Outlook: The growth just keeps coming for BT

NO WONDER British Telecom has been one of the best performing stocks in the FTSE 100 this year. Despite giving away more than pounds 2bn worth of tariff cuts over the past five years and the onset of quite marked competition in the telecommunications market, profits just keep steamrolling ahead.

As fast as competitors and regulators eat into BT's revenues, volume grows to compensate, boosted recently by rapid growth in internet traffic, data and business services. For investors, plodding old BT has all of a sudden taken on a fabulously attractive disposition. It's still a reliable source of monopoly, utility profit, but at the same time it's in the stock market's latest glamour sector, telecommunications. BT is seen as both defensive and potentially high growth - a quite rare combination.

Funnily enough, this is how the Government tried to market the company to investors when it was privatised in 1984. BT should not be seen as a utility, its sponsors said, but a high growth, hi-tech enterprise at the forefront of the information technology revolution. Fourteen years later, the City is beginning to believe the story. If unprofitable upstarts like Colt can be valued at pounds 4.3bn, BT must easily justify its pounds 52bn valuation. With the share price having doubled this year, Sir Iain Vallance, chairman, must be starting to think its time to hang up his spurs.

It is still unkindly said in some parts of the City that this dramatic outperformance is small thanks to Sir Iain, whose planned merger with MCI of the US might have had disastrous consequences for the share price. As it is, WorldCom stepped in and snatched the prize (dog?) from under Sir Iain's nose, thus saving BT from its own folly.

This is a trifle unfair, for actually the upward movement in BT's share price doesn't have a lot to do with the failure of the MCI deal. Rather, it's about a greater appreciation of the value of BT's assets in the deregulating continental market, and, of course, the company's core business back here at home.

And boy, does that core monopoly keep coining it. Competition - from mobile, cable and specialist business service providers - is now providing a real spur to lower prices and greater efficiency, but such is the growth in the market that BT is barely feeling the effect. Take internet traffic. From hardly anything a few years back, internet access is now providing BT with "hundreds of millions of pounds" of revenue a year. Since the marginal cost of this extra traffic is virtually nil, the revenue goes straight through to the bottom line.

If this sort of growth persists, it will eventually create its own regulatory difficulties. BT and other telecommunications companies in Britain charge a standard local call rate for internet access. An internet call tends to be considerably longer in duration than an ordinary voice call, so the potential revenue gain from this sort of traffic is substantial. A recent study by Pacific Bell in California showed that 30 per cent of internet calls in the US last three hours, and 7.5 per cent last an astonishing 24 hours or more.

To some extent, this is caused by the structure of tariffs in the US. By paying a higher monthly rental, residential customers can obtain unlimited free local telephony, with the result that there is no cost penalty to prolonged use of the internet. By charging per minute for local telephony, BT both regulates over use of the network, avoiding the now common congestion encountered in the US, and gains a terrific boost to revenues at the same time.

Good for BT, then, but not so good the internet user, who might reasonably think he's being exploited. It cannot be long before Oftel begins sniffing around at these new sources of high growth revenue. Until it does, BT is sitting pretty. Through recession and boom, the growth just keeps coming.

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