Ahead, but watch out for Amsterdam

<em>London's growth sectors</em> - Telecommunications

Back in the late 1970s, London was the unchallenged financial centre of Europe. Despite this, the economy was in a mess, beset by strikes and a poor communications infrastructure. City institutions were beginning to ask questions about the merit of locating in London. The first wave of American banks arrived to discover an appalling telecommunications service. Worse, the Post Office looked after the telephones and it was a case of like it or lump it.

Today, London and its communications infrastructure are a far cry from those early days when what became BT was the only supplier. The number of telcos choosing London as their European base reads like a list from the Fortune 500. Level 3, which is rolling out a pan-European and ultimately global communications network, selected London as its European base because of the rich pool of skilled engineers in and around the city. The location in London of this and companies such as iaxis and MCI WorldCom has helped to strengthen the city's appeal for other telcos and related telecoms businesses.

Telecoms manufacturers are also looking to London. Last year, Ericsson - one of the world's largest manufacturers of telecoms equipment - shifted its European headquarters to St James's Square. Precipitating the move were London's excellent international transport links and favourable tax environment, which are in stark contrast to the high taxes and relative isolation of Stockholm.

London's current edge stems from two factors. First, many American telcos and US investors preferred it early on because English is the first language. Second, the liberalisation of UK telecoms, which started back in 1981, happened way before the rest of Europe, giving it an important head start in attracting investment capital into the telecoms sector. When Europe followed suit, it encouraged those already based in the UK to expand into the Continent. As a consequence London became the hub of Europe's expanding telecoms services industry.

But while the advantages of being at the head of the field are considerable, most of Europe has caught up. English is increasingly the language of business across the Continent. London's rivals, such as Amsterdam, Brussels, Frankfurt and Paris, are adapting their environments to be far more attractive to telcos. Amsterdam is emerging as a particularly serious competitor. Already home to a strong American-Dutch partnership involving KPN and Qwest, which is building a modern global communications network, it is also home to Europe's second largest cable TV communications company, UPC.

At one time, London was assumed to be the natural home for the new telco exchanges. The blending of financial skills with telecoms would seem a match made in heaven, and companies in the City, such as Band-X, have flourished over the past three years, selling voice telephony minutes over the internet and offering new futures-based products. But the heightened commercial climate in cities such as Amsterdam has given rise to serious competitors, such as InterXion, a company very similar in ambition to Band-X.

Being the home to many telcos brings substantial benefits to London. The large number of highly paid executives and the thousands of skilled engineers inject considerable income into the London economy. One area near the Docklands is even known as Telecity, a complex containing one of Europe's most secure buildings, which houses the thousands of cables linking the city, and Europe, with the rest of the world.

The industry's dynamism spills over into other areas of the London economy. It ensures that communications services delivered to big business are high quality and use the latest technologies, a critical factor feeding the rapidly changing needs of e-commerce. Modern telecommunications also play an important role in stimulating the development of financial services. Whether the dynamism filters down to small telecoms users, however, is less certain, and BT could move faster to bring the broadband revolution into ordinary homes.

But London pays a price for being Europe's number one. The numerous road closures related to telecoms installations cause Londoners great irritation. With an already creaking transport system, the digging up of roads and unsightly presence of satellite receivers diminish the quality of life. The city authorities in Brussels recently placed a moratorium on new cable installations in an effort to co-ordinate construction works. It is just the kind of populist move that might appeal to a newly elected London mayor, but arguably it jeopardised Brussels's competitive position with the telcos, and it would in London, too. On the other hand, policies such as improving local transport infrastructure would be welcomed by telcos and other businesses.

In the new Europe, with cities such as Amsterdam in the ascendant, London faces a dilemma: measures aimed at garnering widespread popular support can reap substantial benefits for the city, but some run the risk of undermining its competitiveness. The new mayor will have to tread a careful path if the city's pre-eminence in telecoms is not to be lost.

Chris Doyle is director, Telecoms, at London Economics