Nearly £15bn was wiped off BT's value on Wednesday morning after its shock 25% fall in profits. It reacted by announcing it is to scrap 3,000 jobs to cut costs. So what has gone wrong for the telecom giant?



By Rebecca Marston



What is eating BT, the privatisation trailblazer which in 1984 tempted more than two million British people to begin trusting their money to shares?

In its early days as a public company it was able to keep cutting costs and boosting profits by shedding thousands of jobs.

In 1984 the company employed 241,000, since then it has cut more than 100,000 jobs and now has 137,000 on its payroll.

Despite the efforts of the Office of Telecommunications (Oftel) to keep BT in check, new entrants to the market found it hard to compete with such an established company.

For some years small shareholders reaped the benefits of this docile business climate.

But eventually the company began to be hit by two key factors.

Cable eating into profits

Its core traditional business, what it calls "fixed voice telephony", initially the most strictly regulated part of its business, began to be attacked by rivals.

BT is still installing fixed lines and now has more than 28 million of these.

But the proliferation of cable and mobile phone customers is eating into profits from call traffic on these lines.

That is despite demand for fixed services being kept high by the rise of home computing and the internet. BT can also make up some of the loss from its Cellnet customers - which number seven million.

BT seems to be floundering in its efforts to spot the next big thing.

It wasted months trying to tie the knot with the American telecoms giant MCI, only to lose that chance.

Timing, cashflow problem

It is still staking its future partly on size, by forming link ups with other major foreign established telephone companies under the name of Concert.

These include America's AT&T, and companies in Japan, Canada, Spain and Germany.

The 20% share price fall is certainly dramatic.

For any company to lose more than a fifth of its value in one day smacks of panic among investors.

But BT's share price could be considered to have been far too high in any case, partly because the share market itself is seen as "toppy", and partly because BT is linked to the hottest investment area, the hi-tech stocks.

It has now slipped back to the same price as it was just last Autumn.

The company's problem can also be seen partly as timing - or even cashflow.

It has not been quick enough hedging its declining and more competitive home market against the bolder opportunities abroad.

And while it has been investing heavily in its Concert business, it has not yet started to reap the profits.

Whether these profits actually start to stream in will be the key to BT's future.

It will also decide whether chairman Sir Iain Vallance's comments on Wednesday morning, that growth prospects remained good both in the UK and internationally, are simply the hopeful words of a man in charge of a failing business.