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Competition and an incumbent operator John Butler January 2002

British Telecommunications’ experience of telecommunications liberalisation as an incumbent operator

Agenda — BT and the UK telecommunications market - basic facts — Practical tasks for an incumbent facing competition — Effects of competition on BT

The UK - some facts and figures Area 244 820 km2 Coastline 12 500 km Population 60 million Life expectancy 78 years GDP $1.36 x 109 GDP/head (2000) $22 800 GDP on telecommunications 2.5%

History of UK fixed telecommunications 1969 Post Office ceased to be government department 1981 BT separated from Post Office 1983 Mercury Communications starts network competition 1984 Government sells shares in BT 1984 Government Office of Telecommunications formed 1991 Duopoly ended - full competition

© Copyright 2002 BT Group plc Size of the UK telecommunications market Turnover (£bn) 98/99 99/00 00/01 Fixed Telephony 12.4 12.6 13.2 Cellular Telephony 4.5 5.8 6.9 Leased Lines 1.9 1.8 2.0 Interconnection 3.5 4.8 6.1 Other (e.g. cable TV, Internet) 8.2 11.8 13.2 Total 30.5 36.8 41.4

Telecommunications in the UK Annual turnover of over £40 billion 12% growth on previous year Value added by industry is 2% of GDP over 180 public telecommunications operator licences over 300 service providers

UK telecommunications industry turnover > £40bn -12%annual growth 45

40 Other services 35 Leased lines 30 Internet 25 Mobile 20

5 Fixed 0 1996/97 1997/98 1998/99 1999/00 2000/01

0 Volumes (Billions of Minutes) 99/00 99/00 99/00 99/00 00/01 00/01 00/01 00/01 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Local Calls National Calls Calls to Mobile Internet

Introducing BT Revenues £17 b 27 b Operating profit £2.8 b 4.4 b Profit £1.7 b 2.7 b Employees 115 000 UK exchange lines 28.2 m (83% market share)

Selected market shares - 2001 100%

90%

80%

70% Other 60% ntl & Telewest 50% C&W 40% Kingston BT 30%

20%

10%

s l s lls lls a a biles c o r ll c m A revenue Rentals n Lo cal c alls to Othe o National cal lls cti a e C n International call Con First calendar quarter 2001 - source Oftel © Copyright 2002 BT Group plc

Practical tasks for an incumbent facing competition Work with the regulator Office of Telecommunications - established in 1984 — independent regulator — non-ministerial government department — funded by levies on the industry — 190 staff — responsible for monitoring and modification of licences — responsible for competition law and licence enforcement — publishes information — investigates complaints from the public and industry

Some types of competitor in the UK Own local access Service provider using BT’s unbundled local loops Indirect access - using BT’s local access and switch – call by call – pre-selected - local, long distance, international Service provider using BT’s network - calls and access

Provide services to sustain competition Interconnection, Unbundled local loops Equal access - Carrier pre-selection and call by call selection Wholesale services for service providers Private circuits for competitors Number portability – geographic – non-geographic – mobile

© Copyright 2002 BT Group plc Competing in the market Improve marketing and sales – Sales and service teams for major customers – Better and more appropriate response for small and medium enterprises – Better communication with residential customers Better quality and more innovative products – differentiated by market and customer segment Lower prices

Example of more innovative product BT Together with national calls – Aimed at residential customers with family members out during the day – Unlimited free calls of up to one hour duration to any fixed line in the UK in the evenings and at weekends – Rental of £18.50 per month(including tax), about 25 (ex tax)

Some special obligations on BT Price controls – Retail - currently RPI-4.5% – Wholesale- currently RPI - 8% – Published non-discriminatory, geographically averaged, prices, both wholesale and retail Universal telephone service — anywhere in the UK — subsidised service to socially disadvantaged — public call offices (phone boxes) Flat rate Internet access call origination

Number of BT employees 300

250

200 •Change driven by technology and competition 150 •Competition created jobs for people leaving BT 100 •Programme agreed with the BT Trades Unions 50 •No compulsory redundancies •Support for people leaving 0

6 0 84 86 88 90 92 94 9 98

BT’s market share has declined

100

20 % BT volume share volume BT %

0 Local National International Calls to Mobile Other calls

96/97 97/98 98/99 99/00 00/01

100 90 80 70 60 50 40 30 20 10 0 Price index Jan 99=100 1996 Q2 1996 Q3 1996 Q4 1996 Q1 1997 Q2 1997 Q3 1997 1997 Q4 1998 Q1 1998 Q2 1998 Q3 Q4 1998 Q1 1999 Q2 1999 Q3 1999 Q4 1999 Q1 2000 Q2 2000 Q3 2000 Q4 2000 2001 Q1 PSTN Mobile All telecoms