As European telecoms prepare for deregulation, the UK pioneers are busy squaring up for the next stage of competition.
Come the autumn, BT and its American bride, MCI, will be happily merged, and trading as the rather blandly transatlantic 'Concert.' As soon as the ink on the register has dried, analysts will start trying to figure out the price at which the new company should float in London and New York. One of the major factors in their calculations will be the liberalisation of the European telecoms markets next January which will open up the hitherto protected phone markets of all the EU's member states. Concert has its eye on these markets and, to be fair, most of the telecognoscenti rate its chances highly, not least because BT, having lived through over a decade of liberalisation, knows the score. Moreover, the competition resulting from British liberalisation has transformed a bureaucratic state leviathan into a svelte world class operator. 'It has been a case of teaching the elephant to dance,' comments Steven Young of telecommunications consultants, Ovum. 'BT has been forced by competition to become much more nimble on its feet.'
The shake-up of the UK telecoms market began in the mid-'80s with the mother of all privatisations - BT - and the granting of a licence to Mercury to build and operate a competing network. For the first seven years, to give Mercury a chance to establish itself, the government adopted a duopoly policy. In 1991 that was scrapped and the market opened up to all comers: at last count there were over 200 holders of operating licences in the UK, ranging from Energis, whose network consists of optical cables strung along the national grid, to COLT Telecommunications (formerly City of London Telecommunications), which concentrates on commercial customers.
Perhaps unsurprisingly, almost two-thirds of the licences are in the hands of cable companies, many of which started by offering telephone services as an adjunct to cable TV. Times have changed: in 1991 the cable companies had a derisory 2,200 telephone customers; today they have more than two million.
Had the government simply awarded operating licences and let the incipient pygmies slug it out with the incumbent giant, liberalisation would almost certainly have been short-lived, with BT using its corporate muscle and predatory pricing to see off the competition. But, to ensure the newcomers got a decent toe-hold, the government set up a regulator, Oftel (the Office of Telecommunications) and the consensus is that it has done a remarkably good job. The latest figures show that, while BT, with over 80% of the total market, still holds the lion's share, competitors have managed to grab enough of each segment to provide effective competition in most areas. This has been particularly true of the business calls market, where Mercury and other operators such as Worldcom, MFS, Global One and ACC Long Distance have between them managed to capture half the market for international calls and a quarter of domestic calls.
Oftel's director-general, Don Cruickshank, has now recognised the strength of the competition and is changing the way the regulator deals with the market. A key tool has, until now, been the price cap, a formula written into BT's licence which limits the prices it can charge. The cap serves two functions - first, it restricts BT's prices to a reasonable level (in practice, the formula usually means BT's prices get cheaper year on year) and, second, it forces competitors and new entrants to match or undercut BT's prices if they want to remain in the game. Cruickshank has announced that the new cap (which will take effect in August) will cover only low-to medium-spending residential customers and small businesses, and that this cap will probably be the last. The thinking here is that regulation is there to protect customers from excessive pricing where competition is insufficient to do so. Once competition is effective, however, regulation becomes superfluous. Indeed, Cruickshank believes that regulation in an adequately competitive market may even be damaging, with the market moving to reflect regulatory decisions, rather than healthy competition.
Ovum's Young views the director-general's move as a sound one, a realistic response to the realities of the marketplace, now that most large companies can switch between suppliers with relative ease should a better deal crop up. 'It's a function of how much you can shop around in the market - if you can do a lot of shopping around then clearly you do not need the protection of regulation as much as someone who can't,' he says.
The regulator's move may also be indicative of the changing nature of the market itself, Young suggests. 'From being a utility, it's now become an extraordinarily rapidly moving industry where technology changes almost on a weekly basis and the market changes daily. That makes it very difficult for any single agency to manage. I think Oftel has recognised that it cannot manage the process. What it has to do is to put very broad guidelines in place, then stand back a little and let the normal play of supply and demand in the market take effect.' It is worth noting here, however, that although Mercury et al (with a little help from the watchdog) have together managed to provide an effective competitive counterweight to BT and are nearing the point where real competition is strong enough to be self-sustaining, no single company has reached the kind of critical mass that would make it a threat to BT were they to meet head to head. Mercury, for example, has often seemed uncertain of its strategy - witness its short-lived foray into call boxes - and new entrants have often poached their customers from the number two, not from the market leader. Furthermore, looking beyond the original duopolists, the cable companies are by and large still getting off the ground and running up losses as they build up their networks.
So the market still has a lot of growing up to do. According to textbook economics, the next stage for the UK is likely to be one of consolidation with many of the 200-plus licensees coming together to form larger companies with greater geographic reach and a wider scope for economies of scale. The first stirrings of this process are already under way: in May, Mercury (which belongs to Cable & Wireless) merged with three leading UK cable companies, Nynex CableComms, Bell Cable-media and Videotron, to form Cable & Wireless Communications. Industry expectations are that more companies will join this group or form other groupings of their own.
That said, it should not be imagined that by the millennium BT will have ceded its pre-eminence to another, but its competitors will be fewer in number, larger and stronger.
In tandem with this simplification of competitive structure, the industry may also be about to diversify radically in terms of what it offers customers.
The telecoms companies which already have the capacity to carry numerous different kinds of digitised data along with conventional voice are looking at how they might penetrate more deeply those areas more normally associated with IT, broadcasting and entertainment. An early example is that of the Internet: the companies which previously provided the networks for service providers are becoming service providers themselves. Industry observers such as Ian Holt, Logica's telecommunications expert, believe that traditional telecoms companies will increasingly use media such as the Net to provide their customers with bespoke information systems which will help them not just with communication but with actual business processes. Companies are already using the Internet to provide their clients with customised pages showing, for instance, how much telecoms time they have used. It is a small step from providing that sort of service to giving customers the wherewithal to conduct business via the Net. 'The telecoms companies want a slice of the action,' elaborates Holt. 'They're trying to move up the value chain by getting more and more into the process of what goes on in, say, ICI, rather than simply providing the lines and the telephones they need.' But there may also be a dark side to the Net for the telecoms companies. In his recent bestseller, Only the Paranoid Survive, Intel's chief executive, Andrew Grove, suggests that while the upside of the Internet is an increase in traffic over the telecoms networks, a possible drawback is that, as information is communicated more and more as data rather than by conversation, income from voice telephony could suffer.
Internet-related gains or losses notwithstanding, a clear indication that telecoms diversification may be leading to a convergence of telephony, IT, broadcasting and entertainment came in May with the announcement that BT, BSkyB, Midland Bank and Matsushita were joining forces to provide a satellite-based service that would enable the TV viewer to shop, bank or surf the Net from the comfort of his or her armchair. BT has also been in talks with the new Labour government about a dispensation that would end the long-standing ban which prevents BT broadcasting entertainment across its telephone network.
The blurring of boundaries between telecoms, broadcasting and IT means that, although Oftel may on the one hand be relinquishing its control over the telecoms market, it may on the other have to be rather more interventionist where convergence is concerned. Oftel and the other authorities involved will not wish to dictate the market's future shape and growth, but they will nonetheless need to keep their eyes open for potential abuse. Meanwhile, as BT - or Concert as it will be known - and its rivals jockey for position in the UK, there is Europe to be considered: we may be sure that Concert will be active on that front, too. Precisely how it goes about things, be it by going it alone for new licences or simply building on BT's existing alliances and joint ventures, remains to be seen. But there can be no doubt that the merged BT and MCI intend to capitalise on their skills and drop large chunks of the European market into their portfolio. As BT chairman Sir Iain Vallance told shareholders recently, the arithmetic is simply too compelling to ignore. Outside the UK and US, he explained, a mere 17% of the market is open to competition. That could be 95% by the millennium - 'and every single point of market share is potentially worth $10 billion'.
COUNTDOWN TO A TELECOMS FREE-FOR-ALL IN THE UK
1980 - British Telecommunications Bill seeks to divide General Post Office into British Telecom and Posts
1981 - British Telecom begins operating under licence
1982 - Mercury consortium awarded licence to compete with BT
1983 - Mercury launches first service. Telecoms Bill reintroduced to allow sale of BT and set up Oftel as regulator
1984 - BT becomes a plc; 51% of shares sold to the public
1991 - Duopoly review white paper, Competition and choice: telecoms policy in the 1990s, announces end of duopoly policy
1992 - Cable licensees premitted to offer voice telephony
1993 - First new licence granted to Ionica. First broadband cable TV licences modified to allow operators to offer voice telephony
1996 - Oftel announces that new cap on BT's prices (RPI minus 4.5%) will probably be the last
Sources: Oftel, Logica
HAS DONE BETTER: BT SINCE 1984
- More than £24 billion invested in modernisation of its UK domestic network
- Domestic call charges down 53% in real terms International prices down an average of 46%
- Number of lines up from 20 million to over 27 million (seven million** business lines and over 20 million residential)
- Revenue per employee up by more than 90% since 1991. Exchange lines per employee up by 89% over the same period
- Employee numbers down from 246,000 in 1990
to 129,000 today
** The figure seven million conceals the fact that switchboards count as one line when they may conceal several hundred lines each.