BT starts new price war with pounds 214m off call costs

But consumer groups say the reduction is not big enough, Chris Godsmark reports
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A new phase in a telephone price war began yesterday with the announcement by BT of cuts in national and international call charges worth pounds 214m.

But the measures, which BT has to make to comply with price controls from the telephone watchdog, Oftel, were attacked by consumer groups as insufficient.

From 8 October, BT will cut 20 per cent off the cost of weekday evening trunk calls (those over a distance of 35 miles or more) and 10 per cent off all daytime trunk calls. The cost of a typical five-minute off-peak trunk call will fall from 29.1p to 23.2p.

There are also reductions in the cost of calls to some of the most popular international call destinations. A five-minute evening call to the USA or Canada drops from pounds 1.90 to pounds 1.41. The new cuts come on top of pounds 35m-worth of reductions for international calls previously announced.

They mean the average quarterly BT phone bill will fall from pounds 66.54 to pounds 64.46, a saving of just over 3 per cent. BT said a transatlantic call was now cheaper than ringing Penzance was at the time of privatisation in 1984.

Last night a corresponding round of industry-wide price cuts was in prospect as some cable television companies, which generally claim to offer substantial reductions over BT's call charges, pledged to maintain their claimed price advantage. Nynex, one of the biggest cable companies, said it would continue to offer a service that was on average 25 per cent cheaper than BT's.

Telephones analysts said the price war would hurt the cable operators most. "It's obviously bad news for cable companies because they're going to have to cut prices as well - they advertise on the basis that they're cheaper than BT," Jim McCafferty, from the stockbrokers Hoare Govett, said.

Despite a predictable fanfare from BT, Oftel, the industry regulator, was unimpressed by the price cuts. "They're just complying with their price cap," a spokesman said. "They've got to do it. It's not out of the goodness of their own heart."

BT has to cut a basket of charges in line with a five-year price cap set by Oftel. The reductions must total pounds 417m over the next 12 months. Yesterday's savings, which are on top of pounds 70m of cuts already announced, mean a further pounds 133m of price reductions are on the way, although BT declined to say where they would come.

However, there were no reductions in the price of local calls, which continue to cost 4p a minute during peak periods and 1p at weekends. Line- rental charges have been going up.

The main criticism of the current price cap has been that BT, which decides where to make the cuts, has been targeting reductions on the customers who spend most. People who mainly make local calls have seen the least benefit. From next year Oftel will attempt to redress the balance with a tougher price cap, focused more directly on lower-spending households.

The National Consumer Council said BT had "singularly failed" to offer flexible payment packages and had failed to cut the cost of local calls, which were most important for the vast majority of customers.

Behind the current round of reductions lies increasingly cut-throat competition in international calls, driven by new technology. A bewildering array of rival companies aims to undercut BT in the congested transatlantic market. Fibre-optic cables, which in theory can carry an almost limitless number of calls, have reduced the cost massively over the past 10 years.

BT, which is on course to make profits of more than pounds 3bn this year, says that it still faces huge costs in the international phone business. A spokesman said a large proportion of the cost of an overseas call went to the foreign telephone company involved.

Experts said that despite all the recent price cuts, BT still stood to increase its profits. "The price paid by the consumer is still substantially higher than the cost to the phone company of transmitting the call," Paul Lee, from the consultancy firm, Ovum, said. "The drop in international call charges is not keeping pace with the fall in this underlying cost."

Business comment, page 19

Rivals have all kinds of deal

So many phone companies are now competing with BT that the biggest problem for those trying to compare prices is finding the time to gather all the information.

BT customers can join a number of discount schemes. Under the Friends and Family offer, promoted in television advertisements featuring Bob Hoskins, call charges to five nominated numbers are reduced by 10 per cent.

Another scheme, PremierLine, targeted at higher-spending households, knocks 15 per cent off all calls for an annual charge of pounds 24. Small business can also join a number of discount schemes. This year BT could spend as much as pounds 180m on advertising to get its message across.

But cable operators still claim to be substantially cheaper than BT for those with average bills. Some offer free local calls if the number dialled is also with the cable company.

The general rule is that the higher the cost of the call, the bigger the competition and the greater the choice for consumers.

In the international market Mercury claims it is still cheaper than BT, despite the latest price cuts. A five-minute weekend call to the US costs pounds 1.02 on Mercury, against pounds 1.31 for BT. Including all the possible discounts from both companies, Mercury comes out 1p cheaper.

The biggest threat to established operators comes from smaller "resale" companies which buy line capacity wholesale and sell it at a discount.

Swiftcall, based in Dublin, charges 10p a minute for off-peak calls to the US and 20p for peak-time calls, undercutting BT by around a half. Most worryingly for BT, research suggests that resale companies such as Swiftcall can still make attractive profits.