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INTERNATIONALIZATION WITHIN THE TELECOMMUNICATIONS INDUSTRY
THE CASE OF DEUTSCHE TELEKOM

By

John Ernest Bennett

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunication

I996

ABSTRACT

INTERNATIONALIZATION WITHIN THE TELECOMMUNICATIONS INDUSTRY
THE CASE OF DEUTSCHE TELEKOM

By

John Ernest Bennett

Most research on the internationalization of firms has focused primarily on
manufacturing and extraction industries and not on service-type industries such as
telecommunications. Within the telecommunications service industry stagnant home
markets, liberalization and increased competition have prompted many companies to
intemationalize their operations seeking profits outside of their home market. This report
outlines the internationalization process of telecommunication companies in general and
focuses on one company, Deutsche Telekom, the German national carrier, in particular, in

its efforts to become a global player.

Copyright by
JOHN ERNEST BENNETT
1996

This is dedicated to my wife, Laura.

iv

ACKNOWLEDGMENTS

In completing this work, I would first like to thank my wife, Laura and daughters,
Karin and Marlena for the many sacrifices they made in leaving "Papa" alone while he
was busy researching and writing. If it was not for those weekend retreats this work
would not have been finished.

I would also like to thank the faculty members in the Department of
Telecommunication for their dedication and insight in opening the world of
telecommunication to me. Their devotion to teaching and to research has helped to make
this work possible.

A final thank you to the members of my committee and especially Dr. Johannes Bauer

for their help in making this work better.

TABLE OF CONTENTS

LIST OF TABLES ......................................................................................................... viii
LIST OF FIGURES .......................................................................................................... ix
INTRODUCTION ............................................................................................................ 1
CHAPTER I
THE INTERNATIONALIZATION PROCESS .............................................................. 4
General Concepts ................................................................................................. 4
Patterns in the Traditional View ........................................................................... 5
Modes of Intemational Involvement ................................................................... 7
Telecommunications as a Technology-based Service Industry ............................ 7
Foreign Direct Investment in the Context of lntemationalization ...................... 10
Recent Research Findings ................................................................................... 12
Strategic Alliances in the Context of lntemationalization .................................. l8
lntemationalization Model for Telecommunication Companies ........................ l9
CHAPTER 2
INTERNATIONALIZATION OF TELECOMMUNICATION COMPANIES -
INFLUENCING FACTORS ........................................................................................... 23
Historical Context ............................................................................................... 23
Global Trends of Regulatory Reform ................................................................. 25
United States ........................................................................................... 25
United Kingdom ..................................................................................... 26
Japan ....................................................................................................... 26
European Union ...................................................................................... 27
Technological Development ............................................................................... 29
lntemationalization of Customers ....................................................................... 29
Increasing Global Competition in Telecommunications .................................... 30
Political Changes in Central and Eastern Europe ............................................... 31
CHAPTER 3
THE CASE OF DEUTSCHE TELEKOM ...................................................................... 33
Introduction ......................................................................................................... 33
Deutsche Bundespost .......................................................................................... 34
The Problems ...................................................................................................... 35
Regulatory Reforms ............................................................................................ 37
Postal Reform I ....................................................................................... 37
The Role of Telekom - What really has changed? .................................. 38
Concrete Steps of Reform ....................................................................... 39
Tariff Restructuring ................................................................................. 4]
Postal Reform [1 ...................................................................................... 42
Telecommunications Law of 1996 .......................................................... 43
Telekom 2000 - The East is Rebuilt .................................................................... 4 5

Vi

Positive Impacts of the Reform Process ............................................................. 48

Deutsche Telekom's Foreign Direct Investment. ................................................ 50

Deutsche Telekom's Firm-Specific Advantages ................................................. 50

Deutsche Telekom's Internalization-Specific Advantages .................................. 51

Location-Specific Advantages ............................................................................ 51

Deutsche Telekom's lntemationalization Strategy .............................................. 52

CHAPTER 4

DEUTSCHE TELEKOM'S INTERNATIONAL JOINT VENTURES AND STRATEGIC

ALLIANCES .................................................................................................................. 53

Eastern European and Central Asian Joint Ventures .......................................... 57

Austria ..................................................................................................... 57

Czech Republic ....................................................................................... 57

Hungary ................................................................................................... 57

Poland ...................................................................................................... 58

Ukraine .................................................................................................... 58

UTEL .......................................................................................... 58

UKRAINIAN MOBILE COMMUNICATIONS ....................... 58

Belarus .................................................................................................... 59

Russia ...................................................................................................... 59

MOBILE TELESYSTEMS (MTS) ............................................. 59

ROSCOM (50x50 Project) .......................................................... 59

MOBILE SYSTEM LICENSES ................................................. 6O

RTK ............................................................................................. 60

Kazakstan ................................................................................................ 60

DEKATEL .................................................................................. 60

KAZTELECOM .......................................................................... 60

Indonesia ................................................................................................. 61

Singapore ................................................................................................ 61

lntemational Joint Ventures and Cooperative Agreements ................................ 6|

Romantis ................................................................................................. 6l

Eunetcom ................................................................................................ 62

Global European Network ...................................................................... 62

Trans Europe Line (TEL) ........................................................................ 62

Trans Asia Europe Line (T AE) ............................................................... 62

Atlas ........................................................................................................ 63

International Strategic Alliances ......................................................................... 63

Global One .............................................................................................. 63

CONCLUSIONS ............................................................................................................. 68

APPENDIX A ................................................................................................................. 70

BIBLIOGRAPHY ........................................................................................................... 91

vii

LIST OF TABLES

Table l - Classification of Service Industries ................................................................... 9
Table 2 — The Internationalization of Telecommunication Companies into Europe ....... 13
Table 3 - The lntemationalization of Telecommunication Companies into S. E. Asia.. 14
Table 4 - The Internationalization of Telecommunication Companies into S America..15
Table 5 - The lntemationalization of Deutsche Telekom ............................................... 54

Table 6 - Global One Partnership Milestones ................................................................. 65

viii

LIST OF FIGURES

Figure l - Major Determinants of lntemationalization in Telecommunications ............ 16
Figure 2 - The lntemationalization Model for Telecommunication Companies ............ 20
Figure 3 - Deutsche Bundespost's Profit and Loss per Division in 1986 ....................... 36
Figure 4 - Average Wait Time For Installation, 1986 ................................................... 36
Figure 5 - Deutsche Telekom's lntemationalization Over Time .................................... 56
Figure 6 - Austria: O-Call Joint Venture ....................................................................... 70
Figure 7 - Czech Republic: Digital Mobile Telephone Joint Venture ........................... 71
Figure 8 - Hungary: MATAV (Hungarian Telecommunications) Joint Venture .......... 72
Figure 9 - Poland: Polska Telefonia Cyfrowa (FTC) Joint Venture ............................. 73
Figure 10 - Ukraine: UTEL Joint Venture ................................................................... .74
Figure 11 - Ukraine: Ukrainian Mobile Communications Joint Venture ..................... 75
Figure 12 - Belarus: Belarus Telecommunications Joint Venture ................................. 76
Figure 13 - Russia: Mobile Telesystems (MT S) Joint Venture .................................... 77
Figure 14 - Russia: Roscom (50 X 50 Project) Joint Venture ...................................... 78
Figure 15 - Russia: GSM Mobile Telephone System Joint Venture .............................. 79
Figure 16 — Russia: RTK Equity Investment .................................................................. 80
Figure 17 - Kazakhstan: Dekatel Joint Venture ............................................................. 81
Figure 18 - Kazakhstan: Kaztelekom Joint Venture ..................................................... 82
Figure 19 - Indonesia: Satelindo Joint Venture ............................................................. 83
Figure 20 - Singapore: Cooperative Agreement ............................................................ 84
Figure 21 - International: Romantis Joint Venture ........................................................ 85
Figure 22 -1ntemational: Eunetcom Joint Venture ....................................................... 86

ix

Figure 23 - International: Global European Network .................................................... 87

Figure 24 - International: Trans Europe Line (TEL) ..................................................... 88
Figure 25 - International: Trans Asia Europe Line (TAE) ............................................ 89
Figure 26 - Intemational: Global One Joint Venture ..................................................... 90

INTRODUCTION

Within the last decade there have been profound changes within the
telecommunications industry worldwide. As companies in the manufacturing industry
and financial institutions began to look beyond their national borders and to
intemationalize their operations so the demand for international telecommunication
services has increased. Faced with stagnant growth at home, either due to a mature
market or as a result of regulation limiting the types of business activity allowed,
telecommunication companies have sought to grow their businesses by following their
customers abroad and have been investing in new foreign markets at an unprecedented
pace.

There has been much research conducted on the internationalization of
companies. This research, however, has focused mainly on manufacturing companies,
and not on service companies, such as telecommunications. The research presented here
seeks to investigate the internationalization of telecommunication companies, to develop
a conceptual framework that defines this process, to define contextual factors influencing
this process and to compare the research findings with an actual test case, i.e. Deutsche
Telekom. The questions that this research seeks to answer include: What is the process
of internationalization of telecommunication companies? What are the contextual factors
influencing the process? And finally, how does Deutsche Telecom compare to the model
developed?

There are different types of telecommunication companies. For example, there
are telecommunication equipment manufacturers as well as local telephone, long

distance, and value-added service companies. Telecommunication equipment

2

manufacturers have been active internationally for a number of years. Only recently have
traditionally domestically focused local telephone companies (e. g. the regional Bell
operating companies in the US. and other national providers including France Telecom
and Deutsche Telekom, the French and German national carriers respectively) sought
business internationally primarily through foreign direct investment, joint ventures and
strategic partnerships. The research presented here focuses on this recent expansion
abroad.

Chapter 1 details the internationalization process in general. The traditional view
is presented including the Uppsala and Innovation Models of international expansion.
This research is then broadened to include service industries including
telecommunications. The idea of telecommunications as a technology-based service
industry with unique constraints on the internationalization process is presented.

Foreign direct investment (FDI) plays a prominent role in the expansion of
telecommunication companies overseas. According to Dunning's "Eclectic Theory",
(1981), there are three factors that determine when a firm chooses to invest in a foreign
company: e.g. firm-specific, intemalization-specific, and location-specific. These factors
are discussed in the context of telecommunication companies. Specific research on the
internationalization of telecommunication companies is also presented.

Alliances play a prominent role in the foreign direct investment noted in the
research. The various alliance strategies are discussed and differentiated. The role of
equipment suppliers are also discussed. The chapter concludes with a summary of the
theoretical model for the international expansion of telecommunications companies.

Chapter 2 provides the context within which the internationalization process of
telecommunication companies has occurred. There are a number of influencing factors
that are shaping this process. Global trends of regulatory reform, technological

innovation, internationalization of customers, increasing global competition in

3

telecommunications, and political upheavals in Central and Eastern Europe have been the
main catalysts.

Chapter 3 introduces and gives a comprehensive overview of Deutsche Telekom,
the German national telecommunications carrier. As a typical P'I’T (Post, Telegraph and
Telephone) fully owned by the government, Deutsche Telekom, inheriting a huge
bureaucracy, has faced a daunting challenge of becoming more competitive and
customer-focused. As European Union-wide deadlines approach for introducing
competition in basic telephone service (the local loop) and infrastructure provision, the
German government has been active in reforming the telecommunications market and
reorganizing Deutsche Telekom to be more competitive to be able to become a global
player in the telecommunications industry. The chapter concludes with a look at some of
the factors that are contributing to the company's foreign direct investment and its
internationalization strategy. Chapter 4 provides a synopsis of the data collected on the
international expansion of the company through foreign direct investment and strategic
partnerships. Data for the case study was collected from numerous published sources,
company documents, and the Internet throughout the process of completing this work.
Prior to beginning this research, the author spent time in Europe including Germany and

was a customer of Deutsche Telekom.

Chapter 1
THE INTERNATIONALIZATION PROCESS

General Concepts

The term internationalization generally means the process of expansion of a
market or a company's operations from a national to a more international focus and
participation. It could also describe the outcome or state of that process at any particular
time (Bohlin and Granstrand, 1994). Depending on the industry, internationalization
could be viewed from a competitive perspective. If competition is localized, e.g confined
within national borders, and products are unique to each area, the industry serving each
region could be considered a multi-domestic industry (Porter, 1986). If competition is
not localized, e.g. having a broader even global scope, and the same products can be used
in multiple areas, industries serving more broader regions across different countries
would be considered global. Globalization, therefore, is the process of increasing
interdependence of competition across various countries (Bohlin and Granstrand, 1994).
Multi-domestic industries would include, for example, retailing, health care, sports,
entertainment, food, publishing, clothing, and personal care products. Global industries
would include pharmaceuticals, automobile, chemicals, construction equipment, medical
equipment and telecommunications.

Multinational corporations (MNC) are corporations that have achieved a certain
level of business activity in multiple countries. There is still a certain amount of
autonomy between the corporate organizations in each country and between markets. As
the differences between markets diminish, e. g. products become attractive in multiple
countries and the organization begins to view markets and strategies on a broader basis,

these companies could be considered transnational. When a corporation takes an

4

5

internationally integrated and worldwide view of its location decisions in order to take
advantage of coordinating on a worldwide scale, these corporations would be considered
global (Bohlin and Granstrand, 1994).
Patterns in the Traditional View

The traditional view of international expansion has evolved out of two schools of
thought: the Uppsala Model, named after the university in Sweden where the theory was
originally developed, and the Innovation Model, a conceptualization of several scholars
from North America (Knight & Cavusgil, 1996). Both theories primarily focused on the
international expansion process of manufacturing firms. According to Johanson and
Weidersheim-Paul (1975), the researchers who developed the Uppsala Model. firms
follow four distinctive stages of gradually increasing foreign involvement on their way to
becoming fully internationalized. These stages are:

Stage 1: No regular export activities

Stage 2: Export via independent representatives

Stage 3: Establishment of an overseas sales subsidiary

Stage 4: Foreign production/manufacturing
The model emphasizes that the process involves an incremental approach through the
acquisition, integration, and use of knowledge concerning foreign markets as well as
successively increasing commitment to those markets (Knight & Cavusgil, 1996). As a
company explores new markets, more and more knowledge is acquired and integrated
into the firm's competitive strategy. This knowledge then enables it to expand into other
markets. The theory assumes that the process of learning occurs primarin through
personal, on-site experience, and that management will not commit more and more
resources without this incremental personal knowledge.

Expansion into other markets follow a pattern. According to Johanson and
Vahlne (1977), the firm will enter new markets with increasingly greater psychic

distance, where psychic distance is defined as aspects of language, culture, business

practices, and industrial development which tend to reduce the efficiency of information

6

flows between the firm and the market. The model, therefore. assumes that a firm will
first choose markets that are more familiar and that they understand best. Only later.
when there is sufficient knowledge and experience will the firm expand into more
culturally dissimilar markets.

The process of internationalization, according to the Uppsala Model is a slow and
gradual process. Johanson and Vahlne (I990) emphasize that the slowness of the
process, due to the incremental nature of acquiring knowledge, may be sped up
considerably under one or more of the following conditions: ( 1) when the firm is large,
possessing substantial resources which minimize the consequences of rapid commitment;
(2) when market conditions are homogeneous and stable, making application of existing
knowledge relatively straight forward; and (3) , when the firm has significant experience
with similar markets, permitting wholesale transfer of relevant knowledge.

The Innovation Model of internationalization, based upon the work of Bilkey and
Tesar (1977), Cavusgil (1980), Czinkota(1982), and Reid (1981), regards the process as
resulting from a series of management innovations that occur within the firm. According
to Bilkey and Tesar (1977), the stages in this process are as follows:

Stage 1: Management is not interested in exporting.

Stage 2: Management is willing to fill unsolicited orders, but makes no effort to

explore the feasibility of active exporting.

Stage 3: Management actively explores the feasibility of active exporting.

Stage 4: The firm exports on an experimental basis to some psychologically close

Stage 5: Tirgnfirrzn is an experienced exporter.

Stage 6: Management explores the feasibility of exporting to other more

psychologically distant countries.
Cavusgil (I980) summarizes the major research findings on the internationalization
process and makes three conclusions. First, internationalization is a gradual process,
progressing in incremental stages, over a relatively long period of time. Each stage

reflects increasing commitments of resources and managerial talent. Second, initial

involvement in exporting and subsequent steps toward greater internationalization can be

7

viewed as innovations within the closed environment of the firm, not unlike adoption of a
new production method. Third, firms appear to intemationalize without much rational
analysis or deliberate planning.

Modes of International Involvement

There are various modes through which companies can pursue international
involvement As indicated in the last section, international involvement tends to progress
in a number of stages, so, therefore, the mode is dependent upon which stage the
company is in. The most common mode of international involvement is export, either
directly from the home market or through a foreign distributor. If a product cannot be
exported efficiently due to size, weight, character, or other internal factors, the company
has the option of licensing its technology to foreign partners as a way to begin the
internationalization process. Licensing is a way to minimize the company's risk. If the
product is a service, such as a restaurant, franchising is a more common method.

As a company matures in its international involvement, it may choose to establish
subsidiaries in key markets to export and sell its products. This allows the company to be
closer to its customers and be in a position to respond more readily to customer concerns.
If the company continues its internationalization process and sees a strategic need for
production facilities closer to key markets, it may choose to directly invest in facilities to
provide this capability. This investment, referred to as foreign direct investment (FDI)
could be in a joint venture, in the purchase of an existing firm (in part or wholly) or in
new facilities.

Telecommunication as a Technology-based Service Industry

Most of the research presented so far has focused on manufacturing industries that
create physical products that are sold. The internationalization of service industries is a
special case and has unique characteristics. Service industries typically do not have

products to sell, rather they offer expertise and knowledge. According to Bohlin and

8

Granstrand (1994), internationalization of service industries is less developed than
internationalization in manufacturing industries. According to Dunning (1991). foreign
direct investment (FDI) in services follow rather than lead FDIs in manufacturing
industries. Management consultants. banks, insurance companies, travel agents, hotels.
telecommunications, etc. comprise what would be considered service industries.

The telecommunications industry is unique in that it is a service industry
dependent upon a physical network infrastructure. In some sense it relates to
manufacturing industries in that it is capital and technology intensive. A technology-
based service industry is, therefore, an industry that provides services, the provision of
which requires technology to a considerable extent (Bohlin and Granstrand, 1994). This
technology can be embodied, e. g. in a network, or disembodied, e.g. in the technical
knowledge of a computer consultant. Table 1 classifies service industries according to
their technology and capital intensity. You will notice that telecommunications is high
on both counts.

As a network industry, telecommunications could be considered an intermediate
service, in that it is not directly consumed but is embodied in final products or other
services (Dunning, 1989). Telecommunication is used, for example, to connect
customers with suppliers, e. g. to place orders. arrange shipment of products, etc. In this
context it facilitates the transaction and is, therefore, an intermediate service. In the
residential context, however, it would be a final service.

Telecommunication services comprise technological knowledge embodied in its
transmission lines, switches, computers. databases, etc. as well as managerial knowledge
which allows services to be conceived and implemented (Johansson, 1994). Unlike other
network-embodied services such as gas, electricity, and water which provide a service
with one "variant", telecommunication services offer an infinite number of variants

(Johansson, 1994). For example, water, gas and electricity all come in one flavor, so to

9

Table l - Classification of Service Industries

 

 

Capital Intensity Technology Intensity
H igh-tech Services Low-tech Services “N o-tech” Services
High Capital Telecom Services Rescue services Rental Services
Intensive Services
Medical Services Entertainment Hotels and
(surgery, etc.) Accommodation Services
Retailing/wholesale
Surveillance and security Religious Services
services Gambling
Defense Services Disposal Services
(sewage, garbage, etc.
Energy Services
Water Supply

Transportation Services
Financial Services

etc.
Low Capital University and Higher Entertainment Social Services
Intensive Services Edu‘mi‘m' SCMCCS
Financial Services Insurance Services
Consultancy Services
(engineering, data, etc.) Restaurants
Medical Services Consultancy Services
etc. (management, legal,
advertising. accounting
etc.)
Police Services Travel Agencies

Cleaning, Housekeeping

 

 

 

 

Source: (Bohlin & Granstrand, 1994)

10

speak, whereas telecommunications services are offered in many different flavors. At
home. you can have residential voice service alone (basic service) or have the basic
service with a multitude of other services including caller ID, call back. voice mail, etc.
which are referred to as value-added services. In the business context, value-added
services could include data transmission, electronic mail, virtual private networks, etc.

In discussing the internationalization of telecommunication companies, it is
important to remember the nature of this business, i.e. offering services upon a network
infrastructure. Each country or region has distinct regulatory and market characteristics
that determine when and how telecommunication companies can expand. National
telecommunication carriers have had bilateral agreements for a long time that defined
how their individual networks would interconnect and how the traffic would be billed.
Only recently, as regulatory constraints have been lifted, have telecommunication
companies begun to enter each other's market as competitors or allied themselves in
strategic partnerships. The next section discusses the role of Foreign Direct Investment in
these partnerships.
Foreign Direct Investment in the Context of Internationalization

Foreign direct investment (FDI) plays a prominent role in the internationalization
process. FDI is defined as a monetary transfer from one country to another intended for
the purchase of another company or manufacturing facility (in whole or part) or for the
construction of new facilities. Dunning (1981) proposes three conditions that need to be
met for a company to invest abroad. His "Eclectic Theory" defines these three areas as
"firm-specific factors ", "internalization-specific factors ", and "location-specific factors. "

F inn-specific factors comprise the firm's assets including knowledge, technology,
management skills, capital, and access to resources. These assets provide the foundation
upon which the company is competitive. Internalization-specific factors determine if the

company needs to keep these assets within itself, in effect, internalizing them, instead of

11

selling or leasing them abroad. Services that require internalization usually are
knowledge intensive and could be considered a core competency. By safeguarding these
strategic competencies internally, the company is in a stronger position to be able to
achieve the advantages from internationalization, e. g. to be in a stronger position to
negotiate joint ventures, and to work with consortia on projects requiring large
investments. Working in a consortium helps the company to share the costs among the
partners. Location-specificfactors influence where a company invests. These factors
including market size, political stability, local resources, etc. reveal to the company how
long they may expect to grow their business in the chosen country (Dunning, 1981).
Within the telecommunications industry, recent evidence shows that there is an
increasing number and amount of FDIs (Johansson, 1994). As home markets mature or
are confined through regulation, telecommunication companies are motivated to seek
profits abroad (Bagchi-sen and Das, 1995). According to Kurisaki (I994), FDIs can take
on a number of forms. They could comprise purchasing shares in a telecommunications
operator, establishing a joint venture, obtaining a license or franchise for the operation of
telecommunication services, or merging with or acquiring providers of
telecommunication services other than telecommunications operators.
Telecommunication services are classified as either basic or value-added. The
form of FDI chosen depends upon which type of service will be offered. As we will see
in Chapter 2 there are a number of factors that influence the choice of FDI. Most
prominent of these factors is the regulatory environment of the country where the
investment will take place. Many governments have required FDI as a precondition to
becoming a domestic service provider. Some countries limited the foreign ownership to
under 50 percent. In Poland and Hungary, for example, foreign investors were not
allowed, initially, to have a majority stake (Bennett, 1995, April)(Bennett, 1995,

December) and had to find local partners.

12

There are a number of advantages companies are seeing in FDIs. The main
advantage is that it provides direct presence or influence in the target country.
Companies are closer to their customers in this way and can respond more readily to
market changes. Another advantage is that FDI allows a company to become globally
known in a relatively short period of time. Within the context of telecommunications,
FDI has allowed companies to rapidly enter a telecommunications market (Kurisaki,
1994) and to intemationalize. The next section discusses this rapid expansion among
telecommunication service operators.

Recent Research Findings

As was mentioned in the last section, FDIs have generally been increasing in
number. Over the last ten years within the telecommunications industry, there has been a
surge of growth and interest in internationalization. A number of factors have contributed
to this growth including a worldwide trend of regulatory reform which has opened
formerly monopoly services to competition. (Chapter 2 discusses this in more detail.)
Prior to this period there was minimal internationalization going on.

In his look at the internationalization activities of 25 telecommunication
companies, Johansson (1994) has found some interesting patterns. (see Tables 2, 3 & 4)l
Johansson documents the activities of telecommunication companies into three regions
including into Europe, South East Asia and into South America. For Europe, he has
limited the list to companies active in at least five countries in the region. For South East
Asia, he limits the list to companies active in at least three countries. For South America,
he limits it to companies active in at least two countries.

The first pattern found was that there were early entries into one of the major

markets in a region in the late 19805. According to Johansson (1994), the main reason

 

1Johannson's research focuses on the internationalization into three regions, European countries, South
East Asia and Australian countries. and Latin American countries. The level of internationalization is the
total number of projects rounded to the nearest 5.

13

Table 2 - The Internationalization of Telecommunication Companies into Europe

 

 

1986-
1987

 

1988-1989

  
 

1990-1991

1992-1993

 

Austria. Belgium. Czech.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HT 30 Denmark. Germany. Ireland.
Italy. Netherlands. Spain.
Sweden, Switzerland
Cable & Germany France, Ireland. Italy, Belgium. Germany.
Wireless 50 Poland. Russia. Spain, Latvia. Netherlands,
Sweden Switzerland
133]) Netherlands. UK Austria. Belgium. Czech. Belarus. Denmark.
Telekom 20 France, Hungary. Poland, Estonia. Finland.
Romania Russia, Slovakia, Italy. Kazakhstan,
Switzerland Latvia. Lithuania
France Germany, Czech, Denmark. Finland, Canada. Greece,
Télécom 35 Belgium, Italy. Germany. Hungary. Iareland. Spain
Switzerland, UK Luxemburg. Netherlands.
Norway. Poland. Portugal,
Romania. Russia. Sweden
I l 1 l0 Germany Belgium. Czech. France, Bulgaria. Ukraine
Telecom Sweden. UK
. Denmark. Estonia. Finland, Hungary. Russia.
Tel'a IO France, Latvia. Netherlands, Switzerland
Norway. UK
Ameritech 20 UK Austria Denmark. France. Norway
Germany. Italy, Netherlands.
Poland Spain. Switzerland
86" Austria, France, Belgium Czech, Russia. Ireland. Norway.
Atlantic 15 Germany, Italy, Spain Sweden
Neth.. Switz., UK
Bell South 20 France. Switzerland Bel gium. Denmark.
UK Germany. Netherlands.
Poland
NYNEX 20 France. Gibraltar, Belgium. Czech. Germany
UK Netherlands
Pac'fiF IO Germany, UK Portugal Bel gium. Denmark.
Telesrs Spain. Sweden
Czech. France. Belgium. Bulgaria,
U'S' West 20 Hungary, Neth.. Gennany, Lithuania. Malta,
UK Norway. Poland, Romania.
Russia, Sweden, Ukraine
AT&T 40 Ireland, Russia Austria. Belgium, France. Denmark, Ireland,
Germany. Italy, Poland, Kazakhstan.
Netherlands, Russia, Spain, Portugal. Ukraine
Sweden. Switzerland. UK
Sprint 35 Germany, Austria, Belgium. Denmark. Poland
Netherlands, Finland. France. Ireland,
Switzerland, UK Italy. Norway. Portugal.

 

 

 

 

 

Russia. Spain, Sweden

 

 

1: Level of Internationalization, approximately rounded to closest five. Source: (Johansson. I994)

 

14

Table 3 - The Internationalization of Telecommunication Companies into S. E. Asia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1986-
Telco I <1986 1987 1988-1989 1990-1991 1992-1993
a
KDD 20 South Korea. Ausualia. China. Hong Cambodia
Singapore Kong, India. Malaysia.
North Korea
Singapore 15 Japan Australia, H0118 Kong. China. Vietnam
Telecom Malaysia, Mauritus, Sri
Lanka. Thailand
Telstra 20 Vietnam Cambodia. Hong Kong. India. Indonesia.
Japan. Laos. Malaysia, New South Korea.
Zealand. Pakistan. the Singapore. Taiwan
Philippines, Thailand
31‘ 30 Japan Australia, Hong Kong. Indonesia. Malaysia,
Thailand New Zealand. the
Philippines. S.
Korea. Singapore,
Taiwan
Cable & 50 Japan Australia, China. South
Wireless Korea
France 35 Japan China. Australia, Bangladesh, Hong Kong. India
Télm Indonesia, caHICfmn. S. Korea,
Singapore Thailand
Bell I 5 Indonesia, New Zealand. Japan
Atlantic South Korea, Taiwan
Bell South 20 Australia China India. New Zealand India
NYNEX 20 China, Australia. Hong Kong. Thailand
South Korea Indonesia, Japan. the
Philippines, Singapore.
Taiwan
AT&T 40 Hong Kong. Australia, China. Indonesia,
Japan. S. Korea New Zealand. the
Philippines, Singapore,
Taiwan
MCI 60 New Mam China. Japan Australia
Sprint 35 Japan South Korea Australia. Cambodia. Guam. China, Indonesia.
Hong Kong. Malaysia. Sri Lanka
Singapore. Taiwan, Thailand

 

l = Level of lntemationalization, approximately rounded to closest five. Source: (Johansson, I994)

 

 

1 5
Table 4 - The lntemationalization of Telecommunication Companies into S America

 

 

 

 

 

 

 

 

 

 

 

1986-
TeIco I <l986 1987 1988-1989 1990-1991 1992-1993
=—= .
Cable & 50 Caribbean
Wireless (16)
France 35 Mexico. Argentina. Brazil
Telecom Venezuela
Telefonia 10 Chile Argentina. Venezuela Puerto Rico
STET 15 Argentina, Brazil. Chile
Bell South 20 Argentina. Mexico. Chile. Uruguay.
Puerto RICO Venezuela
GTE 15 Brazil Mexico, Venezuela. Dom.
Rep.
AT&T 40 Mexico, Brazil.
Columbia Venezuela
MCI 60 Mexico ‘B/razil. Columbia.
enezuela
. 35 Brazil, Mexico. Guatemala, Mexico. Argentina.
Spnnt Puerto Rico Venezuela

 

 

 

 

 

 

 

 

 

I = Level of lntemationalization, approximately rounded to closest five. Source: (Johansson, 1994)

for this early entry, prior to any regulatory reform and liberalization, was that
telecommunication companies were following large multinational customers as they
expanded abroad. This seems to confirm Dunning's (1991) conclusion that foreign direct
investment (FDI) in services follow rather than lead FDIs in manufacturing industries.
Another pattern regards the facilitating factor of technological development in
networks, e.g. digitization, cellular, etc. as well as in services. New technologies were
being developed that allowed services to be offered that bypassed traditional solutions of
the national telecommunications carrier (PIT - Post Telegraph and Telephone). In many
countries, licenses were being offered to take advantage of these new technologies.
Looking at regulatory reform and liberalization of markets reveals another pattern
in internationalization. Many of the 25 telecommunication companies, took any and all

opportunities to invest abroad. Wherever liberalization opened up an opportunity, many

16

companies sought after that business. According to Granstrand and Johansson ( 1993),
companies seem to have been following a "trial and error" strategy when
intemationalizing. This seems to confirm Cavusgil's (1980) research that firms appear to
intemationalize without much rational analysis or deliberate planning.

Johansson (1994) also looked at the driving forces that are encouraging
telecommunication companies to intemationalize. (see Figure 1) According to
Johansson (1994), one main driving force is changed customer demand. As was noted
earlier, telecommunication companies followed their multinational corporations abroad.
These customer began to demand more global services including virtual private networks.
etc. Another main driving force is the liberalization of telecom services. The last main
driving force encouraging telecommunication companies to intemationalize is the
technological development in networks and services. Chapter 2 will discuss these

factors in more detail.

 
   
    

Technological
Development in
Networks and
Services

 
   
   

   
   

 

   

 
     
     
 

 

. _ . Internationalimtion 7 .
Lrberahmtron of the Change In
of Telecom Telecommunication (listomar
Servrces Industry man

 
 

 

Figure l - Major Determinants of Internationalization in Telecommunications

Ruhle ( 1995) has looked at the driving forces of 223 internationalization attempts
by 23 carriers to enter foreign markets by foreign direct investment (FDI) in the
installation and operation of fixed telecommunications markets. Using Dunning's

Eclectic Theory he has tested a number of hypotheses and has come up with some

17

interesting results. There are a number of firm-specific, or using his terminology,
ownership specific advantages (0) that contribute to the explanation of
internationalization. These include revenue development (e. g. when there is dynamic
development and performance improvements of their service business in their home
market), cash flow, range of service provision, the degree of private ownership of a
telecommunications operator (e. g. companies having higher private ownership are more
likely to pursue international opportunities), previous international activity and the
location of target markets (e. g. investments are geared to specific regions and depend
more on geographical adjacency rather than on traditional, cultural, political or economic
factors (psychic distance». All of these factors influence the process of
internationalization. Interestingly enough, size of revenues, number of main lines
installed, revenue per employee, main lines per employee, debt ratio, ability to meet
demand, network digitization, and, as was mentioned, psychic distance were all found not
to have any influence on the internationalization process.

Ruhle's research did not focus on internalization factors (I), which are complex to
analyze, but did highlight some location-specific (L) advantages that contribute to the
internationalization process. For example, when a company has experienced competition
in their home market or knows that there will soon be competition by some specified
date, this company will much more likely pursue international opportunities. In the
bidding process, Ruhle's research found that companies favor open and transparent
regulatory processes. The other location-specific factors that are influencing the
internationalization process include the GDP per capita abroad, the length of the waiting
list and the direction of international telephony traffic. The one location factor found not
to be influencing the foreign entry process is the market structure of the target country.

Bauer (1995, "The anatomy...") has also analyzed the entry patterns of a number

of telecommunication companies and has identified three strategies of international

18

involvement that are followed, sometimes in parallel. The first strategy is service
diversification. As market liberalization began to allow companies to lease lines and
provide value-added services, companies began to enter into bilateral agreements with
local telephone operators to provide international voice or value-added services. In
markets where the network facilities are important for high quality service, such as the
markets for corporate services, carriers such as AT&T, BT, Cable & Wireless, MCI or
Sprint, began to use a second strategy of building their own (global) backbone networks
and securing a presence in important international markets. Other satellite-based
consortia, e.g. Iridium or Inmarsat, are following a similar strategy. According to Bauer
(1995, "The anatomy..."), these strategies, so far, have led to limited cross-penetration of
foreign markets via foreign direct investment, maintaining the predominantly national
structure of the industry.

In light of the continuing gradual liberalization of telecommunication services, the
most recent strategy identified by Bauer (1995, "The anatomy...") is the increasing direct
approach of foreign direct investment, joint ventures, and alliances that mark the
beginning of a more significant cross-penetration of national markets. With this strategy,
dominant or monopoly carriers, such as Deutsche Telekom, are taking a more prominent
role. Of 190 recent projects by 20 different carriers, Bauer has found that 23.2% target
Asia, 21.6% target Eastern Europe and the Newly Independent States (NIS), 18% focus
on Western Europe, 16.8% target South and Central America, 8.4% target Australasia and
Oceania, 7.9% focus on North America (mostly Canada), and only 3.7% of the projects
focus on Africa and the Middle East.

Strategic Alliances in the Context of lntemationalization

As Bauer notes (1995, "The anatomy..."), the liberalization of the

telecommunications market is increasing foreign direct investment and market cross-

penetration. Strategic alliances are playing a major role in this activity. A strategic

19

alliance is defined here as any cooperative agreement between two or more companies
that is designed to mutually benefit each participant, e. g. to gain technological expertise.
market access, etc. These agreements can be equity or non-equity based with long or
short-term objectives. As we will explore in the next chapter, global competition is
influencing the process of internationalization within the telecommunications industry.
Companies are aligning themselves with companies in other markets to able to offer
global services. Many of the national carriers and the RBOCs do not have the
international network nor the capital to create networks to be able to offer global services.
So many are seeking partners that complement their own services and/or provide access
to desired markets. This cooperation allows the members to achieve "critical mass"
within the market and take advantage of business opportunities that they would otherwise
not be able to pursue alone.

Telecommunication manufacturers, such as Siemens, have had some role in
strategic alliances and joint ventures, but not major roles. As we will explore in Chapter
4, Siemens is an equity partner with Deutsche Telekom in two of a total 22 projects
studied. As a major supplier to Deutsche Telekom, they are still benefiting indirectly
from the other projects.

Internationalization Model for Telecommunication Companies

From the research presented in the previous sections, a conceptual model of
internationalization of telecommunication companies can be formulated (see Figure 2).
There are a number of firm-specific factors that greatly influence the decision to
intemationalize. Management support in the form of the commitment of staff and
resources is important for the expansion. Revenue development and cash flow to fund
the effort are also key factors. The greater the range of service provision in the home
market the more likely the company will seek opportunities abroad to offer similar

services. Market knowledge of the target market and market opportunities are also

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21

important to be able to take advantage of opportunities. Previous international activity is
also a key factor in the internationalization process. The more experience a company has
internationally the more likely the company will seek further opportunities.

There are also contextual factors that are influencing the internationalization
process. For example, global trends of regulatory reform/liberalization, technological
development, increasing customer demand for international services and the
internationalization of customers, increasing competition globally and in the home
market, and major political changes (e.g. in Eastern and Central Europe) are all
influencing and affecting the internationalization process. (Chapter 2 discusses these
contextual factors in more detail.)

The outcome of the internationalization process has taken on a number of forms.
Telecommunication companies are pursuing a number of strategies to intemationalize
their operations. Foreign direct investment is prominent among them. The various
investment strategies include purchasing shares in a telecommunications operator in the
target country, establishing a joint venture, obtaining a license or franchise for the
operation of telecommunication services, and merging with or acquiring providers of
telecommunication services.

Strategic alliances have also been prominent. By aligning with partners in
important markets, national and local carriers are coordinating their efforts to provide
services that are global in scope. By working together, these alliances attempt to
complement each other's technical and management expertise, to gain access to closed or
restricted markets as well as achieve "critical mass" in the marketplace. Together, these
alliances are able to take advantage of opportunities the individual companies could not
otherwise pursue.

In comparing the internationalization of telecommunication companies with the

"Traditional” model there are some similarities. The process of internationalization has

22

been incremental. Rarely were multiple projects started at the same time. Expansion
required management approval and an ever greater amount of resources. Another
similarity is that telecommunication firms intemationalize without much rational analysis
or deliberate planning, it has been more of a ”trail and error" strategy.

The differences between the "Traditional" and the ”Telecom" models comprise
the pace and place of internationalization. The "Traditional" model says that the pace of
internationalization is a slow gradual process dependent upon the increasing acquisition
of foreign market knowledge. The "Telecom" model, however, reveals a rapid pace of
internationalization. The "Traditional" model also says that companies expand into
familiar markets that they understand first and later into more culturally divergent
markets, e.g. "psychic distance" According to Ruhle (1995), expansion has been geared
more to specific regions (e. g. Europe, Asia, South America) and depends more upon
geographical adjacency rather than on traditional, cultural, political or economic factors
(psychic distance).

It will be argued in Chapters 3 and 4 that Deutsche Telekom fits this "Telecom"
model of internationalization remarkably well. But first, in Chapter 2, the influencing

factors on the internationalization process will be discussed in more detail.

Chapter 2

INTERNATIONALIZATION OF TELECOMMUNICATION COMPANIES -
INFLUENCING FACTORS

The internationalization process of telecommunication companies is being
influenced by a number of factors. These factors together have shaped and are shaping
the patterns of internationalization globally. The historical context gives the backdrop to
the global regulatory reforms that are taking place. With the pace of technological
network development as well as the pace of internationalization in other sectors, there is
increasing global competition in telecommunications. Carriers are joining together in
strategic alliances to meet this competition and to be able to meet the present and future
needs of their global customers. Political changes around the world are also influencing
and providing market opportunities. The fall of Communism in Central and Eastern
Europe has given many telecommunication companies the opportunity to expand into
these emerging markets. We will discuss these factors in more detail below.

Historical Context

After Alexander Graham Bell patented the telephone in 1876, there were a
number of private companies that offered telephone service in many countries. After the
Bell patents expired in 1893-1896, a great deal of competition was generated. The Bell
Company from this period on attempted to increase its control over much of the networks
in the US. and Canada. It eventually became the monopoly provider in most areas. The
Bell Company, later renamed AT&T, also operated some networks abroad, but was
forced to transfer its holdings to I'l'l‘ in 1925 by agreement with the US. government

(Bohlin & Granstrand, I994).

23

24

In Europe and other parts of the world, after some initial private attempts at
setting up and running telephone networks, most were nationalized around the turn of the
century and became agencies of the respective governments. In Germany, the telephone
system was first run by the military and was considered a national security concern. In
Austria, the system was at first private, but due to poor quality was later nationalized.
After being nationalized, the telephone network was typically integrated into existing
postal and telegraph offices. This organizational structure became known as the FIT
(Post, Telegraph, and Telephone) model and was common throughout Europe. Another
wave of nationalizations occurred during the 1940s - 1960s mostly in developing
countries.

There are a number of distinct differences between the US. "model" and the FIT
"model". Besides the fact that one promotes private ownership and the other public
ownership, each has and is influencing the internationalization process. With private
ownership and monopoly status, AT&T in the US. and the Bell Company in Canada
were gradually regulated by first local, state and later federal agencies. The Federal
Communications Commission (FCC) was founded by the Communications Act of 1934
in growing concern over AT&T's power as a monopoly and as a means to insure the
social goal of "universal service". The regulatory and operational functions of
telecommunications were, therefore, separated.

With the FIT model on the other hand, regulatory and operational functions were
not separate. It was a part of the government and subject to political influences. As a
lucrative business, telecommunications often became a "cash cow" subsidizing other less
efficient governmental agencies. As a government agency, social goals of infrastructure
provision, industrial policy, e.g. nurturing national industries and champions, were much

easier to accomplish and to coordinate.

25

Global Trends of Regulatory Reform

Many countries are in the process or have already reformed regulations governing
the provision of telecommunication services. Market liberalization (e.g. the introduction
of competition), corporatization (e. g. the reorganization of a state agency into a corporate
structure), and privatization (e. g. the selling off of state-owned companies) are the key
reforms being implemented. Initial partial liberalization has led to further pressure to
liberalize. This environment of regulatory reform has encouraged telecommunication
companies to look internationally for opportunities to expand. As international markets
have opened up, telecommunication carriers have gone after these opportunities. In the
following sections we will look at a number of key countries or regions that have begun
the regulatory reform process.
United States

Reform first began in the United States in 1959 when spectrum was first opened
up for corporate microwave systems (Bauer, 1995). During the 1960s and 19703 into the
early 19803, the pace of reform continued with the introduction of competitive services
and the breakup of AT&T in 1984 into a long distance company and equipment
manufacturer and the Regional Bell Operating Companies (RBOCs). The terms of the
breakup limited the business activities of the RBOCs which ultimately led many to
pursue growth opportunities internationally. Competition was introduced in the long
distance market as well as in the customer premise equipment (CPE) market. Reform has
continued in the United States with the recent passage of the Telecommunications Act of
1996. This act opens up competition in the local loop (e.g. local telephone service) as
well as frees up some of the major limitations on the RBOCs' business activities albeit
with certain competitive safeguards. The act eliminates the separation of cable,
telephone, and wireless communication companies and allows competition between each.

The RBOCs are now allowed to offer video and wireless services. Cable companies can

26

now offer telephony services, etc. Since its passage there have been a number of strategic
alliances and mergers announced.
United Kingdom

British Telecom, the national carrier, was a typical P'I'l‘ owned by the
government. As a government agency, it had all the typical PTT problems. Reform first
began in the United Kingdom in 1969 when telecommunication services were separated
from the Post Office and later during the early 19803. During this later period, regulatory
and operational functions were separated and competition was introduced. A regulatory
body, OFTEL (Office of Telecommunication), was created and in 1981, British Telecom
was corporatized and given a mandate to seek opportunities abroad. Corporatization is
the process of transforming the FIT into a structure semi-autonomous from the
government. The new corporate entity may still be government owned, but it controls its
own managerial and administrative functions (Noam & Kramer, 1994). An international
division was also established. Cable & Wireless, the overseas service carrier was also
privatized. A division of Cable & Wireless, Mercury Communications was established to
compete with British Telecom in the local loop. ln 1984, British Telecom was privatized.
Since reform began, a number of the RBOCs have taken advantage of the liberalized
market and began trials of video service. Since the passage of the Telecommunications
Act of 1996 in the US. these companies can now utilize the knowledge gained abroad in
their home market. This is one benefit of internationalization.
Japan

Japan's model for telecommunications was the typical PTT (Oniki, 1993).
Domestic telecommunications was provided by Nippon Telegraph and Telephone (NTT),
a government organization. lntemational services were provided by Kokusai Denshin
Denwa Co., Ltd. (KDD), a quasi-private corporation. Both providers had legal

monopolies for the services they provided. In 1985, NTT was privatized and was given

Z7

authority to begin international operations. The telecommunications services market.
both domestic and international was liberalized and opened to competition.
European Union

Within the European context, formal telecommunications reform began with the
1987 Green Paper on Telecommunications. This document called on the member states
to pass legislation that would fully liberalize the supply of terminal equipment. It called
for the elimination of all restrictions on competition in value-added services, the
harmonization of technical standards, the development of common principles of Open
Network Provision (ONP), the separation of the operational and regulatory functions of
the state telecommunication providers, the establishment of anti-competitive monitoring
provisions, a unified European approach in international negotiations, and recommended
monitoring the social impact of telecommunications development. It allowed, however,
member states to specify certain “reserved services” including network infrastructure and
“basic” services that could have special status, e.g. that could remain monopolies (Bauer
& Steinfield, 1994).

Reform continued with the issuance of the Green Paper on satellites in 1990
which called for the liberalization of the earth segment for both receive-only and two—way
terminals, free (unrestricted) access to space segment capacity (subject to licensing)
except for reserved services (local telephony & network infrastructure), full commercial
freedom for space segment providers including direct marketing of satellite capacity to
service providers and users (subject to licensing), and harmonization measures that would
facilitate European-wide services (Bauer & Steinfield, 1994). In 1994, the Green Paper
on mobile and personal communications was issued that called for the development of a
European-wide market for mobile services, equipment and terminals and to promote the
evolution of the mobile communications market into mass personal communications

services, with particular emphasis on pan-European services (Commission of the

28

European Communities, 1994). Further reform called for the liberalization of the
telecommunications infrastructure and cable television networks. In the Green Paper
issued in 1995/1996, the European Commission called for full liberalization of the
infrastructure and services by January 1, 1998 (Commission of the European
Communities, 1995).

A Green Paper issued by the European Commission, actually is a legally non-
binding communication. Resolutions supporting the implementation of its provisions
must be passed by the European Council and the European Parliament. It is then up to
member countries to enact legislation to implement the provisions (Bauer & Steinfield,
1994). Thus, a directive is a basic guideline, the implementation of which will differ
depending on the individual approaches taken in each country (Steinfield, 1994).
Throughout the European Union, telecommunication legislation has been passed in most
countries, although the reforms implemented vary somewhat between them. Most have
acted to separate regulatory and operational functions. Some have chosen to separate the
regulatory body from both the operator and the government ministry and create an
independent body, e. g. in England with the establishment of OFT EL. Other countries
have created the regulatory body as an agency directly responsible to the minister of
communication, e.g. France (Steinfield, 1994). The liberalization of services has been
implemented in varying degrees throughout Europe. The approaches range from the
more liberal approach in the United Kingdom, to a more restrictive approach in France.
Value-added services, on the other hand, have been opened to competition in most of the
member countries. The implementation of the other Green Papers are progressing.
Germany, for example, recently passed legislation that would Open basic services to

competition at the end of 1997. (see Chapter 3)

29

Technological Development

Another influencing factor contributing to the liberalization of markets and.
therefore, on the internationalization process of telecommunication companies in
general, is the rapid technological advancement in network architecture and software
development. The convergence of computers and telephony has opened up tremendous
market opportunities. Digitalization has been the one technological innovation which has
transformed the telecommunications system the most during the last century. Now,
digital streams of data can flow worldwide. Voice, graphics, text as well as video can be
digitized and sent through fiber optic cables, microwave transmission systems or through
satellite transceivers. With a digital network system interconnected worldwide, new
services such as electronic mail, the lntemet, virtual private networks, etc. are now
possible. These new technologies have allowed new players into formerly monopoly
markets. When the market has been liberalized and open to competition, foreign
telecommunication carriers have often partnered with local companies to offer these new
services.
Internationalization of Customers

As Johansson discovered in his research described in the last chapter, the
internationalization of telecommunication customers has had a profound influence on the
internationalization of telecommunication companies in general. As multinational and
global corporations expand, so their needs for secure and reliable telecommunications
expand. AT&T, Sprint and others, for example, expanded their international operations
when some of their keys clients internationalized (Johansson, 1994). As international
service options become affordable, more companies take advantage of these new

technological innovations and intemationalize their operations as well.

30

Increasing Global Competition in Telecommunications

As global regulatory reform creates more liberalized markets, telecommunication
companies are experiencing or will experience more and more competition both in their
home markets as well as internationally. Within the last few years, telecommunication
carriers have been pursuing strategic partnerships with other national carriers to be better
positioned to meet the competition at home and to be in a better position to offer global
services. For example, in 1991, British Telecom tried to start the "Syncordia" service. In
October of the same year, PIT Telecom (the Netherlands) and Telia (Sweden) started
"Unisource" (other companies joined later including Swiss PTT and Telefonica Espana of

Spain). Also In October, Deutsche Telekom and France Telecom announced a

 

partnership, Eucom, to offer value-added network services (VANS). In March of 1992,
these same partners announced a new partnership, Eunetcom, to offer business services.
In May of 1993, AT&T and 8 carriers in the Pacific Rim announced the "Worldsource"
service (Bohlin and Granstrand, 1994). One month later, British Telecom and MC]
announced plans to offer a global service called "Concert". In December of 1993,
Deutsche Telekom and France Telecom announced plans to join their international
businesses in "Atlas". A year later, the Atlas partners began to court U.S. Sprint to
expand the alliance across the Atlantic. The resulting alliance, "Global One" was
finalized in February 1996.

As noted above, there has been a great deal of activity among the major
telecommunication players. As we discussed in Chapter 1, the Regional Bell Operating
Companies also began to intemationalize and are members of a number of joint ventures
in Central and Eastern Europe as well as in South America. It remains to be seen whether
this process will continue at the same pace. As liberalization unfolds there will continue

to be opportunities to intemationalize and to compete on a global basis.

31

Political Changes in Central and Eastern Europe

Another influence on the internationalization process of telecommunication
companies has been the political changes that have occurred in Central and Eastern
Europe. With the fall of Communism in the late 19803, the newly independent states of
the former Soviet Union as well as the former Warsaw Pact countries began looking to
the West both politically and economically. Tremendous market opportunities were
created for telecommunication service providers and equipment manufacturers as these
countries began to rebuild after decades of neglect.

Although some of the countries have economic structures similar to such middle-
income countries as Portugal, Spain and Greece, their telecommunications networks
resembled those of much less developed countries (Moceni go & Paddock, 1995). Due to
underinvestrnent over the last 45 years, the telecommunication infrastructure and services
in most of the countries in Eastern Europe were in ill-repair or non-existent. Service was
also very poor at best in some places. Typically, penetration rates were low and there
was a huge unsatisfied demand for new service.

In East Germany, one official described the system as a patchwork of "pre-World

War 1] switching equipment stitched together by lead-sheathed copper cables wrapped
with paper insulation" (Protzman, 1992, March 11). Compared to Western standards.
70% of East Germany's central office switches were obsolete (Gronert, 1990).
Incredibly, many East Germans had to wait over 20 years for installation of new service.
When the two Germanys were united in 1990, there were 1.5 million unfilled applications
for service. Of these applications, the oldest was placed in 1961 (T elekom reports...,
1992). It was estimated that a minimum of DM 60 billion ($35 billion) investment would
be needed to rebuild the infrastructure up to Western standards (Griffiths, 1993).

The new governments of Central and Eastern Europe wanted to attract Western

investment. They set about, with the help of international monetary bodies, to begin the

32

process of telecommunications reform and infrastructure redevelopment. The national
telecommunications carrier was often corporatized and partners from the West were
sought to invest in the company and to provide technical expertise. Licenses were issued
for local service as well as mobile systems covering major metropolitan areas.
Essentially, the redevelopment was from the ground up, so newer digital technologies
were implemented. Typically a digital fiber optic overlay network and business services
were implemented first. Local service expanded as revenues or investment allowed.
There was usually also some provision in the license that required the expansion of
services within a given amount of time. As we will see with the case of Deutsche

Telekom in Hungary, the awarding of licenses were not necessarily to the highest bidder.

 

In this Chapter we have discussed a number of factors that are influencing the
internationalization process of telecommunication companies in general. As regulatory
reforms are creating new market opportunities, telecommunication companies are seeking
out those opportunities. Deutsche Telekom is a good example of a carrier seeking out
international Opportunities. In our "Telecom" model of internationalization, the
environmental factors noted in this chapter have influenced and shaped Deutsche
Telekom's internationalization strategy. In the next few chapters we will look at the
German carrier Deutsche Telekom and show how its efforts to intemationalize follow this

"Telecom" model quite closely.

Chapter 3
THE CASE OF DEUTSCHE TELEKOM

Introduction

Germany is in the heart of Europe and is one of the strongest countries
economically in the world. Germany’s telecommunications has been served by Deutsche
Bundespost, now called Deutsche Telekom, a traditional P'I'I‘ (Post, Telegraph, and
Telephone) monopoly, as well as its predecessor, the Reichspost. Dating from 1871
when the German Empire (Deutsches Reich) was founded, the Reichspost united the
postal services of the individual German states into a single public administration which
included telegraph and later telephone services. After World War II, Deutsche
Bundespost carried on this administrative monopoly through the years of the “economic
miracle” (Wirtschaftswunder), i.e. West Germany’s rebuilding of its industrial base and
the resulting economic boom.

As a typical post, telegraph and telephone (PTI') company, the Deutsche
Bundespost enjoyed a monopoly over all means of communication, including post,
telecommunications and the cable television system. It even had a banking service. Its
focus was the domestic market. The Grundgesetz, or the constitution, even outlined the
duties of this institution, i.e. domestic telecommunication services or services originating
in or ending in Germany, and forbid the company from engaging in business outside its
home market.

As we learned in the last chapter, global regulatory reform and liberalization were
changing the landscape for the telecommunications industry worldwide. Deutsche

Telekom’s revenues placed it first in Europe and typically third among the top

33

34

telecommunication companies in the world behind AT&T and NTT of Japan. Yet in this
climate of reform and a European Union deadline for full competition by January 1,
1998, Deutsche Telekom could not risk becoming isolated and stagnant at home.
Deutsche Telekom’s strategy for the future was to reform itself and to become a player in
the international arena.

Within this context, Deutsche Telekom began a process of reform and
transformation. The process of reform was accelerated, in part, after unification with East
Germany in 1990, with the demands of rebuilding the East’s antiquated
telecommunications system. It turns out that the knowledge acquired in transforming
East Germany was the calling card that Deutsche Telekom could use as it sought to
intemationalize its business in Central and Eastern Europe.

In the following sections, we will look closely at Deutsche Telekom's predecessor.
Deutsche Bundespost and the establishment of Deutsche Telekom as a separate entity, the
ramifications of regulatory reform on its structure and business focus as well as highlight
Deutsche Telekom's "Telekom 2000" project to rebuild former East Germany.

Deutsche Bundespost

Deutsche Telekom's predecessor, Deutsche Bundespost (DBP), as a prototype
PIT monopoly offered high engineering quality, slow response to user needs, and high
tariffs (Bauer, 1994). After World War II, the Postal Administration Law of 1953
established DBP's authority and defined its organizational structure in the post-war
Federal Republic of Germany (West Germany) (Witte, 1988). A parallel organization
called the Deutsche Post was established in the Soviet-occupied German Democratic
Republic (East Germany).

DBP's organization included telecommunication, postal and banking services. It
was given monopoly control of the national transmission network, switching systems and

telephones ("Poking..., 1987). It was headed by the Federal Minister of Posts and

35

Telecommunications who was a member of the political leadership in the federal
government. Given special legal status, DBP was allowed to keep its funds separate from
other governmental funds, to act independently, and to borrow money and issue loans on
the capital market in its own name (Witte, 1988). It was required, though, to pay
approximately ten per cent of its operating income back to the federal government each
year. In 1986, total revenues were DM 50 billion ($27 billion), making it the biggest
“services” enterprise in Europe (”Engaged...", 1987). Telecommunication revenues
constituted nearly seventy per cent of this total (Witte, 1988).

In the late 19803, the Bundespost employed approximately 500,000 people,
330,000 in postal and banking services and about 220,000 in telecommunications (Witte,
1988) The majority of these employees were civil servants, a special status in Germany
denying them the right to strike but also guaranteeing them a permanent job. This special
status was a problem for any reorganization, because civil servants could not be fired.
The Problems I

As with all bureaucracies there are inherent inefficiencies. The Bundespost was
no exception. Of the 1986 revenues stated above, only thirty per cent was generated by
the postal and bank employees, constituting sixty six per cent of the work force. Any
deficits had to be made up by the other sister divisions, usually telecommunications. This
drastically limited the telecommunication division’s ability to invest appropriately.
Figure 3 details the profit and loss in 1986 ("Poking...", 1987) The overall profit was
positive, but there was a huge deficit in mail delivery that had to be made up by the other
divisions.

As a monopoly provider, the DBP lacked customer orientation. For example in
1986, the average wait time to install a new telephone was approximately five weeks and
to install a telefax was six weeks. In comparison to the United States, wait times

averaged under a week ("Poking...", 1987). (see Figure 4) Long distance calls and

36

 

 

 

2 DM billion 1 - 0 + 1 2
I I I n 1
Telephone and Telegraph ‘4.1
_y Other

IBanking Services I

Savings Bank —-————-0

0— Account Transfers

0-— Other

7
I Postal Erervicesl

0 verall Profit

 

 

 

 

Figure 3 - Deutsche Bundespost's Profit and Loss per Division in 1986

 

I Telefax
I Telephone

 

 

 

  

 

U.S. Britain Japan Sweden France SwitzW. Germ.

Figure 4 - Average Wait Time For Installation, 1986

37

leased lines were expensive. According to a study at that time, West German high-speed
data transmission services were costing more than in other European countries and up to
15 times more than in America. As a result, Bank of America moved its computer center
from Frankfurt to London and some Japanese companies in Germany, such as Panasonic,
routed their home—bound telex traffic via London (”Poking...", 1987).
Regulatory Reforms
Postal Reform I

After much discussion and to fulfill the directives in the European Union's Green
Paper on Telecommunications of 1987, the West German government passed the
Deutsche Bundespost Constitution Act of 1989, effectively separating the operational and
regulatory functions of Deutsche Bundespost (Griffiths, 1993). The regulatory functions
of DBP, including frequency management, standardization, approval of terminal
equipment and regulation, became the responsibility of the “Bundesminister fiir Post und
Telekommunikation (BMPT)” (Federal Minister for Posts and Telecommunications)
(Griffiths, 1993). He was also given the responsibility of setting long-temr goals and
approving financial plans. Two other organizations were also given regulatory
responsibilities. The “Bundesamt fiir Post und Telekommunikation (BAPT)” (Federal
Office for Posts and Telecommunications) was given the responsibility of issuing licenses
for telecommunications installations, controlling the radio frequency spectrum, and to
ensure the adoption of standards. The “Bundesamt fiir Zulassungen der
Telekommunikation" (BZT) (Federal Office for Telecommunications Approvals) was
given the responsibility to test and approve telecommunications equipment for use on the
telecommunications network.

The operational side of Bundespost was split into three independent, state-owned
units: Deutsche Bundespost Telekom, Deutsche Bundespost Postbank, and Deutsche

Bundespost Postdienst The Postbank and Postdienst provide banking and regular postal

38

services respectively. Deutsche Bundespost Telekom provides telecommunication
services. In addition, Telekom was granted greater entrepreneurial independence to allow
it to better operate in an increasingly competitive telecommunications market (Griffiths,
1993). All three organizations reported to the Federal Minister for Posts and
Telecommunications.

The reform act also called for liberalization in some markets ("Deutsche Telekom
- Organizational...", 1994). Competition was allowed for some private networks (as long
as the origin and destination of the traffic was within the same company). Competition
was also allowed for services such as slow speed data, satellite services and mobile
communications.

The Role of Telekom - What really has changed?

The Constitution Act 1989 called for Deutsche Bundespost Telekom, later
renamed Deutsche Telekom to be set up as a separate entity. As an organization,
Telekom faced many challenges changing from a bureaucracy to a more competitive and
viable business enterprise. While being freed, in principle, from day-to~day political
intervention, Telekom still was a “public organization whose owner lwasl the federal
state, represented by the Minister for Posts and Telecommunications.” (Ricke, 1992)

Regarding services, Deutsche Telekom maintained a monopoly on basic services
including network infrastructure and voice telephony, which according to Germany’s
telecommunications law (Femmeldeanlagengesetz, or FAG) was to remain in Deutsche
Telekom’s hands ("German Telekoms...", 1991). The German Constitution limited the
company's sphere of business activity to telecommunication services within Germany,
and to international service that originated or terminated in Germany. Therefore,
Deutsche Telekom was not allowed to provide local telephone and other services outside
of Germany. On the financial side, Deutsche Telekom was still not independent. Deficits

in the postal services continued to be made up by excess revenues in the

39

telecommunications sector. In 1992, Deutsche Telekom paid DM 1.5 billion (8 1 billion)
to its sister divisions, enough to only cover half of the expected losses in those divisions.
In addition to this, Deutsche Telekom was required to pay taxes on its monopoly profits
to the central government (Postal Reform..., 1993).

Concrete Steps of Reform

At the end of 1989 and the following years, amendments were added to the
telecommunications law (Femmeldeanlagengesetz, or FAG) which liberalized some
sectors of the German telecommunications marketplace (Griffiths, 1993 ). The first
concrete step occurred in December of 1989, when a license was issued by the BMPT to
Mannesmann Mobilfunk authorizing the company to set up a mobile telecommunications
network (D2) that would compete with Deutsche Telekom’s own cellular (C1) and digital
networks (D1). At first, Deutsche Telekom tried to compete, but found its existing
organizational structure too cumbersome to respond to market pressures. So a subsidiary
was established, Deutsche Telecom Mobile (DeTeMobile) that was designed with the
customer in mind.

After the fall of Communist government in East Germany, Deutsche Telekom
began to plan strategically for the eventual reunification of the two Germanys. In the
summer of 1990, Telekom launched a new licensing scheme that allowed for two-way
interactive services permitting interconnection with the fixed public data network at both
ends of a connection (Griffiths, 1993) This allowed firms for the first time to set up
satellite links between East and West Germany and for them to use their own satellite
dishes for communication between offices in the East and across the former border
("German Telekom's Regulation...”, 1991).

The market for telephone terminal equipment (e. g. customer premise equipment
(CPE) was also opened to competition. Up to this time, telephones were leased together

with the basic service and, as a rule, were permanently connected to the network

40

("Report...", 1992). Customers now had the option to purchase licensed terminals from
major retail outlets instead of renting them from Deutsche Telekom. This essentially
opened up the market for foreign suppliers who could pass the type approval at the BZT.
Although this action opened up the market, customers had to pay 65 DM (German mark)
(approximately US$45) for installation of a universal jack. (Monopoly economics at its
best!) The BMPT set a goal for January 1, 1996 to have all universal jacks installed.

The liberalization of the telephone terminal market forced Deutsche Telekom to
streamline its procurement system and make it more flexible (Report..., 1992). Since
Deutsche Telekom does not manufacture its own telephones, it streamlined its
competitive bidding process. The “winner”, however, is given only a portion of the entire
order. The remainder is offered as an option to some of the other firms to supply at the
price of the lowest offer. Market share surprisingly did not go initially to low-priced
foreign imports. This is due, in part, to the expensive type approval costs (up to DM
100,000 ($65,000)), which keeps many imports out of the market. The German people's
demand for quality was also a factor. They are used to paying higher prices for higher
quality.

In February of 1993, a multinational consortium of companies. E-Plus, was
awarded a license to operate one of the world’s largest digital cellular networks.(Griffiths.
1993). The E-Plus consortium is made up of the German industrial groups Thyssen
(28%) and Veba (28%), Bell-South of the US. (21%),, Vodafone of the UK. ( 16%), and
some smaller German and French interests. The El-System, as it is called, is based on
similar technology as the D1 and D2 systems, e.g. GSM - Global System for Mobile
Communication, which was becoming a European-wide standard (Blau, 1992, October).
Plans called for E1 to cover 88% of Germany by the end of 1995 and to be able to
support three million subscribers (Griffiths, 1993).

41

In July 1996, the German government announced that they will be accepting bids
for a fourth mobile license to cover Germany (Boston, 1996, July 16). Existing holders
of mobile licenses including Deutsche Telekom, Mannesmann and the E-Plus consortium
will not be allowed to bid. Whoever wins the license will be required to reach 75% of the
population within five years or by the end of the year 2001. A decision is likely by
February 4, 1997.

Tanfl'Restmcturing

In October of 1993, the Minister for Post and Telecommunications announced
new tariff structures that would be in effect until the year 1998 ("Deutsche Telekom -
Organizational...", 1994). The government chose to follow a price-cap formula, which
effectively limits the amount by which a telecom operator may raise prices by linking
price changes to a measure of inflation, e.g. the retail price index, plus or minus a
percentage factor. (Deutsche Telekom's prices will actually be dropped.) Price-cap
formulas tend to help encourage efficiency, as it sets a maximum price, but if a company
is able to reduce its costs, it is allowed to keep the cost savings as profits. This
arrangement allows the company and its shareholders to benefit.

According to the announcement ("Deutsche Telekom - Organizational...", 1994),
telephone tariffs would be reduced in three stages. On January 1, 1996, there was a five
percent reduction in inland telephone tariffs. At the same time, a Value-Added Tax
(VAT) of 13% was placed on telephony charges, but Deutsche Telekom decided this cost
would not be passed on to customers. Business customers could claim back the tax,
which Deutsche Telekom will effectively pay on their behalf, and receive a real price
reduction in 1996 of 18%. On January 1, 1997, there would be another reduction based
upon the rate of inflation plus 1%. And on January 1, 1998, there would be another rate

reduction based upon the rate of inflation plus 8 %. Overall this is likely to mean total

42

price reductions of at least 25 — 27% for business customers and 13 - 15% for residential
customers (Deutsche Telekom - Organizational...", 1994).

One could argue that this rate reduction is unusually harsh, considering that
German labor laws make it difficult for Deutsche Telekom to significantly reduce its
personnel, especially its large number of civil servant employees. Yet with the opening
of basic services to competition due by 1998, the government has recognized that it is
imperative that Deutsche Telekom reduce its cost base. This crash program could,
therefore, be considered a positive incentive for Deutsche Telekom to prepare itself to
defend its market share against rapid erosion (Deutsche Telekom - Organizational...".
1994).

Postal Reform 11

Throughout the early 19903, Deutsche Telekom was in the midst of its
transformation from a governmental bureaucracy to a more innovative and competitive
business enterprise. With its continued responsibility to cross-subsidize the other postal
divisions and the immense financial costs of rebuilding the eastern part of the country,
Deutsche Telekom found it more and more difficult to accomplish its goals. With the
rapid pace of change in the international telecommunications market, there were growing
calls for the privatization of Deutsche Telekom to give it the flexibility and resources it
needed to continue its reform and rebuilding plans (Reichlin, 1992), as well as to allow it
to operate internationally.

As discussed in Chapter 2, the European Commission had issued directives
regarding the liberalization of the telecommunications market that the member states
were required to implement. The latest directive was a call to open up basic services
(voice telephony, etc.) and network infrastructure provision to competition by January 1,
1998. According to Griffiths (1993), basic services made up 90% of Deutsche Telekom's

revenues. Any competition in these basic services would mean lower revenues over all.

43

So there was a sense of urgency within the company to move forward with privatization.

Passed in 1994, Postal Reform 11, transformed the former Deutsche Bundespost
subsidiaries into joint-stock corporations (Aktiengesellschaften) with regulatory control
still in the hands of the Federal Minister for Posts and Telecommunications (BMPT)
("Deutsche Telekom - Organizational...”, 1994). The effective date for Deutsche
Telekom to be corporatized was January 1, 1995. A holding company with the status of
an independent state entity was established to represent the interests of the government.
Employees with civil-servant status were to continue to have this status and although they
would be working in a corporation, their benefits and compensation would still be
determined by the government. The act also called for the privatization of Deutsche
Telekom through a capital increase with new stock being floated in an international
public offering. Partial privatization of 25% would be offered in 1996 and another 24%
in 1998 ("Privatization...", 1993). Since Deutsche Telekom is ranked among the top three
telecommunications companies in the world with NTT and AT&T, they could probably
raise as much as $28 billion. The law also effectively freed the company from its
domestic provision limitation, although in practice, as we will see in the next chapter, it
already was active internationally.
Telecommunications Law of 1996

In July of 1996, the German legislature passed a telecommunications law which
effectively ends Deutsche Telekom's monopoly on services as of January I, 1998 and
opens the German telecommunications market to competition (Welecommunications...",
1996). Provisions of the new law also define how the telecommunications industry will
be regulated once competition is allowed. Beginning immediately, private companies
will also be able to offer some services, such as data transmission.

Under the new law, any operator may apply for a license to offer services or

manage a network in Germany after January 1, 1998, although Deutsche Telekom is to

44

retain a monopoly on voice services to individual customers until July 1, 1998 ("German
parliament...", 1996). This was designed to meet an EU directive timetable for lifting
restrictions on alternative infrastructure provision by July 1, 1996. The law stipulates that
basic service must be made available to all users, especially in rural areas, at a reasonable
cost, though the companies would only be forced to do so if universal service were not
provided as a result of market forces (Boston, 1996). This is intended to safeguard
against companies concentrating only on the more lucrative urban or densely-populated
areas. Deutsche Telekom and its competitors will be required to implement technology
to allow customers to keep their existing telephone numbers when they switch service
providers (”German committee...", 1996). In addition, these companies are required to
provide subscriber information, free of charge, to government security authorities
(German upper..., 1996). On the local level, the law requires that rights of way through
local communities be granted free of charge to telecom operators to lay their cable
(Boston, 1996).

The law also establishes the regulatory framework that will manage the new
competitive environment as well. On January 1, 1998, the Ministry of Post and
Telecommunications will be dissolved and an independent regulatory body will be
established. This new body will be headed by a president and two deputies and will
report to the federal economics ministry. An advisory committee made up of 18
members of the Bundestag and the Bundesrat, the upper and lower houses of parliament,
will nominate candidates for the positions, but the federal government will make the final
appointments. The 16 federal states had fought for more control over telecoms regulatory
policy, but the final version of the law effectively keeps it at the national level. The states
were, however, given authority to regulate the broadcast spectrum. Not specifically
spelled out in the legislation, is how much prices will fall once there is competition. This

and other issues will be left to the discretion of the regulatory authority. Of particular

4S

concern is the potential for competitors, particularly electric utilities, to be in a position to
cross-subsidize, taking monopoly profits from the electric side and putting it into the
telecom side (”Expectations mixed...”, 1996).

The passage of the law effectively allows Deutsche Telekom to go forward with
privatization in November of 1996. It was important that the regulatory and competitive
environment be clearly spelled out to potential investors. If the legislation had not been
passed, the public offering would have been in danger.

Telekom 2000 - The East is Rebuilt

When the two Germanys were reunited in October 1990, the various units of
Deutsche Bundespost (telecom, post, and bank) in the West absorbed the parallel
organizations of East Germany's Deutsche Post. As we discussed in the last chapter, the
Communist governments of Central and Eastern Europe greatly underinvested in their
infrastructures. Although East Germany was recognized as having the most sophisticated
telecommunications system in Eastern Europe (T himm, 1992), compared to Western
standards, Deutsche Telekom took over a very antiquated system. According Gronert
(1990), 70% of the central office switches were obsolete.

In 1989, the population of East Germany was 16.4 million people (compared with
West Germany’s 62.7 million) (The Europa World Year Book, 1992). The total number
of telephone connections installed in the East was 1.8 million (compared to West
Germany’s 28.8 million) (Griffiths, 1993). This gave a telephone density of
approximately 11 main lines per 100 people (compared with West Germany’s 46).
Dialing internationally was also difficult, especially to West Germany. In November of
1989, there were only 111 access lines from East to West Germany (Purton, 1991).
Attempting to call to West Germany would normally result in getting a busy signal. The
number of access lines available to call other countries was also limited and sometimes

took hours to go through (Protzman, 1992, March).

46

With the state of East Germany's telecommunications infrastructure in such poor
condition, Deutsche Telekom set about developing a program to rebuild. This program
became known as Telekom 2000 (Griffiths, 1993). The plans called for a DM 60 billion
($35 billion) investment from 1991 through 1997 in infrastructure modernization and
mobile communications network expansion. Through the implementation of digital
technology, Germany, by the end of the decade, planned to have one of the most
sophisticated telecommunications networks in the world (Protzman, 1992, March).

The short-term plans for infrastructure modernization called for immediate
construction of new East-West telephone lines to facilitate West German firms setting up
businesses in the East, immediate improvement of the technical performance of the
telecommunications system, and improvement in the provision of telephone service for
new customers in eastern Germany, with a reduction of the long waiting period for new
telephones (T himm, 1992). Long-term objectives included the installation of 7.2 million
new telephone access lines (of which, about 1.2 million will be fiber-optic) (Ramirez,
1992), 360,000 fax access lines, 50,000 data connections, and around 70,000 public
telephones (Griffiths, 1993). To achieve these long-term objectives, 10 million miles of
fiber-optic and copper cables as well as 2,000 digital telephone switches had to be
installed (Protzman, 1992, March). One of the initial projects was to install a digital
overlay network to facilitate long distance traffic.

Mobile communications networks were to be expanded quickly to offset some of
the demand, especially for business customers. The long-tenn objective was to cover
more than 300,000 users. In order to meet these objectives, the German government
planned to open the market up to competition (Mannesmann Mobilfunk and E1 Network)
and to allow VSAT-based services and local Public Access Mobile Radio networks to be

implemented.

47

Regarding the infrastructure modernization, work has progressed steadily in the
installation of telephone access lines. In 1990 and 1991, around 100,000 and 500,000
lines were installed respectively (Griffiths, 1993). On July 6, 1991, a milestone in the
modernization effort was reached when eastern Germany inaugurated a long-distance
network of 34,000 lines linking East and West (Protzman, 1992, March) In 1991, 12,000
new telephone booths were installed, but due to vandalism, 7000 had to be replaced
(“Telekom reports...”, 1992). In 1992 and 1993, around 758,000 and 850,000 new
telephone main lines were installed respectively (“East’s telephone...”, 1993). As of the
middle of 1993, the total number of main lines stood at 3.5 million, which translates into
a telephone density of 21 lines per 100 people, a marked improvement from its 1989
density of 11 (“Germany -Telecommunications...”, 1994).

In order to accelerate local service infrastructure improvements, Deutsche
Telekom awarded contracts for an additional 200,000 lines on a tum-key basis. In 1993,
Telekom established the conditions for ISDN (Integrated Services Digital Network)
connections and the extension of its Integrated Data Transmission Network (IDN) to
cover the same amount of area as in the West (e.g. 31,000 data connections) (East’s
telephones...”, 1993).

Regarding the mobile communications network expansion, by the end of 1992,
Telekom’s analog C network was available in all of the eastern regions. By the end of
1993, Telekom’s digital D1 and Mannesmann’s D2 system covered 40 percent of the area
of eastern Germany and could reach 60 percent of its population. In February 1993, the
Diisseldorf E-Plus consortium, promising very compact, inexpensive hand-held
telephones and favorable calling fees, was offered a license to establish Germany’s first
digital cellular personal communications network, E1, in greater Berlin and Leipzig.

They expected to expand the network region-wide by the end of 1994.

48

As of the middle of 1996, Deutsche Telekom reported that there are now
approximately 7 million telephone lines installed, 200,000 of which are ISDN (digital
connections). This brings the telephone density up to about 40 telephones per 100 people
up from the 11 per 100 people in 1990. Almost 90 percent of all local networks have
been digitized - almost twice as many as in western Germany. The data network is
reported to be complete as well. Mobile communications including analog and digital
services as well as radio paging and trunked mobile radio service are available almost
everywhere. At the beginning of 1995, the total number of outstanding orders for service
stood at 1.6 million. At the end of the year it stood at 900,000. The company expects to
be able to fulfill the remaining outstanding orders by the end of 1997 as planned.
Positive Impacts of the Reform Process

The reform process outlined above has impacted both Deutsche Telekom and
German consumers. Typical P'I'T monopolies suffer from weak performance and do not
meet the expectations and needs of their increasingly diverse customer base (Bauer.
1995). Deutsche Telekom was no exception. As the reform process unfolds, Deutsche
Telekom has had to change its orientation from a government bureaucracy to a more
commercial model. When Mannesmann was awarded the D2 mobile license, Deutsche
Telekom found organizationally that it could not effectively maneuver and compete on
equal footing, so it established a subsidiary, Deutsche Telekom Mobile (DeTeMobile) to
manage its mobile services. This smaller organization was designed to be able to adjust
to changing customer demands more quickly.

As a response to outside criticism that the company lacked market and customer
orientation, Deutsche Telekom sought to reorganize internally to be in a better position to
respond. According to Elixmann and Schniiring (1994), three main divisions were

established in 1993 to focus on customers: a private customer division, a business

49

customer division and a division for system customers. All three divisions were
supported by the network division.

After the merger with Deutsche Post in 1990, Deutsche Telekom had a combined
total of 240,000 employees (200,000 in the West and 40,000 in the East). Its combined
revenues that year was approximately DM 37 billion (US$ 25 billion) and net pre-tax
profit was DM 7.5 billion (US$ 5 billion). In 1994, the company had revenues of DM 63
billion (US$ 42 billion) and net pre-tax profit of DM 8.5 billion (US$ 5.7 billion).

Results for 1995 show that Deutsche Telekom's revenues grew by 3.6% from the
previous year to DM 66.1 billion (US$ 44 billion) with pre-tax net profits of DM 9 billion
(US$ 6 billion) ("Deutsche Telekom on course...", 1996). This translates into a return on
sales of 13.6%. After payment of taxes of around DM 700 million (US$ 467 million) and
the final levy to the government of DM 3.1 billion the consolidated net income was
around DM 5.3 billion (US$ 2.07 billion), making Deutsche Telekom the leading German
company in terms of performance for 1995 ("Deutsche Telekom posts...". 1996). This
performance was in light of losing market share by 2% from the previous year down to
87%. Mobile communication revenues rose by 12.6% to DM 3.] billion (US$ 2.07
billion).

The company was able to significantly reduce its debt from DM 125 billion (US$
83.3 billion) in 1994 down to DM 110 billion (US$ 73.3 billion) in 1995 ("Deutsche
Telekom on course...", 1996). The restructuring program and the reduction of the work
force led to a 9% rise in productivity per capita from DM 279,000 (US$ 186,000) in 1994
to DM 300,000 (US$ 200,000). Redundancies progressed according to plan with 16,000
employees taking early retirement or compensation payments. At the end of the year, the
total number of employees stood at 213,000, a 11.25% decrease from 1990 levels.

Di gitalization of local networks throughout the country increased from 30% in

1994 to more than 60% in 1995 ("Deutsche Telekom on course...”, 1996). Digitalization

50

in eastern Germany reached 90%. The total number of ISDN channels sold by Deutsche
Telekom currently stands at 3.6 million, which makes it the largest network in the world.

The financial impacts of reform reveals one of the key factors in the
internationalization process. revenue development and cash flow. Revenue development
has been enhanced through the company's restructuring, which has resulted in a greater
cash flow needed to invest in international projects. As can be seen by the financial
results shown, cash flow dramatically increased between 1990 and 1995. As it turns out,
Deutsch Telekom began its international expansion beginning in late 1992 and early
1993, coinciding with internal reform efforts.
Deutsche Telekom's Foreign Direct Investment

In looking at the internationalization of Deutsche Telekom, foreign direct
investment (FDI) has played a prominent role. As was discussed in Chapter 1, Dunning's
(1981) Eclectic Theory postulates that there are three factors or advantages which allow a
firm to invest abroad: firm-specific, internalization-specific, and location-specific
factors. Ruhle (1995) has further defined the firm—specific and location-specific driving
forces which are influencing the internationalization process. Given the proper set of
assets, internal strengths, and market potential, a company can be poised to invest
successfully abroad. In the next few sections, we will discuss some of these factors.
Deutsche Telekom's Firm-Specific Advantages

As noted in a previous section, Deutsche Telekom is among the top
telecommunication companies in the world. Its 1995 revenues of DM 66.1 billion (US$
44 billion) puts the company at the number one position in Europe and second overall in
the world. With this kind of revenue, the company has been in a good position to make
investments. As Ruhle (1995) points out, revenue development, e. g. the dynamic
development and performance improvements of services in the home market, and cash

flow are two factors which contribute to internationalization. Ruhle (1995) also points

51

out the location of target markets as a firm-specific factor. Germany's proximity to
Central and Eastern Europe has given Deutsche Telekom the advantage in pursuing
investment opportunities there. Its experience rebuilding East Germany, in terms of
technical as well as managerial knowledge, has also proven to be beneficial. In addition,
as a non-manufacturer, Deutsche Telekom has the advantage of being able to pick from
the best as well as demand the best solution for a particular problem.
Deutsche Telekom's Internalization-Specific Advantages

As a large corporation, Deutsche Telekom has kept a great deal of its technical as
well as its managerial expertise in-house. This knowledge, according to Ruhle (1995), is
also difficult to teach to others. With the resources it has on hand, it can create business
units internally or seek foreign investment opportunities, to expand its business. This
advantage has given the company leverage in negotiating most of its joint-venture and
collaborative activities.
Location-Specific Advantages

In the next chapter, we will look closely at the international projects that Deutsche
Telekom is involved with to date. As Ruhle (1995) concludes, the location-specific
advantages that influence the internationalization process include competition (or planned
competition) in the home market, open and transparent regulatory processes in the target
countries, GDP per capita abroad, the length of the waiting list for service, and the
direction of international telephony traffic. The liberalization of the German market has
been a strong motivating force for Deutsche Telekom to intemationalize. As investment
opportunities have arisen in Central and Eastern Europe. the length of the waiting list for
service has been a strong motivational factor as well. In general, the market potential for
the countries where Deutsche Telekom invested showed positive growth potential and a
relatively stable political climate once political reforms were in place. The tender process

revealed a relatively open and transparent regulatory environment. Regarding GDP per

52

capita, of course, the countries of the Eastern Europe had a lower GDP per capita than
Germany, but most of the people were highly educated and investment in the
manufacturing and other sectors were being made, so one could conclude that there is
good potential for the future.

The direction of international telephony traffic has also been a factor. Located in
Central Europe, Germany wanted to become an international telecommunications hub
between Western and Eastern Europe as well as into the NIS countries. It, therefore, has
pursued a number of international fiber optic cable projects to bring this idea to fruition.
Deutsche Telekom's lntemationalization Strategy

Reviewing our "Telecom" internationalization model (Chapter 1), the
internationalization strategies identified include foreign direct investment and forming
strategic alliances as the main strategies implemented. Beginning in 1992, Deutsche
Telekom began a bold and aggressive push internationally. It set up international sales
offices initially in New York, Tokyo, London, Paris, Brussels, Moscow, San Francisco,
Chicago, Atlanta and later in Singapore, Hong Kong and Beijing. It’s
internationalization strategy has primarily focused on foreign direct investment in equity
joint ventures. It also sought cooperation on standardization and interconnectivity as well
as forged strategic alliances with other telecommunication companies in order to broaden
its base and to be able to offer global services. By the year 2000 the company expects to
generate a significant portion of its revenue from abroad (”Deutsche Telekom on...",

1996). In Chapter 4 we look closely at Deutsche Telekom's internationalization efforts.

Chapter 4

DEUTSCHE TELEKOM'S INTERNATIONAL JOINT VENTURES AND
STRATEGIC ALLIANCES

As was mentioned before, Deutsche Telekom’s internationalization strategy has
primarily involved foreign direct investment in the form of equity joint ventures and
strategic alliances. (see Table 5 and Figure 5) This activity fits closely with our
"Telecom" model of internationalization. Much of the company's investment has been
focused in Central and Eastern Europe as well as in the former Soviet states. The
company has also pursued a number of strategic alliances within Europe and
internationally. France Telecom, its nearest potential foe, is a partner in a number of
these projects. The Global One joint venture with US. Sprint and France Telecom has
broadened Deutsche Telekom's international activities to the global level.

Since 1992, Deutsche Telekom has boldly and aggressively sought international
investment opportunities. Of a total of 22 projects studied, 18 (82%) were equity
investments or equity joint ventures, 4 (18%) were non-equity cooperative agreements
and 4 (18%) would be considered strategic alliances. Regarding location, 15 (68%) of the
projects focused on Central or Eastern Europe (including Russia or the former Soviet
states), 1 project (4.5%) was in Indonesia, one in Austria, and one in Singapore. Three
projects had a broader focus on Europe, two projects a broader focus on Eastern and
Central Europe and the NIS countries and one project had a global focus. In the next few
sections we will discuss these joint ventures and strategic alliances in more detail. The
examples are listed more geographically than sequentially. More information for each

individual joint venture or strategic alliance can be found in Appendix A.

53

Table 5 - The lntemationalization of Deutsche Telekom

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Country or DT’s Initial Announce
Region Project Partners Nature Investment Date
Austria O-Call Siemens Austria EJV $400 1/96
[mobile, GSM] million
Czech (not avail.) STET (Italy) EJV $200 3/96
Republic [mobile, GSM] Ceske Radiokomunikace million
Hungary MATAV [national Ameritcch FJV $875 12/93
carrier] EBRD million
MATAV
Poland Polska Telefonia US. West FJV $338 2/96
Cyfrowa (PTC) Elektrim million
[mobile, GSM] Other Polish firms
Ukraine UTEL PIT Telecom (Neth.) EJV N.A. 5/92
[national carrier] AT&T
Other Ukrainian companies
Ukrainian Mobile FIT Telecom (Neth.) EJV N.A. 5/92
Communications Telecom Denmark
[mobile, analog] 17 Regional telephone comp.
Belarus satellite, long Telecommunications Min. EJV N .A. 11/92
distance system Philipps
Russia Mobile Telesystems Moscow City Telephone FJV $28 10/93
(MTS) Service (MCI‘ S) million
[mobile, GSM] Siemens
17 regional telephone comp.
Roscom (50x50) France Telecom EJV up to $600 2/94
Project US. West million by
[fiber optic network] Rostelecom West. partners
Mobile Telephone Telecom Finland EIV $100 2/94
System Others million
[mobile, GSM]
RTK RTK El N.A. 4/96
[mobile, GSMI '
Kazakhstan Dekatel Kazakhstan Ministry of Post EJV $15 10/93
[switching system, & Telecommunications million
satellite]
Kaztelekom France Telecom EIV N.A. 3/96
[national canier] Kazakhstan Government
Indonesia Satelindo PT Telecom EJV $586 2/94
lsatellite, mobile, Indosat million
GSM, international] Bima Graha Telecomindo
Singapore Singapore Telecom Singapore Telecom N ECA - 7/94

 

El = Equity Investment; EIV = Equity Joint Venture; N ECA= Non-equity Cooperative Agreement;
N.A. = Not Available.

 

55

 

 

 

 

 

 

 

 

 

Table 5 (cont'd)

Country or ”7’5 Initial Announce
Region Project Partners Nature Investment Date
Eastern Romantis Deutsche Aerospace EJV N.A. 12/92

Europe, CIS [satellite project] ANT Nachrichtentechnik
countries Other potential partners in
individual countries
Europe Eunetcom France Telecom EJV N .A. 9/93
[business services]
Europe Global European France Telecom NECA - 12/93
Network Belgacom (Belgium)
[broadband network Telefonica Espana (Spain)
coordination] Mercury Communications
(UK)

Central and Trans Europe Line Consortia of 14 companies in NECA - 1993
Eastern [fiber optic Central and Eastern Europe
Europe network]

Southem CIS Trans Asia Europe Ministry for Post and NECA - 6/94
countries, Line Telecommunications (China)
China, Japan [fiber optic Other country partners
& Korea network]
Europe Atlas France Telecom FJV N.A. 12/93
[business services,
coordinate
international
activity within
Europe]
Worldwide Global One France Telecom FJV $3.5 6/94
U.S. Sprint billion

 

 

 

 

 

 

 

 

E1 = Equity Investment; EJV = Equity Joint Venture; NECA: Non-equity Cooperative Agreement;
N.A. = Not Available.

56

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Figure 5 - Deutsche Telekom's lntemationalization Over Time

57

Eastern European and Central Asian Joint Ventures
Austria

In January of 1996, Deutsche Telekom’s and Siemens’ joint venture “O-Call” was
awarded a license to build a second digital mobile telephone network based upon the
Globale Special Mobile (GSM) standard. The winning bid was $400 million. The
partners in this equity joint venture planned to begin building the network in July 1996, to
cover 50% of the country by the end of 1997 and 80% of the country by the end of 1998.
Additional investment was set at $600 million.
Czech Republic

In 1995, the Czech Republic sought bidders for a stake in its monopoly carrier.
Deutsche Telekom sought after this but was not among the winning consortium. In 1996,
the Czech Republic offered a second GSM mobile telephone license up for bid. Deutsche
Telekom, STET of Italy and some Czech companies had the winning bid with $200
million. The partners formed an equity joint venture called TMOBIL to make the formal
bid. TMOBIL was awarded 49% of the new company. Ceske Radiokomunikace the
Czech transmission company was the other party with 51%.
Hungary

In December of 1993, MagyarCom, a joint venture between Deutsche Telekom
and its American partner, Ameritech, was awarded a 30.2% stake in MATAV, the
Hungarian telecommunications provider. Deutsche Telekom and Ameritech’s bid of US
$875 million was, interestingly enough, not the highest bid. Deutsche Telekom’s
experience in rebuilding East Germany was credited as being an important factor. The
deal worked out gives the consortium 50% of the seats on the operating committee
including the crucial tie-breaking vote, the choice of Chief Financial Officer and Chief

Technical Officer, and a 25-year stake in the company (Striplin, p. 363). The partners are

58

expected to invest up to US $4 billion for infrastructure development. In December of
1995, the partners were allowed to increase their stake to 67% for $852 million.
Poland

Early in 1996, Poland announced the winning bids for two GSM digital mobile
telephone network licenses. A consortium of Deutsche Telekom, US. West and a
number of Polish firms won one of the bids for a total of $338 million ($130 million the
first year and the rest to be paid in equal increments for another four years.) This equity
joint venture called Polska Telefonia Cyfrowa (PT C) plans to begin service by the end of
1996. Projected subscribers by the year 2000 is about 500,000.
Ukraine
UTEL

In March of 1993, the supervisory board of Deutsche Telekom approved a plan
that would give DT a 19.5% stake in Ukrainian Telecommunications (Handelsblatt,
March 15, 1993, p. 21). This equity joint venture, called UTEL, was to improve the
telecommunications system in the Ukraine. Other partners included AT&T with a 19.5%
stake, P'I'I' Telecom Netherlands with a 10% stake and the remaining shares being held
by the Ukrainian network carrier Ukrtek and 27 Ukrainian carrier companies. The project
called for the partners to install and operate telephone exchange systems for international
and national communications as well as build a digital overlay network that would serve
25,000 subscribers. The total capacity of the telephone system is expected to be doubled
from 8 to 22 million lines by the year 2008.
UKRAINIAN MOBILE COMMUNICATIONS

Early in May of 1992 a joint venture was announced called Ukrainian Mobile
Communications that would team Deutsche Telekom, P'I'l’ Telecom Netherlands,
Telecom Danmark and 17 regional telephone companies in the Ukraine together to build

an analog mobile telephone network. The partners of this equity joint venture planned to

59

initially serve the cities of Kyiv, Sevastopol, Simferopol, Yalta, and Odessa. Within 7
years the system was to have expanded to reach 21 cities. The total investment was
expected to be $150 million.

Belarus

In November of 1992, Deutsche Telekom announced plans to establish an equity
joint venture with the telecommunications ministry of the former Soviet republic of
Belerus, working with Dutch manufacturer Philips. The venture planned to build and
operate the telecommunications network and provide access to international and long
distance links. Deutsche Telekom was to have a 51 percent stake in the project.

Russia
MOBILE TELESY STEMS (MTS)

There are a number of Russian telecommunications projects that Deutsche
Telekom has invested in to date. The first is a joint venture, Mobile Telesystems (MTS),
that was announced in 1993 with Siemens, the German telecommunication equipment
manufacturer, MGTS, a company in Moscow, and other smaller Russian firms to build a
digital mobile communications system in the Moscow suburban area. The joint venture.
called Mobile Telesystems, has built a network based on the GSM standard, which
became operational in 1994. The company expects to be able to handle up to 100,000
subscribers within a 4 - 5 year period. Access to the lntemational telecom network has
also been implemented. Initial investment in the venture was around $85 million.
ROSCOM (50x50 Project)

One of the most ambitious Russian projects, to date, is the joint-venture called
“Roscom” or (formerly called “50x50 Project”) proposed in 1994. In partnership with
US. West, France Telecom, and the Russian company Rostelecom, Deutsche Telekom
proposes to help build a 50,000 km fiber optic overlay network that will connect 50

Russian cities. Initial investment by the foreign partners was to be $600 million. The

60

total cost could be around $40 billion over 10 years. Installation was to begin the middle
of 1995. As of April 1996, the project has stalled due to uncertainties in financing and
terms.
MOBILE SYSTEM LICENSES

In 1994, Deutsche Telekom was one of 3 western companies (with US. West and
Telecom Finland) that were granted mobile cellular licenses in 4 other Russian cities.
These licenses were for smaller cities. Deutsche Telekom and Telecom Finland joined
forces in an equity joint venture to use these licenses.
RTK

In April 1996, Deutsche Telekom acquired 48.5% of RTK, which owns six
mobile telephone licenses in western Russia. This equity investment will allow the
company to expand the systems in the six cities. Expected subscribers will be around
250,000 by 2001.
Kazakhstan
DEKATEL

In this southern former Soviet republic, Deutsche Telekom is forging ties with the
Kazakhstan Ministry for Post & Telecommunications. A joint venture, called Dekatel
based in Alma Ata, was established in 1993. This joint venture will work on various
projects to improve the telecommunications infrastructure. The first project announced
called for the installation of an international switch, a terrestrial satellite station, and the
construction of a 120 km fiber optic transmission link. The initial investment totaled DM
15 million ($10 million).
KAZTELECOM

In March 1996, the Kazakhstan government announced that it was planning to sell
a portion of its telecommunications carrier, Kaztelekom. Deutsche Telekom and France

Telecom have been offered the stake. The goals of this equity investment is to improve

61

the country’s long distance, international telephone network as well as improve local
facilities.
Indonesia

Part of Deutsche Telekom’s international strategy is to forge links to Asia. In
February of 1994, Deutsche Telekom secured a 25% share of the company Satelit Palapa
Indonesia (Satelindo). Its $586 million investment gives Deutsche Telekom a foothold in
that part of the world. Satelindo operates the Indonesian satellite Palapa C, launched in
1995, manages access to the GSM mobile telephone network launched in 1994. and
handles international connections with the network.
Singapore

In a spirit of cooperation Deutsche Telekom signed a non-equity cooperative
agreement with Singapore Telecom in July of 1994. This agreement calls for the
development of telecommunication facilities between the countries, the enhancement of
existing joint services and the introduction of new ones, as well as for cooperation in
integrated services digital network (ISDN) and broadband services.
International Joint Ventures and Cooperative Agreements
Romantis

At the end of 1992, Deutsche Telekom sought partners in a joint venture that
would utilize its capacity on Intelsat to offer satellite services in the former Soviet
republics. Deutsche Aerospace, a division of Daimler Benz, and ANT
Nachrichtentechnik, a telecommunications equipment manufacturer, joined with
Deutsche Telekom in the venture. This equity joint venture sought to improve the
international satellite access for voice, data and broadcasting in CIS countries. It targets
telecommunications operators and large businesses. The area covered stretches from
Germany on the west to Japan on the east. In the short term, the Romantis partners will

utilize Intelsat capacity. In the long run, they will seek to launch their own.

62

Eunetcom

In September 1993 Deutsche Telekom finalized a joint venture with France
Telecom that targeted business customers. This equity joint venture was the first step in
the development of a strategic alliance between these two telecom giants. The partners
sought to unify their efforts to offer global telecommunication network services. This
project ultimately will be superseded by the Global One alliance.

Global European Network

December of 1993, Deutsche Telekom sought partners for a cooperative
agreement, that would unify the standards and setup of broadband network applications
across Europe. The partners include France Telecom, Belgacom (Belgium), Telefonica
Espana (Spain), and Mercury Communications (UK).

Trans Europe Line (TEL)

As Eastern and Central Europe opened and efforts to upgrade the antiquated
infrastructure began, Deutsche Telekom took the lead to seek cooperation in building a
fiber optic link between the major cities. The Trans Europe Line (TEL) is the result of
this lobbying effort. The agreement calls for each country to pay for its own segment.
The first 3,700 km section of the line was completed in 1994 and connected Frankfurt
with Warsaw, Prague, Bratislava and Budapest. Plans are in place to extend this to
Belarus, Ukraine, Rumania, Bulgaria, and possibly to Russia and on to Finland.
Deutsche Telekom is heading up the project and offering technical assistance.

Trans Asia Europe Line (TAE)

In June of 1994, Deutsche Telekom confirmed that the company was planning a
fiber optic link from China through Central Asia to Europe called Trans Asia Europe
Line (T AE). As a logical continuation of the Trans Europe Line (TEL), the TAB would
link the new Central Asian countries of Kazakhstan, Turkmenistan, Kyrgyzstan,

Uzbekistan and Tajikistan not only to Europe, but also to China, Japan and Korea. The

63

24,000 km cable project is being jointly overseen by Deutsche Telekom and the Ministry
for Post and Telecommunications in China and is scheduled to go into service in March
of 1997.

Atlas

Within the heart of Europe, Deutsche Telekom and France Telecom are two
powerhouses in the telecommunications field. France Telecom has yet to report its 1995
earnings, but in 1994 it had $28 billion which gave it the number four position in the
world. Each has enjoyed monopoly status at home and are equally threatened by
European liberalization, especially in 1998 when basic services are to be opened to
competition. It can be argued that these two neighbors are potential competitors in their
home markets. Yet these potential adversaries have joined forces in a number of ventures
both in Europe and internationally.

In December 1993, a memorandum of understanding was signed by Deutsche
Telekom and France Telecom that called for the establishment of a joint venture, called
Atlas (Weinkopf, 1995). The formal agreement was signed in December 1994. The
strategic plan of this venture called for combining existing business units of both
companies that were focused primarily on business services. This 50/50 joint venture
would then pursue business customers first in Europe and then later expand
internationally. They planned to offer international end-to-end services, VSAT, data
network services, intranational & international voice virtual private networks, customer-
defined networks, and outsourcing.

International Strategic Alliances
Global One

As mentioned previously, the strategic plan of Atlas called for expansion

internationally. In the middle of 1994, the US. long-distance carrier, U.S. Sprint, was

approached by Atlas to form an alliance and create an organization offering global

64

services. During this same time period other alliances were being formed by competitors.
e. g. Concert (MCI and British Telecom), Worldsource (AT&T and others). Unisource
(PIT in Switzerland, PIT in Netherlands, Telia in Sweden, Telefonica Espana in Spain)
and Uni-World (a joint venture between AT&T and Unisource). A memorandum of
understanding was signed in June 1994 and a final joint venture agreement was signed in
June of 1995. See Table 6 for a complete list of milestones for this joint venture.

The joint venture, Global One (formerly referred to as Phoenix) comprises the
international operations of all three companies (Keller, 1996). Deutsche Telekom and
France Telecom will each buy 10% of Sprint for an estimated price of $3.5 billion. All
three partners would remain 100% responsible for the business services in each of their
respective countries. Business in Europe (other than in Germany and France) would be
divided up between Atlas (2/3) and Sprint (1/3). The rest of the world as well as the
global network backbone would be divided 50/50 between Atlas and Sprint.

As the joint venture name implies, the Global One partners plan to offer global
services to both business and individual customers. Expansion will include more carrier
and consumer services. “Away from home” services such as prepaid calling cards,
collect calling and toll-free numbers are planned. (Keller, 1996). According to Chris
Rooney, the chief executive officer of Global One, the venture will provide “locally-
based global account managers to handle customers’ needs as well as 24—hour, 7-days-a-
week service agents and state-of-the art technology.” (Keller, 1996).

The Global One partners will combine and extend their existing international
services including Eunetcom and Sprint lntemational. The data networks of Deutsche
Telekom (Datex—P) and France Telecom (T ranspac) will be combined into Global One as
well. After January 1, 1998, the Datex-P and Transpac units will be combined in each of

the countries. Overall Global One will begin with annual revenues of $800 million, 3,000

65

Table 6 - Global One Partnership Milestones

 

December 1993

June 1994

July 1994

October 1994

December 1994

January 1995
Spring 1995
June 1995

July 1995
January 31, 1996
February 20, 1996

February 28, 1996

July 17, 1996

 

 

Atlas Memorandum of Understanding signed by D.T.
and ET.

Phoenix (later known as Global One) Memorandum
of Understanding signed by D.T., ET. and Sprint.

Notification of Phoenix joint venture made to the
Dept of Justice in the U.S.

Notification of Phoenix joint venture made to the
Federal Communications Commission in the US.

Atlas joint-venture agreement signed; European
Commission notified.

European Commission Approval Procedure begins
Various requests from E.C.

Phoenix joint-venture agreement signed; European
Commission notified.

Phoenix - Consent Decree with D.of J. approved.
Agreement Finalized - Name changed to Global One

Swiss subsidiary established to focus on domestic
market.

Global One with Israeli partners bid for second
carrier license in Israel.

EU gives final approval to Atlas/Global One with
conditions.

 

 

66

employees, and 1200 switching centers worldwide in more than 50 countries. On January
31, 1996 the partners finalized their agreement.

In February of 1996, the Global One partners began their concerted effort at
seeking global business by establishing a subsidiary in Switzerland that will focus on the
domestic market. They seek to win 20% of the market by the year 2000. The unit plans
to provide customers in 30 cities with telecom phonecards and data transmission services
this year. When the Swiss market is fully liberalized in 1998, the unit expects to provide
full services. The Global One partners also went after the second carrier license in Israel
during the same time period. Joining with Israel’s Clalcom Ltd., a value-added service
provider, and Matav, an Israeli cable television broadcast service provider, the partners
bid for a place in the $600 million Israeli telecommunications market.

In July 1996, the Global One partners received the final regulatory approval for
their venture from the European Union ("Global One finally...", 1996). The approval was
granted with a number of conditions. Deutsche Telekom and France Telekom are
specifically prohibited from cross-subsidizing their joint venture and discriminating
against market players. Both countries had to commit to early liberalization of their
infrastructure in 1996. The approval will be valid for 5 years and will be reviewed in
2001 at the same time as the BT-MCI alliance. The Commission also set out a two-tiered
approval with authorization of Atlas/Global One European and global services as well as
most value-added services in France and Germany from the date on which France and
Germany grant the first two alternative telecommunications infrastructure licenses for
liberalized services (i.e. basic services can be excluded until 1998) ("Atlas-Global
One...", 1996). The second stage of approval (mainly for the Atlas joint venture) may
include the national public-switched data networks, Transpac and T-Data. Approval to
include these services in the venture will be authorized only when France and Germany

fully liberalize all telecommunication services, including basic services and all network

67

infrastructure, which is expected by January 1, 1998. Access to these domestic public-
switched data networks must still be maintained on a non-discriminatory, open and
transparent basis to all service providers offering low-level data services (i.e. using
protocols such as X.25, Frame Relay, Internet or SNA) and they must also implement any
generally applied standard that may modify, replace or co—exist with the current standard.
Deutsche Telekom and France Telecom acting as distributors for Global One/Atlas in
their respective countries must each negotiate a separate distribution agreement. France
Telecom must also sell INFO AG, an important competitor of T-data in the German data
network services market.

As we have seen in this section, Deutsche Telekom has aggressively sought
international opportunities through foreign direct investment and strategic alliances. The
various investment strategies have included purchasing shares in a telecommunications
operator, establishing joint ventures, obtaining a license or franchise to offer
telecommunication services usually with other partners, and merging or acquiring a
telecommunications provider. As we review our "Telecom" model of

internationalization, we see that Deutsche Telekom fits this model exactly.

CONCLUSIONS

Within the last decade telecommunication companies have been intemationalizing
their operations at an unprecedented pace. Stagnant home markets, liberalization and
increased competition have prompted many telecommunication companies to seek profits
outside of their home market. This research has sought to qualify and to quantify the
internationalization process of telecommunication companies. In Chapter 1, the
"Telecom" model of internationalization was developed. This model presents a number
of firm-specific and environmental factors that are influencing the internationalization
process. The outcome of the process was identified as foreign direct investment and/or
strategic alliances. In Chapter 2, the environmental factors such as global trends of
regulatory reform, technological developments, increased competition and the
internationalization of customers were identified as contributing to the
internationalization process.

In Chapter 3 and 4, Deutsche Telekom, the German national carrier, was chosen
to test the model. Deutsche Telekom has pursued an aggressive internationalization
strategy that has focused on foreign direct investment and strategic alliances. Through
internal restructuring and cost reduction since 1990, the company's revenue development
and cash flow improvements have given it the cash to make investments at an
unprecedented pace. With management support, the company has pursued opportunities
in Eastern and Central Europe as well as into the former Soviet states with striking
success. Starting with the Ukraine and continuing on in Hungary, Kazakhstan, Russia,

Indonesia, Singapore, the Czech Republic, and Austria, Deutsche Telekom has

68

capitalized on its internal strengths and knowledge and has rapidly internationalized its
operations within three years.

On a broader basis, Deutsche Telekom has forged strategic alliances (Eunetcom,
Atlas, Global One) with a potential adversary (France Telecom) and courted the third
largest long distance carrier in the US. (Sprint) to meet its goal of achieving "critical
mass" and creating a global infrastructure to meet the demands of its global customers.
Since the conclusion of the agreement in February 1996, the Global One partners are
already aggressively pursuing opportunities in Switzerland and Israel.

The telecommunications world has dramatically changed. In this climate of
global regulatory reform and market liberalization, internationalization among
telecommunication companies will continue to grow. With 1998 approaching for full
market liberalization in Europe and the recent passage of the Telecommunications Act of
1996 in the U.S., this indeed, is a changing, yet exciting time for telecommunication

companies worldwide.

69

APPENDICES

APPENDIX A

APPENDIX A

ADDITIONAL FIGURES

 

 

 

A Siemens
Austria

- Deutsc he ’
Telekom

               

25% 19.8%

 

 

 

 

 

Others O-Call
Nature: Equity Joint Venture
Partners: Deutsche Telekom (25%)

Siemens Austria - A subsidiary of a German
telecommunications equipment

rrranufacturer (19.8%)
Others
Initial Announcement: January 1996.
Initial Investment: $400 million for 20 year license.
Goals: 0 Build a second digital mobile telephone network based on GSM.

0 Begin building network in July 1996.
0 Cover 50% of country by the end of 1997; 80% by the end of 1998.
- Invest additional $600 million in network

 

Source: various

 

 

 

Figure 6 - Austria O-Call Joint Venture

70

7 1
APPENDIX A

 

Deutsche I STET
Telekom

84.5% 12%

 

 

 

 

Ceske

hree CZFCI‘ Radiokomunikace
- Companres

    
   

TMOBIL

 

 

A

 

New Joint- 51%
Venture
Company

 

 

 

Nature: Equity Joint Venture

Partners: TMOBIL (49%):
Deutsche Telekom (84.5%)
Societo Finanziaria Telefonica (STET) of Italy (12%)
Three Czech Companies (3.5%)
Ceske Radiokomunikace - The Czech telephone
transmission company (51%)

Initial Announcement: March 1996.
Initial Investment: $ 200 million for 20-year license.

Goals: 0 Set up second digital mobile telephone network (GSM).
- Will serve 500,000 customers by 2005.
0 Plan to expand network to cover 65% of population by end of 1996.
0 Will have 90% coverage by July of 1998.

 

 

Source: various

 

 

Figure 7 - Czech Republic: Digital Mobile Telephone Joint Venture

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDIX A
I Deutsche Ameritech
Telekom International
\5096 /0%
AV Rt.
MagyarCom (The Hungarian state
holding company)
initial: 30.2% ‘
Initial: 66.74%
"“9““ ‘7% Present: 29.94%
MATAV EBRD ]
Initial: 2.97%
Present: 2.97%
Nature: Equity Joint Venture
Partners: MagyarCom (Initial: 30.2%. Present 67%): Deutsche

Telekom (50%) and Anreritech (50%)
AV Rt - The Hungarian state holding company

Initial Announcement: December 1993.

Initial Investment: $ 875 million for 25-year license.
Goals: 0 Invest up to $4 billion to expand and improve telecommunications
infrastructure.

0 Install digital overlay network.

0 Be exclusive supplier of domestic and international long distance as well as
serve the local districts awarded to them.

0 Expand MagyarCom ownership of company (up to 67% in December 1995
for $852 million).

 

 

Source: various

 

 

 

Figure 8 - Hungary: MATAV (Hungarian Telecommunications) Joint Venture

73

 

 

 

      

 

 

 

 

 

 

 

APPENDIX A
Deutsche I U.S.
Telekom West
22.5% 22.5%
Elektrim 32.5 Polska Telefonia 225% 3:32:11.
(P0504) Cyfrowa (PTC) Firms
Nature: Equity Joint Venture
Partners: Deutsche Telekom (22.5%)

U.S. West (22.5%)
Elektrim - A Polish trading company (32.5%)
Other smaller Polish firms (22.5%)

Initial Announcement: February 1996.

Initial Investment: $ 130 million for first year - total of $338 million;
must also pay $104 per new subscriber.

Goals: 0 Set up digital mobile telephone network (GSM).
- Begin operation by end of 1996.
- Have 500,000 customers by 2000.
- Serve chief economic areas as soon as possible.

 

 

Source: various

 

 

Figure 9 - Poland: Polska Telefonia Cyfrowa (PTC) Joint Venture

74
APPENDIX A

 

 

 

Deutsche P'I'I‘ Telecom
Telekom Netherlands

\19.S% /0%
19.5% 51 %

I AT&T UTEL

 

 

 

Other
Ukrainian
Companies

 

 

 

 

Nature: Pointy Joint Venture

Partners: Deutsche Telekom (19.5%)
FIT Telecom Netherlands (10%)
AT&T (19.5%)
Other smaller Ukrainian companies (51%)

Initial Announcement: May 1992.
Initial Investment: Not available.

Goals: 0 To rebuild the country’s long distance and international telephone network
and a stated commitment to local loop development.
0 Supply switching to all 25 regions of the country.
0 To double capacity of telephone system from 8 to 22 million lines in 15
years.

 

Source: various

 

 

 

Figure 10 - Ukraine: UTEL Joint Venture

75
APPENDIX A

 

 

 

I Deutsche PTT Telecom]
Telekom Netherlands]

16.3% 16.3%

 

 

 

17 Regional
Telephone
Companies

Telecom 1‘3 Ukrainian Mobile 514%
- Danmark Communications

 

 

 

 

 

Nature: Equity Joint Venture

Partners: Deutsche Telekom (163%)
PIT Telecom Netherlands (163 %)
Telecom Danmark(16.3%)
17 regional telephone companies (51.1%)

Initial Announcement: May 1992.
Initial Investment: Not available.

Goals: 0 To build an analog mobile telephone system (N MI‘ 450. built by Nokia.
which was also used at the time by Poland and Czechoslovakia) serving
initially the cities of Kyiv Sevastopol, Simferopol, Yalta, and Odessa.

0 Expand system to 21 cities within 7 years
0 Total investment expected to be $150 million.

 

Source: various

 

 

 

Figure 11 - Ukraine: Ukrainian Mobile Communications Joint Venture

76
APPENDIX A

 

 

   

Deutsche

 

 

  
  

 

 

   

 

 

 

Telekom
51 %
Belarus
Belarus , Telecomm unications
Telecomm unrcatron M inistr
Nature: Equity Joint Venture
Partners: Deutsche Telekom (51%)
Belarus Telecommunications Ministry (Not available)
Philips (Not available)

Initial Announcement: November 1992.
Initial Investment: Not available.

Goals: - Build and expand telecommunications system
0 Provide international and long-distance links

 

Source: various

 

 

 

Figure 12 - Belarus: Belarus Telecommunications Joint Venture

77
APPENDIX A

 

 

 

Deutsche MGTS

Telekom

\... I/M

 

 

 

 

 

 

 

 

. ’ Other
I Siemens 10% Mobile Telesystems 32% Russian
MTS) .
( Companres
Nature: Equity Joint Venture
Partners: Deutsche Telekom (38%)
Moscow City Telephone Service (MGTS) (20%)
Siemens (10%)
17 regional telephone companies (32%)
Initial Announcement: October 1993.
Initial Investment: $28 million
Goals: 0 To build a digital mobile telephone system (GSM) in the Moscow area.

0 Hope to attract over 100, 000 subscribers by 1998.
0 Total investment expected to be $100 million

 

Source: various

 

 

 

Figure 13 - Russia: Mobile Telesystems (MTS) Joint Venture

78

 

 

 

      

 

 

 

 

 

 

 

 

APPENDIX A
Deutsche U .S .
Telekom West
10.66% 10.66%
7 France 10.66 Roscom 68%
. Rostelecom
LTelecom , (50 X 50 PrOJect)
Nature: Equity Joint Venture
Partners: Deutsche Telekom (10.66%)
France Telecom (10.66%)
U.S. West (10.66%)
Rostelecom (68%)
Initial Announcement: February 1994.
Initial Investment: Up to $600 million by Western partners.
Up to $400 million by Russian partners
Goals: 0 Install 50,000 km network (including fiber optics. satellite and digital
microwave transmission).

° Install 50 exchanges in 50 cities.
0 Double the number of telephone lines to 20 million by 2004.
- Expand to 80 exchanges and include 14 million local lines over 10 years.
0 Total investment could be up to $40 billion over 10 years
(Note: As of April 1996 the plans for this joint venture have stalled.)

 

Source: various

 

 

 

Figure 14 - Russia: Roscom (50 X 50 Project) Joint Venture

79

 

 

 

    

 

  

 

 

 

APPENDIXA
Deutsche A Telecom A
Telekom Finland
Others? New MODIIC

System Company

 

 

 

Nature: Equity Joint Venture

Partners: Deutsche Telekom (Not Available%)
France Telecom (Not Available%)
Others (Not Available%)

Initial Announcement: February 1994.
Initial Investment: $100 million for GSM licenses in four Russian cities.

Goals: 0 Build digital mobile telephone systems (GSM) in each of the
following cities: Nowgorod, Pskow, Twer and Kaliningrad.

 

 

Source: various

 

 

Figure 15 - Russia: GSM Mobile Telephone System Joint Venture

80
APPENDIX A

 

 

Deutsche
Telekom

\m
| 1

 

 

Nature: Equity investment in Existing Company

Partners: Deutsche Telekom (48.5%)
RTK - holds six mobile phone licenses in western Russia.

Initial Announcement: April 1996.
Initial Investment: Not available.

Goals: 0 Expand digital mobile telephone systems (GSM) in each of RTK's cities.
0 Have 250,000 subscribers by 2001.

 

Source: various

 

 

 

Figure 16 - Russia: RTK Equity Investment

8 1
APPENDIX A

 

 

 

Ministry of Post &
_ Telecommunications

Deutsche
Telekom

     
  

 

Dekatel

 

 

Nature: Equity Joim Venture

Partners: Deutsche Telekom (Not Available%)
Kazakhstan Ministry of Post & Telecommunications (Not
Available%)

Initial Announcement: October 1993.

Initial Investment: $ 15 million

Goals: 0 Deliver an international switching system.

0 Deliver a terrestrial satellite station.
0 Build 75-mile fiber optic link.

 

Source: various

 

 

 

Figure 17 - Kazakhstan: Dekatel Joint Venture

82

 

 

     

 

 

 

 

 

 

 

 

 

APPENDIX A
Deutsche France
Telekom 7 Telecom
Kaztelekom Kazakhstan
Government
Nature: Equity lnvestrnent in existing company
Partners: Deutsche Telekom (Not available%)

France Telecom (Not available%)
Kazakhstan Government (Not available%)

Initial Announcement: March 1996.
Initial Investment: Not available.
Goals: - To improve the country’s long distance. international telephone

network as well as improve local facilities.

 

Source: various

 

 

Figure 18 - Kazakhstan: Kaztelekom Joint Venture

 

83
APPENDIX A

 

 

 

PT
Telekom

Deutsche
Telekom

 

25% 22.5%

 

 

   

 

Satelindo . 45% Bima Graha
(Establrshed rn Telekomindo
1993)

lndosat

 

 

 

 

 

Nattu'e: Equity Joint Venture

Partners: Deutsche Telekom (25%)
PT Telekom - The Indonesian domestic telecommunications
company (22.5%)
lndosat - An Indonesian communications group listed in New
York in Oct. 1994 (7.5%)
Bima Graha Telekomindo - An Indonesian telecommunications

group (45%)
Initial Announcement: February 1994.
Initial Investment: $586 million by Deutsche Telekom for 25% of company.

Goals: 0 Operate the Indonesian satellite Palapa C (to be launched in 1995).
0 Manage access to GSM mobile telephone network launched in 1994).
0 Handle international connections with the network (in competition with PT
Telekom)

 

Source: various

 

 

 

Figure 19 - Indonesia: Satelindo Joint Venture

84
APPENDIX A

 

 

 

 

 

 

 

 

 

f Deutsche —p Singapore
Telekom 4— Telecom
Nature: Cooperative Agreement (Non-Equity)
Partners: Deutsche Telekom

Singapore Telecom
Initial Announcement: July 1994.
Initial Investment: Not Applicable.
Goals: 0 Develop telecommunication facilities between the two countries.
0 Enhance existing joint services and introduce new ones.

0 Explore areas of cooperation in integrated services digital network
(ISDN) and broadband services.

 

Source: various

 

 

 

Figure 20 - Singapore: Cooperative Agreement

85
APPENDIX A

 

 

 

i Deutsche i Deutsche
Telekom

 

51%

0 7 if ANT
I ther I.__.I Romantis .
Fume”? * l I “£22334

 

 

 

 

 

 

Nature: Equity Joint Venture

Partners: Deutsche Telekom (51%)
Deutsche Aerospace - a subsidiary of Daimler Benz (Not
Available%)
ANT Nachrichtentechnik - a telecommunications equipment
manufacturer (Not Available%)
Other potential partners in individual countries

Initial Announcement: December 1992.

Initial Investment: Not Available
Goals: ' Improve international satellite access for voice, data and broadcasting in
the CIS countries.

- Wants to set up joint ventures in each country.

0 Will cover an area bounded by Germany to the west and Japan to the east

0 In the short term joint venture will lcase Intelsat capacity. in the long run
they will launch their own

 

Source: various

 

 

 

Figure 21 - lntemational: Romantis Joint Venture

86
APPENDIX A

 

 

 

Deutsche ‘ France
Telekom ITelecom

\. /

Eunetcom

 

 

 

Nature: Equity Joint Venture

Partners: Deutsche Telekom (50%)
France Telecom (50%)

Initial Announcement: September 1993.
Initial Investment: Not Available

Goals: ' Offer global telecommunication services to business customers.
- Begin focus in Europe and expand internationally.

 

Source: various

 

 

 

Figure 22 - International: Eunetcom Joint Venture

87

 

 

 

APPENDIX A
Deutsche 8 France
Telekom Telecom

 

 

 

 

 

 

 

 

 
 
  

 

 

 

 

 

 

 

 

 

 

Bel gacom
Mercury
Comm unications
, Global (UK)
Telefonica European
Espana Network
(Spam)
Nature: Non-equity Cooperative Agreement
Partners: Deutsche Telekom
France Telecom
Bel gacom (Belgium)
Telefonica Espana (Spain)
Mercury Communications (UK)
Initial Announcement: December 1993.
Initial Investment: Not Applicable.
Goals: 0 To coordinate the standards and setup of broadband network

applications across Europe.

 

Source: various

 

 

 

Figure 23 - lntemational: Global European Network

89

 

 

 

APPENDIX A
Trans Europe Trans Asia Europe
Linc (TEL) Line (TAE)

 

 

 

 

 

Nature: Non-equity Cooperative Agreement

Partners: Ministry of Post and Telecommunications (MP1) of China
Other central Asian republics including Kazakhstan.
Turkmenistan, Kyrgyzstan, Uzbekistan and Tajikistan.

Initial Announcement: 1992 by MPT; reconfirmed by DT in June 1994

Initial Investment: Not Applicable.

Goals: 0 To connect the Central Asian Republics of Kazakhstan. Turkmenistan.
Kyrgyzstan. Uzbekistan and Tajikistan to Europe. China. Korea and
Japan with fiber optic cable.

- Up to 21.000 km of cable planned to be laid.
' Each country pays for the section of the cable on their territory.
0 Deutsche Telekom oversees project with MPI‘.

 

Source: various

 

 

 

Figure 25 - lntemational: Trans Asia Europe Line (TAE)

9O

 

 

 

APPENDIXA
Deutsche 7 France
Telekom Telecom
50% 50% 10%
' 10% ‘

 

" Sprint
ATLAS I

   
 

Global One
(Formerly called Phoenix)

 

 

 

 

 

Nature: Equity Joint Venture

Partners: Deutsche Telekom (25%)
France Telecom (25%)
Sprint lntemational (50%)

Initial Announcement: J une 1994

Initial Investment: $ 3.5 billion by Deutsche Telekom and France Telecom
in Sprint.

Goals: 0 To offer global services to both business and individual customers.

0 Expand carrier and consumer services.

' To offer “Away from home" services (c. g. prepaid calling cards.
collect calling and toll-free numbers.)

0 To combine and extend existing international services.

 

Source: various

 

 

 

Figure 26 - International: Global One Joint Venture

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