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BT Faces 21st Century Dilemma

BT Group plc (NYSE: BTY; London: BTA) unveiled its second-quarter results today, proudly displaying how revenues from what it calls "new wave" services are increasing (see BT Reports Leap in New Service Revenues).

But it also admitted it's caught between a rock and a hard place over its broadband strategy, and that an impending decision about how to address the growing DSL access market could affect the aggressive timetable for its next-generation network, the 21st Century network (21CN). (See BT Moves Ahead With Mega Project.)

BT's tough decisions and the potential impact on its 21CN timetable are linked to its new wave growth. The new wave revenues -- from ICT services and products, managed services, broadband, and mobility -- were up by 22 percent year-on-year at just over £1 billion (US$1.84 billion), and accounted for 22 percent of BT's second-quarter turnover, which totaled £4.6 billion ($8.5 billion).

Of those new wave revenues, broadband (DSL) accounted for £199 million ($366.7 million), up by 88 percent from a year earlier.

The problem lies with BT Retail, the business unit that engages directly with consumer and business customers in the U.K., and which buys services from BT Wholesale on the same terms and conditions as its rivals.

Basically, the operator's management must decide whether BT Retail should match some of its more aggressive rivals by unbundling the local loop and investing in its own DSLAMs in order to offer broadband services at prices lower than the regulated wholesale rate will economically allow.

If it doesn't unbundle, it risks becoming less competitive on price -- a key market differentiator in the current broadband land grab -- and could lose market share to its rivals. That would hit one of BT's prime areas of new wave revenue growth and make BT Retail a less effective "anchor tenant" for BT Wholesale in the future.

That's important, because part of BT's business plan for its next-gen infrastructure is based on BT Retail being a significant customer with a healthy market share.

Currently, BT Retail has 39 percent of the U.K.'s DSL market, or 1.3 million of the total 3.3 million active lines, though its share of the total broadband market is lower, as the U.K.'s cable operators have about 2 million cable modem customers among them. BT wants its share of the DSL market to be maintained, or bettered.

If BT Retail does unbundle, then it would invest in the same DSLAMs systems that BT Wholesale already has installed, duplicating capital expenditure. It would also mean that Retail wouldn't be spending as much on BT Wholesale's services, making it a less significant anchor tenant.

"Local loop unbundling is not BT Retail's preferred route," said BT CEO Ben Verwaayen during today's presentation, but unless there's a viable alternative it's an option that may be chosen, he conceded.

BT chairman Sir Christopher Bland added that BT Retail "has to be able to compete on price and functionality, and the ideal way to address that would be to do that without having to unbundle, but we're looking at that option."

It's a tricky situation for BT's board members and strategists, and there have been rumors of arguments between the head of BT Retail, Pierre Danon, and other senior executives.

But Bland dismisses the rumors of an internal battle over the issues as "stupid" and "ridiculous." "The board meeting at which these rows were alleged to have taken place was chaired by me. I didn't witness them, and I don't go to sleep in my own board meetings -- that would be rude," he jokes. "It's a dilemma we'll resolve, but there's no rift."

And what about the potential affect on 21CN? Bland wouldn't go into details, but he said the speed and nature of the planned rollout would be affected by a decision by BT Retail to unbundle the local loop. Verwaayen said it would affect the timing of certain 21CN access network deployments and the planned geographic rollout.

Any change to the current plan would not be welcomed by BT and its potential suppliers, which are girding their loins for the impending contract awards. Paul Reynolds, the CEO of BT Wholesale who discussed the 21CN strategy in a special Light Reading SuperWebinar earlier this week, confirms that the prime contractors for the next-gen network would be chosen "around Christmas time," and that they would be identified during the first few months of 2005.

A lot is riding on this project. BT plans to spend about £10 billion ($18.4 billion) on the new network and believes it will save about £1 billion ($1.84 billion) a year in costs once the current PSTN is switched off and all its voice and data traffic is running over the single IP infrastructure. And with BT planning to have nearly all its customers switched across to the new network by the end of 2009 in order to reap the economic benefits and remain competitive, it can't afford to deviate far from its tight schedule.

So are there any viable alternatives to unbundling for BT Retail? Yes. The first, and least likely, is that BT Retail will tough it out with its unbundling rivals, such as Cable & Wireless plc (NYSE: CWP), AOL UK, NTL Group Ltd. (Nasdaq Europe: NTLI), and Wanadoo UK, and hope that its current bundled offers and marketing muscle can help it maintain a decent market share.

The second is dependent on the U.K. regulator, the Office of Communications (Ofcom). It is due to issue a report on the U.K. telecom market on November 18 (next Thursday), and BT is hoping that Ofcom will enable its Wholesale division to offer its services at lower prices.

That would allow BT Retail to offer the services it buys from its Wholesale sister at lower prices and compete on price with the unbundlers. It would also cause uproar among BT's major rivals, though please the hundreds of smaller ISPs that rely on BT Wholesale and can't afford the capital outlay that unbundling demands.

So November 18 is a crucial date in the diaries of BT and its hopeful 21CN equipment suppliers. Bland said Ofcom is "going through a very careful process to create a framework for the U.K. telecom market. We believe this will give us the confidence to invest in the 21st Century Network."

Verwaayen added that, no matter what happens, the 21CN will be built, and BT will migrate from its current "narrowband network to a broadband IP network."

Whether that investment will match BT's current plans could be determined by next week's Ofcom report.

— Ray Le Maistre, International News Editor, Light Reading

purna 12/5/2012 | 1:05:19 AM
re: BT Faces 21st Century Dilemma Wholesale owns the access network and has to decide on unbundling, not Retail.
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