Why didn't British Telecom do an Energis?

Jeremy Warner on why enegeris can steal a march on BT; and the high-speed rail link

Energis, the National Grid's telecommunications offshoot, is being floated on the stock market next month with a value which analysts estimate at anything between pounds 1bn and pounds 1.3bn. The company is barely four years old and is not expected to make a proper profit until well into the next century.

British Telecom, which has a near monopoly of the telecoms market in the UK and has been around since the turn of the century, is valued at little more than 20 times this sum. The pounds 400m invested by Energis during its brief existence on the planet represents just two months capital expenditure for BT, whose network has had upwards of pounds 15bn spent on it.

How can this be? How is it possible for Energis to generate such value when BT doesn't and apparently can't? And if Energis is as good a business proposition as its sponsors insist, how come British Telecom, which knows these markets as well as anyone, hasn't done it already?

I put this question to both Energis and BT. Surprisingly, they both came up with broadly the same answer. If anyone were trying to build BT's network from scratch today, it wouldn't look anything like it does. New technology would allow the company to have very few exchanges and use the latest in optical fibre architecture. Such a network would have huge advantages over the present one in terms of cost, reliability, capacity and general intelligence.

Instead, BT is the product of decades of different systems and technologies, laid one on top of the other. It would be neither practical nor economic to abandon this infrastructure in favour of a spanking new system.

This doesn't mean BT accepts that Energis is innately superior. BT already has its own overlay or "derived services network" which specialises in the same intelligent, value-added business services targeted by Energis, and uses many of the same technologies. The private circuits BT sells to business are a different version of the same thing.

All the same, BT does seem to accept that in a fast changing world, there is an important advantage in starting fresh without any of the baggage a big established company must always carry with it. Moreover, the National Grid decided to go ahead with its telecoms network just as the very latest of technologies - synchronous digital hierarchy (SDH) - came on the market. As a result, Energis was the first to implement a nationwide deployment of SDH and it remains the only pure SDH network.

Rolling out the network across the Grid's matrix of electricity pylons also carries big advantages, Energis claims. The cost of building the network in this way was two thirds lower than it would have been under conventional methods and it also took a lot less time. Return on investment is correspondingly enhanced. Some spectacular claims are made for the operating costs of the new network as well, at just 1 per cent of BT's and less than 10 per cent of Mercury's.

So there you have it. Better technology and prices than BT will give Energis an important competitive advantage in a market - that of intelligent business services - which is in any case growing much more rapidly than other forms of telecommunications.

It almost sounds too good to be true, doesn't it? Returning to the original question, if it is true, why hasn't BT already done it? The parallel here is with Midland Bank, which threatened by telephone and other forms of low-cost banking with real advantages to the customer over conventional methods, set up its own telephone banking operation, First Direct. This is a company quite separate from Midland and to some extent competes head on with it. Highly successful it has been too. The same approach is about to be tried by British Airways, which is planning to set up a separate, no frills, discount airline outside its own business to meet the challenge of easyJet and others.

In theory there was nothing to stop BT doing the same when the new technology came on the market. BT would not have enjoyed the advantages of the Grid's network of pylons as a conduit for the new system, but it could still have done something similar. So why didn't it? Partly it is down to the old truism that an established monopoly rarely spots a good business opportunity in its own market place. Furthermore, even when a monopoly knows it is about to be preyed on by newcomers, there is something unreal and unsatisfactory about setting up in competition with yourself. This is generally enough in itself to discourage the practice.

But perhaps as important, Britain's regulatory framework for telecommunications is set up with the deliberate purpose of establishing viable competitors to BT. Competitors such as Energis are allowed access to the BT network under the "interconnect" regime on what by any standards are very favourable prices indeed. In Germany these interconnect rates have recently been set three times higher than they are here and still Deutsche Telekom is appealing against them.

And in any case, if BT had tried to establish an Energis type operation, it would almost certainly have been seen by the regulator as an attempt to stifle competition and might have been jumped on as a result. The circle, then, can just about be squared. It is indeed possible for a four-year- old upstart to be worth a twentieth of the century-old incumbent, if only because all industries, like life itself, are a constant process of birth and rebirth.

Oh dear. The high speed, Channel Tunnel rail link seems to be in trouble again, or at least Railtrack has been trying to make it so. The money and route for this vital piece of rail infrastructure linking the Channel Tunnel and London has been left wanting for almost as long as I've been in financial journalism. By promising pounds 1.5bn of state subsidies, British Rail's stake in Eurostar, St Pancras Railway station, vast tracts of disused railway land, the kitchen sink and various other odds and sods, the last government finally persuaded the private sector to agree to finance and run it. Now, according to rumours put around by Railtrack, the whole thing is in trouble again. The City won't finance it, and the route is in dispute once more. At this stage it is unclear whether there is any substance behind these rumours, or if this is just Railtrack trying to muscle in on the action. Let's hope it is the latter.