BT Group plc

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BT Group plc

BT Centre
81 Newgate Street
London EC1A 7AJ
United Kingdom
Telephone: (44) 20-7356-5000
Fax: (44) 20-7356-5520
Web site: http://www.groupbt.com

Public Company
Incorporated: 1984 as British Telecommunications plc
Employees: 137,500
Sales: $28.95 billion (2001)
Stock Exchanges: London New York
Ticker Symbols: BTA (London); BTY (New York)
NAIC: 513310 Wired Telecommunications Carriers; 513322 Cellular and Other Wireless Telecommunications; 513330 Telecommunications Resellers; 514191 On-Line Information Services; 551112 Offices of Other Holding Companies

BT Group plc was formed in 2001 to serve as the holding company for British Telecommunications plc. British Telecommunications came into being in early 1984 through the transformation of a former state utility, at a turning point in the development of U.K. and European telecommunications. Since being privatized, BT has maintained its position as the dominant provider of local and long-distance telephone service in the United Kingdom, but has faced increasing competition and seen its market share fall as the English government continues to deregulate the market. BT has subsequently looked abroad for its future growth and is in the process of developing a global telecommunications network for multinational companies.

The Birth and Growth of the Telephone Industry in England: 1869–1969

British Telecommunications’ administrative and technological roots are mingled with those of the U.K. Post Office and reach back into the second half of the 19th century, when inventors at home and abroad, such as Alexander Graham Bell, Thomas Edison, and Guglielmo Marconi, were applying electromagnetic principles to the development of practicable forms of telecommunications. Out of this the modern telegraph, followed by the telephone, was born. In 1850 the first submarine telegraph cable was laid across the English Channel. In 1878 Bell demonstrated his newly patented telephone to Queen Victoria, and in 1879 England’s first telephone exchange opened in London. It was in the United Kingdom, too, that the first international telephone call was made, in 1891, between England and France. The telegraph and telephone were at first exploited by private enterprises, but they were gradually taken over by a U.K. government department, the General Post Office. The reversal of that nationalization process was completed in the early 1990s.

In 1869 the Postmaster General was granted the exclusive right to transmit telegrams within the United Kingdom. At first the telephone was slow to catch on and was not regarded by the Post Office as a serious threat to its telegraphic network. The first independent U.K. telephone service provider, Telephone Company Ltd., was set up in 1879 and in 1880 merged with its competitor, Edison Telephone Company, to form United Telephone Company. Seeing that the telephone was beginning to take customers away from its telegraph service, the Post Office embarked on a series of protective measures, and in 1880 the government brought an action against the recently formed United Telephone Company, claiming that it was operating in contravention of the Telegraph Act of 1869. The High Court subsequently decided that the telephone was a form of telegraph. The merger was revoked, and telephone companies were required to be licensed by the telegraph monopoly holder, the Post Office.

The next stage in the process of squeezing out competition and establishing a state telephone monopoly was the building up of the Post Office’s own system. In 1896 the Post Office completed its improved telephone network by taking over the trunk lines of National Telephone Company, the largest of its licensees, and started to set up its own local telephone exchanges. It was then decided that more national licenses would be granted. National Telephone Company continued to operate a local service until its license expired in 1911, but in 1912 the Post Office was granted a monopoly on the supply of telephone services throughout the United Kingdom. It took over all of National Telephone Company’s exchanges and opened an automatic exchange in Epsom, south of London.

Since 1899 several of the larger towns and cities, including Glasgow, Brighton, Swansea, Portsmouth, and Kingston upon Hull (Hull), had each been operating an independent local telephone service, but their number gradually dwindled as they were bought out by National Telephone Company or the Post Office. In 1913 only Hull was left. By cooperating with successive competitors—National Telephone Company and the Post Office—it survived, first as the Hull Corporation Telephone Department, a municipal enterprise run by the Hull City Council, and since 1987, as a limited company, Kingston Communications (Hull) PLC, wholly owned by Hull City Council and a licensed public telecommunications operator (PTO), with interconnection agreements with BT and BT’s competitor, Mercury Telecommunications Limited.

The Move Toward Privatization: 1969–90

A landmark in the prehistory of BT was the Post Office Act of 1969, which changed the status of the Post Office. This former government department became a state public corporation under the Secretary of State for Industry. The telecommunications services remained in the Post Office but were divided from the postal services into Post Office Telecommunications.

Three further events marked the telephone industry’s move toward an environment of free competition. First came the passage of the 1981 British Telecommunications Act, which took Post Office Telecommunications out of the Post Office, turning it into an autonomous, though still state-owned, body known as British Telecommunications Corporation or, more familiarly, British Telecom. Second was the 1984 Telecommunications Act, by which BT was privatized, the telecommunications market was further liberalized, and a regulatory body was set up. Third, the Duopoly Review in 1990 resulted in the government’s 1991 decision to further increase telecommunications competition. The government also decided to sell off its remaining shares in BT, although this decision was not influenced by the Duopoly Review.

In July 1981 the British Telecommunications Act, which separated telecommunications from the Post Office and set up a new state public corporation to supply them, also gave the government powers to license competitors in the operation of the domestic telephone network. As well as modifying the state company’s statutory monopoly of the telephone network, this act took away its monopoly in the provision of telecommunication equipment, leaving it only with the right to supply and install a subscriber’s first telephone. The act not only opened the market to competition in value-added services, such as data processing and storage, but also allowed other providers to use BT’s lines.

In October 1981 Mercury Telecommunications Limited was chosen to receive a 25-year renewable license to operate a national and international digital network—a system that encodes information as a series of on-off signals—to compete with BT’s trunk traffic. Mercury had been set up early in 1981 by British Petroleum, Barclay’s Merchant Bank, and Cable and Wireless plc (C&W) to enter the business of long-distance communications, offering a customized service to companies. The license allowed it to interconnect with the BT network and to enter the European and U.S. sectors. In 1983 the government undertook for seven years not to license any company but BT and Mercury to carry telecommunications services over fixed links. Under this duopoly policy, Mercury, which began operating in 1986, was to be BT’s single serious network competitor until the early 1990s. Less than a year after the 1981 act, the government announced its intention to privatize the British Telecommunications Corporation.

At the end of 1982 the first telecommunications bill had reached the committee stage, when the general election of May 1983 was called. The bill immediately died, but was presented again in the new Parliament and finally became law in its second form, the Telecommunications Act of April 12, 1984. It had undergone 320 hours of debate and discussion, during which BT itself had briefed members of Parliament on its views and interests. By the act, BT lost its exclusive right to run telecommunications systems, and all PTOs had to be licensed. The new company was to be sold as an integrated organization. Fragmentation, similar to the breakup of American Telephone and Telegraph Company (AT&T) in the United States, would have left the resultant entities too small to defend the home market from foreign competition, to stand up to multinationals in the world markets, and to command the technology and the financial strength for adequate research and development. In November 1984, 3.01 billion ordinary shares of 25 pence were offered for sale at 130 pence per share, the first figure being the nominal or face value of the share, and the second its sale price, or market value, at the time of sale. The government retained a 48.6 percent stake in the new company, valued at the time of sale at £7.8 billion. All the offered shares were bought.

Company Perspectives

BT is one of the world’s leading providers of telecommunications services. Its principal activities include local, long distance and international telecommunications services, internet services and IT solutions.

Under the terms of the 1984 act, BT’s main activity was to supply telecommunications services in the U.K. market of 55 million people in accordance with a 25-year operating license from the Department of Trade and Industry. Starting in 1984, BT’s performance and development were conditioned by an official regulatory body, the semi-independent Office of Telecommunications (Oftel), set up in August 1984 under the Secretary of State for Trade and Industry and headed by the Director General of Telecommunications (Bryan Carsberg being the first to hold the post). A major role of this body was, by simulating the effects of real competition, to prevent BT from abusing its inherited dominance of the U.K. telecommunications market during the process of deregulation. Nevertheless, the fairness of the competition was often disputed by interested parties. In its severely regulated environment, BT had lost the security of being a state monopoly, without gaining the freedom of action of a wholly autonomous business. Oftel monitored BT’s pricing, accounting, investment policies, and quality of services; issued licenses to additional competitors; and continued to facilitate the interconnection of rival services to the BT network. Competitors, for their part, tended to feel that BT was favored by the regulator. The new British Telecommunications plc created by the 1984 act then shared its monopoly in telecommunications systems with Mercury as well as Kingston Communications, plus some general licensees.

When BT became a separate state corporation in 1981, before its rebirth in 1984 as a privatized company, it inherited from its Post Office days an evolved network. This network had to be brought up to date at the same time BT was taking on competition from operators starting from scratch. These competitors were using the latest technology, without public service obligations, and were able, for example, to go straight to digital systems and cheaper and more efficient fiber-optic cable, while BT still had copper wire circuits to be amortized. BT kept technology in the forefront, however, and spent 2 percent of its turnover on research and development to keep it there. The domestic telephone services sector was by far BT’s largest operating division in terms of assets, revenue, and number of employees. In 1990 it accounted for nearly 75 percent of turnover. Its core business was the public switched telephone network (PSTN). The 20 millionth U.K. telephone was installed in 1975, the system became fully automatic in 1976, and in the early 1990s BT, with more than 25 million lines, operated the world’s sixth largest telephone network, with nearly 100,000 public pay phones. In 1990 BTUK—the product of the 1987 merger of BT’s local communications services and national networks divisions—was operating more than 7,000 local exchange units, of which nearly half were already digital.

Meanwhile, Mercury’s market share in the early 1990s was variously estimated between 3.7 and 5 percent, but was increasing markedly. An efficiency and investment effort was BT management’s response to this new competition and to growing demands and service expectations from its customers. Waiting times for connections and repairs were reduced, and new digital equipment was introduced into the network, including exchanges that use microchip technology to integrate the switching and transmission elements of the network, resulting in a higher quality of service and improved voice transmission. All trunk exchange units were digital since June 1990. BT aimed to have a fully digital network by the year 2000. In addition, new products, such as microwave radio transmission in the city of London, were offered.

Another area within which BT faced stiff competition was the capricious mobile communications market. BT’s Mobile Telephone System 4, a noncellular service introduced in 1981, with 7,000 subscribers at the beginning of 1990, had capacity problems at peak periods and was being replaced by a cellular network, Cellnet, shared by BT’s 60 percent and Securicor Communications. Its rival, using another network, was Racal-Vodafone. In February 1989 BT bought, for £907 million, a 20 percent interest in McCaw Cellular Communications, Inc., a U.S. mobile cellular telephone and broadcasting systems provider and operator.

In the late 1980s, BT offered a wide range of VANS—value-added network services, including such electronic mailbox services as Telecom Gold and Message Handling Service—in the United Kingdom. In November 1989, to further its strategies in the home and international VANS market, BT bought, for £231 million, the U.S. company Tymnet, one of the largest VANS companies in the world, and consolidated some of its own international services under a new company, BT Tymnet Inc. BT started setting up an ISDN—integrated services digital network—that could eventually replace the other networks by offering all data, voice, text, and image network services at high speed, with circuit-switched digital connections from a single access point. Although ISDN was of primary importance in BT’s plans for the future, like other telecommunications firms, BT had to move slowly in this area, needing to await definition of international standards and to raise the consciousness of potential customers. A pilot service was launched by BT in June 1985 that by the end of 1989 was available to 75 percent of business users.

Adapting to a New Competitive Market: 1991–96

In the early 1990s BT faced major changes. The duopoly policy was reviewed in 1990, and a report issued in January 1991 was followed two months later by a government recommendation that both BT and Mercury should face greater competition in local, trunk, and international services. BT was still barred from offering entertainment services on cable television, but after some hard bargaining, Bryan Carsberg, director of telecommunications; Peter Lilley, secretary of state for trade and industry; and Iain Vallance, BT’s chairman, agreed on amendments to BT’s 25-year license. BT was then allowed to proceed with further rebalancing between telephone rentals and call charges and with customized tariffs. It was announced that the sale of a slice of the government’s residual share in BT would take place in November 1991.

Key Dates

1880:: Telephone Company Ltd. merges with Edison Telephone Company to form United Telephone Company.
1969:: Post Office Telecommunications is formed.
1981:: The British Telecommunications Act is passed.
1984:: British Telecommunications plc becomes privatized.
1994:: British Telecom enters strategic alliance with MCI Communications to form Concert Communications Company.
2001:: BT Group plc is formed as a holding company.

In the face of increasing competition, BT engaged in a rationalizing and restructuring operation. In the year ending March 31, 1990, a slimming-down and cost-control operation began, covered by an exceptional charge of £390 million. In the following year, 18,800 jobs were shed and overtime work was cut, while another 10,000 terminations were planned for 1991–92. In April 1991 the reshaped company announced that the three former operating divisions, BTUK, comprising Local Communications Services and National Networks; BTI, British Telecom International; and CSD, Communication Services Division, would be replaced. In their stead were placed two major divisions that dealt directly with customers: Personal Communications and Business Communications, both supported by a Products and Services Division. BT’s international and U.K. networks were brought together into a new Worldwide Networks Division, and some business activities best managed separately, such as mobile communications and operator services, comprised a new Special Business Division.

Early in 1991 BT’s intensified drive to consolidate its image as a smart, market-oriented world organization with a human face was signaled by its integration of the current BT acronym into a new blue and red logo, representing a dancing piper apparently delivering a sound message. A new designer image was commissioned for the group and was widely publicized; public telephones were replaced by newly designed models; and the bright yellow of BT vehicles began to be replaced, in a notoriously expensive replace-or-respray operation, by a stylish gray.

As the 1990s continued, BT’s challenges became more intense. While at least 98 percent of its revenues and profits continued to come from its home market, the additional competition allowed under the 1991 review of the duopoly policy combined with continued moves by Oftel to reduce BT’s monopoly began to seriously erode BT’s position in the U.K. market. From 1991 to early 1996, some 150 firms started operations in the United Kingdom that were competitive with BT, several of the most important of which were cable firms owned by U.S. Baby Bell companies. As a result, BT’s share of the U.K. telephone market tumbled, with its residential customer market share falling from 99 percent in 1991 to 93 percent in 1995 and its business customer market share falling from 94 percent in 1991 to 83 percent in 1995. Some analysts were predicting that by 2000 BT’s share of the U.K. residential market would fall to as low as 65 percent.

In response, BT continued the cost-cutting program it began in 1990. More than 100,000 jobs had been eliminated by 1995, reducing the BT workforce from 239,000 in 1990 to 137,500 in 1995. The program was to be continued into the late 1990s, moving toward a goal of a 100,000-employee workforce with productivity levels in line with the Baby Bells. BT’s upstart competitors also forced the company to upgrade its service and lower its prices since they were luring away BT customers by offering low prices and better service. In fiscal 1995 BT reduced prices on both domestic and international long-distance calls, adding up to more than £800 million in savings for its customers for the year. That same year, BT increased capital expenditures 23 percent in order to improve customer service and upgrade its network.

Meanwhile, the often cantankerous relationship between BT and Oftel grew more confrontational in the mid-1990s. Perhaps not coincidentally, these BT-Oftel battles took place after 1993, the year in which the British government sold nearly all of its remaining stake in BT for $7.43 billion. In 1995, BT expressed support for the development of number portability—the ability of customers to keep the same phone number even if they changed telephone suppliers—but objected to a plan that the company felt would place a disproportionate share of the costs on BT. In response to BT’s rejection of the plan, Oftel referred the matter to the Monopolies and Mergers Commission, the first time BT had been subjected to such a referral. Later in 1995, the regulator announced that it wanted to reduce BT’s return on capital from the 15.6 percent of 1995 to as low as 8 percent. If forced to accept this, the company’s ability to invest for future growth might be seriously damaged. Such a possibility sent BT stock plunging throughout 1995.

The overall impact of the competition and regulation showed clearly in BT’s revenues and profits. The company revenue growth had stagnated, with the £13.15 billion figure of 1991 only increasing to £13.89 billion in 1995. Profits fell in three of the four years from 1992 to 1995, and fell overall from £2.04 billion to £1.74 billion.

Embattled at home and certainly facing more and more pressure there for the foreseeable future, BT almost had no choice but to look overseas for its long-term survival. Early attempts at international expansion had failed, including the 1986 purchase of Mitel Corp., a Canadian phone equipment manufacturer that BT sold in 1992 at a loss of £120 million ($200 million); and the company’s stake in McCaw Cellular, which it sold in 1992 to AT&T (which had just purchased a larger stake in McCaw) at a profit exceeding £200 million ($333 million). According to Vallance, these investments no longer fit into the company’s international plans, which now centered around building a global telecommunications network offering comprehensive services to multinational corporations. Vallance’s first attempt at this failed, however. In 1991 the company set up a subsidiary, Syncordia Corp., in Atlanta, Georgia, to start such a network on its own, but had little success attracting either customers or the telecommunications partners it needed around the world to make the venture succeed.

Syncordia was shut down three years later, after BT realized it had erred attempting to go it alone. In mid-1993, BT’s second attempt to go global began with the announcement of an alliance with the major U.S. telecommunications firm MCI Communications Corp. The alliance, which received final approval in mid-1994, involved BT purchasing a 20 percent stake in MCI for £2.86 billion ($4.2 billion). The two firms set up a joint venture called Concert Communications Company, based in England, which was 75 percent owned by BT and 25 percent by MCI. Syncordia was folded into the new venture, which would inherit Syncordia’s charge of providing telecommunications services for multinational corporations.

To make Concert work, however, BT needed additional partners in other areas of the world. Over the next few years, BT set up alliances with several European companies including Norwegian Telecom, Tele Denmark, Telecom Finland, and Banco Santander of Spain. A foothold in the important German market also was secured in a 1995 alliance with the German conglomerate Viag AG, in which the partners planned to start a joint venture that would offer Concert services. BT now had a solid network of partners in Europe and North America, but remained weak in the critical Asian market, having allied only with International Telecom Japan Inc., a small international carrier. Meanwhile, AT&T was working furiously to set up its own system of global alliances through its WorldPartners program. By 1995, while AT&T had had more success than BT in Asia, having established partnerships with KDD of Japan and with Singapore Telecom, the U.S. giant was having difficulties making inroads in Europe.

In the midst of the difficult 1995 BT endured, two top executives left the company, one retiring and one resigning. Vallance decided to step aside as CEO, while remaining chairman, and turned to an outsider, Peter L. Bonfield. Taking over as CEO in early 1996, Bonfield had been the chief executive of ICL PLC, a British computer company owned by Fujitsu Ltd. Observers noted that Bonfield’s experience with Japanese business practices might help BT in its effort to enhance its alliances in Asia.

Heading into the new century, British Telecommunications was certainly being squeezed in its still all-important home market. Its international activities were still very much in a start-up phase and needed time to turn the company’s huge investments in them into profits. The question was whether its cash would be drained faster at home than its payoff abroad. Perhaps, therefore, needing to move faster than AT&T to secure a global network, it appeared in early 1996 that BT might try effecting a major merger to gain its missing Asian link. The most significant possibility was that BT would merge with Cable and Wireless plc (C&W), which owned 80 percent of the main home market competitor of BT, Mercury. Merger talks between C&W and BT began in late 1995. If it happened, the merged firm would have to sell off Mercury, but more important, BT would have gained C&W’s 57.5 percent stake in Hong Kong Telecommunications Ltd. and its telecommunications businesses in Japan and Australia. BT might finally break free of its dependence on the U.K. market.

The Challenges of Globalization: 1997–2002

As the 21st century loomed, British Telecom found itself under increasing pressure to look abroad for new opportunities to expand its business. A number of factors contributed to the urgency of BT’s position. By mid-1996 the Office of Telecommunications, wary of the near-stranglehold BT held on the domestic market—the company was still providing phone service to nearly 90 percent of all English households—was already beginning to implement measures that would help reduce consumer telephone rates by up to 40 percent within a five-year span. At the same time, the regulatory agency introduced procedures that greatly simplified the process by which customers were able to transfer phone numbers to new accounts. The new rules delivered a significant blow to BT; by the end of 1997, the company was losing close to 60,000 domestic customers a month. Finally, the imminent unification of Europe, along with the broader trend toward globalization, threatened to make the British phone industry too competitive for BT to retain its position as the United Kingdom’s telephone powerhouse.

In the information age, it was becoming clear that corporations needed to be able to provide a full range of phone, Internet, and wireless services in order to remain competitive. Believing that the Internet would soon account for a higher volume of communications traffic than the telephone, BT began searching for a high-powered merger, with the aim of establishing itself as an international corporation with the capacity to meet the technological needs of the new century. Although C&W seemed in many ways a perfect fit, the companies were ultimately unable to work out a deal, and BT was forced to look into other options. One possibility was to join forces with MCI, a company in which BT already owned a 20 percent stake. The two corporations entered negotiations in the summer of 1996, and by the following summer were on the verge of inking a $22 billion agreement. The deal stalled in August 1997, however, with MCI’s announcement that it expected to suffer losses of up to $800 million for the previous year. The news struck trepidation in the hearts of BT’s majority shareholders, and the two companies entered renegotiations. Unfortunately for BT, the merger was suddenly blindsided in October 1997, when Worldcom Inc., a fast-rising U.S. telecommunications firm, made an offer for MCI that exceeded BT’s by nearly $13 billion. BT once again found itself without a partner.

The company immediately began searching for other possibilities. In July 1998 it entered into a promising new partnership with AT&T, wherein the companies merged their international operations into a single entity. The combined businesses had the potential to generate more than $10 billion in revenue annually, and to place the two industry giants in a position to gain a foothold in newly deregulated telecommunications markets worldwide. One particularly attractive target was Japan; in March 1999, the companies acquired a combined 30 percent stake in Japan Telecom, the country’s fourth largest telephone company. Encouraged by the initial promise of the joint venture, the companies pooled their global wireless phone operations in September 1999. The new company, called Advance, boasted more than 41 million customers across the world, and promised to generate more than $12 billion a year.

In the end, however, BT’s international expansion strategy proved to be hastily conceived. For one, Advance took longer than expected to generate a substantial product line. Worse, BT’s efforts to achieve a wide global reach over a short period ultimately spread its resources far too thin, and by May 2001 the company had accumulated $43 billion in debt and was reporting its first fiscal year loss since becoming privatized. Under siege by investors, Chairman Sir Iain Vaillance resigned, and BT was forced to dump several of its minority holdings in overseas telecommunications companies, including its shares in Japan Telecom. By October the joint venture with AT&T was defunct, and the company had undertaken a massive restructuring. The result was the formation of the BT Group, which became the holding company for British Telecom. Although the divestitures and the streamlining of its business operations had helped BT get a handle on its debt, it was clear that the company needed to seriously rethink its ambitions for the future.

Principal Subsidiaries

BT Australasia Pty Limited (Australia); BT Cableships Limited; BT Cellnet Limited; BT Communications Management Limited; BT (Hong Kong) Limited; BT Ignite GmbH (Germany); BT Ignite GmbH & Co. (Germany); BT Ignite Nederland BV (Netherlands); BT North America Inc. (U.S.); BT Property Limited; BT Subsea Cables Limited; BT Tele-comunicaciones SA (Spain); BT (Worldwide) Limited; BT Wireless Limited; Clear Communications Limited; Esat Digifone Limited (Ireland; 50.5%); Esat Group Limited (Ireland); Farland BV: Manx Telecom Limited; Syntegra Groep BV (Netherlands); Syntegra SA (France); Syntegra (USA) Inc.; Telfort Mobiel BV (Netherlands); Viag Interkom GmbH & Co.; Tell Limited; Yellow Book USA Inc.; Yellow Pages Sales Limited.