Can BT make a success of moving into entertainment?

The new chairman would like to expand into broadcast distribution if the telecoms group is granted a licence

By hinting that BT was considering morphing into a media company, Sir Christopher Bland, its outspoken chairman, has set the industry's imagination running wild.

Offering so-called "entertainment services" in tandem with telephony would seem an entirely logical step for the company to take. The only hitch, many thought, was whether BT, with its poor track record of successfully implementing new strategies, could make a go of it.

Speaking at a communications and broadcast conference in Arizona yesterday, however, Sir Christopher seemed to be back-pedalling on the broadcast plan, suggesting that the speculation had simply got ahead of itself.

"It's worth emphasising, in the light of recent press comment, that our key broadband priorities in order are: One, high speed internet; two, protection of the voice market and three, and very much last, the possibility of broadcasting over our broadband network," he told the Schroder Salomon Smith Barney conference.

Nevertheless, last November, the company did apply for a broadcast television licence and Sir Christopher confirmed over the weekend that launching a service was under consideration.

"At one extreme, we can be a distributor of other people's programmes, just as the existing cable companies do," he said then. "On the other extreme, we can build a fully integrated model like BSkyB, which makes and distributes its own programmes over its own and other networks and also distributes other content over its system."

That the company was looking into the idea could hardly have come as a surprise since Sir Christopher, the former chairman of the BBC, is steeped in the media industry.

Nor is it a secret that BT must come up with new ways to drive growth from its existing assets before the cable companies and other new entrants prise away too many more of its precious 20 million residential customers.

The cable companies' so-called "triple play" packages, where customers are offered telephony, television and high speed internet services, have proved a resounding hit with customers. Indeed, BT already has a cross-marketing deal in place with BSkyB and ITV Digital.

How, when and indeed if BT will offer its own trio of services, though, remains to be seen. The answers will undoubtedly depend on whether the Independent Television Commission awards BT a broadcast licence next month.

While BT insiders say there are many options and contingency plans on the table, Sir Christopher hinted yesterday that, even if it did gain a licence, becoming a rival "BSkyB" operation was extremely unlikely.

"We are more likely to focus on distribution rather than creation or ownership of broadcast content. We are less likely to become a television content owner or creator and more likely to seek to participate in content provision through suitable partnerships," he said at yesterday's conference.

Steve Trowbridge, a telecoms analyst at SG Securities, said he thought BT's potential plan to offer "entertainment services" alongside telephony was, nevertheless, "a credible strategy". However, he said: "I'd rather see them de-risk the process as best they can with partners rather than do everything themselves. I'd rather see them partner, say with ITV Digital, or HomeChoice, or someone like that, just to try to get some expertise and assistance in that area."

Until a year ago, BT had been banned from owning a broadcast licence although it had a temporary one in the mid-1990's to enable it to trial different high-speed internet technologies in the Ipswich area. Being awarded a full broadcast licence would enable it to launch a rival Sky service if it so chose.

Should BT fail to get a licence, however, the company would still be able to offer services such as "video on demand" – where customers pay through their TVs to rent films that are sent over phone lines.

Whichever path BT chooses, Sir Christopher has pointed out that BT will, ultimately, have to make an extra investment in upgrading its existing telecoms network to allow it to deliver the new services.

Simon Hochhauser, the chief executive of Video Networks, the company which operates the HomeChoice video-on-demand service in London, said he did not think upgrading the network would be a particularly costly exercise.

"It is not anything like, for example, having to create a cable network or anything like that. We're talking hundreds of millions [of pounds] not billions. It's a relatively cheap upgrade," he said. Nor, Mr Hochhauser said, would such a plan be particularly hard to implement. "They would need to upgrade their network but it's not a difficult exercise."

Three or four years ago, industry experts had estimated that it would cost some £15bn to provide a fixed-line telecoms network capable of delivering next generation services such as broadcast and video on demand.

The potential problems for BT in creating such an offering would, therefore, seem to be the very same that have dogged it for years. The company, which has a chequered history of successfully implementing new strategies, has long been criticised for being too bureaucratic and slow-moving.

In addition, given that BT's new chief executive, Ben Verwaayen, does not take up his position until Monday, a new strategy could take months to get formal approval. A new finance director must also be appointed to replace Philip Hampton, who has already announced his plans to step down.

As one analyst put it: "Wait until Ben [Verwaayen] has started and the new finance director is on board before anything major is decided. Give those individuals a chance to buy into it [the plan] and then all three [Sir Christopher, Mr Verwaayen and the new finance director] are all accountable for it should it be a great success or a failure."

What is certain, is that BT must come up with a strategy to keep its existing customers as well as drive extra growth and that some kind of broadcast strategy would make sense.

The mere prospect of such a plan will also send the industry its strongest signal yet that BT's much talked about local loop network will not be up for sale.