UK: Telecoms 2 - British lead in the PHONEY war - MOBILE TELECOMS.

UK: Telecoms 2 - British lead in the PHONEY war - MOBILE TELECOMS. - The UK is becoming the role model for its EC partners trying to inject competition into their existing monopolies. Its experience of deregulation will be valuable in the battle to come.

by Matthew Lynn.
Last Updated: 31 Aug 2010

The UK is becoming the role model for its EC partners trying to inject competition into their existing monopolies. Its experience of deregulation will be valuable in the battle to come.

By the end of this century, experts predict, telecoms services will account for some 7% of the gross output of the European Community, making it one of the largest and most powerful industries on the Continent. To get some hints on the coming shape of the industry, however, those experts have to travel to one of the northern outposts of the Continent, to Hull, which for years has operated one of the most liberal telecommunications systems in the whole of Europe. Telephone services there are run not by the UK telephone giant, British Telecom, or by its newer rival Mercury, but by a local operator, Kingston Communications. Within the city it runs the phone services, feeding lines into the national and international networks at prices, it claims, far below those its customers would be charged by either of the two larger companies.

"The UK has shown a lot of guts and a lot of initiative," says Kingston's company secretary, John Bailey. "It has driven for liberalisation far harder and faster than any other country in Europe."

True enough. Over the '80s, the UK telecoms policy has been marked by a steady desire to liberalise the market for telephone services. As a result, say industry players, two things have happened. One is that the UK may be poised to become a role model for its EC partners as they too seeks ways to inject some competition into their old telecommunications monopolies. And British companies, after the experience of finding their own way around a deregulated UK market, are starting to sharpen a significant competitive edge against European companies for whom the idea of competing for orders and customers is still both noval and distinctly foreign.

At the start of the decade, telecoms worldwide was dominated by a set of national monopolies all providing broadly similar telephone services using similar electronomagnetic technologies. But the UK broke away from the pack in 1984, when the national monopolist BT, which had earlier been broken away from control by the Post Office, was privatised. At the same time the Government opted to introduce a degree of competition into the market by allowing one rival, Mercury, set up by Cable and Wireless, to offer a competing service to BT. Although that initiative created a very unpopular, near-monopolist private sector in the UK, it has been applauded in the rest of the world. It has also been widely imitated. Since the BT privatisation, both the Japanese and New Zealand governments have adopted a similar strategy. The Australian government is selling Ausat, its international satellite operator, and there have been privatisations in three South American countries - Argentina, Mexico and Chile. The German government, taking a slightly more cautious tack, has decided to sell off a minority stake in its national operator, Deutsche Telekom.

This trend towards privatisation, far from being spent, is expected to gather pace in the '90s. One expert, Janice Hughes, of management consultants Booz, Allen and Hamilton, predicts that the total worth of privatisation over the next five years or so could top $150 billion.

Other countries, while sidestepping privatisation, have opted to restructure their domestic monopolies to allow greater room for the forces of competition. The break-up of AT and T in the US has provided an alternative model for countries seeking greater freedom in the provision of telephone services.

Across Europe, the pace of privatisation has proceeded at varying speeds. Britain is in the vanguard, with Germany the one other country now looking seriously at competition. But, as well as varying by country, the pace of liberalisation has also varied by product category.

Markets for telephone equipment, including such items as handsets and fax machines which used to be supplied by the domestic monopolies, have been freed up far faster than services. In Europe, partly driven by the European Commission and its 1992 single market project, there is now close to a single Continental market in equipment. The result has been to create three substantial European manufacturers in place of a patchwork of domestic suppliers: Alcatel of France, Siemens of Germany, and Ericsson of Sweden. These companies are now regarded as strong enough to compete in the world market against giants such as AT and T of the US, and the two major Japanese players, Fujitsu and NEC.

Another area to be freed up is data services, including products such as electronic mail. The EC plans a phased liberalisation of this area of the market, starting in 1993. Internal networks, set up by large multinational companies, have also been liberalised. Here again the UK has taken a striking lead, allowing lines to be leased cheaply, and attracting companies to use the country as a base for their networks, of the 14,000 internal company networks set up in Europe, 4,500 are operated out of the UK.

There is little doubt that the UK has taken the fast road toward liberalisation, only the United States has moved further or faster. Even in Britain, however, there is widespread recognition that the pace has to be quickened still further.

In March last year the Government published a White Paper on the BT/Mercury duopoly and recommended that the market needed to be opened up to more players. It trebled two radical proposals. One was that other companies should be allowed to come into the market, offering their own telephone networks. The other was that Cable TV operators, which in Britain are largely owned by US telecommunications companies, would be allowed to offer voice as well as picture services through their cables. The policy document, which was resisted by BT, opened the way for a second stage of deregulation.

One of the first companies to take advantage of the new freedom was British Rail. It already had its own substantial telephone network which it used internally. The rail operator has now gone into business as a telecom company, selling its network to other companies. Peter Borer, British Rail Telecom's MD, believes the UK policy has taken a far-sighted and imaginative path. "We now have one of the most liberal environments in the world."

To free the market is only one part of the story, however. For liberalisation to work, companies have to take advantage of the changes in the law, and create services that translate into better prices and quality for consumers. With the UK now Europe's testing ground, much depends on the ability of men like Borer to take advantage of the space the Government had granted them. He admits it is a tough task. "It is very difficult to move into a market dominated by two big players without ending up as a look-alike to your larger rivals," he says. "Also people need a lot of reassurance before they will make the switch. They need to believe that you really can provide the service you say you are going to provide."

Even so, Borer sees two ways his company can score an advantage. One is price - the traditional weapon of the new entrant into a market characterised by little competition. He suspects there is still plenty of scope for tariff reductions beyond those already made by BT and Mercury. The other way in is providing specialised services to companies which are too small to set up their own internal networks. Using those two tools he believes he can lever open a wedge in the market. "We believe we have advantages," he says. "There are large markets that have not been tapped." His tactic is to create a rival network to the two operating in the UK. Not everyone, however agrees that the British policy of allowing a host of companies to build and run a network is the right way forward.

Kingston's Bailey feels the UK may be going down the wrong road. "We believe the European regulators should try to avoid the UK experience. The UK has become besotted with the idea of a choice of network providers, rather than a real competition between services."

The formula men like Bailey favour is called Open Network Provision. That would create a single network of wires and transmitters, to which a range of competing operators would have access. It would allow companies to compete on prices charged and services provided, while avoiding the heavy costs involved in duplicating the essential infrastructure. "If you keep on extending competition between networks you will only damage the incumbent players, and undermine the economics of the network," he says. "Services will eventually suffer."

The alternative argument is that competition between networks is needed if ways of bringing down the basic cost of the service are to be explored. A single network would be in danger of remaining a high-cost, inefficient system. The debate, however, is still largely theoretical. And it will be played out in Brussels rather than London: the European Commission is due to publish a policy paper on telecoms regulation later this year which will start setting the framework for an European industry. It is still too early to say what kind of structure it will opt for. One thing is clear, though. It will draw heavily on the UK experience.

And because it does that, it is likely that UK companies will benefit disporportionately from the liberalisation of European telecoms that all the players in the industry now accept is inevitable. Their greater experience of a deregulated market will be a valuable weapon in the competitive battle to come. "It will be an advantage," says Borer. "Working in this country you learn a lot about how to operate in a free market. Look at what happened in the US. They started the whole process of deregulation 15 years ago and their companies have taken a tremendous lead as a result. It is all valuable experience."

One example, British Rail Telecom has already started putting together a consortium of European railway companies to operate telephone services across the Continent; its greater know-how is bound to give the British partner a big role in shaping that business. As the European market is gradually opened up, it is a lead that may well be duplicated by many other British companies. If so, the progressive liberalisation of the last eight years may well pay off in francs and Deutschmarks. "In Europe there have already been fears of the Americans taking over," says Borer. "And I think we can expect some similar hostility now that the Brits are coming in."

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