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The stealthy advance of a telecoms underdog

DEREGULATION may have thrown Britain's telecommunications market open to competition, but the practicalities of breaking into this multi- billion-pound industry are a good deal more complex than the theory. Competing with the likes of BT and Cable & Wireless generally requires a lot of money, not least for financing the advertising needed to remind customers of a newcomer's arrival.

However, Redstone Telecom is set upon taking on the big players through more stealthy means. Admitting that it does not have the funding to set up its own network, it says it is relying on innovation to make up for its lack of firepower.

The latest evidence of this strategy came last week when it announced that it was launching a national service through, in effect, piggy-backing on the Fibernet network set up to transmit data rather than voice.

Graham Cove, managing director of the company, says the move brings it the country's fifth or sixth largest network, so giving it an edge over such operators as Colt and Scottish Telecom, which are limited to running regional networks. The result is that a business with offices spread between such areas as Scotland, the North-west, London and the West can now see Redstone as a potential telecom service provider alongside the likes of BT, Cable & Wireless Communications and Energis.

Nor does the innovation end there. Redstone, which has signed an initial pounds 1.8m contract with Fibernet, has come to an arrangement with the company whereby it pays more for use of the network as its customer base grows. It has also set up a rolling programme for purchasing more of the Nokia switches that enable access to the network over the next two years.

Mr Cove says: "Our network is set to shake up the market. Until today, multi-sited, medium-sized corporates have had few options in terms of telecoms operators, as only the big three are able to offer them directly connected services.

"We aim to open up the market place, offering more choice and real value to businesses. Our return on investment cycle is also much shorter than that of other, networking-owning telcos. I wouldn't be surprised to see others following in our wake."

Bold words. But Mr Cove admits that the penetration of small players such as his organisation is greater among business users than among residential customers.

BT still has about 80 per cent of the residential market, with the only real competition coming from the cable companies, but its share of the business market, where managers are more apt to see the cost benefits of competition, is down to about 50 to 60 per cent, he says.

However, he insists that the UK is big enough to enable his organisation to create a solid business even with a small share of the total sector. Once Redstone is on the way to achieving that, he is set to expand further afield.

"There are opportunities in Europe, but we are not going to take them until we've proven [the system] in the UK," says Mr Cove.

Even if doubters might feel the company is vulnerable to imitation by its bigger rivals and other would-be rivals, Redstone has made impressive progress since being granted a licence to run a public telephone network in 1995.

Founded by Simon Thomas and Richard Newsome, the company took on Mr Cove as its first employee and in the little more than two years since it started operating has seen turnover climb from pounds 1.8m at the end of the first year to pounds 8.2m last year. This year it is expected to show a similar (roughly 300 per cent) rise to about pounds 30m.

Key to this growth has been the company's development of a personal numbering system under which an individual can have a single telephone number, whether he is at work or at home, using a mobile or a land-based phone, in the UK or overseas.

Sold through such retailers as Carphone Warehouse, Dixons and The Link, the service has about 180,000 customers. This makes it, says Mr Cove, the largest service of its kind in the UK and possibly the world. The nearest UK rival, he adds, has about 30,000 to 40,000 customers.

The workforce in Borehamwood, Hertfordshire, has grown to 70 and, though regulation specialist Mr Newsome is no longer actively involved in the company, Mr Thomas remains as operations director.

Three rounds of financing, the latest from a US investment bank, have got the company to its current position. But Mr Cove, who with the two founders holds about 30 per cent of the equity, admits that flotation on the London Stock Exchange might come as soon as next year.

Redstone is determined to punch above its weight and to be "a big player rather than a niche player" - and that might mean floating purely for the sake of becoming more credible to the large businesses with which it would like to deal. Competition in telecommunications could depend on Redstone being taken seriously.