BT unveils plan to reconnect with mobile market

Two years after demerging Cellnet, the telephone giant steps back into the fray. Why?

BT unveiled its plans to return to the mobile phone market yesterday with the launch of 'BT Mobile Home Plan' - a service it hopes will have won 1 million customers by the end of 2005.

BT unveiled its plans to return to the mobile phone market yesterday with the launch of 'BT Mobile Home Plan' - a service it hopes will have won 1 million customers by the end of 2005.

The move comes less than two years after the company demerged its own mobile phone operator, Cellnet, which has since been renamed mmO2. Pierre Danon, head of BT's consumer arm BT Retail, says that the mobile phone market - currently worth in the order of £13bn a year - is too large to ignore. He also notes that it is too risky for BT to have all of its eggs in the one basket - the fixed line telecoms market, which is worth a similar amount of money per year.

So why did BT spin off its mobile phone operation only to try to attack the market again just a couple of years on, particularly when its plans don't seem that aggressive? 'BT Mobile Home Plan' - which will be targeted at families - is a relatively modest project. If all goes as expected, it should have 100,000 customers by the middle of next year, Mr Danon says.

The service, he expects, will make up only about a third of the £300m of revenue that BT is expecting to get from mobile, in general, by the end of 2005.

Given those relatively modest targets, surely it would have made more sense to keep Cellnet -- an operation which now has 12.3 million customers? BT insists not. When BT demerged Cellnet, the telecoms giant was struggling to cut a £30bn debt mountain and was desperately trying to slash its cost base.

Under the terms of the demerger, BT was able to shunt around £500m of its debt pile into the mobile phone operation. More significantly, though, the demerger removed from BT the costly burden of upgrading the mobile network.

Mr Danon, who says BT does not regret that move one bit, argues all that it is now history. Besides which, he is undoubtedly onto something quite interesting now.

The UK mobile phone market is maturing - around 80 per cent of the population has a handset - a feature that is throwing up new opportunities. All the operators know they must now differentiate themselves on the services they provide since the phase of merely grabbing customers is long gone. BT thinks its unique selling point is in tailoring offers for families.

Four major players - Vodafone, Orange, Deutsche Telekom-owned T-Mobile and mmO2 - currently dominate the scene with remarkably similar shares in terms of customers.

And Mr Danon is also right when he points out that you don't have to own a mobile phone network to build a successful mobile phone brand.

Virgin Mobile - a joint venture between Virgin and T-Mobile - is a case in point although the MVNO (mobile virtual network operator) model espoused by that company has been fraught with problems causing the two partners to end up in court. Strangely, despite the very public spat between Virgin and T-Mobile, BT has spurned mmO2 and has also teamed up with the German-owned company.

"Isn't it bizarre that BT are following little old Virgin into mobile?," a Virgin Mobile spokesman remarked yesterday, adding: "It is very flattering that they're modelling themselves on the success that we've achieved."

But BT is, of course, not the only company to have spotted this so-called 'virtual network' opportunity. Tesco recently unveiled a joint venture with mmO2 which will see the supermarket chain start selling a Tesco-branded mobile phone service in its shops.

That 50:50 venture plans to start selling pre-pay phones in Tesco stores by Christmas and expects to have contract deals on offer after that. Each company will invest £8m in the venture over the first two years and it expects to have 2 million customers over five years.

Nor will BT find it particularly easy to snatch customers away from the big four. Look how hard 3, the UK's fifth mobile phone operator which launched in March, has found the going.

By the third week of May, 3 - which specialises in third generation, or 3G, services - had only got about 25,000 customers and has had to launch a price war to make its presence felt.

BT said yesterday it would 'soft launch' its new mobile service next week and is planning a full, commercial launch in October, backed by a £10m advertising campaign.

The service, which is pitched at families, means up to six people's mobiles can be bundled onto one bill and free minutes shared among them. The phones will initially go on sale in The Carphone Warehouse, The Link and Phones 4U.

But BT's tariffs have hardly got the competition running scared. Line rental for the first user is £15 a month but drops to £10 a month for the next five people.

In addition, customers will be able to make quick calls - of up to two minutes - to their landlines for free. According to BT, people phone home on average five times a week and most of those calls last two minutes or less.

"At first sight, these tariffs do not look that competitive. Instead, BT is looking to appeal to customers looking for greater flexibility and simplicity in the provision of mobile phones," said analysts at Cazenove, adding: "Investors in UK mobile may therefore be a little relieved that BT's mobile service is not as aggressive as perhaps first feared."

Mobile Sense - the limited mobile offering BT launched last October which is sold only over the internet - will eventually be swallowed up. That service, which uses the mmO2 network, should have something like 30,000 customers by the end of this year although the brand will have disappeared by October and will be part of 'BT Mobile Home Plan'.

No doubt the telecoms regulator will also be keeping a close eye on the company as well although BT insists it is fully compliant with competition law and doesn't envisage any problems.

What could make all the difference for BT, though, are its plans for 'convergence' where fixed line and mobile telecoms services will merge into one.

Customers will have one handset and one phone number that will use the fixed line when they are at home and the mobile network when they are out and about. "The advantage for the user is that, at home, you pay a fixed line tariff not a mobile tariff and that makes a huge difference," says Mr Danon.

BT is trialling that service - nicknamed 'project bluephone' at the moment, although it is expected to be launched in the middle of next year.

All well and good in principle but new technology launches rarely get off the ground on time or without glitches. Nor has BT figured out which operator it will use or what kind of commercial deals it might have to cut with all the players.

Nevertheless, it is encouraging to see BT on the front foot given its core business is under attack. Quite rightly, Mr Danon said yesterday he didn't want to "sit in a corner, waiting for the heat to come".

But whether BT will succeed in its ambitions in the mobile space and, eventually in the convergence arena, and how the mobile phone market will shake out in general, remain to be seen.