ITT, French in big phone supply linkup

The sketchy future of global telecommunications is gaining a little more definition. Last week ITT Corporation and France's state-owned Cie. G'en'erale d'Electricit'e announced they would combine their telecommunications and office automation businesses.

If the deal gets a green light from the French government, which ITT expects by the end of the month, the combination would create the second-largest equipment supplier for national phone companies, after American Telephone & Telegraph. A Belgian and a Spanish company would also have a stake in the venture, with ITT retaining 30 percent share and the European concerns dividing the rest.

The move is an incremental step toward stabilizing a highly fractured industry with several big players fighting over a small turf.

Analysts say that telecommunications is going through the same upheaval that the computer industry went through in the last decade. In a few years, they say, this industry will look very much like computers today: a few major players and some niche companies doing the innovative research.

Before that can happen, however, Western Europe will go through jolting changes. At present, each country has a telephone monopoly which buys its equipment from a couple of suppliers. Generally, British Telecom would buy its large central office switches or other equipment from a British-based company such as Plessey; the French from France-based Alcatel (which owns CGE); and so on.

Part of the reason is pride -- every country wants its own state-of-the-art switch. Partly it's for strategic reasons, since countries don't want to leave themselves at the mercy of other countries for their communications systems. Governments also want to keep their people working at a time of high unemployment and want their own companies at the leading edge of technology, which spills into other industries like computers.

Those barriers to a Europe-wide telecommunications industry will be hard to fell. But a ``Frenchified ITT'' may be a step in that direction. The pending merger puts France in a good position to launch into markets in West Germany, Italy, Austria, and other European countries.

The problem for ITT, as with the other European equipment manufacturers, is that these closed national markets are too small to support the cost of developing the products. This generation of central office switches, for example, cost about $1 billion to develop.

``When you have a market that has 25 million access lines like Germany, or 24 million like France, or 22 million like Britain, you can't recover that investment,`` says Fritz Ringling, vice-president of telecommunications research at the Gartner Group, a consulting firm.

He says the next ``optical'' generation of switches, which should be in place at the turn of the century, will cost about $2 billion to develop.

That means Europe will have to put aside its ``national animosities,'' he says. This is already happening, both on the governmental and corporate level. The European Community is behind cooperative ventures from the Airbus to mobile army radios to semiconductors -- and is holding out research money to fasten such alliances.

It's a little slower going in the telecommunications industry, but most analysts believe the next five years will see the dozen-plus equipment suppliers fall to six or seven major alliances. Some of those alliances will cross the Atlantic: US-based GTE is talking about a joint venture with West Germany's Siemens, for example.

This poses a threat to AT&T, as the world's biggest telecommunications company, which dominates the lucrative United States market. The US does have barriers. For example, Mr. Ringling says, it costs a foreign company $10 million to $12 million and two to three years to get its switches tested and approved for the US market.

Japan is an even harder market to crack, and it has too many domestic equipment manufacturers already. The debt-ridden developing countries and the newly frugal Middle East nations aren't eager buyers.

Moreover, European countries want to move quickly before AT&T gets too big.

``If AT&T expands significantly from its US base, it's going to become the IBM of telecommunications,'' says an analyst at Northern Business Information Inc., a New York-based telecommunications research firm. ``The Europeans failed to protect themselves in computers, but they have a chance in telecommunications.''

AT&T, however, is aggressively forming alliances with European and Asian telecommunications companies. ``It's a strategy of penetrating markets where [AT&T] didn't have a presence and using them as a launching pad into Europe,'' says Ringling. From there, AT&T can move into areas in which its European partners have alliances.

When the dust settles, analysts expect a few major players to be standing, including Sweden's Ericsson, Germany's Siemens, France's CEG-ITT, Canada's Northern Telecom, and Japanese manufacturers.

Eli Noam, director of the center for telecommunications and information studies at Columbia Business School, thinks small companies will get more of a role in the future. A recent federal ruling opens the door for local phone companies to subdivide their big central office switches. Users of phone services could buy only services they wanted, and equipment suppliers would not have to supply the entire switch. That would leave room for much smaller manufacturers.

He predicts that in telecommunications, like computers, ``much of the most exciting technology will be developed outside the large companies and sold to them.''

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