British Telecom Case Solution

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Case Study: British Telecom: Searching for a winning strategy

Tuomo Summanen Michael Pollitt Judge Institute of Management

November 2002

1. Introduction

The development of the telecommunications market in the United Kingdom and the corporate strategy and development of the incumbent, British Telecom, represents an interesting object of analysis for several reasons. First, the UK telecommunications market was - along with the U.S. market - among the first telecommunications market that was deregulated in the early 1980s. Also some regulatory innovations, such as price cap regulation, were developed, and first implemented in telecommunications in the UK. Second, British Telecom was the first large incumbent in telecommunications that was privatised in the early 1980s. Third, competition in the UK telecommunications started gradually about ten years earlier than in most of the other European countries, and for a long period the UK market was, in number of competing companies at least, well ahead other European countries. However, competition evolved gradually, and had some country specific features that have affected the development of the telecommunications market, and particularly British Telecom.

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The main question to be explored in this paper is how the incumbent, British Telecom, in its strategies utilised the early mover advantage in the deregulated market? First, the development of telecommunications market in the UK after deregulation will be reviewed, and second, the development of corporate strategies of British Telecom will be described.

2. Telecommunications market in the United Kingdom

2.1 The History of liberalisation Before its 1984 privatisation British Telecom had a legal monopoly over fixed line network operations (local, long-distance, international) and the supply of network services, most apparatus supply, and value added network services. In the beginning of 1980s the agenda was not to privatise British Telecom, but rather to clarify the financial and operational routines and tighten financial control on the company. In 1981 the Beesley report recommended liberalisation of the resale of leased circuits. In the same year the British Telecommunications Act split BT from the Post Office and begins liberalisation. As a result in 1982, Mercury, a subsidiary of Cable and Wireless, was licensed as a national fixed line network operator in competition with BT. In 1982 White Paper announced the government’s intention to privatise BT. In 1983 the government announced its “duopoly policy”, which meant that for next seven years there will be only two operators, BT and Mercury, for nation-wide fixed line networks. This duopoly policy also prevented cable television companies from providing telecommunications services in their own right. In 1984 British Telecom was privatised: 50.2% of its shares were sold. Two possible models of privatisation of

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BT were considered: to privatise it as an integrated company, or to follow the recent model of restructuring of AT&T in the USA, and break up BT, for instance by separating off local services, long-distance services and apparatus supply services. The former model, which also BT’s management strongly supported, was chosen. BT was also forbidden from carrying television services on its network. The liberalisation of the telecommunications market in the UK can be divided into two periods: first, the period of duopoly 1984-1990, and the period of more liberalised market after 1991. The duopoly policy ended in 1991 following the publication of a White Paper. Earlier in 1989 further liberalisation had taken place: domestic, but not international yet, simple resale was permitted and the duopoly policy in the mobile telecommunications – until 1989 only two operators, namely Vodafone and BT’s Cellnet were licensed as network operators – expired. White Paper allowed cable TV companies to start to offer telecommunications services in their own right...
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