CALL TO ARMS

It’s Britain’s second-largest advertiser, a company which just 11 years after privatisation has become a highly profitable international business with a market value of 24.5bn.

Yet today BT faces unprecedented competition. Its core business – telephony – is under attack. And demand for a potentially lucrative new revenue stream – interactive multimedia services – remains unproven. BT starts its interactive trials this month, the outcome of which will shape the company’s future strategy.

BT’s current market position appears unassailable. It owns, controls and maintains 97 per cent of the country’s telephone lines, serving 21 million domestic households. It is one of the UK’s top profit earners, posting pre-tax profits of 2.66bn for the year to March 31, 1995. But this figure was down three per cent on last year.

And in an attempt to protect future profitability, a five-year cost-cutting plan has been introduced: a further 10,000 of the 137,500 workforce will be axed by March 1996. Meanwhile, the cable industry is poaching 55,000 BT customers every month, according to Cable Communications Association estimates.

BT claims to embrace such vigorous competition. First came Mercury Communications. Now there are more than 160 telecoms companies licensed to compete against BT in particular sectors. Cellular telephone operators such as Vodafone now boast 3 million UK customers. So-called “personal communications networks” – such as Orange – have so far signed up 250,000 customers.

Cable TV companies, backed by US giants such as Nynex and Videotron, now provide telephone services to 750,000 people in the UK. Meanwhile, Energis is developing a phone service using the country’s power lines, Motorola is constructing a global satellite network to offer calls more cheaply and Vocaltel has launched the first Internet phone – offering users unlimited international calls for the local rate charged to access the Internet.

No wonder BT is lobbying hard for changes to existing telecommunications law which restricts its activities in the name of encouraging new competition.

BT wants to lower the cost of calls, offsetting them against higher rental charges. A report by telecoms regulator Oftel proposes abolishing the present cap on line rental charges but keeping overall price changes to the present limit of inflation minus 7.5 percentage points until 1997 – a measure built in to protect customers from steep rises in the rental charges.

For BT to increase line rental charges is a calculated gamble. BT would risk losing customers altogether if rental costs rose too high. And its costs are already higher than the competition. According to a report by the Consumers’ Association magazine Which? last month, BT calls are up to 25 per cent more expensive than rival cable networks. A 74 quarterly BT bill could be reduced to 55 by using cable, it claimed.

BT also backs the removal of “access deficit contributions” – money paid to BT because it owns, operates and maintains the only national network. Mercury must pay these, but other operators do not – their payments were waived to encourage competition. Oftel’s report proposed the abolition of access deficit charges and says it will examine “interconnection fees” – the money operators pay each other for carrying calls. BT wants a new system based on cost of carriage plus a contribution to overheads. Rivals claim this would mean they would have to subsidise BT operational inefficiencies.

In addition, BT wants to be able to compete directly with cable companies to provide entertainment services. The company is banned from doing this until well into the millennium, although a Government review is promised some time before 2001.

“BT’s traditional revenue source is on a one-way track – downwards,” explains John Kearon, planning director of Impact FCA!, who has responsibility for new media initiatives and futures strategy. “From all directions, the message is clear: telephony is becoming a commodity. BT must find added value products to sell.”

Michael Biden, BT sales and marketing director for the Personal Communications division, concedes competition will eat into areas of its business: “My challenge is to develop the market faster than we lose share.” He believes he can achieve this by encouraging greater use of the phone – a key feature of the current Bob Hoskins advertising campaign. “Our usage rate of phones in the UK is much lower than in the US,” he explains. “There remains a basic perception that the telephone is a luxury – a perception we are trying to overcome with new rates, such as the 1p per minute local call tariff recently introduced for weekends.

“A competitive market will thrive and bring new products and services to the consumer. Our role is to be a leader in innovation. There is no way BT, Mercury or any other company can offer single-handed all the services people will want.”

So, BT is developing new products: after “caller identification” and “call waiting” will come “call minder”. These features have been re-dubbed “select services” and will form part of a new advertising campaign breaking later this month.

Then there is multimedia.The East Anglia trials that started this month include video on demand – a service BT can explore because it is not classified as broadcasting by the Government. The trials are essential to assess potential consumer demand for interactive services, Biden explains.

“Broadcasting is a known quantity – we know what people will spend because of the cable companies’ experience. The market for interactive services is more nebulous,” says Biden. BT wants to be allowed to broadcast entertainment to develop a new market in the longer term: for truly interactive products. Video on demand is in effect a halfway house before a fully interactive, “information superhighway” can be established in five to ten years’ time.

“A competitive market thrives and brings more benefits to the consumer faster than if there were still a monopoly,” Biden says. Others are not so sure. “Competition is hamstrung by existing regulation,” Mercury public policy manager Stephen Young believes. Like many, Young believes BT protests too much about its current plight.

“As competition develops, newcomers take customers from each other, not from BT,” another industry source adds. “The problem is how the industry can balance regulation with comp- etition. If certain regulations are lifted, I believe more customers who recently defected will simply go back to BT.”

Taking on BT is not easy, as Mercury found to its cost. Last December it conceded defeat in the UK payphone market. Yet there are numerous overseas challengers waiting in the wings. In June, the Italian company, Interphone, took over Mercury’s payphone business and announced plans to invest 20m in establishing a network of 10,000 or more UK payphones over the next two years. The reason is simple: existing UK telecoms regulation has been designed to encourage newcomers by restricting BT in certain areas of business – notably the ban which prevents BT from offering entertainment services down its phone lines.

This has encouraged numerous US-backed companies to enter the UK cable market. In the US, they are banned from offering both cable TV and local telephone services. Not so in the UK where Government incentivised overseas investment encourages the construction of a UK cable network. So far, cable companies have invested 3bn and connected 1 million UK households to cable.

Many believe cable is replacing Mercury as the real competition to BT. But cable faces massive problems, believes Henley Centre director James Walker. “It is squeezed by satellite on the one hand, BT on the other,” he explains. “It’s very difficult for cable companies to directly compete because of BT’s universal network.” Cable penetration remains patchy – and is generally restricted to more densely-populated urban areas.

This puts the cable industry in a tricky position, says Derick Peters, project manager for Swiftcall, which launched in the UK two years ago and offers discounts on international calls by brokering phone lines direct to customers. “Cable companies will look to other, non-TV revenue streams should BT be allowed to compete in entertainment. Where they go from here, I don’t know. But it will increase competition for all of us.”

As a result, cable companies are lobbying the Government, urging it not to lift the ban on BT’s entertainment ambitions. “There is nothing cable companies can do now that BT can’t,” says CCA director general Richard Woollam. “BT claims the current situation is unfair, that there is ‘asymmetry’ in the market. This isn’t so. It could buy Nynex if it wanted to. It could apply for cable franchises – but it has decided not to.”

Instead, BT has set its sights on becoming the world’s leading telecoms company. And it is forging a number of strategic alliances abroad.

BT owns 20 per cent of MCI – the US long distance telephone operator which earlier this year struck a deal with Rupert Murdoch by purchasing 13 per cent of News Corporation stock and injecting 200m in the company. The aim is to create a US-based joint subsidiary to distribute electronic information, education and entertainment material worldwide. In July 1994, BT and MCI launched Concert Virtual Network Services – a product which claims to offer seamless voice links between all 11 countries in which it now operates.

BT also has its eye on other markets including Germany, where it has struck a strategic alliance with Viag AG in anticipation of deregulation, to compete against Deutsche Telekom AG. And in Italy, BT last month forged an alliance with Banca Nationale del Lavoro, a leading bank which has interests in one of the country’s largest private telecoms networks. It has recently participated in an Israeli telecoms consortium and another in India; in March, it opened its first Chinese office.

“Increasingly the telecoms business is an international one. It’s all about strategic alliances,” says Peters. “I don’t think BT will necessarily get all that it wants. Technology is lowering the entry barriers; our company couldn’t have existed four or five years ago. BT wants to become a major player in Europe, and it will be. But being so large will always have its failings. Only customer ignorance will let it get away with these shortcomings.”