Tesco takes the battle to BT for home phone users

Supermarket giant teams up with Cable & Wireless to challenge dominant operator

Fighting one of the most vicious bid battles the supermarket sector has ever seen ought to be quite enough to keep Sir Terry Leahy, Tesco's chief executive, busy.

If not then the daily struggle to steer Britain's leading supermarket group through the most cut-throat of all retail sectors certainly should be.

Obviously not. Tesco took time out from its everyday business and other distractions yesterday to announce that it was launching an audacious bid to bite off a chunk of BT's powerful share of the fixed-line residential phone market.

From May or June this year, Tesco will be offering its customers – and anyone else who is interested – the chance to get their calls provided by Tesco Telecom. Tesco has joined forces with Cable & Wireless, Servista, the billing operation, and Vertex Customer Management, the support services group, to provide the new services.

The supermarket chain and its partners studiously refused to comment on the terms of the tie-up yesterday or how many of the 12 million people who buy their groceries from the group each week they reckon they can transform into phone customers.

But clearly Tesco believes it can capture a large swathe of BT customers. And analysts believe it will need to do just that if it is going to make this latest diversification – which follows moves into banking and home shopping and a long mooted flirtation with selling cars – pay for itself.

"Customers tell us that they want a more convenient way to lower their phone bills," Sir Terry said. "Because we think like a retailer, not like a utility company, we will give customers supermarket-type offers and a simple alternative to the lock-in contracts and complex billing systems that they hate."

The British telecommunications market has been opened to competition for two decades. Yet progress towards competition in the standard market to supply fixed-lines to people's homes has been painstakingly slow. For the gung-ho privatisers of the Thatcher years, the slow march of competition was always an embarrassment.

Some 22 years on from its privatisation, BT still controls a giant 76.7 per cent share of the market for residential phone services, according to the latest figures from Oftel.

The cable companies have slowly eaten into the market since the completion of their networks. NTL and Telewest now have just over 17 per cent of the market. A whole group of smaller competitors – with market shares too small to show up on Oftel's official figures – share just under 6 per cent.

Clearly, Tesco thinks something has changed. So too does Carphone Warehouse, which confirmed last week it was about to start offering fixed-line phone services, having paid £65m last November to buy Opal, the private provider of fixed-line networks. Carphone is aiming to sign up 200,000 of its 2.2 million customers a year to the new service.

And Centrica, through its subsidiary One.Tel, is already established in the market with a similar logic to Tesco – that customers will choose to change if it is easy and the brand is trusted.

Two specific new types of service have opened the doors for operators of this sort to enter the market. The first was the introduction of indirect access services, the second was the start, 12 months ago, of carrier pre-selection.

With the first, callers can take advantage of cheap calls but the process is cumbersome. To connect to their chosen operator a caller either needs to key in a four figure code before dialling the number, or they need to install a dialler box which automatically inputs the pre-fix for them.

Carrier pre-selection technology means that the connection is handled at the exchange automatically. All the caller must state is a preference as to which operator they want to use. Pre-selection allows them to vary the menu too, if they are not locked in by a contract. They can, for example, select one operator for local calls, another for long-distance and a third for international. In effect the consumers can home shop for the best deals on different types of calls.

Oftel is also working on new rules, announced last summer, that should clean up the billing process. Currently a caller who switches to a new operator faces two bills. One from BT for line rental, and one from the new operators for call charges.

The new scheme – expected to come into force towards the end of the year – allows competitors to act as line rental wholesalers and means consumers will be able, for the first time, to get line rental and calls from another telecoms operator under one bill.

These services may eventually capture the imagination of BT customers looking for choice. But as a survey of the residential market published by Oftel yesterday shows, awareness and usage of these services remain at a relatively low level. Only 16 per cent of callers say they use indirect access services and only 3 per cent say they use carrier pre-select services. But it's early days, says Oftel.

Tesco said it would move steadily as new regulations and new technologies came on stream. "As the rules relax and as the technology becomes available we intend to be right there," a spokesman said.

Potential competitors were sanguine about the Tesco announcement.

"I think the Tesco announcement is actually a good sign," said Ian El-Mokadem, managing director of Centrica's telecoms business which offers both indirect access and carrier pre-select services. "That may be an odd thing to say, having another competitor, but, we've thought for some time, that the residential telecoms market was not competitive enough and hasn't been because of the lack of things like carrier pre-selection and wholesale line rental."

The Tesco announcement was a good indication that regulatory changes announced by Oftel last summer were beginning to take effect and make it easier for customers to choose, he added.

BT appeared equally relaxed that the retailer was poised to attack its market . "It's a highly competitive market place," a spokesman said, adding: "The more competition the better."

Analysts were less convinced Tesco could make real headway, however. Andrew Moffat, of ABN Amro, said competitors will need to attract huge volumes to make a move into the market pay. While customers remain apathetic, BT's still huge residential customer base will remain pretty safe. "The real threat in voice traffic is the very aggressive competition from the mobile phone market," he said.

If Tesco knows differently, it has decided to wait until the summer to make its case in full.