BT: Head of the pack
Although its strategy has not been an unqualified success, the UK's BT has been a model for other incumbents around the world. Caroline Chappell reports.
BT has been one of the most influential and, to many, one of the most inspirational telecoms operators of the past decade. Its 21CN (21st Century Network) project has been a beacon for incumbents facing the writing on the wall for their legacy network infrastructure. Its creation of BT Design and BT Operate was pioneering – a radical bid to integrate separate IT and network cultures and organisations in order to strengthen the company’s ability to compete against the internet players.
BT’s approach to, and execution of, structural separation is seen as a model by the rest of the world: “There is no doubt that telcos and regulators round the globe regard BT as a good example of how separation can be achieved and they acknowledge that BT and the UK have done this better than anyone else,” comments David James, principal analyst at Ovum. BT bit the bullet earlier than most other operators on process improvement programmes, recast its operational systems in a service-oriented architecture mould in the face of market scepticism, adopted rapid product development techniques and took the lead in bringing a Web 2.0 approach to communications services through its acquisition of Ribbit.
Was it worth it?
As Cameron Rejali, BT Wholesale’s MD for products, points out: “Looking back, we’ve tried to tackle three very significant transformations at the same time: the regulatory structure, our IT and network estate and our customer focus.” The company has done this against a backdrop of financial and market upheaval. Some believe it is a minor miracle that BT has emerged from this maelstrom in as good a shape as it has. But has all the change been worth it? Though BT is certainly wiser after a rollercoaster 10 years, is it stronger and more able to take on and vanquish its competition? As fellow carriers assess their own appetites for transformation, they are looking for guidance that the pain really does bring gain. The answer is not clear-cut.
James rightly comments: “It’s very difficult to say what BT would have looked like if all the transformations hadn’t happened.” But even BT struggles to articulate the tangible benefits of transformation.
“It hasn’t been an easy success,” Rejali admits. “The journey has taken longer than we hoped. We are getting there and we are reaping the benefits of no regulation in a large part of our business – we now have the largest unregulated broadband footprint at a retail and wholesale level anywhere in Europe. We are still seeing legacy service revenues shrink and there is a challenge in growing non-traditional services fast enough to make up for this. But I think we are beginning to demonstrate we can do this. We are in a period of transition. I’m confident that BT will thrive in the future because we are approaching customers completely differently than in the past. We have developed complex services that they trust us to deliver and we will be introducing new services at retail level.”
Solid financial results
There are indicators that BT is going in the right direction. The company delivered a solid set of 2010 results and it is successfully moving into new areas of business, such as managed services. However, the financial markets and BT’s peers are only likely to judge its transformations a complete success if they begin to see clear blue water between it and the competition – strong revenue growth that outstrips the loss of legacy revenue, for example, substantial margins and evidence of innovative services that are only available from BT.
“The company has certainly improved as a business, with a lot more customer focus and new solutions and services such as Ethernet. It is moving from a civil service, incumbent mindset to being more aggressively competitive,” comments Sandra O’Boyle, service director at Current Analysis. “But it has not yet come up with market-changing, disruptive services.” In fact, these are beginning to emerge from BT’s domestic competition such as Virgin Media, with its latest Big Red Internet service for business customers. Virgin Media’s fibre-based access network is in direct competition with BT Openreach, but unlike BT, Virgin Media doesn’t have to contend with the separation between its access business and its retail and wholesale businesses. In BT’s case, structural separation has caused tensions within the group: equivalence of inputs means that BT Retail and Wholesale have no room to manoeuvre over the price of access circuits and therefore have limited ability to compete with a rival that can offer 100Mb of uncontended fibre-based access for the same price as 10Mb.
But Rejali believes that, overall, structural separation has been good for BT Wholesale. Certainly it has been excellent for the UK market and for Openreach – at the end of September 2010, the Office of the Telecommunications Adjudicator (OTA) said that the UK had a total of 7.14 million unbundled lines installed, with the volume of fully unbundled lines now surpassing the volume of shared lines for the first time. Openreach customer order levels were reported to be at an all-time high.
Rejali points out that structural separation also forced BT to think differently and “proactively” about what it means to be a wholesaler. “We could have walked backwards slowly trying to hang on to as much as possible, but we want to win business by offering good-quality services, not because people have to buy from us,” he says. As a result, BT has not only invested in its broadband and Ethernet services – made possible, Rejali says, by the company’s underlying investment in its 21st Century Network infrastructure – but branched out more successfully than other operators into managed services.
According to O’Boyle, “BT Wholesale booked £2 billion of managed services contracts in the 10 months to February 2010. Managed services now account for around 40% of its revenues.” And James points out: “BT Wholesale’s move into managed services and multi-year bundles is great news – it is clearly of value that getting on for half of BT Wholesale’s revenues are based on multiyear contracts.”
The success of BT Wholesale’s managed services is yet another result of a change that has been good for one part of the business, but hasn’t helped another. A significant proportion of its managed services contracts are with mobile operators. “BT couldn’t have won this business if it had had a mobile arm,” James suggests. While some lament BT’s decision to sell O2 in 2004, James says it was “unavoidable because of the level of BT’s debts”. It has also had the fortuitous outcome of enabling BT Wholesale to develop a lucrative new line of business. O’Boyle comments: “It is unhelpful for an incumbent to be without a mobile network. BT Retail is really up against it as a result. The way the market is headed, Vodafone and the other mobile operators are much better positioned to meet the future needs of consumers and SME customers. And by helping mobile customers with fixed connectivity, BT Wholesale is only going to put more pressure on BT Retail.”
On the other hand, Rejali notes that until BT won Orange’s broadband business, this customer had been pursuing an unbundled strategy “and now its entire managed broadband network is back on 21CN”. The lack of an internal mobile arm has also meant that BT Wholesale has overlooked the opportunity to develop an attractive mobile wholesale portfolio. “BT is behind globally with this,” O’Boyle says.
As analysts point out, much of the initial business case for 21CN investment was based on migration from BT’s multiple legacy networks to a single IP infrastructure. BT’s voice migration started promisingly enough, with the company publishing regular updates on how many lines would be switched onto the new network in various parts of the country.
But the migration has now been scaled back and BT still bears the costs of running a TDM network in parallel with 21CN.
Rejali defends the company’s decision: “We have learned about voice since the start of the 21CN programme. We originally thought that we had to take it onto the new infrastructure but then we realised we weren’t providing customers with anything new. We were disrupting customers needlessly and deploying new infrastructure for the sake of it. We are still looking at how aggressively we need to provide IP voice services but there has to be an incremental value to them, such as SIP trunking and IP voice services for SMEs in the business market, and IP voice services that follow you around or which can be integrated with other services such as broadband and TV. All the building blocks are in place and these services will be rolled out over time.”
The next decade
BT is now preparing its business, service portfolio and network for the needs of the next decade which will be all about content and especially video-based content delivery. “We are making our network look more like a broadcast network but with many more features, so that our customers can create content services with a better quality of customer experience,” Rejali says. “It’s also important that we are able to support interactivity between services in the future and that we can help mobile operators manage content.” The company has tightened up cost control in Global Services and is on track to roll out advanced services, such as IP Exchange globally. Bruised and bloodied BT may be from its experiences over the past 10 years but it has emerged unbowed and certainly ready for its next fight.
BT's wholesale history
2000: Following modifications to BT’s licence in April, it began to offer local loop unbundling (LLU) to other telecommunications operators, enabling them to use its copper local loops to connect directly with their customers
2001: As part of a restructuring and debt reduction programme, BT announced a three-for-10 rights issue to raise £5.9 billion – still the UK’s largest ever rights issue
2002: BT and AT&T unwind their Concert joint venture, set up to provide services for multinational organisations, returning its customer accounts and networks to the original parent companies
2003: The Communications Act introduces a new industry regulator, the Office of Communications, known as Ofcom, to replace the Office of Telecommunications, or Oftel. Under a new regulatory framework, BT retained its universal service obligation (USO) for the UK
2004: BT launched Consult 21, an industry consultation for its proposed 21st Century Network (21CN) programme
2005: By summer, BT said 105,055 lines had been unbundled. In this year, BT acquired Infonet – now BT Infonet – a provider of global managed voice and data network services
2006: Openreach opens for business, reporting directly into the BT chief executive. It is responsible for managing the UK access network on behalf of the telecommunications industry. Openreach is one of four businesses which make up BT Group. The other three are BT Retail, BT Wholesale and BT Global Services
2007: BT acquired International Network Services, a global provider of IT consulting and software solutions
2008: BT bought Wire One Communications to build its video conferencing capabilities
2009: BT announced plans to cut around 15,000 jobs over the coming year to help it meet the general economic downturn
2010: BT announced a push for new business in Asia Pacific, and is ordered by regulator Ofcom to make new fibre network investments available to rivals