BT points the way to the future with MCI deal

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The Independent Online
What will British Telecom look like 10 years from now? The question seems worth asking because of the welter of adverse press comment that has greeted BT's ambitious plans to merge with MCI of the United States. To many in the press, this looks like expensive empire building, an example of the folly of ambition on a grand scale. BT, its shareholders and customers will all live to regret this acquisition, is the general line.

Oddly, however, this is not the general view of the City, which with its short-term horizons and concentration on immediate shareholder value, is generally at least as alive to anything that smacks of management aggrandisement as the press. So who has got it right - the press or the City? To see that it is the City and BT you have to look at what's going on in this industry and BT's plans to adapt to and benefit from these changes.

Sir Iain Vallance, chairman of BT, takes the view that 10 years from now the world of telecoms will be dominated by no more than a handful of international super carriers. That doesn't mean global hegemony for those that make the big league. Powerful national players will continue to co-exist alongside the super league, but they will be very much second division. Running in parallel with globalisation of the industry is its commoditisation. With the cost and price of all forms of telecommunications falling like a stone, the main players are going to have to expand rapidly and effectively into all kinds of value-added services to keep their profits rising. That means moving into media, not necessarily as a content provider but certainly as a packager of product and a method of delivery. It also means moving into wider systems integration, contracting out and consultancy, the sort of territory occupied at present by EDS and IBM.

To do this effectively, the aspiring super-carrier needs to establish a real presence in all three main trading blocks - the USA, Europe and Asia Pacific. Until comparatively recently this has not been possible. Domestic telecommunications has been the preserve of closely guarded national monopolies, or public telephone boards (PTBs). International telecoms has been governed by an exclusive network of bilateral agreements between individual PTBs, much like those that govern the airline industry.

Even those few markets that have introduced a degree of deregulation and liberalisation - such as the United States - have remained largely closed to foreign competition. This is now changing rapidly and in no small measure, it is down to BT.

Domestically BT still looks like an avid defender of monopoly power. More than 10 years after privatisation and deregulation, it still has over 90 per cent of the domestic market. So its defence of monopoly has actually been a highly successful one. From a commercial standpoint, it would have been failing its shareholders if this were not so.

However, the failure of competition to take off in Britain is more down to the ineptitude of competitors - the cable companies and more particularly Mercury - than anything else.

What is certain is that internationally BT has been very effective in using the example of Britain's experiment in deregulated, open telecoms markets as a way of bringing about change elsewhere. Most notable of its successes is Europe. What is now happening - deregulation of European telecoms and the privatisation of both Deutsche Telekom and France Telecom - would have been almost unthinkable six years ago. Throughout most of the 1980s BT was a whipping boy for public opinion - poor standards of service combined with apparently excessive profits made BT one of the most hated institutions in the land. It was not a model the rest of Europe would have wanted to adopt. Liberalisation was regarded as a ghastly American aberration which had typically managed to wash up on the shores of Britain but very definitely would go no further. The reaction of other PTBs to any suggestion of deregulation in the EU was extremely hostile.

Over the course of the 1990s, however, BT has gradually managed to bring the rest of Europe round to its way of thinking, culminating finally in the 1995 agreement to free up telecoms markets throughout the Union by 1998. BT's part in this process should not be underestimated. The lobby for change came mainly from BT. The 64,000 dollar question is whether it will actually make much difference. If the experience of Britain is anything to go by, where BT has so far managed to retain the vast bulk of the market, what is on offer in Europe may be little more than crumbs off the table.

This is where the argument comes back to MCI, which was the first of the upstart competitors to challenge AT&T's monopoly of long-distance traffic in the US. Just as Mercury has been a poor competitor for BT, MCI has proved a very effective one for AT&T. Sharp marketing, buccaneering, entrepreneurial instincts, and the heavy use of litigation to push out the barriers of deregulation and undermine monopoly, have made MCI into one of the US's fastest-growing companies. If deregulation has so far largely failed in providing significant competition to BT in the UK, MCI has been a powerful force in making it succeed in the US. There is no reason to believe that MCI cannot repeat in US local markets, which are in the process of being opened up to competition, what it has already achieved in long distance.

In conjunction with MCI, BT also plans to repeat the trick in Europe, so much so that Sir Iain believes it quite possible that in 10 years BT (or Concert as it will shortly be renamed to emphasise its divorce from the old PTB tradition) will have overtaken Deutsche Telekom as Europe's largest telephone company. The last bits of the jigsaw are due to fall into place over the next year or so in the Asia Pacific region.

Some of this may have been possible without MCI but the two together make a much more powerful combination. For all these reasons what BT is doing in buying MCI makes obvious sense. BT's peers in the rest of Europe would dearly love to do the same thing, given the chance. But without access to capital and while their markets remain closed to competition, they cannot.

For the time being BT remains uniquely placed ahead of the wave to exploit the opportunity opening up in these markets. Nor in truth is the MCI acquisition even much of a gamble. The deal will be mildly dilutive to BT shareholders in the early years but assuming Sir Iain's vision of the future is no idle one, that will be paid back in spades as we move into the next millennium. The press is often accused of failing to back the reasonable aims and ambitions of British business. On this occasion its critics are right. The MCI takeover will be good for BT and good for Britain.