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MOODY’S EXPECTS EU DEREGULATION WILL BOOST WIRELESS

NEW YORK-Incumbent and new carriers in Europe, the world’s third- largest telecommunications market, are in reasonably good shape to meet competitive pressures despite uncertainties posed by pending deregulation, according to a report just published by Moody’s Investors Service Inc., New York.

As the World Trade Organization’s January 1998 deadline approaches for worldwide liberalization of telecommunications markets, “the former national telecommunications monopoly providers are positioning themselves to face the challenges … through a variety of defensive and offensive strategic moves that include joint ventures, strategic alliances, mergers or privatization,” Moody’s said. “At the same time, alternative telecommunications service providers are preparing to take advantage of deregulation.”

The report, “Big Bang in the European Telecommunications Industry,” also said, “Moody’s outlook for mobile telecommunications is positive. Despite the intrinsic technological and start-up risks associated with this sector, companies are proving to be highly successful in creating a consumer product where demand is booming, penetration rates are increasing, churn and fraud rates are being reduced and [Global System for Mobile communications] digital technology is standard.

“All these factors present a strong argument for established cellular carriers and new competitors to strive for gradually stronger market position and cash flow growth.”

Over the next two years, the agency projected that incumbents could lose 10 to 15 percent of market share in certain market segments, and up to 25 percent of the most profitable market segments over the next decade. Loss of market share by incumbent telecommunications companies is likely to be offset by extra traffic volume resulting from lower prices, new service offerings, access line growth and higher demand for mobile telecommunications, said the report, written by Moody’s telecommunications analysts Carlos Winzer and Richard Stephan in London and Robert Ray in New York. These factors should maintain credit quality in the intermediate term, they said.

Despite deregulation efforts, it is clear that regulatory bodies throughout Europe will have a strong and ongoing role to play in the evolution of liberalized markets, according to the rating agency review.

“However, in the next five years, increasing competition combined with tough regulation and diversification strategies could erode the credit quality of some issuers,” Moody’s said. “If this occurs, growing credit differentiation between industry players will occur.”

Among the key determinants of how the situation will play out is whether wire-based communications, “will become redundant due to the expansion of wireless technologies in the local loop and the possible future convergence of mobile and fixed networks,” the report said.

Some European countries are still in the process of determining the best way to liberalize their telecommunications markets. “One of the key questions they face is whether to introduce competition by creating a duopoly or by opening the market to many competitors,” Moody’s said. “The incumbent monopoly usually prefers a rapid opening of the market because it can better defend itself against multiple, but small, operators.”

Regardless of the way in which the opportunity to compete is provided, “it is becoming increasingly obvious to European policy makers that … the capital-intensive nature of the telecommunications industry limits the number of potential players,” the report said.

As a result, the rating agency said it anticipates that European regulators will promote aggressively open access to established telecommunications networks with the goal of creating a wholesale and a retail segment. The wholesaler component would be permitted to sell its network facilities to any other operator functioning as a retailer in direct competition with the wholesaler’s own customer service organization.

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