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Outlook: BT wrestles with its digital future

LET BATTLE commence. About four years too late, British Telecom has woken up to the fact that it is about to have its domestic telephone monopoly poached from under its nose. In an attempt to head off the threat and protect those burgeoning profits, it has belatedly begun to invest in the latest technology.

Now pay attention. The technology in question is known as "asymmetric digital subscriber line" (ADSL) and it allows BT, through digital compression, to use its rickety old co-axial telephone network to deliver what is essentially a broadband service to the home. Got that? Never mind, you will eventually, for this is the future, and BT's chief executive, Sir Peter Bonfield, is having to spend a fortune on being a part of it.

The cable companies have also taken their time in putting their networks to good use, but sometime next year, they should all be in a position to offer a full broadband service to customers, allowing high speed internet access, video and TV programming on demand, and just about anything else you could possibly want to do with a telephone line. Up until now, BT hasn't had to worry too much about the cable guys. They have failed utterly to capitalise on their spanking new broadband networks, and if you believe the TV ads (which you shouldn't), even those who defected to cable are now returning to the bosom of BT in their thousands.

Of late, however, cable has shown distinct signs of getting its act together, and in theory at least, the natural advantage of its new age networks should allow it to provide far superior service to BT at considerably lower cost. For instance, Telewest will be launching its own fully interactive service sometime next year, and given that its fibre optic network is already up and running, it's not going to cost it much to do so.

BT by contrast is having to invest pounds 250m just for the initial phase of its new service. This will only make ADSL available in areas covering 8 million households, mainly London and Manchester. Furthermore, that expenditure will allow for no more than a couple of hundred thousand connections, each extra subscriber costing an unspecified amount more. Even more alarming, if more than about a third of households in these areas subscribe, it would probably collapse the entire network.

Applying ADSL to BT's existing local network is a bit like putting a nuclear reactor inside a nineteenth century steam vessel. It'll make the ship go a lot faster initially but eventually the vessel will sink and need replacing. Meanwhile cable's own nuclear powered super tanker will still be afloat and motoring.

This threat to BT's core domestic customer base is much more potent than generally appreciated. The high margins of domestic voice telephony are already under siege from fast growing mobile telephony. At the present pace of development, it won't be long before cable starts throwing in voice for free alongside the rest of its multi-media package.

Like the high street banks, BT can to some extent rely on customer apathy to safeguard its core domestic revenue stream. Unfortunately for BT, anyone clever enough to know what ADSL stands for is unlikely to have too much difficulty choosing between the pounds 40-pounds 150 a month BT plans to charge for broadband connection, and the much cheaper rates that will be on offer from cable.

BT has defended its monopoly against all comers much better than anyone would have dreamed possible when the telecommunications market was liberalised in the halcyon days of the Thatcher government. That could change very rapidly from here on in. Apart from the consumer, the one clear winner in all this is Microsoft, which having already sewn up the cable companies, has managed to gain key brand positioning on BT's ADSL offering too. Bill Gates isn't worth more than $100bn for nothing.