Jeremy Warner's Outlook: BT boldly goes, but will it deliver the goods?

Free-to-air BSkyB; M&S/Radice

All of a sudden, British Telecom seems to be doing most of the right things. Last month, the group dramatically slashed its wholesale prices in a move that will deliver a huge boost to broadband roll-out. Then there was the bluephone initiative with Vodafone, which seeks to combine fixed line and mobile telephony within a single handset. Yesterday came news of a definitive timetable for transforming the network from the present hotchpotch of older technologies onto a spanking new Internet Protocol (IP) infrastructure.

All of a sudden, British Telecom seems to be doing most of the right things. Last month, the group dramatically slashed its wholesale prices in a move that will deliver a huge boost to broadband roll-out. Then there was the bluephone initiative with Vodafone, which seeks to combine fixed line and mobile telephony within a single handset. Yesterday came news of a definitive timetable for transforming the network from the present hotchpotch of older technologies onto a spanking new Internet Protocol (IP) infrastructure.

Against the paralysis and misjudgments of the past, it is almost as if BT is a fully functioning company again, for which full credit must go to the still comparatively new team of Sir Christopher Bland as chairman and Ben Verwaayen as chief executive.

Only one problem. Despite their best efforts, the shares remain firmly down in the dumps close to their all time low. It's not hard to figure out why. Over the past ten years, telecom prices have deflated by 50 per cent while levels of competition have never been more intense. As the incumbent, most of what BT does, including the three initiatives listed above, is by definition defensive. However hard it tries, there is really only one way for BT to go as far as its core, domestic and business subscriber base is concerned, and that's down.

So while BT at last seems to be getting the response right, it won't necessarily do anything for top and bottom line growth. BT is having to run just to stand still.

The Twenty First Century network programme outlined yesterday is a case in point. For BT this is a transformation equally big as the switch from analogue to digital in the late 1980s and 1990s. If anything, it's even bigger. It will also take place over a much swifter time frame with nearly all customers transferred onto the new IP network within five years.

BT has been talking about the IP transformation for at least four years. Much of the company's £3bn a year of capital spending has already been switched from supporting the old switched network onto transformational projects. Yet there is so much money invested in the old legacy networks, that it's never been easy to bite the bullet and make the change.

By committing to the timetable outlined yesterday, BT puts itself ahead of other national incumbents in exploiting the new technologies. In theory, the single IP network that will replace the hotchpotch of older systems will be hugely more efficient, enabling BT to make annual cost savings of £1bn by the time it is fully operational.

None the less, the plan is not without its risk. Most of the early teething problems associated with IP networks - tinny voice quality with some packages of data often going missing altogether, leading to jerky voice delivery - have been ironed out, and in the past few years the technology has become relatively reliable. Yet although IP now forms the basis of most large corporate telecommunications networks, it has not before been used on the scale planned by BT. Presumably the old networks are close to being fully depreciated, but it's an awful lot of kit to throw on the scrap heap none the less.

Nor is just the technology that will change. IP makes a shift away from the traditional, metered way of charging for telephony to bundled packages where voice might be thrown in for free on top of a broadband subscription, pretty much inevitable. In time, that's going to require a complete rethink of BT's business model.

BT's gamble is that the lower cost base IP makes possible, in combination with the scope it gives for service innovation, will put the company ahead of the game. What's more, if BT doesn't do it, then someone else almost certainly will, making the company's competitive position even more perilous a few years down the line. It's good to see BT at last back on the front foot. Regrettably, it may not do much for earnings. BT's prices and market share are under attack on all fronts. Even in the exciting new world of broadband, revenue growth is proving extraordinarily difficult to achieve. Can the Twenty First Century network deliver the goods? We'll see, but the unappetising truth is that it may do no more than hold the fort.

Free-to-air BSkyB

After a low profile and somewhat lack lustre start as chief executive at BSkyB, James Murdoch yesterday delivered a bombshell with plans to enter the free to air market through digital satellite TV. In fact, it has always been possible to get free TV from BSkyB by buying a Sky set-top box and satellite dish, but as a company that makes nearly all its money out of pay TV, BSkyB has never before actively encouraged the practice.

Now it's planning an aggressive assault on a market which hitherto Freeview has had all to itself. Freeview's success in free to air multi-channel TV has been a surprise to all concerned, not least Sky, whose growth potential it has arguably begun to crimp. Mr Murdoch's answer is such an obvious way of dealing with the problem that in a way it is astonishing it hasn't been tried before. As with most good ideas, however, it is only obvious with the benefit of hindsight.

BSkyB's cost at £150 for installation of a dish and set-top box is quite a bit more than Freeview's, where a box can be bought retail for a mere £60. Yet Sky is offering 200 free to air channels to Freeview's 26, and though most of these you would want to watch once in a blue moon, it's none the less a quite powerful marketing proposition. Add to that the fact that a quarter of households either cannot access digital terrestrial TV at all or need to upgrade their aerial to do so, and the potential is obvious.

Yet the real beauty of the plan is that it captures for Sky a whole new multi-channel market who might eventually be persuaded to upgrade to paid for packages. Better still, they will actually have paid for the bulk of their equipment costs when they do. Even at £150 per household, there is still a modest cost for Sky in installing the equipment, but it is considerably less than that of a pay-TV subscriber, who gets all his equipment paid for when he signs on the dotted line. According to the marketing blurb, the pay-TV subscriber gets free equipment and installation worth £229.

Of course, the proof of the budding will be in the degree of take-up for Sky's new free-to-air proposition and the speed with which those new subscribers can be migrated onto paid for packages. There's also a danger that Sky will only end up cannibalising its remaining growth potential in pay TV. All the same, it's a clever and bold initiative for which the stock market rightly rewarded Mr Murdoch with a near 3 per cent rise in the share price. There may after all be life for BSkyB after Tony Ball.

M&S/Radice

So farewell then Vittorio Radice after little more than a year in the Marks & Spencer hothouse. Stuart Rose, the new chief executive, was unable to say yesterday whether Mr Radice, the exuberant Italian from Selfridges, fitted his definition of a round peg or a square one, but whichever it was, there plainly wasn't a hole into which he could be slotted.

The fact of the matter is that Mr Radice made the wrong call in giving up Selfridges to go to M&S. His first job there was to revitalise M&S's homewares sales, with the promise of eventually building an entirely new chain of homeware stores. Yet although he always denied it, he must have had his sights firmly set on eventually securing the chief executive's seat. With his appointment as head of clothing and the incumbent, Roger Holmes, sinking fast, he even seemed to get half way there.

It was never to be, and from the moment Mr Rose stepped through the door, it was obvious that Mr Radice's days at M&S's Baker Street headquarters were numbered. Mr Rose is moving with speed in establishing his team and overhauling the M&S board. Philip Green, the stalker, will need to move soon if he is to regain the initiative.

jeremy.warner@independent.co.uk