Battle lines drawn in the phone wars: BT takes the offensive against its burgeoning competition with a new marketing campaign, lower prices and expanded services

TELEPHONE WARS are beginning to rage in earnest.

Over the last week alone, BT abolished its peak rate on local and national calls and Mercury followed suit. A US operator, MFS Communications, revealed its intention of setting up a network in the City of London. And BT appointed an advertising agency to handle a pounds 50m campaign to encourage greater use of the telephone.

BT claims the price cuts will save telephone users pounds 350m a year. When this is added to last December's reduction in charges on weekend calls, phone users should be pounds 500m better off a year.

Britain is fast becoming one of the most cut-throat telephony markets in the world. As BT loses its old monopoly, it is being forced increasingly to compete against a burgeoning array of newcomers.

At present, Mercury, a subsidiary of Cable & Wireless, is its only competitor on the long-distance fixed network. However, at a local level, BT faces increasingly fierce competition from a plethora of US-backed cable companies that are able to offer both TV and cheap telephony across their networks. There are also a handful of mobile phone companies operating on a near national basis.

But for the time being, BT's price cuts are still driven more by the dictats of Oftel, the Government's telecommunications watchdog, than competition. Oftel has imposed a price cap of the retail price index minus 7.5 per cent each year until 1997. With inflation running at roughly 2 per cent, this means BT has to trim its prices by about 5.5 per cent each year.

BT's price levels set the standard for everyone else. Mercury has to match any cuts, if it wants to be seen as good value. The mobile phone companies also have to consider BT prices, as do the cable companies if they want to maintain their roughly 15 per cent price advantage over BT. It is low prices, after all, that coax people away from BT.

'One could argue that these phone wars are making a virtue out of a regulatory necessity,' says Chris McFadden, telecommunications analyst at Smith New Court.

As prices fall, BT aims to counter the effect on its revenues by generating greater volume. With luck this should happen naturally. But it is by no means certain. The average residential customer uses the phone for just 4 minutes a day. So, for 23 hours and 56 minutes, it is not being used. And therein lies the challenge.

Michael Hepher, group managing director of BT, says: 'Our big challenge is, how do we get the people in this country to really use the telephone more. When I was a child it was seen as an expensive necessity. I say we have got to get it out of the hall and into the living room, so it becomes a pleasure rather than a necessity.'

According to Mr Hepher, market research shows that the average person thinks it costs twice as much to use the phone as it actually does.

To tackle the problem, BT has moved Stafford Taylor from his old job as head of Cellnet, its subsidiary mobile phone company, to run the residential division at BT. He took Cellnet from second place - to Vodafone - in the mobile phone market to first. Mr Hepher believes Mr Taylor can repeat his success and change the way people use the phone.

At the core of the new marketing drive is a pounds 50m advertising campaign that BT has awarded to Abbott Mead Vickers. It starts in April and will be backed up by a direct-mail campaign. BT's engineers are being trained to talk to people about special offers and services when they are out on call.

A number of products and services will be launched over the next few months with due pomp and ceremony. A recent example of this is the Friends and Family package. This allows a phone user to register with BT up to five numbers he or she calls regularly at a cost of pounds 4.99 and receive a 5 per cent discount on those calls. The user can have only one international number but the others can be anywhere in the UK.

Although 'video on demand' down the phone line has attracted most publicity, home shopping, financial information and a network answering service are more imminent. In addition, BT will market its existing fax, chargecard and call waiting services.

Advertising can be extremely effective in increasing phone usage. In the United States, the most mature telephone market in the world, AT&T, the international communications giant, launched the long-running 'Reach Out And Touch Someone' campaign in 1978.

'I can tell you, it did have a significant impact on increasing long-distance usage within the United States,' says Jim Speros, corporate advertising and brand management director. He is not, however, prepared to be more specific about how much it boosted line usage.

Nevertheless, Michael Baulk, chief executive of Abbot Mead Vickers, regards it as a role model for the BT campaign.

AT&T's campaign showed sons calling their fathers, people calling friends and similar ideas. The radio advertising used well known singers such as Ella Fitzgerald and Lionel Ritchie to sing the jingle 'Reach Out and Touch Someone'.

Both BT and its agency are coy about the details of the campaign. But they confirm that Bob Hoskins has been approached and that they plan to use other personalities. Comparisons have been drawn with Sainsbury's recipe campaign, which stars famous personalities such as Denis Healey and Philip Schofield.

The Telecoms Users' Association (TUA) believes that the lower prices will soon be offset by people making more use of the telephone. It also says that the array of charges has become so complicated that it is no longer possible to say whether BT is cheaper than Mercury or vice-versa. It all depends on the duration of the call, the destination of the call and the time of the day.

In the mobile arena, Cellnet and Vodafone have each been notching up record numbers of new subscriptions following price cuts last autumn. They surprised everyone by the strength of new subscription figures in the run-up to Christmas, and then surprised them again when subscriptions held up well in January.

A third mobile company entered the fray last autumn. Mercury One-2-One is a telephony service run by US West and Cable & Wireless. It achieved an immediate marketing coup by offering free off-peak local calls within the network. So far, it is only available in London and areas in the South-East but people have already flocked to the service in their tens of thousands.

Cable television companies have only 317,000 telephone subscribers at present. Even so, analysts see them as a much greater long-term threat to BT than the mobile phone companies, which they still regard as premium services.

Evan Miller, an analyst at Lehman Brothers, the US broker, says: 'Cable is the real threat. There is big money already there and much more to follow. The cable operators are serious about it. They have the wherewithal and the knowledge. And in the areas they are going into they are doing extremely well in taking numbers away from BT. They will do even better when people can keep their phone numbers when they switch from BT.'

Mr Miller predicts that by the end of the decade cable companies will be self-sustaining, earning more from their telephony services than from TV.

Mr Hepher says: 'What I am clear about is that four years of RPI minus 7.5 per cent is a pretty draconian regime when inflation is low. It means that the price of telephony in this country is going to be one of lowest in the world. It is super for the customer, but if it hurts us, imagine what it does to Mercury, and imagine what it does to the cable companies.'

As for the possibility of a further price cap when this one ends, he says: 'It is not clever to regulate a cable company to such an extent that it can't invest. It would be a pity if you screwed people's prices down so much that they couldn't invest in anything.'

(Photographs omitted)