How to pick a winner in the telecoms stakes

Think of the European telecoms industry as a pyramid. At the apex stands BT - the most forward-looking of the former national monopolies - going head-to-head not only with the likes of Deutsche, but also with Microsoft, the UK cable television industry, and Rupert Murdoch's BSkyB as the phone, computer and media industries converge.

Below BT and the other former monopolies stands Cable & Wireless, which has sold Global Crossing, the undersea cable-laying operation, for pounds 550m to refocus its business on the corporate market.

Challenging BT, the other monopolies and C&W, are MCI WorldCom, the post-deregulation-era American giant founded in 1984, and an even more recent new-era phone company called Equant.

Next down the line comes London-based Colt, the start-up backed by US mutual fund giant Fidelity, as well as Colt lookalikes, including Level 3. Colt is a niche pan-European player. It installed a high-capacity fibre- optic loop serving the City of London in the mid-Nineties and has since repeated this procedure in a dozen other European cities.

At the base of the pyramid stand scores of companies buying the excess capacity of giants then reselling that capacity at a discount.

Then there's Global Telesystems Group. An odd-man-out, GTS most comfortably slots in alongside Colt. But its shares trade on Nasdaq and Easdaq, not in London.

GTS did not exist in its current form until March, when it acquired Esprit - which offers telecoms services to medium-sized European companies - for pounds 458m. This purchase got some coverage because of its size, and also because GTS's dominant shareholder is George Soros. The hedge fund manager founded GTS in 1983 as a not-for-profit company linking Russian telecoms with the US. It incorporated in 1986 and floated last year. Its acquisitions spree since has snared not only Esprit, but also Copenhagen internet provider Ebone and a series of internet service providers in central Europe.

Talking to its chief executive, Brian Thompson, you gain the impression that GTS could get a share listing in London and become another darling of City investors. You also start thinking that distance brings clarity - here are some of his views.

n The European telecoms industry: "People talk about the `European market'. But this market is 20 or more countries only slowly evolving toward a homogeneous market in a crazy-quilt pattern."

n GTS's strategy: "We aim to be a full service provider across Europe. Our target market is medium-sized companies with pan-European operations - hotel companies, for example.

"We're concentrating on getting agreements with regulators in place. We focus on staying in touch with the market through our 70 sales offices in Europe."

n The competition: "Surprisingly, the incumbents [BT, Deutsche Telecom, France Telecom] don't have much intelligence on their customers. This is because they have always dealt with their customers as ratepayers.

"Why Cable & Wireless sold its undersea cable-laying business, a wonderful business, is beyond me. Maybe it was change for change's sake.

"Colt's strategy is to convince the regulatory authorities that it is a credible, low-cost alternative to the incumbents. In some places Colt has good relations with local regulators, but in others it doesn't.

"AT&T's acquisition of MediaOne positions the US giant at the crossroads of the convergent telecoms and cable television industries. AT&T has got a tiger by its tail. An awful lot of capital has gone on a strategy based on a belief in technology changes."

n How investors can pick telecom winners from losers: "The game has been about stimulating growth through competition. You see that, for example, in the advent of free internet access. In future, the game will be about taking the pieces and putting them together.

"Investors should watch the offerings telecoms companies make to the marketplace. They should watch quarterly reports to see if telecoms companies are doing what they said they were going to do."