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Outlook: It is nice to be a lollipop man - just ask BT

NOT MANY people would think of British Telecom as a nice friendly lollipop man, but that apparently is how BT thinks of itself. In a speech last week to the Telecoms Managers Association, Sir Iain Vallance, chairman of BT, begun with this extraordinary analogy. "When it comes to the mass deployment of new technology across our network, BT has the unenviable task of the lollipop man. His job is to restrain the over-exuberant children from dashing across the road at will, and to ensure that the crossing is made safely and in an orderly fashion".

Now we all know that BT gets a rough press, but it surely isn't so bad that Sir Iain should entirely have taken leave of his senses. What on earth can he mean? Briefly summarised, it is this. BT still enjoys a monopolistic share of the UK telephone market, and rightly or wrongly, it is often accused of abusing this position.

Such criticism used to be confined to charges, which are frequently depicted as too high, and quality of service, invariably described as too poor. There are not many downsides to monopoly, but public disdain is one of them. More recently, however, the attack has been broadened into the allegation that BT is standing in the way of the new economy. It is refusing to deploy bandwidth with the speed required for Britain properly to enter the brave new world, and it is inhibiting internet use with timed local call charges.

Sir Iain's defence is a peculiarly public sector if not altogether surprising one. In a fast changing world, experience should count for something, he says, and here, BT the expert is introducing the new technologies just as fast as the natural constraints of safety and economic viability will allow. If you let the little children go rushing around all over the place, sooner or later they are going to get squelched. Much better, Sir Iain suggests, for BT, the lollipop man, to take control, and make its own decisions on the speed with which ADSL and other technologies are introduced. Lollipop man BT knows best.

Yes, well, leaving that one aside, what about time charged internet access? On this, Sir Iain is on firmer ground, for the present outrageously high charges for internet access are largely an accident of regulation. This has historically required BT both to charge a universal tariff, regardless of economic cost, and to limit the way it can rebalance tariffs away from time charging and towards a flat rate rental. That in turn has created some quite high timed local call rates, especially at peak hours.

However, when it comes to internet and mobile use of BT's network, most of the tariff goes not to BT, but to the terminating operator, either fixed or mobile. In the case of internet traffic, the revenue is then divided between the operator and internet service provider. In Britain and on the Continent, this has enabled the development of "free" ISPs, a model pioneered by Freeserve. This is very different to the US, where most ISPs earn their revenue by charging a rental. Internet access is then unlimited, and "free" to the extent that its telecoms costs are covered by a fixed rental to the telecoms operator.

Plainly, the differing charge methods lead to some equally different patterns of internet use between Europe and the US, but the point BT likes to make is that one way or another, the internet user always pays, and on average he probably pays in equal measure. As if to drive home the point, BT yesterday announced a series of new flat rate monthly charges which allow varying degrees of unlimited internet access. Splendid! It even drew a guarded welcome from the telecoms watchdog, Oftel. Isn't this exactly what the stalwarts of the new economy have been asking for all along?

Er, well, not quite. As ever in matters concerning BT, not everything is as it seems. BT has structured the flat rate fees in a way that limits any revenue damage to a bare minimum. Moreover, "free" ISPs that offer these new flat rate charges won't get any share of the revenue. To recoup its costs, the ISP will either have to start charging a rental, or find some other way of generating revenue. It can readily be seen that ISPs operated by BT will not suffer the same disadvantage. Plainly, it pays to be the lollipop man.

In July 2001, BT will lose much of this gatekeeper status, when it is forced to open up the local network to all comers. That is the point at which we can expect to see some genuine tariff competition develop for local telephony, both internet and voice. Curiously, the cable companies have so far largely failed to provide it.

It is also the point at which BT will have to revisit the thorny issue of whether to split itself in two or more parts, like British Gas did, by separating the customer facing service business from the network. At this stage BT continues to insist that the company works best as an integrated whole, but the logic of the process points the other way. For accounting and regulatory purposes, the businesses will have to be split anyway.