British Telecom is facing competition from the cable operators as the European telecom market opens up. Trevor Dooley reports.
Britain is the privatisation laboratory of the world and its telecoms industry was the first experiment. While the other utilities are still edging towards competition, BT is being circled by contenders for every part of its market.
Cable & Wireless was the only company permitted to pitch against BT in the early days of privatised telecoms. It set up Mercury Communications as a joint venture between C&W and Canadian operator Bell Canada.
The duopoly was ended by the government in 1992. Since then some 130 companies have obtained telephony licences and about half of them are active in the market now. But BT still commands some 85% of the business market and more than 90% of the residential sector thanks to a combination of clever marketing, favourable regulatory rulings and some bad decisions by its rivals.
BT used a heavy price cap placed on its call charges to its advantage by applying them legitimately to the markets where competition has been stiffest. It enjoyed the proceeds of a punitive accounting move which enabled it to collect extra charges from Mercury for use of the BT network.
Once the new competitors arrived – chiefly from across the Atlantic – they all focused on the highly lucrative business markets, particularly the international corporate businesses and the finance sector. First in was City of London Telecommunications (now called Colt) which wired up the capital with fibre-optic cable and offered attractive deals to the bankers and brokers in the Square Mile. Its growth was fast and largely at the expense of Mercury, which had wrenched some 80% of the City market from BT. Since then another US-backed company, MFS, has entered the City market and Colt has targeted the media industry in west London.
Shortly after the market was opened to competition, the cable television companies were allowed to offer telecommunications as well as broadcast television. They were guaranteed a safe run at the television market with no competition from BT or Mercury.
Consolidation
The cable sector has grown rapidly: it has spent £3bn on infrastructure and is winning some 60,000 customers each month from BT. So far, of the 6m of Britain’s 20m households passed by a cable, about 1.7m of them are actually linked up. According to those in the industry, cable companies will have passed 9m homes by the end of this year and cable will be available to 85% of households by 1998.
Four years into its existence, the industry is starting to consolidate. Last year TeleWest – already the largest operator – bought the fifth largest cable company in the UK, SBC Cablecomms, taking it well ahead of its nearest rival Nynex. However, Nynex is expected to merge with one of the other big operators.
Consolidation usually means job losses and property disposal. However, the cable sector’s capacity to expand is huge, with only one-third of its £10bn infrastructure programme complete. Expansion of the successful companies should counter the shrinkage which usually follows mergers.
The cable operators have until recently largely eschewed the opportunities in the business sector. Their main thrust has been on the back of television services which made the residential market their natural hunting ground. But telephony has far outstripped their expectations and now generates more than half their revenue.
This caught the industry on the hop. It has forced it to step up its cost base because telephony requires greater investment in maintenance and other services. Having established themselves as a force in the UK telecoms market, the cable operators have decided to address the business sector. Some have formed a marketing operation to promote their offerings in London, Manchester and Birmingham.
Other recent entrants in the telecoms market must look at new ways of reaching their customers:
- putting up or burying lines using existing infrastructure, as done by the likes of Mercury and Energis – the telecom arm of the electricity transmission company the National Grid Group – and regional electricity companies, Norweb and Yorkshire Electricity;
- burying lines to target customers selling connections as done by the cable operators and companies such as Colt and MFS which have targeted the financial sector;
- installing radio networks to connect customers to the local exchange. Cambridge-based Ionica, which started operating in May, is the only company to use this technology so far.
Fibre optics’ capacity to carry information – usually called its bandwidth – is several million-fold greater than that for copper wire. So for businesses such as banking and academic institutions with their need for data transmission, and the cable television companies who are transmitting bandwidth-guzzling television signals, fibre optic cables are the only real option.
Installing lines direct into premises is an expensive job for a telecoms company. Mercury built its long-distance network from scratch and leased local connections from BT except in the City and for some other large industrial customers where it could justify taking a line into the customers’ premises.
However, once those lines have been installed they should increase the value of the property – particularly with the introduction later this year of number portability whereby a customer can change operator without losing his number. It is conceivable that lack of a fibre-optic link into commercial buildings will be a distinct disadvantage.
Still in their early stages are operations set up by regional electricity companies which have used their own distribution networks on which to hang fibre-optic wires. Norweb in Manchester has formed Norweb Communications to supply the business community in the North West. But across the Pennines, Yorkshire Electricity has just pulled out of a venture – Torch Telecoms – with the Hull council-owned operator Kingston Communications.
Swalec, the South Wales electricity company, has linked up with its local cable operator, CableTel, while Scottish Power is developing its Scottish-Telecom operation. With the exception of Cable-Tel South Wales, the electricity companies set up high-capacity fibre-optic networks with the business sector, local authorities, hospitals and academic institutions in mind. Only Scottish Telecom has short-term intentions to approach the residential sector.
The North West is a centre of particularly brisk activity: alongside Norweb’s emerging business, Colt has moved on from its success in targeting business in London and is stepping up operations in Manchester.
While takeover activity is starting to bubble in the cable industry the fixed-line business has shown little activity. BT and C&W came close to a merger to create a £35bn company that would have spanned the globe. The deal might have hauled C&W out of its legacy of near valueless businesses scattered worldwide from its roots as the telegraphy company for the British Empire. The company’s 57% stake in the highly profitable Hong Kong Telecom is viewed by the City as the sole undertaking of real value at C&W. Had the merger happened it would have given the company access to Hong Kong and the Far East where its presence is weak and where there are burgeoning markets or sectors with enormous potential, particularly in China.
Global alliance
The alliances in the fixed-line sector have generally stopped short of merger. There has already been a deal between Scottish Telecom and Ionica whereby the Scots have leased the use of Ionica’s radio technology in order to enter the residential market north of the border while Ionica has agreed to stay out of Scotland. And Mercury has a mutual marketing agreement with the main cable operators. Although such a union makes a lot of sense in their shared aim to oust BT, the Mercury cable deal has been disappointing.
Applying the same logic, this spring, one of the leading cable players bought satellite network operator NTL, giving it an international carrier for broadband services. A response elsewhere among the cable industry is likely, and speculation is growing about the future of the National Grid’s long-distance telecoms arm Energis, which has been notoriously underperforming in its current owners’ hands.
And the telecoms sector is rapidly turning into a global business. European Union member states have all pledged to privatise their telecoms operations by 1998. European operators are already teaming up with each other and giant US operators for an assault on the revenue mountain in the international corporate communications market.
To tap this hugely rich seam of revenue, AT&T has drawn in confederates from across the world to form WorldPartners. It recently merged its international activities with those of Unisource, a massive joint venture between the state operators of the Netherlands, Sweden, Spain and Switzerland.
Concert – BT’s venture with the US’ second-largest long-distance operator, MCI, in which it holds a 20% stake – is widely seen as the front-runner in the multinational corporate business market. The third big player on this field is France Telecom’s tie-up with Germany’s state-owned operator, Deutsche Telekom, to form Global One.
Meanwhile, the European rail networks have formed Hermes, with plans to use their combined infrastructures to create a pan-European network targeting the business market.
BT has entered into joint ventures in many European countries in order to take on new markets. It has done this by teaming up with indigenous utility companies, such as Viag in Germany, or with banks as with Banco Nazionale del Lavoro in Italy where it is co-operating with Silvio Belusconi’s Mediaset to offer data communications services.
Telecoms operators in the rest of the EU – most of which are state-owned or controlled monopolies – are preparing for the opening up of their home markets to foreign operators. The business sectors of many EU markets are already open to some competition, hence BT’s ventures outside the UK. And naturally BT’s counterparts are eyeing the British market – particularly its highly lucrative financial sector.
As the telecoms sector combatants combine and merge, so their need for office space will increase. Inevitably they will gravitate to London but, where ventures like those of the regional electricity companies and Colt centre on regions outside the capital, they could attract business to those areas.
While it is unlikely that they will draw established businesses out of the capital, they could swing the balance when new businesses are making decisions on location. This will happen only if BT’s rivals can create networks outside London where customers can get access not only to broad-band services, which are available anywhere, but also to good local service to back it up.
Trevor Dooley is news editor on Utility Week.
