BT wrestles with internal divisions over strategy

While tension mounts over a possible tie-up abroad, Oftel is keeping up the pressure at home

Two relationships, one commercial, the other regulatory, are at the heart of the increasingly tense battle being waged over the future of BT.

Two relationships, one commercial, the other regulatory, are at the heart of the increasingly tense battle being waged over the future of BT.

The first concerns its growing strategic ties with AT&T, the biggest US telecoms and cable operator, with whom the UK company already shares a business services joint venture, called Concert, as well as an embryonic wireless alliance, called Advance.

Unsurprisingly, BT yesterday confirmed that the strategic review, which has occupied Sir Peter Bonfield, chief executive, in recent months, has included talks with AT&T about developing a closer working relationship. "These discussions include exploring ways of broadening and strengthening the scope of the relationship between BT and AT&T in business services," the company said. "These conversations are continuing and may or may not lead to any change in the existing alliance arrangements."

Although many telecoms industry watchers are genuinely unclear about BT's strategy - a key factor in its share price having plunged from an all-time high of 1,513p on 1 January to a 12 month low of 795p yesterday - the company's actions bear an alternative interpretation. On this view, which some analysts believe is being advanced by a restless executive faction, BT is looking to hive off its fast growing, deregulated international operations from its slower growing, regulated domestic side.

The former - Concert, Wireless and Ignite, the internet wholesale and systems solutions arm - are genuine global businesses and therefore the areas likely to be increasingly integrated with AT&T. Moreover, they address the strongly growing markets where an integrated global carrier would have a significant advantage over national or regional operators.

The latter group of operations - BT's UK network backbone, the local loop copper wire lines connecting each home, and services using that equipment - are domestic in scope. Due to BT's continuing 80 per cent market share, these businesses will remain closely regulated and under increasingly tough competition.

It is thought that within BT, directors are divided about the merits of such a radical reorganisation of the company's operating and management structures. The traditionalists, led by the chairman, Sir Iain Vallance, and finance director, Robert Brace, are understood to oppose a separation owing to the financial uncertainty such a move would generate. They see little benefit in BT splitting its fast growing, but loss making, sunrise businesses from its declining, but hugely cash generative, sunset businesses.

Commenting on the traditionalists, John Tysoe, an analyst with West LB Panmure, notes: "They have a civil-service heritage and 16 years after privatisation they still haven't shaken that off. Like other former monopolists it does not like the idea of benefiting from any business. They want to do everything for everyone."

The flip side of the growing commercial and strategic ties with AT&T is the increasingly fraught regulatory relationship with Oftel, the telecoms watchdog. David Edmonds, Oftel's director general, has faced growing criticism recently from rival telecoms groups for helping to shield BT from competitive forces and failing to deliver greater competition, particularly in innovative high speed internet services.

A tale, perhaps apocryphal but indicative of the frustration with regulatory delays in the UK telecoms market, has it that BT operates a covert policy entitled 'walking backwards slowly'. According to competitors, citing ex-BT employees, the policy has underpinned the UK company's approach to deregulation and rising competition during the 1990s.

According to one executive with a start-up telecoms firm: "With every regulatory development 'walking backwards slowly' encapsulates BT's practices. It's a policy of constant delay and resisting any form of innovation. If you look at the evidence of their actions you can conclude this is the policy."

Although criticism by competitors over the perceived sharp end of BT's aggressive business and marketing practices is old hat, what is new is the increasing fire being directed by rival telcoms companies at Mr Edmonds. This has coincided with BT securing exemptions on some network access provisions, notwithstanding their adoption on the continent.

The latest controversy enveloping Oftel has come over the introduction of competition on BT's local loop copper wire network. In an effort to quell dissent within the industry, Mr Edmonds recently met executives of telecoms firms, including Colt Telecom, Energis and Cable & Wireless. The companies believe BT is foot dragging and that this will slow the development of new services, notably high-speed ADSL internet access. ADSL offers the possibility of using BT's existing copper wire lines into people's homes for high speed internet access.

RSL Communications, yesterday withdrew from the first phase of bidding for BT local loop capacityand accused Oftel of failing to ensure that BT faces real competition. Ian Duncan, head of marketing with RSL's UK arm, said: You would think that in a major project like this the regulator would have been involved."

Oftel, now deciding on an initial list of 360 BT exchanges (out of some 6,500) for access, believes that competition and lower ADSL prices. Oftel's spokesman, Duncan Stroud, said: "What we are making absolutely clear is that we agreed to allocate these first exchanges at the request of the operators because they were unable to agree amongst themselves. Everyone wants to get into BT's exchanges but that has to be managed."

In the meantime, Britain's record of innovation and success in telecoms liberalisation looks increasingly dated. After leading the world in deregulation during much of the 1990s, the UK has fallen behind North America and most of Europe in making available high speed internet services judged crucial to the development of e-commerce and securing a national competitive advantage in the New Economy.