mobile

London-based Cable & Wireless’s Dick Brown wants to lead the telecom world in integrated communications. Not bad for a Midwesterner who had never been to the U.K. before taking the CEO job.

ADVANCING TECHNOLOGY AND the globalization of markets have turned the telecommunications industry on its head. For the greater part of this century, operators were national monopolies that enjoyed cozy relationships with fellow monopolists in other countries. With deregulation and privatization, most major telecom remain national but hungry for international markets. By contrast, the U.K.‘s Cable & Wireless, a $11.5 (S,7) billion London company operating in 72 countries, started out 126 years ago as a global company, Eastern Telegraph Company Ltd., which linked London to Hong Kong by telegraph cable. By 1934, it had become Cable & Wireless Ltd., Today it is the fourth-largest provider of international telephony and data traffic, owns a 12th of the world’s international submarine cable capacity, and operates mobile communications in 30 countries.

Its revenues-70 percent of which come from outside its home country-and earnings per employee are among the highest in the industry. In the past five years, revenues and earnings grew at double digit rates, with the operations throwing off $3.5 billion in cash last fiscal year. In many countries, including the U.K., C&W is the second force competing with the former monopoly; in others, such as Hong Kong, it is the primary operator fighting to fend off rivals and sustain growth.

The challenge has been that 80 percent of business came from operations that did not carry the Cable & Wireless name. Hongkong Telecom CSL, Optus in Australia, and Mercury, and Granada Group in the U.K. were among the family of operating companies. Technologies, products, and costs were proliferating in all directions. The time had come to raise efficiencies and redirect focus.

But its leadership couldn’t agree. In November 1995, the company was almost torn asunder by a feud over strategic direction between its chairman, Lord Young of Graffham, who had once served as Margaret Thatcher’s trade minister, and James Ross, the company’s chief executive since 1992. Critics said the company resembled an investment trust more than a telecom company. When neither would step down in the face of the demands of the other, a boardroom coup forced both to resign.

In 1996 the board flirted with British Telecom, but merger talks ended when it reached all the way to Kansas City for a successor in Richard H. Brown, 50. Then CEO of H&R Block, tax preparer for 18 million Americans, Brown, who hadn’t always kept his U.S. passport current, might appear an odd choice for a far-flung enterprise created by a Victorian entrepreneur. On the other hand, he had been in the industry for 28 years, most recently as vice chairman of Chicago‘s Ameritech, and earlier as an executive vp of Sprint. His early tenure with Illinois Bell had exposed him to local exchange experience.

Since moving to London, Brown has set about consolidating C&W’s operations around competencies such as mobile communications and multimedia services and creating a global brand. He withdrew from an alliance with Germany‘s VEBA and from C&W’s NetCom stake in Sweden. Mercury, the company’s distant No. 2 in its home market with BT, was merged with NYNEX CableComms, Bell Cablemedia, and Videotron to form Cable & Wireless Communications. Similarly, Boatphone is now Cable & Wireless Caribbean Cellular.

But challenges still loom. “C&W is at a crossroads at the moment,” asserts Andrew Harrington, a London-based managing director at Salomon Smith Barney, who says that despite formidable presence in significant markets, such as Australia, Hong Kong, and the U.K., C&W needs to boost its ability to service multinationals in order to solidify its future. “C&W does not have significant telecom assets in the U.S., in the rest of Europe outside of the U.K., and in Japan-three areas that are very important from the perspective of a multinational company,” he points out, noting that multinationals comprise one-fifth of the world telecom market and one-third or more of global telecom profits. “With markets liberalizing around the world, in the future telecoms will only be able to service multinationals if they have significant assets in all major business centers.”

As the pressure mounts, the question isn’t whether C&W is courting another telecom, but which one? While rumor has C&W and BT resurrecting their failed flirtation to create a $68 billion-plus powerhouse, AT&T, Sprint, and Bell Atlantic would also fit the bill, says Harrington, who expects to see a move within six months. “C&W has to increase the scale and scope of its operations significantly and that probably means forming a tight, equity-owning alliance or merger. All four options would solve problems on both sides.”

Harrington’s money seems to be on Sprint. “Dick Brown used to work with Sprint; he knows its setup very well and there’s almost perfect complementarity as far as assets go. With Bell and. AT&T there is no obvious progression for him in the combined organization, whereas with Sprint, Bill Esrey is close to retirement.”

Meanwhile the telecom industry as a whole is bracing for change. While much debate revolves around the impact of the Internet, within five years almost a third of the world’s telephones will be mobile-a market segment that hardly existed 10 years ago, but now accounts for more than half all new telephones worldwide. In the following interview in C&W’s London headquarters, Brown discusses betting on integrated networks and where further industry deregulation is likely to lead.

CALLING ALL COMPANIES

How are the major changes in the telecom industry affecting the overall landscape?

I look at all the possibilities of the telecommunications industry as a giant weather map. You can see fronts coming in and storm clouds forming, but what shapes and patterns dictate is not predictable. To be a survivor, and to succeed in the future as one of the big players of tomorrow, you’ve got to be both global and mobile.

We have been focusing on continuing to exploit our position as a global company. We’re in 72 countries. We’re in Asia-Pacific more extensively than any non-Asian telecom company. We’re quietly but persistently building a substantial presence in the Middle East because we believe it’s a strong market for tomorrow. We’re in Europe, North America, the Caribbean, and Latin America. We’re building a strong base in our home country, the UK. We’re gaining 100,000 customers a month. We’ve got a mobile portfolio where we have a presence in 30 countries. We’re now growing mobile customers at the rate of 50,000 net new customers every seven days. Overall, in the last six-month period, we’ve added five million customers.

The rest of the industry is big, local telecom companies. Deutsche Telecom has got enormous resources, but they’re in Germany. France Telecom is a French company, and 90-plus percent of its revenues come from France. AT&T, with its great global branding is an American company. Bell Atlantic and Worldcom are American-just look where the revenues come from. And what are they all trying to do? They’re trying to be global.

They’re trying to poach from each other.

They’re trying to expand out of their home regions-to leverage their localness into globalness. And Cable & Wireless is global trying to leverage into local. Instantly, when we run across the grain of the industry patterns, we begin to look beautiful.

We’re working hard to build our presence in countries that we are already in. That’s why we bought a controlling interest in Optus, the second force in Australia, and in Panama, which has the potential for 2.5 million more customers. It’s why we created Cable & Wireless Communications.

We’re rebranding ourselves. We’re a company that went by 37 different names around the world, and those splintered, multiple identities didn’t serve us well in approaching multinational accounts. In the last 12 months, we’ve changed the names of 12 of our companies and put the C&W brand before 60 million more users. The objective, over time, is to get our name in front of a billion more.

Fundamentally, our vision is to lead the world in integrated communications. That’s not just a fancy phrase. We want to integrate telecommunications information services-home banking, home shopping-and entertainment over a single network. We’re doing it with Hongkong Telecom and our license award a few weeks ago to provide video-on-demand services.

Local companies like PTT and Deutsch Telecom are privatizing. When the smoke clears, who’ll be standing?

The way I see the European telecom world unfolding reminds me-it’s deja vu-of the U.S. circa 1978. There will be not an identical replication, but a similar evolution. We can debate how long it will take. But it’s going to open up, and opening it up is going to provide opportunity.

When real competition goes into a market, you can expect four things: prices plunge, consumers get real choice, innovation accelerates, and the market expands. To be a surviving player when it all sorts out, you have to be global and local. How to get big enough to be efficient and stay small enough to be effective is the management challenge in this industry.

Even after all these years of deregulation, MCI only has about 16 percent of the market. How does a global company penetrate against the local incumbent?

It’s a question of timing. In many countries, we are a second force competing with the incumbent. In the UK, BT’s got a 90 percent market share and we’ve got 10 percent. The way I like to look at it is: who ought to wake up at night worrying? The one that’s got 90 and heading down, or the one that’s got 10 and is heading up?

In other countries, we’re the primary force, bracing for competition and getting ourselves at a trimmed weight level. Even the incumbent can do things to expand the very definition of service. You can create new markets where you are. It’s what I call “sinking roots deeper.” I’ve challenged the organization that if we’re in a market and we do one thing, if we’re wireless only, we should work to also complement that with a wire-line capability. Do entertainment, information services, interactivity. If your portfolio is spread broadly in a market, customers are happier and margins are better. And markets where we cannot provide integrated full-service capability become candidates for exit. That’s not to say we will exit them. But they’re high on the list for consideration for exiting.

Ten years ago, the value of telecom companies was driven by two factors: what did you earn and what was your cash flow? Today, markets want to see your top-line growth and your price/earnings ratio because that paper can be used as a tool to acquire. As a new CEO, one commitment I have made to the outside world is delivering double digit, top-line growth.

Our incentive plan’s payout levels call for double digit earnings per share growth. I’m not saying we’ll make it all the time. In our half-year results, even with adverse currency changes, we delivered top-line growth of 15 percent, operating profit of 12 percent, profit before taxes of 52 percent, and earnings per share increase of 120 percent. With constant currency, we’re up 20 percent in revenues, 17 percent in profit, 58 percent profit before taxes, 125 percent EPS. That’s during a period when we also had heavy investment in building for the future-S,1.6 billion.

Under your strategy, where are your resources best served?

We’re not really in South America and don’t intend to go down there and start operating a business. We’ve got plenty to do with Asia-Pacific, the Middle East, Europe, North America, and the Caribbean. We have a strong presence in Indonesia, Malaysia, Singapore, Australia, and Hong Kong. We’re the largest foreign investor in Japan, in the telecom industry. And opportunities will unfold in China.

We’re interested in not being an investment trust in telecom companies. We’re changing. We’ve gotten into Panama, upped our stake in Australia, done a big deal in China, and won Vietnam. We’re upping our stakes to enhance our influence in these businesses, if not to control them. And where we can’t, we’re getting out. We’ve announced a program to shed billion of assets in the next 12 months. We’ve exited both Germany and Sweden.

What about North America?

We’re a $1 billion business in the U.S. We’re growing 30 percent a year, top line, and just amassed earnings improvement of 22 percent. with revenue growth of 26 percent last year. To be a global player you cannot ignore the American market. We can organically grow, we can acquire, or we can merge. I don’t think that’s a door that’s closed to the future relative to potential partners. But whatever we do, it must be tied to a broader global strategy.

What do you hope to accomplish with alliances such as the one with US West?

In this industry, few of us have the resources to go into so many places completely alone. It’s not uncommon to be competitors in market A and partners in market B. It’s not easy, but it happens. I like to avoid that, but sometimes it’s essential.

How did the Asian flu affect you?

Our stock price got sick and dropped about 15 percent. But our domestic revenues are now growing 22 percent in Hong Kong. Hongkong Telecom is a company that, historically, has done well in sluggish economies. And it’s adding things like Internet access and gaining customers at the rate of 20,000 a month

How will the advent of a single currency affect your business?

It’s like the weather. I don’t know how to plan on a single currency. We’re looking at markets, opportunities; I’ll let some other experts figure out the common currency impact. My message to Brussels would be, if you’re going to lead a common market, you’ve got to make sure you have the clout to do it. There’s a bit of artificiality in some of the European markets and artificially restrictive markets are not conducive to superior competitiveness.

How will the Internet affect your industry?

As customers begin to rely on the Internet more heavily, they’re going to expect reliability and security to improve. And somebody’s got to pay for producing that, which will inevitably lead to an increase in price. Overly simplistically, the Internet grows up to be another international long distance carrier with unique capabilities.

We’re talking to various companies about how we can help customers navigate the 200 channels that digital can provide, as opposed to the 40 channels of analog. This will be done through integration with the Internet. We’re like a supermarket, accessing content the way a store brings in dairy and meat products. We’re not going to be content makers.

What challenges did you face in setting forth a new strategy?

As a person who had never visited the U.K. before agreeing to run this company, I had virtually no international experience and yet took the helm of an international company. Over the past year, having traveled one-third of a million miles and having been out of the country literally half the year, I feel somewhat of a force-fed veteran of international experience.

What cultural changes have you made within the company?

The things that all leaders deal with. Painting a vision for the business, getting the right people in the right jobs, focusing people, getting a sense of urgency about the business, eliminating committees, and undoing boards of directors. It’s instilling confidence and telling people it’s okay to make mistakes because, by definition, to be human is to err, and people who don’t make mistakes just don’t do things.

I take on accountability. I’m a believer that leaders get the behavior they tolerate. Show me a business over time with mediocre service and I’ll show you leadership that tolerates it.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.