Can BT divide and conquer?

The cost to BT of unbundling the local loop could be more than £4bn a year. This dramatic figure is revealed in a new report from specialist telecoms consultancy Schema. And the European Parliament's decision on unbundling by 1 January has left BT no room to manoeuvre.

The devastating estimate by Schema, if borne out, would certainly explain BT's refusal to be hustled into opening up its local exchanges to rival providers of telecoms services. It also casts further doubt over the future of the telco, beset as it is with a share price in free fall.

Schema said it has based its estimates on BT's own financial results. Nicholas Blades, the report's author, explained the situation. "Around 50 per cent of BT's revenue is from telephone calls and exchange lines. If its share of this market went down to around 40 per cent, which it probably would if the local loop was freed up, then that would wipe around £4.2bn off its annual turnover," he said.

Two consequences of this eventuality seem possible: BT might be forced to split into two, or could face a takeover.

"BT can't just let its share price go down forever without becoming vulnerable. It's due to make an announcement next month at which it might well announce a split - one half regulated and one non-regulated," said Blades.

Split could be beneficial
Although BT chief executive Sir Peter Bonfield denied that a split is on the cards, Blades believed it was a serious option. He said a split would be beneficial. The non-regulated half would be free to compete properly.

"I'm not sure that corporate customers would notice a great difference," he explained. "That part of the telecoms market is where the serious competition already is. Unbundling the local loop would help large companies setting up branch offices."

Bill Moran, chairman of the Telecoms User Association, welcomed any unbundling moves, regardless of the consequences to BT. "A strong BT is in the interests of our members, but not a dominant BT. It must have seen the local loop issue coming from a long way off, and it had better pull its finger out to find alternative revenue," he said.

Moran cautiously welcomed the possibility of a split. "BT needs to consider unbundling itself, not just the local loop," he quipped.

The unbundling issue is certainly a knotty problem for BT, and no local loop issue is hotter than digital subscriber line (DSL). Rival broadband operators itching to get at BT have said that its process for unbundling local loop facilities in the UK is more obstructive than that of any other incumbent European telco. The consequences of this mean a serious delay of the full rollout of DSL for at least another year.

Rivals allege that BT knowingly profited from the chaos of unbundling in order to delay connection of their DSL customers to its network.

DSL service providers also lay the blame with the regulators. They believe that they were being denied access to the BT exchanges in which they want to collocate DSL equipment, because of a lack of regulatory supervision in the unbundling process.

And while Oftel had said that alternative service providers would be able to switch on their own DSL equipment in the BT network from 1 July 2001, some of those service providers said a more realistic date was some time in 2002.

Schema explained that, in any case, supply would fall a long way short of demand for broadband in the UK for many years. Up to three million customers in rural areas will be restricted to an ordinary phone line for the foreseeable future, it claimed.

The consultancy also believes that local loop unbundling is unlikely to spark the kind of competition that everyone outside the telecoms industry is hoping for. All the operators are likely to cherry pick the most lucrative locations, such as the big metropolitan areas.

To further complicate matters, the European Parliament has recently put its oar into the proceedings. Its Industry Committee has ruled that new telecoms market entrants should be entitled to compensation if local loop unbundling does not take place by 31 December of this year.

Equal opportunities
MEPs have said that the ruling is aimed at avoiding further procrastination by privatised former monopolies. "Refusal to allow unbundled access would prevent, restrict or distort competition in this sector," said the Committee.

It also called for enhanced powers of intervention for regulatory bodies like Oftel, and "confirmation of the possibility of shared unbundling".

The European Competitive Telecommunication Association has also waded in, accusing Oftel of presiding over an unnecessarily complex process for ensuring collocation.

Some 30 operators have applied for space in more than 2500 BT local exchanges, but Oftel has so far selected only 360 exchanges where it is confident there is appropriate capacity. But it's not just the limited number of exchanges they have access to that operators are unhappy about. They are now claiming that they are being allocated exchanges which they can least profit from.

Oftel has responded by proposing a new allocation procedure designed to give a fairer opportunity to operators bidding for space in BT's exchanges.

This will probably not deflect blame from the troubled regulator, but it will help. Whether BT is able to dig itself out of its hole is another matter.

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