Answering the call of an emerging market: Mary Fagan reports on the smaller rivals taking the fight to BT and Mercury

BRITAIN has become a focus of change in telecommunications, and nowhere more than London, the corporate heart of the UK.

Mercury, BT's first rival, put much of its efforts into winning business in the capital in its early years, and in the City has achieved about 50 per cent market share. Now it is Mercury's turn to face competition, as newer rivals are luring the large business customers so important to Mercury and BT.

Among the latest are City of London Telecommunications (Colt) and MFS. Although barely heard of in this country, they are backed by big US companies. Their market share in London may be negligible but they claim to have made an impact in just a few months.

Colt is owned by Fidelity, one of the world's largest unit trust managers, with assets of about dollars 360bn. MFS is part of a six-year-old start- up which already has local telephone networks in 32 cities in the US. These enable large American businesses to link into long distance networks, bypassing the local Baby Bell operating companies.

Superficially, they seem very different - MFS oozing entrepreneurial enthusiasm, Colt a more traditional business. Scratch the surface, however, and they have remarkably similar strategies.

They intend, where possible, to build their local fibre-optic networks direct to customers rather than leasing lines from BT or Mercury. They both offer either private leased-line services or full public telephony and they intend to stick to big businesses.

They can barely conceal their glee at being among the first to gain a foothold, however small, in this marketplace. They are arch-rivals but both believe that this market has room for two.

The most striking example of this is the way Colt and MFS have just agreed to share the same ducts - the holes in which fibre-optic cables are laid.

'We do not compete on the basis of ducts,' Michael Storey, chief executive of MFS in the UK, said. 'We compete in the boardroom and in customers' minds. While we are well resourced - and capital is certainly not a problem - if you can do it less expensively then you should.'

The MFS investment this year is likely to be pounds 30m. The company, whose public telecommunications licence is a national one, also plans to launch in most big UK cities within three years. It insists investment is no obstacle.

'We are young and entrepreneurial and we are prepared to take risks. We are investing up front for long-term returns,' Mr Storey said.

He is keen to point out differences between MFS and Colt. His rival does not have a national licence, for example, and is therefore limited to the M25 area, although that is likely to change.

He does have a few scathing comparisons between his company and BT. 'The most important thing we do that they do not is listen very intently to customers and design solutions for their problems. Customers do not want to be sold stuff, they want a relationship with their supplier,' he said.

While he stresses that MFS is not trying to be the cheapest option, prices for the public switched service are about 6 to 7 per cent less than Mercury's best discount price, he claims, and there are no connection or line-rental fees.

In spite of his ebullience, Mr Storey is coy about his initial customer base on the network, which stretches from east of London Docklands to the City and into Westminster. He boasts 86 customers but will not name any.

Paul Chisholm, managing director of Colt, is less reticent. He lists Robert Fleming, Reuters, Quilter Goodison, Bankers Trust and London Guildhall University among the first customers. The network reaches from Docklands to the City and to Oxford Street and continues to expand to the west and south. He says Colt's prices, at least for private lines, undercut BT by up to 12 per cent.

'Once you have a key base of customers in the capital they naturally push you out as they want service provided to other sites,' Mr Chisholm said.

In spite of the M25 limit, the company's five-year plan to invest about pounds 25m annually will take it beyond London.

Colt is studying the potential of other UK cities and expects to apply for more licences in the coming months. Like his counterpart at MFS, Mr Chisholm is not averse to the notion of alliances with other companies. To link far- flung urban networks, the two newcomers will need to work with long-distance operators such as BT, Mercury and Energis, the telecommunications arm of the National Grid Company.

'We see the telecommunications industry breaking down to a combination of trunk services and local feeder networks including the cable television companies and ourselves,' Mr Chisholm said. 'This is the model you see evolving in the US today.'

Although uncertain as to the development of real competition in the rest of the European Union, he also hopes to take the Colt concept to countries on the Continent.

Liberal as the UK may be, neither Colt nor MFS thinks the market is as free as BT would have people believe. There are huge barriers to competition to be overcome. As chairman of the Other Licensed Operators Group, Paul Chisholm is acutely aware that the road to success is not going to be easy.

The most notorious obstacle is that of the charges to interconnect to BT's network to complete calls. Like most newer telephone network operators, MFS and Colt need to use BT or Mercury lines to carry the calls beyond the confines of their own networks and for that they must pay. The problem, Mr Chisholm says, is getting a price based on costs.

'You really do not know what you are paying for, or why. Are we paying for bad investments by BT or its inefficiencies? We want to make sure what we are paying only for what we use. BT offers a package while what we want is an a la carte menu.'

Although the regulator, Oftel, is trying to resolve the issues by forcing BT to publish separate accounts, Colt believes that will only be part of the solution.

There is also another payment to BT - the contribution to the losses of about pounds 1.5bn a year which BT says it makes in providing and maintaining local lines.

Only Mercury makes these payments, called Access Deficit Charges, as Oftel recently granted a two-year waiver for newcomers, including Colt and MFS.

Mr Storey also cites less obvious barriers - for instance, the allegation that BT and Mercury are less than keen to allow wires from other operators to pass through their pipes, even when there is room. And number portability, which will allow customers to keep their telephone numbers if they move from BT, has not yet arrived.

Ultimately, the problem is simply that BT is almost everywhere. Colt, MFS and others can claim to offer lower prices, a better quality of service, a new approach, but BT is winning sympathy because so many new entrants are snapping at its heels while the regulatory screws turn tighter.

Mr Chisholm has the last word. 'People look at all the competition. But look at the power of BT - the size, the information database, the captive audience.'

(Photograph omitted)