TalkTalk lays siege to BT's fixed-line business but the fight back begins

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The Independent Online

"All the trends are in the right direction," said Mr Verwaayen yesterday, announcing a 20 per cent increase in quarterly pre-tax profits to £511m and a 25 per cent rise in earnings per share to 4.5p.

However, these figures, along with a 5 per cent rise in first quarter revenues to £4.8bn, are just as well because large parts of BT's foundations - its traditional line rental and voice call businesses - are being hurriedly eaten away by ever bolder competitors.

One of the boldest of these, Charles Dunstone, the chief executive of Carphone Warehouse, yesterday grabbed Mr Verwaayen's limelight by announcing, with immaculate timing, that his TalkTalk home phone service had signed up its one millionth customer - which in simple language means one million less customers for BT.

So is the onslaught of Carphone Warehouse and the like an insoluble problem for BT? Can it keep afloat those of its businesses in decline while changing course in pursuit of growth from so-called "new wave" revenues - namely broadband internet, mobile telephony and information technology services that rely on the creation of made-to-measure networks for large business customers?

Mr Dunstone is confident the economics mean there is still plenty to aim at for TalkTalk.

"What it depends on is whether BT ever decides it is worthwhile radically reducing the prices of calls and line rentals to make it uneconomic for us to compete; or does BT really make more money competing with us at certain price levels," said Mr Dunstone.

BT's traditional business has been under attack for some time - its monopoly was ended more than 20 years ago with privatisation - but the momentum has gathered pace as rivals have recovered from the aftermath of the telecoms and technology crash. Add to the mix a new regulator, in the shape of Ofcom, much more determined to expose BT to competition, and the outlook still seems to be as much about treading water, for Mr Verwaayen, as sprinting off for calmer seas.

The company's numbers tell their own story. BT's traditional revenues in its first quarter to the end of June were £3.4bn, £233m lower than the same quarter last year, or a rate of decline of 6 per cent. BT's estimated market share of fixed line voice calls among consumers fell 1.4 percentage points between its first quarter this year and the same period last year. That leaves it with a total market share of 61 per cent and falling. Its market share among businesses fell by 0.3 per cent, to about 41 per cent.

Within BT's main business divisions, BT Retail saw a 9 per cent decline in traditional revenues to £1.8bn while BT Wholesale saw the same revenues fall from £810m to £791m, a 2.3 per cent fall.

Thanks to deregulation, the likes of Mr Dunstone can see a bright future. His TalkTalk operations had revenues up 86.8 per cent, year-on-year, for the three months to 2 July. This translates into revenues for the quarter from TalkTalk of £42.9m and 990,000 customers who have pretty much all defected from BT. During the month, TalkTalk has exceeded 1million customers, which represents a doubling of the size of the business a year ago.

At the moment Mr Dunstone's fixed line customers get one bill from TalkTalk for their calls and another bill from BT for their line rental. From next month that will change when TalkTalk launches line rental as well, so BT will lose all billing relationships with these customers, making it even harder for BT to win back its lost clientele.

TalkTalk is testing its own internal sales force to back up this new all-in-one service and has also become part of the Nectar loyalty scheme, both initiatives aimed at reducing the cost of recruiting new customers and allowing the company to continue with its "aggressive" customer growth strategy. It will soon launch a high-profile campaign to win over BT's broadband internet customers in an attempt to further undermine BT Retail's proposition.

And it's not just Carphone Warehouse which is gnawing away at BT's foundations. A plethora of retail rivals have joined the chase for a piece of BT's consumer customer base along with a business market which is seeing an equally competitve environment.

So why doesn't BT, a £20bn company, simply swat the £1.6bn Carphone Warehouse away? Well, Ofcom has opened the telecoms market up to a price war and is determined to see the consumer win in terms of price and service. BT has sufficient legacy issues such as poor customer service, however much it has tried to improve recently, which will persuade people to leave.

But in reality BT knows the current rate of decline probably represents the best of a bad job and is working hard to try to consolidate its market position as far as it can. It continues to launch initiatives, such as BT Privacy, which blocks unwanted sales calls for instance, which since its 11 July launch has attracted 350,000 customers.

Mr Verwaayen is also increasing the number of retail customers tied into its business, so that 65 per cent of residential revenues are locked into contracts. The equivalent figure for business customers is 50 per cent.

But the reality is that the smile on Mr Verwaayen's lips yesterday was not simply an attempt to put a brave face on a troubled company.

The chart shows that while BT's traditional revenues continue to fall, new wave revenues are growing robustly. At £1.4bn they represent about a third of BT's total sales, so there is a fair way to go before they outstrip traditional revenues of £3.4bn. However, the most recent quarter reveals the reason behind Mr Verwaayen's confidence.

The £233m decline in traditional revenues was more than compensated for by a £449m increase in new wave turnover, resulting in a net £216m increase in turnover, which is the 5 per cent increase which Mr Verwaayen was trumpeting so loudly on stage yesterday.

So while BT's traditional business is facing a serious threat, its new wave business is proving a real source of compensation - something reflected in BT's share price, which has risen impressively from 177p a year ago to 229p yesterday.