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Global Wake-Up Call

In the scramble to capture a piece of the world telecoms market—projected to reach $1 trillion by 2000—expect to see more deals than dial tones. With the acquisition of MCI, British Telecom’s Sir Peter Bonfield faces the daunting task of creating a seamless global organization from two disparate cultures. Now on the crest of the cross-border wave, he must grapple for growth even as competition drives prices down—and rivals into one another’s arms.

Last February 68 countries, accounting for 90 percent of the world telecommunications market, agreed to liberalize their home markets, opening up the $600 billion-a-year industry to direct competition. The World Trade Organization pact is expected to drive down telephony prices—cutting international telephone call rates, for example, by more than 80 percent. It will also drive out remaining state-run monopolies. By 1998, Europe must open restricted national markets to all competitors.

Cross-border competition, already well underway, inevitably leads to cross-border ownership. Anticipating the new era, £14.4 ($24.5) billion British Telecom, the fourth-largest telecoms company in the world, announced its intention last November to acquire $18.5 billion MCI Communications, the second-largest U.S. carrier, in a $23 billion deal that would create a $43 billion megacarrier. Assuming no FCC regulatory or European antitrust restraint, the BT-MCI combo—to be renamed Concert Plc by August of this year—will encompass 184,000 employees and hold network connection in 30 countries, making it the fourth-largest telecoms company in the world in revenue, with joint ventures in 25 countries and 44 international alliances.

The union also wins BT direct access to the U.S. market through MCI, which has already picked off 20 percent share and is now poised to tap into the local market. It opens a line to Latin America, particularly to Mexico, where BT was not a player, but MCI’s Avantel, a joint venture with Mexico‘s largest financial services company, aims to rival TELMEX (Telefonos de Mexico). It further enhances BT’s prospects of wooing a telecoms partner in Asia, the one region where BT’s global links are weakest.

BT chairman lain Valiance and MCI CEO Bert Roberts, who cut the deal, will become Concert’s co-chairmen. Gerald Taylor, MCI’s president, becomes Concert’s COO. And Sir Peter Bonfield, now in his second year as BT’s CEO, will continue his efforts of transforming a once boring old utility—privatized in 1984 under Margaret Thatcher’s Conservative government—into a global growth company.

It’s a formidable task. After a lengthy tenure enjoying the same monopoly in the U.K. that AT&T had in the U.S., BT has had to overcome the same reputation for arrogance that allowed MCI to gain a foothold in America. Since taking the helm in January of 1996, Bonfield has been busy. He’s conferred with Rupert Murdoch on building on existing links between BT/MCI and News Corps.’ satellite-based British Sky Broadcasting Ltd. He took a 37.5 percent stake in Germany‘s Viag Interkom, a joint venture between BT and VIAG, to become Germany‘s second-largest carrier after Deutsche Telecom, and convinced Telenor, Norway‘s state-owned telecoms operator to join in with a 10 percent hold.

The trim silver-bearded Letchworth, England-born Bonfield, 52, who jogs each morning and rates Eric Clapton as his fave rave, began his career as an engineer at Texas Instruments in the U.S. and Europe. He came to his current post from ICL, where he earned an interesting track record in semiconductors and computers. He became ICL’s CEO 1984. Seven years later, by the time Fujitsu bought 80 percent of it in 1991, it was the only European semiconductor company turning a profit.

Wall Street skeptics note that BT paid a $4.25 billion premium for something it already had—an alliance resulting from its 20 percent stake in MCI. Analysts say BT lost its link with McCaw Cellular when AT&T took control and that MCI may have pushed for BT’s bid by flirting with other partners, initially GTE. But Bonfield touts the strategic benefits of creating a seamless connectivity web where the new global entity can invest anywhere instead of each investing separately in its own half of the world. Multimedia interactivity, he reckons, will become an important new playing field in which huge technology investments may be required. For now, Bonfield splits his time between London and Washington. Recently CE caught up with him at BT’s Newgate St. headquarters in London.

What do you intend to accomplish through this acquisition?

Merging BT and MCI will position the company as a world leader and get it onto a global stage and into a growth market before the competition. We couldn’t do that without putting the two companies together. We couldn’t get the earnings growth, synergies, and the fundamental image change that we needed. The new company will be the first on the scene in the new global view of telecommunications. That’s the long-term vision.

Who are your chief competitors now, and what advantages do you have against them?

AT&T is still, obviously, the largest international competitor, with Global One, Sprint, France Telecom, and Deutsche Telekom, among other major competitors and more on the way. Concert’s advantage is that it will be fully integrated together, whereas Global One is still a mixture of companies operating separately from their parent. We will be more international than AT&T, because the spread of activity will be wider in terms of geographic footprint. AT&T is an international company, but a huge amount of its volume is still U.S.-based, whereas we will be much more internationally based and, therefore, the best at providing seamless services to the world’s multinational companies.

In investments, R&D, and new markets, what will you emphasize going forward?

Three main areas: One, we will focus on the European marketplace, and being well-positioned for that once-in-a-lifetime opportunity. Two, we will expand our original joint venture with MCI, which serves multinational corporations. We want to add products, provide more seamless service, and go after the evolving and relatively high-growth multinational market. And, three, in the U.S. market, liberalization kicked off by the FCC last year will allow MCI to get into the local loop.

These are the high-growth areas we see: the green field site in Europe, the multinational global network businesses, and the U.S. local loop. After that, there are the more medium- to long-term prospects, such as the mobility in multimedia.

MCI was already pushing its way into the U.S. local service arena, a $100 billion market. What additional resources will the merger bring to that effort?

MCI will continue to put a lot of investment into that area and go ahead with its rollout plan. The U.S. marketplace is changing state-by-state, so activity depends upon the effect of these changes on the marketplace topology.

We will help MCI penetrate faster in the U.S.—not necessarily through financial resources, but rather through BT’s expertise with local markets. We will try to graft that into MCI by transferring people and expertise—knowledge of what works and what doesn’t work, and what to look for and what not to look for. But we will not completely overlay MCI, which is a very pushy, hard-driving company. This is a good area for MCI’s skills and, if we can blend in some expertise from BT, we will have an unbelievable combination.

MCI’s image is that of a fast-moving, entrepreneurial company, whereas BT is seen as more staid. How will the two corporate cultures meet?

Those stereotypes are a bit overdone. People get stuck on ideas about the other side, but underneath everybody’s actually similar. People at both companies work well together. MCI is very aggressive, but BT has also been very aggressive and highly competitive in the UK market, where there are 200 national licenses and 45 international licenses—heavy competition.

We do want to bring elements of MCI’s hard drive, hard reward culture into the new company. But you don’t want to implant BT in MCI or MCI in BT. You want to blend the two to develop a brand new culture for Concert that is all of the things everybody aspires to—international and fast-moving.

I think the key is to talk to everybody and not to be dogmatic with the culture we’ve got. It’s about communicating and understanding. We set up teams across the companies to explain to people what it looks like from the other end of the telescope. We also tried to learn from other mergers of cultures, to understand the ones that worked best and the techniques used. It takes time, a huge amount of communication, and building up trust.

Now that the convergence of telephony and technology have made the two almost indistinguishable, how will you protect your technology base?

Our research labs are pushing hard on what we call the intelligent platforms, the computerization of telephony so you can have high intelligence in a network. This allows you to react quickly to the marketplace and bring in new products rapidly.

We’re also driving hard on voice so that we can provide services such as voice response, call answering, and call forwarding in a very efficient way without using real people. We’re pushing hard in multimedia, particularly in interactivity. We did some extensive trials on distributing video over our own network and through satellite networks. We’re trying to understand how the technology of our business is going to interact with the television technology of multimedia. And we have also put a huge amount of investment in the Internet and intranets, and how all that will work in terms of network management. Together, MCI and BT now carry about 40 percent of the world’s Internet traffic.

Ray Smith at Bell Atlantic once pointed out that the $4 to $6 cost of sending a 40-page document across U.S. by fax is much lower than a $9 overnight service. Now the Internet can reduce the cost to $0.014—effectively nothing. How will this cost equation affect the future of telecoms use?

The financial equation of the Internet is going to change as the vast explosion of traffic and some repricing techniques make it a viable marketplace. The charging regimes will change. The cost won’t reach the level of faxing, but will increase to pay for the investment, and yet remain a fantastically efficient and relatively cheap medium warranting exponential growth.

I can’t believe that everybody’s going to allow the return on their networks to drop through the floor. It makes no economic sense. Everybody believes this is the future; that companies will communicate more and more on Internets or intranets. A lot of companies are going to intranets because they want the value added—more security, more network management—and they’re willing to pay for that.

That’s what we’re going to provide. And that’s why we’re working with MCI and developing backbone networks around the world to take the traffic. We’re adding Internet capacity at a phenomenal rate.

As competition and technical advances accelerate and drive prices down, how will that affect your competitive model?

There’s no doubt that new technology reduces costs and, therefore, allows prices to come down. To consumers it may seem that prices are going up, but because of the added value, they are getting more bang for the buck. As technology allows costs to come down and adds more value, people will use the services more, and the overall market will still grow. We’re seeing that in the UK, where four years ago the average daily household use of a line was about eight minutes. Today, huge advertising, merchandising, and marketing programs have brought it up to about 10 minutes and. I think it will continue to climb as people gain an understanding of the price equation, the products, and the added value services. It’s 18 minutes a line in the U.S. and there’s no intrinsic difference why people in the UK talk less on the telephone than their cousins in America. So this is an area where we can learn from MCI.

What is your strategy for Europe?

We go in by partnering with local companies and trying to win licenses in the major countries, so that we can operate services, both fixed and mobile, and stitch them into our Concert network. Our partners vary country by country: For example, we’ve teamed up with CGE in France to form CGETEL, with the industrial group VIAG in Germany to form Viag Interkom, and in Italy with BNL to form Albacom.

Our approach will start by serving the business and the high-end residential markets, and wrap those services into the Concert international network. The key is in winning licenses and then understanding the license conditions, because those conditions can make a huge difference on the profitability of any start-up company.

Telecoms prices in Europe are signifcantly higher than those in the UK. We expect prices to come down as the markets open. We may take a leaf out of MCI’s book in challenging the incumbent both through price but also with extra services. In Germany, for example, we hold both fixed and mobile licenses, so we’re trying to offer both products as a value-added package.

BT has had an office in Beijing for the past year; what do you hope to do there? What about new or planned projects in other parts of Asia?

Our strategy in China is for the long term. We’ve got technical links with companies there, but no specific large deal. As the market develops, we want to be able to distribute Concert products in China, but at the moment the regulatory situation is complicated. It is a large and difficult market, so you have to have people on the ground there all the time.

The whole Asia Pacific region is highgrowth—higher GDP growth than Europe or the United States. It has a massive population, but an underdeveloped telecoms system. Because there isn’t a magic date of opening up, a lot of markets there are still dominated by monopolies. As that changes, we want to go in so that we can service multinational customers in Singapore or Japan. Then, down the road, we want a larger partner to help us develop new opportunities. We’ve had a technology partnership with NTT for a long time and would like to extend that in other areas, but they’re talking to all the girls.

In Korea we just signed an agreement with Dacom, and we’ve signed up ITJ in Japan to distribute the voice services for CCS, the existing Concert Communication Services joint venture between BT and MCI. So there are some markets opening up, but it’s going to be country by country in Asia, rather than a single date as there is in Europe. So we’ve got to look at it over a five- to 10-year period.

How would you characterize the market opportunities of India?

India‘s a very large market. In India, we chose not to bid for the so-called rings, or the fixed networks, but we bought a stake of just over 20 percent interest in a cellular company in Delhi, called Bharti Cellular. Again, we are also interested in the international services into and out of India. It’s a very large and interesting market, but right now the cellular investment is our only direct interest in the local infrastructure.

In the U.K., BT had a 7 percent increase in local calls over the last 12 months but has also been losing 50,000 residential customers per month. Are you concerned that while targeting international markets, your home market might be poached?

The UK market is highly competitive now, which happens after a market opens up. We’re trying to grow the overall market through advertising, merchandising, and introducing new products. Even though we will lose market share as the competition comes in, we can still actually be in a growth market. Numbers indicate that it’s working, because while others are gaining 50,000 to 60,000 new customers a month, BT’s residential system is flat or growing a little, which means that the overall market is growing, but our market share is decreasing. And that’s a result of competition. And that’s fine.

When you took over a year ago, BT was at a rocky point in its history. Why did you make the switch?

I didn’t think that BT was in a rocky position. I thought it was in a fantastically well-poised position and that the company was a good company in an exciting industry. I’d been chairman and CEO of my previous company for 10-plus years and was at an age where I could either stay there for another eight years and retire, or have another go. I decided it would be bad for my previous company if I stayed there. And I had the opportunity to join BT at just a phenomenally exciting part of its change. So it worked well all around.

Concert will reportedly have two executive chairmen, an arrangement that proved too much for Cable and Wireless, which ultimately had to forsake both. How will do you intend to meld the new structure?

If you look at the number of deals around the world, the number of government and regulatory interfaces that we need, there’s a huge amount to do. So we’re going to divvy up areas. We’re going to have headquarters in London and in Washington, with people actually in both headquarters.

I think we’ll prove that two chairmen is not always a bad thing. I’m not saying that it’s without issues, but I see it as more a benefit than a hindrance. Whether we will use that structure for the next 20 years, who knows? But for the foreseeable future, it will provide stability and knowledge; and it will give us an enormous spread of capability, because we can hit so many things with some pretty senior people.

When you left ICL for BT, Mr. Yamamoto of Fujitsu awarded you a Samurai sword and helmet and said that you would need them to be a formidable warrior in your new job. Have you had to use them, metaphorically speaking?

The industry has proven that it does require a bit of warrior instinct, but the takeaway is that in the end, you’ve got to be a driver and a warrior to win in anything. You can’t sit back. I guess a lot of people thought that coming from the computer industry, the telecoms business would be a bit boring, and I found it the opposite. It’s phenomenally fast moving. There are so many changes going on that you have to either say, “We’ll let it pass us by,” or “We’re going to ride the wave, and we want to be the top.” That’s why we’ve taken this bold step of attempting to merge BT and MCI together.

About JP Donlon

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