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)

A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary