|
||
 |
||
|
There will always be an England. But the same might not be true of British Telecommunications. Frittering away a giant’s advantage, BT is perhaps in an even bigger bind than its American counterpart, AT&T. Boardroom clashes—perhaps even class snobbery—have kept BT from reacting fast enough as technological advances and start-up companies have transformed the world in which it has been so comfortable. Many analysts say BT hasn’t muddled through its crisis; it has just muddled. As a result, after enjoying decades of monopoly dominance, BT has missed almost every recent opportunity for innovation. It was blindsided by two wireless start-up businesses in the United Kingdom, Vodafone Group and One2One, which exploited the seemingly obvious interest in wireless so quickly and thoroughly that BT has been pushed into third place, with just 23% of the British wireless market. BT was surprised by another start-up company, Freeserve.com, which offered to hook up customers to the Internet free of charge. Freeserve has emerged as Britain’s largest Internet service provider. A host of other opportunities, such as a possible merger with AT&T, have gone nowhere, despite round after round of discussions. Meanwhile, BT has suffered as deregulation and technological advances have greatly increased available bandwidth and pushed the prices of telecommunications services into a tailspin. BT also has taken on an unwieldy load of debt as it has invested in additional capacity. With no clear solution in sight, BT insiders say a breakup or takeover of the company is possible. BT’s chief executive, Sir Peter Bonfield, says with typical English understatement: "Yes, there are always some regrets. We could have achieved more on a global scale." A British money manager with a stake in BT is far blunter: "There were always too many meetings, too much discussion. They were counting the pennies, while the dollars were running away."
At the heart of BT’s shilly-shallying lies the executive-suite struggle that pitted the middle-class Bonfield against BT’s aristocratic chairman, Sir Iain Vallance, and Robert Brace, who was BT’s chief financial officer until late 1999. Bonfield, who has a background in technology, pushed for bold, quick moves. Brace often argued against expensive acquisitions, and Vallance usually sided with Brace. (While Bonfield spoke briefly on BT’s travails, neither Vallance nor Brace responded to requests for comment.) When Bonfield became CEO of BT in 1996, the company still was like an exclusive gentleman’s club, led by the old-school Vallance. Educated at the elite Edinburgh Academy, then at Oxford University, Vallance joined BT in 1966, when it was part of Britain’s Post Office. He became CEO in 1986, added the chairman’s title in 1987, and did a solid bureaucrat’s job of running the giant company. He also handled the first stages of privatization. Bonfield, by contrast, attended a middle-class grammar school and graduated with an engineering degree from Loughborough University of Technology—a so-called red brick university, meaning it was built after World War II to educate the masses. He made his name in the computer industry and became CEO of Britain’s ICL, then Europe’s most profitable computer maker, in 1985. When Bonfield arrived at BT to deal with the rapid changes that had beset the telecommunications world in the mid-1990s, Vallance was unceremoniously shoved aside—but not out. The reason, perhaps, is that the board, like Vallance, is a traditional one, whose outside members include former government officials and executives from other old-line companies, none of whom have experience in telecommunications. "They are a standard bearer for the whole imperial, complacent, backward-looking culture of management in Britain," declares John Bennett, top investment European manager for Global Asset Management. "Can you imagine any company with global ambitions that has only Brits on its board? It’s ridiculous." The BT board let Vallance remain in a full-time role as chairman until August 1998, creating a messy management structure. Even when the board moved against Vallance again, it merely downgraded him to the nebulous title of part-time chairman. Bonfield believed the company had to break out of its domestic markets and become a global player, so he championed an attempt to buy MCI Communications, then the No. 2 long-distance company in the U.S., in 1997. Brace, who was appointed CFO under Vallance’s tenure, argued it would cost too much money. Vallance, predictably, sided with Brace. As BT debated within itself, WorldCom, the fast-growing telecommunications start-up, came in with a higher bid. During 1999 and early 2000, this ugly scenario repeated itself. Brace dug in his heels when Bonfield wanted to buy German telecommunications outfit Mannesmann. This time, BT lost out to U.K. archrival Vodafone. Securities analysts say Bonfield also wanted to become a big provider of Internet services, but again was thwarted. According to analysts, Vallance and Brace simply failed to feel any urgency to change with the times. Some say Vallance was offended that he had been supplanted by a humble engineer and was determined to be an obstructionist. All that lumbering BT could manage was the purchase of cheap, minority stakes in carriers that were in certain crucial markets. Bonfield finally had enough. In the summer and autumn of 1999, major investors say that they were called by BT executives, who asked whether the investors thought Vallance should go. Those who described the conversations say the reaction was a universal yes. Thus armed, Bonfield won his bid to increase BT’s holding in German wireless carrier Viag Interkom from 45% to 90%. (By that point, though, wireless valuations had soared to the point where it cost BT a whopping $7.5 billion for its stake. On top of that, BT had to pay the German government $4.3 billion for a third-generation, or 3G, wireless license. All for a company that has just 6% of the German market.) In taking control of Viag, Bonfield discredited Brace’s strategy of buying minority stakes in mobile-phone operations. By October, Brace had resigned. He was succeeded by Philip Hampton, previously a consultant with PricewaterhouseCoopers, the accounting and technology consulting firm, who is known as a merger and spinoff artist. According to BT insiders, Vallance is under pressure to abandon his role as part-time chairman and step down well before his 2002 retirement date. Even if Bonfield makes all the right moves now, though, time is running out. In Britain, home to Europe’s freest markets and fiercest competition, BT’s share of international data and voice traffic has plunged to 44% from 68% in 1996. Analysts expect the company to report an earnings decline of as much as 40% for the year ending March 31. Like AT&T, BT has been nearly beggared by its vast expenditure on new capacity. BT has spent heavily to provide DSL, or digital subscriber lines, which give users of phone lines Internet access five to 20 times faster than previously. BT also has invested mightily in a 3G wireless network, designed to provide always-on Web access using mobile phones. Bonfield is pushing BT to be the first in the world to have a 3G mobile phone network running in 2001. This new network would boost data transmission speeds 20 times beyond what wireless networks can currently handle, and allow businesspeople and consumers to surf the Web, shop, and communicate from small portable devices. Because of all the investment, BT has taken on $45 billion in debt over the past two years. The heavy recent investment has, at least, given BT a few rays of hope. BT has built Genie, a portal that serves as an entry point for wireless users who want to reach the Internet, and already has attracted one million users. By comparison, hated Vodafone has captured only 185,000 users. To attract users to both BT’s wired and wireless portals, Bonfield has signed partnerships with some 50 content providers, including British Airways, the all-news cable-TV station CNN, the Financial Times newspaper, music cable-TV station MTV, and news and data provider Reuters Holding. While the Genie portal remains embryonic, the idea is to let mobile phone users book tickets, buy information, make reservations, and shop online while on the move. BT has, for once, moved quickly in its efforts to create an extensive fixed-line network able to deliver high-bandwidth services such as fast Internet access, video on demand, online games, and interactive digital television. Some 50% of its wired network already has been converted to DSL. This matches German telecommunications concern Deutsche Telekom and is well ahead of France Telecom and most other European national carriers. BT is at least a year ahead of NTL Group and Telewest Communications, the major U.K. cable companies. Still, there haven’t been a lot of success stories at BT, and even the 3G and DSL initiatives have uncertain prospects. For instance, demand for high-speed DSL access has been relatively slow to take off. Only about 100,000 U.K. business and personal users have signed up for DSL services. Failure would be catastrophic, especially in wireless. "My guess is that wireless activities and potential make up around 80% of the value of the whole company," figures Mike Williams, analyst for German financial-services concern Deutsche Bank, "and commercial data and data services make up most of the rest. Wireless is the business that it must succeed in." Analyst firm IDC says BT can’t afford to miss out on the coming wireless Internet bonanza, which IDC predicts will result in U.S. and European companies spending $67 billion annually on network services by 2003. Even if wireless is a spectacular success for BT, time is so short that analysts expect Bonfield, at best, to have to conduct a rummage sale. To keep from drowning in debt, Bonfield has pledged to reduce debt by $15 billion over the next year. Analysts say one option is for BT to sell off its core fixed-line network, which not only demands continuous investment but also exposes BT to greater regulatory control. Who, though, would buy such a business? An easier sale would be the tiny stakes that BT amassed in telecommunications companies around the world. "It’s time for BT to bite the bullet and realize it has lost its opportunity to become a global force," a securities analyst says. "It should sell out in France and Spain and try to find other partners." Selling the stakes in those countries would raise several billion dollars. Sales of minority stakes in Hong Kong, Korea, Malaysia, and Singapore might raise a further $3 billion, analysts say. They say BT also might be able to generate cash by selling roughly 20% of its wireless, Internet, and business services units in initial public stock offerings. The company has already announced a plan to list Yell, its electronic Yellow Pages service, on the London Stock Exchange. The IPOs might have the added benefit of injecting BT’s staid culture with a dose of entrepreneurial spirit, complete with stock options and a Silicon Valley-style work pace. "If its Internet business was more autonomous, it would certainly bring benefits," says Eric Owen, IDC’s research director for the European telecommunications industry. "It would help BT’s growth businesses if they were free to make their own decisions and to move more quickly." Selling bits and pieces may not be enough. With telecommunications prices and earnings under such pressure, debt so high, and prospects for improvement so limited, BT may well have to take a more drastic step, such as a merger. AT&T would be the most likely candidate. The two companies have worked for years as partners and launched a joint venture, Concert, in January 2000. Concert will offer large, multinational companies a seamless array of global voice and data services by combining the two giants’ extensive networks. But it has been tarnished by familiar-sounding reports of internal squabbles. Mitigating against a merger is the fact that "between them they have $100 billion in debt," points out Patrick Foulis, telecom expert for securities firm UBS Warburg. "And given AT&T’s much larger size, any merger would effectively mean a takeover of BT’s wireless business." Without a merger partner, many believe that it is just a matter of time before the sun sets on this British empire. "I don’t think they’re going to change until someone changes them," says Bennett, the investment manager at Global Asset Management. "There will be either a takeover or a carve-up. And it’s probably going to be within a year or two."
|
