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telecoms marketplace in the United Kingdom

telecoms marketplace in the United Kingdom
The evolution of the telecoms marketplace 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
markets that were 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
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.
History of BT
Before privatisation in 1984 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 a White Paper announced the government’s intention to privatise BT. In
1983 the government announced its “duopoly policy”, which meant that for the next
seven years there were to 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 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, 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 through their cable networks. At
the same time national public telecommunications companies were not permitted to
carry TV services on their networks for a further decade.
Armstrong, Cowan and Vickers (1994) describe the first period of liberalisation in the
UK telecommunications as a decade of lost opportunities. Competition in the market
grew very slowly, e.g. only in 1986, four years after its license was granted, could Mercury could get access to BT’s local loop. And due to weak competition there was
no need for BT to restructure itself: major restructuring of the company only started at
the beginning of 1990s.
The essential developments are listed below:
– Gradualism
Deregulation of the market and the privatisation of BT were the first major
liberalisation decisions and were at that time radical politically, starting a new period
world-wide in the network industries. However the liberalisation policy itself during
the 1980s tried to ensure a soft transition to a more competitive market.
In the duopoly policy the gradual, the planned transition to the competitive market
can be seen perhaps most clearly. In the literature (e.g. Laffont and Tirole, 2000) it
has been pointed out that market forces would have done a better job at selecting
worthy competitors to BT than did regulators, and that Mercury might have not been
the optimal choice.
– Regulation by bargaining
There were three regulatory bodies in the UK – the Department of Trade and Industry
(DTI), Oftel and the Monopolies and Mergers Commission (MMC). The regulatory
authority of Oftel can be extended beyond the powers and duties of the 1984
Telecommunications Act because it can always employ the threat of a reference to the
MMC to seek regulatory change. In fact regulation has involved what seems like
bargaining between Oftel and BT. This is in quite sharp contrast to the rather
legalistic type of regulation in the USA, and to very weak regulation in the Nordic
– Growth of the role of regulation
It is difficult to believe that the aim of the lawmakers was to increase gradually the
role of regulatory bodies in developing the competitive market.
At privatisation about half of BT’s business was subject to price control, but in mid
1990s around 70% of its business (by revenue) was under price control. The duopoly
between BT and Mercury might have created the illusion of the possibility of
effective regulation by bargaining with Oftel and with final referee of the MMC. To
regulate hundreds of companies is a different kind of task.

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