The Anglo File: BT Lumbers Away From Last Vestige of Its Monopoly

U.K. regulators want greater competition for broadband services. British Telecom is surprisingly nonchalant about giving up its turf.
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Last week, the

Office of Telecommunications

, or Oftel, the U.K.'s telecom watchdog, instructed

British Telecom

(BTY)

to go the final mile and open up its local network to rivals. Apart from some grumbling about the timing, BT seemed pretty nonchalant about giving up its remaining piece of telephone monopoly.

Oftel said it intends to promote competition for broadband services such as voice telephony, video on demand and fast Internet access through a twin-track approach.

First, the regulator wants services-based competition. As BT upgrades its copper loops for Asymmetrical Digital Subscriber Loop, or ADSL, services, it will be required to provide access to these upgraded lines at fair prices in order for other providers to deliver their own services to customers.

Second, there will be facilities-based competition. This is a form of local loop unbundling under which BT is required to make its local copper loop available as a leased circuit to other operators by July 2001 at the earliest. Competitors can upgrade the loop to provide higher bandwidth capacity by installing their own equipment at BT's local exchanges and at the customer's premises.

So why BT's shrug of the shoulders at Oftel's orders to hurry up and get with the broadband program?

BT Has Time and Money on Its Hands

According to Paul Sharma, an analyst at

Investec Henderson Crosthwaite Securities

, which has a buy rating on BT and no investment banking relationship with the telco, Oftel's decision was "basically a

fait accompli

," following similar moves by Germany and the Netherlands.

This approach is largely favorable for BT because of decisions by Oftel over two key aspects of the plan to open up the loop: pricing and timing.

Oftel has shied away from imposing a pricing structure on BT and instead said it should offer "fair prices" for allowing its competitors access to the local loop.

Credit Suisse First Boston

, which has a buy rating on BT and has had an investment banking relationship with the telco in the past three years, believes that fair here means BT will still be able to make a reasonable return.

Indeed, it is unimaginable there won't be many years of argument between BT and its competitors about what fair actually is. It is expected that Oftel will have to step in to smooth out the differences between BT, which will want to get as much as possible, and the rival operators, who will want to pay as little as possible. All this takes time, which leads to the second favorable part of the ruling for BT.

Oftel's report included some thinly disguised criticism of how BT had been dragging its feet over upgrading its copper wire network to allow ADSL. And it was instructive that the day before last week's report by Oftel, BT suddenly announced it intends to upgrade 400 of its 2,800 exchanges by spring 2000, following an equipment supply agreement with

Alcatel

and

Fujitsu

.

"BT knew the decision was coming, so they've waited until the last minute so the prices for this new equipment have come down," says Investec's Sharma.

BT also has a full two years to roll out its broadband services before allowing competitors to install their own equipment at BT exchanges. During this time, BT has a great opportunity to build up its customer base for broadband services. When competitors do enter the market, it is likely to accelerate market growth in broadband, and this extra growth should partially counterbalance any loss of market share by BT.

The market certainly appears unflustered by the report. Since it was issued on July 6, British Telecom's ADRs have slipped 3.8% to 172.375, according to

Baseline

. But they remain near the 181.938 level hit in late May.

In reality, the greatest threat to BT in the short to medium term is broadband access from the cable companies. None of the European regulators, including Oftel, have tackled the issue of unbundled access to cable networks, and the U.K. cable companies such as

Telewest

and

NTL

have been waiting for the right time to roll out their broadband services.

With BT set for a marketing blitz to get as many customers signed up for ADSL services as possible before any serious competition arrives, the cable companies are likely to start offering their own services to consumers. The drawback for cable companies, though, is that, according to

Inside Cable

, an industry newsletter, their cables only cover about 50% of the U.K.'s homes, and only about 15% actually use cable telephone services.

Basically, the broadband war is there for BT to lose. Data traffic already accounts for $3.6 billion of BT's revenue, or about 13% of its annual revenue. Since this part of the business is growing at over 40% a year, there will be plenty of business to go around.