Are BT an obstacle to British internet services? 5/9/01

PAUL MASON:
BT's mobile phone business is to go surfing off on its own. Mobile is the high-growth business of the future and the argument is that it will do better as a separate company. It seems like a lifetime since BT was a state-owned monopoly.

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MASON:
Privatisation in 1984 started BT's transformation from a national company to a global player in the telecoms industry. But last year things went wrong. Faced with the cost of investing in the telecoms technology of the future, BT ran up massive debts. To balance the books, it had to restructure, and that's what's led to the mobile spin-off. So BT's set to split into two businesses - a dynamic, globally focused mobile phone business, and the old BT, based on a network of copper wires that connects our homes to the telephone exchanges. This old-style BT is crucial to the delivery of fast internet access - broadband internet services - that will take us into the future. BT has a monopoly of the technology that can bring fast internet access into every home in Britain today. But it's not happening fast enough. This key broadband technology is called ADSL. You put it on the existing network and it speeds up the flow of information - like using the same road to carry ten times the traffic. You can watch films, play games, or even have a doctor's appointment on the internet. But it's pricey, and in 1999, to increase competition, BT was ordered by the regulator to let other companies into its exchanges to provide the service. This process is called local loop unbundling. So far only 70,000 of these lines have been installed. And 40% of UK homes still can't get access to ADSL. Britain is 21st in the broadband league table.

PATRICK BOSSERT:
KPMG Consulting
The problem with the adoption of broadband has been around availability of competition. You need competition in the market to drive price competition. That drives a bigger take-up, and that's not happened.

MASON:
But BT's competitors say it makes the process of getting into the exchanges slow and costly. Many of them have already gone out of business. The survivors say they're being told to put their equipment into expensive new rooms, so-called gold-plated rooms, and that prevents fair competition.

RICHARD GRECO:
Chairman, Bulldog Communications Ltd
We do not have a level playing field. BT's had unfettered access to put their own broadband equipment in their exchanges. It's given them what amounts to about a two-year head start. The operators are still haggling over whether we can get access to these gold-plated rooms. BT doesn't have to put their equipment in the gold-plated rooms, so they don't have those costs. We do, so we have to pass higher costs on to the consumer.

MASON:
Oftel, the regulator, is supposed to ensure a level playing field. It's imposed strict conditions, and even the threat of fines, to get things moving. And it's not impressed with BT's progress.

DAVID EDMONDS:
Director General, Oftel
I'm unhappy about the way the process has gone. BT could have been more forthcoming, more helpful, and could have provided a greater level of assurance much earlier. I'm unhappy about the number of times I've had to intervene. BT could have done better and could have eased the paths of their competitors earlier in the process.

CHRIS EARNSHAW:
Group Engineering Director, BT plc
We've negotiated a set of standards which reflect everyone's interests. We've worked with the regulator to get the consensus. We've met all the obligations that have been set out for us. We're on target, and anywhere in the UK if they want access to the local loops, that is now available. But the commercial reality is that the demand is very low.

MASON:
Demand is low, but at £40 a month, prices are high. Analysts say there's a conflict of interest between BT's duties to its shareholders and the fast roll-out of broadband. The new-look BT is under pressure to invest only in growth areas. The paradox is, the more they invest in ADSL, the better it is for their competitors.

CHRIS GODSMARK:
Investec Henderson Crosthwaite Securities
The new regime at BT - led by the finance director who came in ten months ago - have identified that the visibility of profits from these new broadband services just isn't there. So from an investor perspective, BT is saying to the City, we aren't going to invest in ADSL in anything more than a peppercorn way until we see those profits coming through.

MASON:
It may not be in BT's commercial interest to speed up the move to broadband, but it's vital to take the UK economy into the future. The Government's so concerned that it's drawn up a broadband strategy and told Oftel, the regulator, to clear away all the obstacles. The question is, is regulation enough to do the job? In fact, Oftel itself has been criticised for not pushing BT harder to deliver on broadband.

EDMONDS:
The job of the regulator is to provide the conditions in which the incumbent delivers, and in which competition provokes the incumbent to deliver. The job of the regulator is to set out the conditions in which markets can operate. So, I am interested in demand, but above all I'm interested in removing obstacles to the supply.

MASON:
Technology has transformed the industry and it's complicated the task of regulating it. Telecoms companies typically are trying to do a multitude of things - run the network, deliver customer service, and even provide content, like interactive TV. One expert who advises BT and many of its rivals on broadband strategy thinks effective competition will only come when companies limit themselves to one basic function. For that to happen, we need a shake-up of the industry structure.

BOSSERT:
To accelerate Britain in the broadband league table, the industry needs to make some very bold decisions. It's around splitting the functions that telecommunications providers have into network operations and either concentrating on those, or into service provision, and concentrating on that. As a result, those companies build far greater shareholder value and deliver much better service to their customers.

MASON:
According to this vision, the industry would be split into two. Network companies would own and look after the infrastructure - the wires and the exchanges. Service companies would sell us our mobile phones, internet access and the existing phone connections. That idea appeals to some of the money men.

GODSMARK:
There's a lot of merit in splitting off BT's local loop. This is clearly the real source of BT's market power - it's the bottleneck, the new monopoly in BT's network. If you split off the local loop, BT becomes like any other telecoms operator - buying services off the local loop company, whoever that is, and it markets in competition with Cable & Wireless, or any other telecoms operator. The local loop company then - if the incentives are right - could be the vehicle to deliver these broadband services.

MASON:
BT has already received a bid for the local loop, and turned it down. It accepts the need for some form of split, but so far it's only looking at an administrative separation - both divisions would still remain part of BT.

EARNSHAW:
The next steps would be to continue to separate the retail and the wholesale parts of the company. We're on track to do that. We believe that enormous benefits come from having the focus, and that's what we'll do. We believe we can be very successful in the network business - we have a long history. But we have enormous strengths in managing the service base - in the way we manage the relationship with our customers, the applications and services we provide, and the whole empathy with the end user. That's going to be incredibly important in the future.

MASON:
But empathy may be not enough. It was the politicians who created BT in its current form. And maybe it's only the politicians who have the power to change it. So if market forces can't push BT to give up its monopoly, the Government has to step in to make broadband Britain a reality.