BTwatch, issue 2008.10-11 snapshot
2 December 2008
MAIN STORIES: BT released its results for the second quarter of the 2008-09 financial year — although the major news on its performance had been pre-announced in a trading update that warned of a margin slump at BT Global Services, which would bring down Group EBITDA targets with it. The profit warning was met with shock by the City, which sent BT’s share price tumbling to record lows, but, by the time the full results were released — which appeared to confirm BT claims of as-expected-or-better performance in its three other divisions — there was an acknowledgment that BT was recognising that hard decisions will have to be made and was taking action to implement them. [pp.3-17.]
Issue: 2008.10-11
Covering: mid-October to end-November 2008
Published: December 2008
Next issue: January 2008
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EXECUTIVE BRIEF
MAIN STORIES: BT released its results for the second quarter of the 2008-09 financial year — although the major news on its performance had been pre-announced in a trading update that warned of a margin slump at BT Global Services, which would bring down Group EBITDA targets with it. The profit warning was met with shock by the City, which sent BT’s share price tumbling to record lows, but, by the time the full results were released — which appeared to confirm BT claims of as-expected-or-better performance in its three other divisions — there was an acknowledgment that BT was recognising that hard decisions will have to be made and was taking action to implement them. [pp.3-17.]
BT Global Services’ Chief Executive François Barrault was the highest profile victim of the profits warning, and his resignation was followed by BT attributing Global Services’ problems on his failure to focus on cost cutting in the 18 months of his tenure at the unit, although BTwatch considers Global Services’ malaise dates much further back and that Barrault had actually made steps towards recognising and rectifying its deep-rooted problems. [pp.8.]
10,000 BT staff are to join Barrault in leaving the company, with Livingston announcing that substantial job cuts are to be made by the end of the financial year. BT stressed these job losses would be achieved mainly by cutting down its use of indirect employees; and reductions in directly-employed staff would be achieved through non-replacement of departing staff and voluntary redundancies. While BT positioned the cuts as taking decisive action to address its need for closer cost controls, Livingston also acknowledged that the redundancies were already underway as part of existing restructuring plans. [pp.4.]
Hanif Lalani was named as Global Services’ new Chief Executive, and hit the ground running — claiming to have identified £20m in cost savings by mid-November. The former Group Finance Director is undertaking a 90-day programme to assess the situation and cut costs. He also put a halt to any prospect of further acquisitions for BT. His appointment was welcomed, although some concerns were raised that he may not show the same skills in sales as his predecessors, and that he has limited experience in running retail businesses. BT also announced that Tony Chanmugam is to replace Lalani in the Group Finance Director role. [pp.3,12,17,34-35.]
Lalani will not be leaving his finance responsibilities entirely behind him, at least initially, as it was confirmed that he will continue to head the review of the BT Pension Scheme, which is coming to the end of its triennial review, and raising worries that it may once again become a drain on BT’s cashflow. An overhaul of the BT pension terms is also in consultation after BT bosses and the unions reached a grudging agreement on the need for action. [pp.20,34.]
BT GROUP: In a £1.8m deal, BT sold a 30%-stake in its South African unit to Sekunjalo Investments, a black-controlled investment company, in a move that is intended to boost local potential for customer acquisition. [pp.18.]
STRATEGY & OPERATIONS: Galliford Try Communications was awarded a £30m contract to upgrade telephone exchanges as part of 21CN plans. The construction business indicated the project would be finished by the end of 2012. [pp.23.]
Ian Livingston indicated that BT was looking to cut its IT spend by 20%, while emphasising the importance of IT as a tool in cost cutting. BT is also considering a “service factory” approach to its solution development, to enable it to more quickly and efficiently offer products to customers. [pp.24.]
BT confirmed a previously trialled seven-year contract with Alcatel-Lucent that will see the vendor manage the telco’s non-UK networks. BT is to maintain control of 21CN infrastructure and all customer management, but Alcatel-Lucent still viewed the deal as a significant shift in the approach of fixed-line operators to network outsourcing. [pp.26.]
BT RETAIL: BT announced a new 7.5p-per-minute daytime rate to calls from landlines to mobiles, as part of an effort to halt and reverse fixed-to-mobile substitution. [pp.29.]
BT increased its influence over its ISP subsidiary PlusNet, with the appointments of Anthony Vollmer as Chief Executive, and John Petter as Chairman. [pp.31.]
BT stood firm on its decision to deploy the controversial Phorm-based BT WebWise advertising solution, despite news that rival Orange was withdrawing its participation in tests of Phorm. [pp.28.]
BT Vision said it was the first video-on-demand operator to have secured a deal with ITV for its programming, and will offer a range of current and archive ITV shows to its IPTV customers. Interactive functionality for advertisers is still in the pipeline for BT Vision, which added just 58,000 customers in the second quarter, and looks to be struggling to build the momentum needed to reach its customer targets and achieve operational critical mass. [pp.30.]
BT’s online retailer dabs.com overhauled its retail software with a new solution from Junction Solutions and Microsoft, replacing home-grown systems. [pp.33.]
BT GLOBAL SERVICES: BT was awarded a contract to partner Avanti Communications in provision of satellite network services in the South West of England. A £33m expansion deal was also announced for the Liverpool Direct public-private partnership, and a consortium featuring BT, which manages procurement for Sandwell Metropolitan Borough Council, took responsibility for more buying activity. [pp.36,38.]
The state of the NHS National Programme for IT was once again in the spotlight, with BT central to reports of: delays in the rollout of electronic patient records; a re-think in plans for primary care systems with GPs; and substantial overspends at London hospitals. Reviews of the situation appear to be pointing to a requirement for BT to amend its rollout plans, and the need for a more bespoke approach to deploying solutions. [pp.38.]
BT announced the launch of a new converged LAN offering in the Brazilian market, powered by Cisco technology. In Spain, BT worked with Nortel on the delivery of BT iComms, an IP-based unified communications offering. [pp.39,42.]
BT in Germany signed a multi-million euro contract to operate IT systems for data centres used by Adcotel, and will also form a strategic alliance with the ASP services specialist. In Kuwait, BT Frontline won a contract to provide security infrastructure for the government’s communications network. [pp.40,43.]
BT is collaborating with University College Cork on testing new optical networks technology, and providing access to its fibre network and expertise at Adastral Park. [pp.42.]
BT welcomed the opening of a Tech Mahindra call centre in South Tyneside, which it will use to help support BT Global Services’ clients. BT Frontline is partnering Sun Microsystems for the launch of Sun Vietnam, a joint venture under the Sun Equity Partner Programme. [pp.44,45.]
BT announced the addition of a new fully-managed WAN optimisation service to its Applications Assured Infrastructure portfolio. [pp.46.]
BT WHOLESALE: BT overhauled the pricing of its broadband offerings, with some increases introduced for legacy products. The price rises, which it said would not affect most customers, are intended to encourage migration to next-generation services. [pp.47.]
XLN Telecom signed a telephony wholesale agreement with BT Wholesale, to use the BT network to provide services to 100,000 SME customers. [pp.47.]
OPENREACH: A spike in bulk migrations from IPStream to LLU saw the total number of unbundled lines rise by a quarter of a million to 5.29 million at the end of October. [pp.48.]
Openreach announced cuts in connection costs of up to 65% for Ethernet backhaul offerings, and reductions of between 14% and 31% for rental rates, in a move the access services division said would enable service providers to address rapidly escalating demand for bandwidth without significantly increasing their spend with the BT unit. [pp.49.]
CITY REPORTS: Standard & Poor’s maintained its credit rating for BT, but downgraded the outlook to “negative“. The consensus broker recommendation for BT was reported as “hold“. [pp.51.]
EXTRACT
COMMENT: TIME TO BREAK UP BT’S PARTY?
BTwatch has repeatedly over the years warned of problems coming to the boil for BT, including over-inflated expectations for BT Global Services, far weaker than generally appreciated operating performance across the entire business, and the likelihood that too many years of financial engineering would eventually hit limits. Accordingly, the recent admissions simply confirm this aged diagnosis. The current pension problems also have an air of inevitability, with equity market weakness invariably accompanied by panic about BT’s pension “black hole”.
While curious to see old hand Livingston positioned as a new broom (this was also predicted by BTwatch when he took over), it is more interesting and valuable to look at how BT is actually performing at present, and how it is positioned for the future — and there are signs of hope. Livingston is a master of cost control and cash generation, as evidenced by his tenure at BT Retail, meaning that BT’s basics and short term are probably fairly safe.
How the divisions stack up
However, the fear with promoting chief financial officers to chief executive positions (with Lalani now undergoing the same metamorphosis at BT Global Services) is that they cannot see the wood for the trees, and consequently fail with innovation and longer-term strategy. Here, Livingston remains something of an enigma: at BT Retail, he backed innovations like Internet Protocol television, fixed-mobile convergence, and broadening the information and communication technology portfolio, but many of these initiatives had their origins with Livingston’s Retail predecessor Pierre Danon (who was at the other extreme compared to an accountant’s focus on costs and cash, with a continuous stream of grand visions and big ideas, rarely supported by viable business plans). However, even the initiatives that Livingston has backed could be crippled by a short-term investment focus, and mainly positioned as defensive products. Over the past two years, the division has also increasingly looked willing to sacrifice its valuable brand and reputation for short-term gain, such as penalising payment methods popular with poorer customers and railroading implementation of the highly controversial Phorm internet usage tracker.
Elsewhere in the business, BT Global Services has been on the operating table for many quarters, and François Barrault’s sin was probably over-promising on cost control and profit-margin improvement, rather than inaction or lack of ability, as he had appeared to be making a number of promising changes and admitting to the most glaring problems. Yet there were also indications, noted by BTwatch, that Barrault was not always prepared to toe the company line, and his self-anointed position as an entrepreneur and outsider on major PLC board decisions may also have contributed to his downfall.
BT seemed quite long ago to have learnt — but only recently to have publicly admitted — that mega-contracts can be low-margin fools’ gold (unless you can hold out for potentially lucrative later stages), and moved instead to chase a greater number of relatively smaller contracts and develop a promising niche serving the international connectivity needs of multinationals.
BT Wholesale has also recently looked sick, and it has taken a long time for the division to effectively re-define itself following the creation of Openreach and other associated changes within the Group. However, the continued confidence in the division now seems to be justified after a slowing of the revenue decline and a series of large contract wins from other retail players, such BSkyB, mobile operators, and the Post Office.
Openreach, meanwhile, continues to look like a gem of a utility business (but also one that cannibalises BT Retail and other divisions), with a near monopoly on local access.
Should BT jettison a division, and is Global Services the right candidate?
The state of the business, with its successes, challenges and regulatory complications, leads on to the continuing gentle hints that BT could be open to dismemberment and divisional sell offs.
However, apart from the challenge of neutralising the pension fund ogre, the big question has to be which part or parts are really at the heart of BT. Openreach and BT Wholesale mesh nicely together, but have a cash-generative utility rather than growth profile, while BT Retail and BT Global Services have more potential but also far greater risks and challenges.
In terms of further challenges, BT continues its ostrich-like tendency to blithely ignore the opportunities and threats pitched by mobile. BTwatch maintains its firm beliefs that BT was both quite correct to de-merge its mobile operations, primarily because it had proven itself utterly incompetent in running the business, and that it must now strategically prioritise the building of a major mobile virtual network operator (MVNO). This seems as relevant as ever now that consumers are increasingly abandoning fixed-line services in totality, aided by the advent of low-priced mobile broadband, and also being poached by wireline rivals like BSkyB, TalkTalk, Virgin Media, and even the mobile network operators, all of which are building compelling multi-play offerings that variously partner wireline and wireless broadband, mobile voice, pay-TV, other multimedia, and fixed-mobile convergence capabilities.
If BT does fully embrace an MVNO operation, this could conflict with lucrative wholesale sales to cellcos. However, it could also be said that BT’s restructuring in 2007, which led to the creation of BT Design and BT Operate, and focused its major divisions on customer-facing sales activity, and the earlier fencing-off of Openreach in 2006, should have created a company with the flexibility to both compete and collaborate within the market. Perhaps this conundrum simply reinforces an argument to de-merge BT Retail from Openreach-Wholesale (which could be considered to be the heart of the real BT), and set the consumer business free to properly address its weaknesses and exploit its strengths.
An unleashed and independent BT Retail operating at fighting weight, free of the regulatory and intra-company shackles, could again become a very attractive and competitive business. This separation was BTwatch’s call when Ian Livingston took control of the Retail division from Pierre Danon at the end of 2004 (BTwatch, 2004.11-12); and while the division itself has strengthened and grown in many ways in the intervening period, the market has moved on even faster, and the case for a spin-off remains as strong as ever.
The question remains of where would BT Global Services fit? This is not so obvious; it possibly merits patching up before even considering a sale, and much of its business would still fit well with an access and networks business, so perhaps the answer is to break the division itself up, selling-off the non-core elements that stray too far from BT’s core networking, managed services, and lucrative niche operations.
Any break-up would not be without significant risks
Although Livingston insists that a sale of Global Services is not on the agenda, he has also underlined its potential value to others, and in a recent interview said that “all parts of BT, and I mean all parts of BT, are available” for possible acquisition.
A further factor in a fundamental restructuring of BT is the regulatory and political gaming — BT is an acknowledged master at playing the system, meaning that untangling its convoluted, and, in places, impenetrable web of operations risks exposing how and where it really makes its money — exposure that could trigger some very unwelcome regulatory and competitive retorts.
TABLE OF CONTENTS
3 BT Group
3 Q2 FY08-09 results
4 Results and trading update
8 Community 10 Competitors;
Q2 FY08-09 by business unit
13 Property
18 Acquisitions and disposals
19 Employment 20 Pension
23 strategy and operations
23 21CN; Appointments
24 BT Design; Intellectual property; IT 25 Fibre
26 Outsourcing 27 Ribbit
28 BT Retail
28 Appointments; Broadband; Phorm; Expedite
29 Fixed line; Business; Directories
30 BT Vision; Payphones; Privacy 31 Competitors; PlusNet 33 dabs.com
34 BT Global Services
34 Awards and accreditations;
Management 36 Contracts
37 NHS contracts
38 Public sector contracts
39 Americas 40 Asia; Europe
42 Financial Services
43 Media & broadcast;
Middle East
44 Tech Mahindra 45 Partners; Property 46 Products and services; Suppliers
47 BT Wholesale
47 Broadband; Contracts
48 Openreach
48 OTA2 49 Products and services 50 WLR
51 City reports
51 Brokers’ reports
52 INDEX
INDEX
A
Adcotel, 40
Alcatel-Lucent, 26
Algorithmics, 21
AOL, 30
Avanti Communications, 36
B
Babcock & Brown
- Eircom, 40
BabyTV, 30
Blue Index, 16
BMW, 12
British Broadcasting Corporation, 49
BSkyB, 8, 9, 30, 31, 33
BT Group, 3, 5, 6, 7, 16, 17, 23, 24, 26, 34, 36, 51
- Asia
- – Tech Mahindra, 44
- BT Exact
- – Adastral Park, 42
- BT Global Services, 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 16, 17, 19, 20, 24, 26, 34, 35, 36, 39, 40, 42, 44, 45, 46, 51
- – Applications Assured Infrastructure, 46
- – BT Counterpane, 43
- – BT Frontline, 43, 45
- – BT Germany, 40
- – BT Global Financial Services, 42
- – BT iComms, 42
- – BT International, 39, 40, 43
- – BT Italia, 42
- – BT Media & Broadcast, 43
- – BT Radianz, 42
- – BT Spain, 42
- – Global Carrier, 6
- BT Pension Fund, 20
- – Hermes Pension Management, 21
- BT Retail, 3, 7, 8, 9, 12, 13, 28, 29, 31, 34
- – Basilica, 12
- – BT Business, 12, 27, 29
- – bt.com, 28
- – BT Conferencing, 12
- – BT Consumer, 6, 29, 30
- – BT Expedite, 28
- – BT Fresca, 28
- – BT Ireland, 13, 40, 42
- – BT Northern Ireland, 34, 35
- – BT Payphones, 30
- – BT Vision, 13, 30, 31
- – BT WebWise, 28
- – dabs.com, 33
- – Lynx, 12
- – PlusNet, 31
- BT Wholesale, 3, 7, 8, 9, 14, 47, 49
- – IPStream, 47, 48
- – Wholesale Broadband Connect, 47
- Executives
- – Armstrong, Brian, 18, 43
- – Bross, Matt, 23
- – Bruce, Gary, 24
- – Cavestany Vallejo, Jacinto, 42
- – Clark, Chris, 42
- – Crockett, Fergus, 49
- – Goldfarb, Greg, 27
- – Hu, Lim Chin, 43
- – Klindworth, Sven, 40
- – Lalani, Hanif, 3, 12, 17, 20, 26, 34, 35, 36
- – Le Clerq, Ray, 34
- – Livingston, Ian, 3, 6, 7, 9, 12, 13, 17, 24, 25, 34, 35
- – Lubich, Hannes, 43
- – McInally, Jim, 19
- – Moneton, Jean-Noel, 46
- – Murphy, Bill, 29
- – Petter, John, 29, 31
- – Ramji, Al-Noor, 24
- – Riley, Andy, 8
- – Robertson, Steve, 49
- – Sanches, Luiz, 39
- – Sayers, Chris, 44
- – Smith, Stuart, 38
- – Thomas, Martin, 19
- – Ting, Steve, 45
- – Vollmer, Anthony, 31
- – Watson, Marc, 30
Wilson Dunn, Mark, 43
- Ex-executives
- – Barrault, François, 3, 7, 8, 12, 17, 34, 35
- – Danon, Pierre, 8, 9
- – Reynolds, Paul, 10
- – Verwaayen, Ben, 26, 35
- Goonhilly Earth Station, 36
- Openreach, 3, 7, 8, 9, 15, 34, 48, 49, 50
- – WLR3, 50
- Strategy and Operations, 23
- – 21CN, 6, 15, 23, 26, 47
- – BT Design, 9, 19, 24, 42
- – BT Operate, 9
- – Ribbit, 27
C
Carphone Warehouse, 31
- TalkTalk, 9
Cerner, 37, 38
Cerner Corp, 37
Cisco Systems, Inc., 39
Collins Stewart, 4, 5, 6, 16
COLT Telecom, 42
Communications Workers Union, 20
Computer Associates, 46
Compuware, 46
D
Datamonitor, 38
Deutsche Telekom, 45
- T-Systems, 45
Disney ABC International, 29
Dresdner Kleinwort, 6, 17
DUO, 28
E
EMAK Information Systems, 34
EMC, 13
e-MID, 42
Enders Analysis, 6
European Union, 29
F
FastWeb, 42
Fiat SpA, 10
Fios, 18
Football Foundation, 9
France Télécom, 28
- Orange, 28, 31
Freeview, 30, 31
Frost and Sullivan, 34
G
Galliford Try Communications, 23
Gartner Group, 24, 45
GlobeScan, 40
Google
- YouTube, 49
H
Health Systems Technologies, 18
HEAnet, 13
Hutchison Whampoa
- 3 Group
- – 3 Ireland, 40
I
IDX, 37
Investec, 16
ITV, 30
J
JPMorgan Chase, 4, 7
- JPMorgan Cazenove, 5, 17
Junction Solutions, 33
K
Kuwaiti government, 43
L
Liberata, 39
Liberty International, 13
Liverpool City Council, 38
Liverpool Direct Limited, 38
M
Merrill Lynch, 51
Microsoft, 33
Ministry of Defence, 8
Morgan Stanley, 4
N
National Broadband Scheme, 40
National Health Service (NHS, UK), 37, 38
- London Hospital, 37
- NPfIT, 37, 38
- Royal Free Hampstead NHS Trust, 37
- St. Bartholomew’s Hospital, 37
Natural England, 8
Nortel Networks, 42
Northern Ireland Department of Finance & Personnel, 13
O
Ofcom
- Carrier pre-selection, 48
- LLU, 6, 13, 14, 15, 48
- Wholesale line rental, 4, 15, 48, 50
Office of the Telecommunications Adjudicator, 48
- OTA2, 48
Olympic Games, 25
- London 2012, 25
Omnicom Group
- Organic, Inc., 10
One North East, 44
Oracle, 24
Ovum, 5, 7, 31, 36
P
Phorm, Inc. (121Media), 8, 28
PIPEX, 31
Point Topic, 33
Post Office, 8
Procter and Gamble, 10
R
Radianz, 42
Riverbed, 46
Royal KPN, 5
S
Salesforce.com, 27
Sandwell Metropolitan Borough Council, 39
SAP AG, 45
Saratoga Software, 18
Secerno, 23
Sekunjalo Investments, 18
Soft-ex, 45
South Tyneside Council, 12, 44
South West Regional Development Agency, 36
Standard and Poor’s, 51
Standard Life, 6
Strategic Imperatives, 50
Sun Microsystems, 45
- Sun Equity Partner Programme, 45
- Sun Vietnam, 45
Synergy Computing, 18
T
Tech Mahindra, 44
Technologies
- ASP, 40
- Broadband, 4, 6, 9, 12, 13, 14, 28, 31, 33, 36, 40, 47, 48, 49
- CRM, 27, 40
- DSL, 6, 13, 31
- ERP, 33
- Ethernet, 49
- Fibre, 25, 42, 43
- ICT, 9, 34, 43, 44
- IP, 26, 39, 42
- IPTV, 30, 31, 43
- LAN, 39
- MPLS, 13, 18
- R&D, 42
- WiMAX, 40
Technologies
- HD, 43
Tele2, 42
Telecom Italia, 42
Telecom New Zealand, 10
Telefónica
- Telefónica Europe (O2), 30
Telstra, 10
Tiscali SpA, 31, 33, 42
Tyndall National Institute, 42
U
University College Cork, 42
V
Virgin Media, 9, 28, 31
Vodafone, 42
W
Webswell UK, 50
Welcome Italia, 42
Wind Telecomunicazioni SpA, 42
X
XLN Telecom, 47
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