UK: BT PREPARES TO BEAT THE WORLD. - BT is toughening up in order to compete globally with the industry's best.

by Roger Eglin.
Last Updated: 31 Aug 2010

BT is toughening up in order to compete globally with the industry's best.

During the run-up to the privatisation of BT eight years ago, its then chairman, Sir George Jefferson, was asked why the quality of calls in parts of central London deteriorated when it rained. The trouble, he explained, was caused by the worn-out paper insulation of the underground cables. They had not been replaced for years and when it rained the dampness caused crackling on the line. Somewhat bitterly, he went on to say that this was just one of many deficiencies in a network starved of investment for years.

A considerable leap of imagination is needed to appreciate the transformation this organisation has undergone. Those investors who buy shares in the BT3 float this month will be taking a stake in a very different animal. The company that could not cope with the rain is building a $1 billion global communications 'highway' that will link 20 cities, while its productivity is getting closer to matching the best of America's efficient telecommunications industry.

Vast investments in electronic telephone exchanges have transformed the quality of BT's service. Its productivity is rising sharply as Iain Vallance, the BT chairman, oversees the rundown in the swollen workforce. In a bold strategic move, BT has struck a $4.3 billion partnership deal with the American giant communications company, MCI. The agreement also includes a $1 billion joint venture which is aimed at providing communications for multinationals.

Revitalisation is essential. Without it, there is no guarantee that BT will survive the radical changes sweeping through the industry. For instance, it is clear that within a year or so BT will find itself slugging it out in the domestic market with a flock of new competitors, among them AT and T, America's largest telecommunications company.

Until recently BT's monopoly has scarcely been scratched. Mercury, Cable and Wireless's subsidiary, has made only modest inroads into BT's business. Ten years after its launch it still has less than 10% of the UK telecommunications market.

But BT's market domination is now coming under great pressure both at home and abroad. The Anglo-American cartel that has earned excess profits from transatlantic communications traffic is breaking up. AT and T is urging BT to agree big cuts in the 'wholesale' price of transatlantic phone calls. (This is what BT and Mercury pay AT and T for delivering their calls to US destinations and vice versa.) Rates have nearly halved over the past two years and AT and T wants another 60%. This particular battle is part of a wider game. BT is seeking access to the US public telephone network. As part of its bid to either block this or extract the highest price for an entry ticket, AT and T is hoping its tough stance on transatlantic rates will convince the US Federation of Communications Commission (FCC) that its instincts are sufficiently competitive without having to open the door to foreign interlopers. BT, in turn, is trying to establish its competitive credentials with the FCC by saying that it will not oppose AT and T's wish to gain access to the UK domestic network.

The Government has come straight out in support of AT and T and says that it wants to open up the UK market. There seems no doubt that within a year or so mutual market entry will be granted. But AT and T will simply be one of many. Other US carriers, Sprint among them, are seeking licences, and cable companies, some American backed, want to supply telecommunications services. New UK operators have already been given the nod. Once pressure builds on this scale, it is difficult to stop. BT now accepts this and is gearing up to fight it out in the marketplace. In truth it has no alternative. Its own expansion depends on breaking into overseas markets and, as the debate before the FCC shows, it cannot demand of others what it is not prepared to concede itself.

To back this strategy, BT's management is showing a new toughness. The first switching centres for Operation Cyclone, the $1-billion plan for a global network, are already being built in London, Frankfurt, New York and Sydney. To extend this to the 20 cities envisaged will mean some tough negotiating to get regulatory approval. But recognition that future expansion lies abroad explains why BT is also a keen advocate of European deregulation.

A successful drive into world markets, helped by the link with MCI, will only be achieved when BT can match the productivity of the industry's best. If Vallance can pull this off, the dream of BT as a global communications supercarrier will be attainable.

Roger Eglin is associate business editor of The Sunday Times.

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