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Change rings at Britain's AT&T. Private control, new technology, and competition shake old image

For years, it was a state-owned monopoly, a sluggish, bureaucratic giant that controlled everything from local business phone calls to transmissions for royal weddings. British Telecom remained impervious to repeated complaints from the public about inefficiency and bad service. Now, changes on an unprecedented scale have swept through British Telecom, leaving the company with a different face -- leaner, more efficient, and more profitable.

This dramatic upheaval is the direct result of events that began in 1981. About the time British Telecom was helping to transmit pictures of the wedding of Prince Charles and Lady Diana Spencer around the world, Prime Minister Thatcher's conservative government initiated a sweeping liberalization of the country's telecommunications industry.

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The upshot was a licensing of another company, Mercury Communications, to provide a nationwide network in direct competition with British Telecom. Cutting government ties

Three years later, as part of an ongoing policy, the government privatized British Telecom, selling off the company to private shareholders and adding to the pressures for change.

``The introduction of competition, the liberalization of the industry, and privatization have galvanized Telecom to expand and offer new services,'' says Richard Ryder, an analyst at Phillips & Drew, a British brokerage.

The primary catalyst has been Mercury Communications. Only a tiny fraction of British Telecom's size -- with a market capitalization for its parent company, Cable and Wireless PLC (C&W), of 3.5 billion ($5 billion), compared with 11 billion ($16 billion for British Telecom -- Mercury has nonetheless emerged as a significant threat to the giant utility's share of the market.

``Any competitor is obviously a challenge,'' says John Tysoe, an analyst at Kleinwort Grieveson, a British brokerage; ``Mercury is something more than that. Under the terms of its license, it can target the single most profitable area of British Telecom. It can target the City [London's financial district].

``It doesn't have to provide services to the Isle of Skye or the Outer Hebrides,'' he continues. ``It can just do cream skimming.''

Mercury's approach has been coupled with the introduction of newer, advanced technology. In a company that is not weighed down by top-heavy bureaucracy, that has meant the ability to charge lower prices and undercut British Telecom.

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Telecom has been hit hardest in the highly profitable sector of long-distance and international phone calls made in the financial community. This is where Mercury is not only offering cheaper rates but, because of its new equipment, better service.

``British Telecom is making a lot of progress towards modernization,'' says Mr. Tysoe. ``There is no doubt it has accelerated plans to reduce long-distance rates and spend nearly 2 billion to overhaul its service, offering some new services not widely available six years ago. These include message handling and telephone answering facilities, electronic mail, and video conferencing.'' Embracing new technology

British Telecom is fighting back, and in doing so has come a long way toward shedding its image as an ossified, obsolete giant.

British Telecom has also established a cellular radio service and has moved aggressively into the market of setting up private branch exchanges with more than 100 extensions. And it's replacing the old analog system with new integrated digital exchanges, which can transmit both data and voice and provide customers with a fast connection and clearer speech.

In addition, British Telecom is converting its long-distance trunk network from conventional cables to optical fibers. These will improve line quality and facilitate transmission of data.

British Telecom is also pushing aggressively to expand overseas. It is competing directly with C&W, Mercury's parent, to build and operate telephone networks in developing countries, long the stronghold of C&W.

Earlier this year, it acquired Mitel Corporation, a Canadian maker of communications equipment. This is British Telecom's first manufacturing operation and provides it with a toehold in the United States and Canadian telecommunications market.

For average consumers, this more aggressive management style has had mixed results. New residential customers no longer have to wait nine months to get a phone installed, as they did six years ago.

But the effect on the phone bills of private subscribers is likely to be similar to what happened in the US when American Telephone & Telegraph was broken up in 1984. As subsidies from long-distance calls are eliminated, the cost of local calls could rise, although any increase is limited by government regulations. Customers will begin to pay for services like directory inquiries that are now free.

For the first time phone bills will be itemized. For what it says are technological reasons, Telecom has never customers' itemized bills but plans to do so in the next decade. Problems lingering

Despite its attempts at modernization, British Telecom still has serious problems.

Although its top management is considered progressive, it is overmanned and faces a difficult task slimming its work force of 236,000 employees. And it also must change the attitude of many who see themselves more as civil servants than as workers in a commercial organization.

``Cultural change and head-count reduction are two of the biggest problems,'' says Harold Rich, an analyst at Capel-Cure Myers, a brokerage. ``For as long as anybody can remember, there wasn't any idea of profit at British Telecom, and it tended to be overmanned.''

British Telecom's drive to expand and improve has had a dramatic effect on the telecommunications industry in Britain. It has both distressed a number of its established suppliers and forced them to be more competitive with foreign companies.

``The liberalization of telecommunications sent shock waves through the industry,'' says David Gibbons, an analyst at James Capel & Co., another British brokerage. ``It meant British Telecom was no longer a monopoly and accelerated foreign competition.''

Despite the sweeping changes, there is still concern here about how British Telecom would fare under a Labour government, and these fears have been reflected in its share price, which has fallen dramatically. Could Labour renationalize?

Last spring a Labour policy committee announced that if its party gets into power, it might repossess British Telecom without allowing shareholders any profit, or it might give shareholders some form of an income bond in exchange for sacrificing their voting rights.

Despite this proclaimed policy, most analysts regard it as somewhat hollow. Renationalizing the company without giving a profit to the shareholders could create a lot of potentially disgruntled voters.

``British Telecom has over a million small British shareholders, and this will not enhance Labour getting back into power if they think they are being ripped off by the Labour Party,'' Gibbons notes.

In the face of these difficulties, Telecom's prospects are still good, but quality of management is crucial.

``It has an excellent future, but it comes down to the management,'' says G. Alan Horne, managing director of Interconnect Communications Ltd., an information technology consultancy. ``British Telecom needs strong management at all levels.''

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