Blair's less than super highway

Tony Blair's 'deal' was described as 'political fluff' by one analyst

THE City has learnt rather quickly to treat any excited announcement involving the phrase "information superhighway" as cautiously as radiation workers coming across a lump of uranium on the floor: they retreat to a safe distance and wait for the initial activity to subside. Then they put on the safety clothing and get to grips with it.

They did not take long last week with Tony Blair's "deal" with BT, by which a future Labour government would allow BT to broadcast "entertainment" such as TV programmes down phone lines from 2002. In return, BT would wire up every school, college, library, health centre, hospital and surgery for free, running a line of optical fibre from the nearest trunk line.

City opinion was blunt, once the political fall-out dissipated. "A piece of political fluff," said one analyst. By the end of the week, neither BT's shares nor those of the few quoted cable TV companies (which would come into head-on competition with BT under a revised regulatory regime) had changed.

But for BT, if the "deal" is enacted, it would mark a significant pair of victories, one political and one commercial, in the pursuit of its strategy.

The political effect is already noticeable. Even before it was privatised in 1984, BT was urging the government to let it broadcast down its phone lines. The government has always refused. When last year the House of Commons Select Committee on Trade and Industry looked at the future of telecoms, BT popped up and asked to be set free of its regulatory shackles.

The select committee agreed. The Department of Trade and Industry disagreed, again. But the Labour Party took the cross-party committee's report and incorporated its main recom- mendations - especially those that would allow BT to compete with cable companies in their 130 franchises across the UK within seven years of the cable company being licensed - into official party policy.

When Mr Blair "announced" the deal, the reaction of the Conservative Party was interesting. Ian Lang, the Secretary of State for Trade and Industry, criticised Labour. But he did not criticise Iain Vallance, BT's chief executive. Thus BT has got both main political parties to move closer to it in a single week. The Conservative Party conference could be the platform for further reconciliation.

This would all fit into BT's business strategy. It needs a solid revenue base in its home territory to make gains further afield. In May, the corporation's group strategy and planning chief, Richard Marriott, commented: "We are largely dependent on the UK, and the whim of the regulators."

If the regulators' whim is changed by government edict, the finances of the deal become interesting. How much is BT really giving away? Early estimates put the cost of the wiring at about pounds 60m, within an overall investment of more than pounds 15bn to install optical fibre throughout the country. Certainly the free connections would be a fraction of the total.

And BT could charge rental to those organisations connected up for free, and impose call charges and charge them for movies or TV broadcast over the phone - a technology being tested in a BT trial in Colchester.

It will also be able to offer everyone with a BT phone line an entertainment service, allowing it to break into a market potentially worth billions. That would also make the level of usage of the domestic phone line - currently busy for just eight minutes a day - shoot up. BT would then win twice over: the network would begin paying off, and cash flow would be virtually guaranteed.

And how much is BT sacrificing by offering free connections? Its current pounds 99 domestic installation charge is cross-subidised. In cities, the cost of adding a new line is probably pounds 150, mostly in labour. The maximum cost of installing a line is pounds 43,000, the fee demanded by BT for installing a line to a woman on a mountain in Powys, Wales, this summer.

What, then, do the cable companies, who will become BT's direct rivals, think? They are investing millions in wiring up 130 area franchises with optical fibre to reach most of the UK's 22 million homes. Last week, their mood could be described as "hopping calm".

Alan Bates, chief executive of Bell Cablemedia, said: "It's a storm in a teacup. Cable companies have been connecting up schools and hospitals for free since the beginning of this year. We just haven't made the same noise about it."

City analysts also think the cable companies have passed the point of no return: that so many have invested so much in their own systems that to give up just because BT might compete would be foolish.

"The cable companies have been stepping up their marketing push anyway," according to one sector analyst. "They've always known the election is the key point for them. But there's no reason why they shouldn't reach a reasonable market share before then."