£10bn is hanging on the line as BT takes biggest-ever gamble

Marconi loses out as BT embarks on an ambitious route to update its ageing network. Ben Schneiders wonders if it can succeed

It is a decision that will transform the UK telecommunications industry and determine the future of BT, its suppliers and the way consumers use telephony.

It is a decision that will transform the UK telecommunications industry and determine the future of BT, its suppliers and the way consumers use telephony.

Last week BT selected its suppliers for a project worth up to £10bn in an overhaul called 21st Century Network, or 21CN.

"A programme of this scale could fundamentally reshape the sector," says Dave Tansley, a telecoms and technology partner at accountancy firm Deloitte. "As well as BT, those that may win or lose include technology vendors, other telecommunications service providers, and all users of voice and data communications services."

Over five years, 21CN will move BT from its current system of multiple circuit-switched networks, to a single internet-protocol (IP) network.

IP technology can move more traffic and uses less physical infrastructure - for example, the boxes and switches in exchanges. This allows companies such as BT to cut costs.

That may not sound particularly impressive, but BT hopes that the implementation of 21CN will carve £1bn a year from its costs by 2008-09.

"It vastly simplifies [the network]. It will take a huge amount out of our costs," says Paul Reynolds, chief executive of BT Wholesale.

Already the fallout has begun from 21CN after BT chose eight suppliers from a field of more than 300. Marconi, a long-term partner, missed out entirely and, as a result, its shares nearly halved on Thursday. It was expected to win a great deal of work from 21CN.

Instead, Fujitsu, Alcatel, Cisco, Ericsson, Ciena, Huawei, Lucent and Siemens pocketed different parts of the equipment- supply deal. BT will not say how much the contracts are worth to each player, but one supplier calls its deal "massive".

But there are risks to both BT and its partners. Experts warn that a project of this size has never before been attempted anywhere in the global telecoms industry. "The integration risks are quite substantial," says Marina Gibbs, head of fixed telecoms (Europe) for Spectrum Strategy Consultants.

She argues, though, that BT had no choice but to take its chances and undertake the investment. "A lot of its equipment is nearly obsolete."

By changing its core network to IP, BT will be able to slim down the amount of equipment in its network from around 100,000 pieces to 30,000, explains Ms Gibbs.

"There will be labour savings as well as infrastructure savings, as well as system savings [from 21CN]," says Chris Alliott, telecommunications analyst at the investment bank Nomura. But he too warns that there are considerable risks for BT.

One concern is security. "No one has yet got an all-IP national network," Mr Alliott points out. "We know the risks of hackers on the internet; there's a danger someone may try to disrupt the system."

The other hazard is executing such a large project. "They've got a detailed timetable which they are seeking to adhere to, but of course there are likely to be a number of technical issues to be overcome," says Mr Alliott.

Mr Reynolds at BT says the company has been able to reduce that risk by picking suppliers that already have the technology up and running.

Not everyone is convinced, though. "It is a very, very large, complex and IT-centric programme," says Mr Tansley at Deloitte. "Such programmes have a reputation for over-running in terms of time and budget."

He adds that the IP technology has in the past been deployed only in more limited contexts. "[The concern is] whether the technologies will scale, the standards mature quickly enough, and whether the vendors will have the skills to provide the necessary support."

The IP infrastructure is not just intended to slash costs. It will also allow new products to be introduced and hopefully lead to increased revenues.

"Consumers could have cheaper - or even free - telephone calls and a raft of new products," says Mr Tansley. "New products and services that appear futuristic now may be commonplace in just a few years' time."

But new products are no guarantee of success. "Market demand for these innovations is unpredictable, and as recent history shows, picking winning propositions will remain a challenge," Mr Tansley concludes.

Amid such radical changes, BT's competitors - which will have to use the new network - are understandably concerned about its dominant role as an infrastructure provider.

"It's quite scary for them," says Ms Gibbs. "There are lots of question marks over whether they will have access to those platforms."

Ian El-Mokadem, chief executive of BT rival One.Tel, wants industry regulator Ofcom - which is currently conducting a review of BT - to play a big role. "We have no problem with BT shareholders seeing a fair rate of return [from 21CN], but for the bits of that network we all have to use, we want to have fair and equal access," says Mr El-Mokadem. "You need to make sure that the transition happens smoothly - that BT Retail doesn't have an advantage over other players."

Mr Reynolds says the project will allow the industry as a whole to grow and benefit all players, as all its wholesale customers will connect to 21CN.

Other telecoms companies, such as Cable & Wireless, are trying to compete with BT's 21CN by shifting to an IP-based network themselves. Last week, C&W said it would invest £190m over three years.

The company's chief executive, Francesco Caio, agrees that the role of Ofcom is crucial to the future of the industry. "The regulator is pretty central. There is very much the opportunity and requirement that it favours infrastructure-based competition."

But BT is the gorilla on the block. It is spending the biggest bucks. Can it dictate the future?