BT 1999 Annual Report Download - page 28

FINANCIAL REVIEW
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financial position in light of the experience of significant
price cuts in the last two financial years and in view of the
continuing volume growth in services provided.
The regulatory environment in the UK has had, and will
continue to have, a significant adverse impact on the
group’s turnover and operating profit. As the group extends
its operations to other countries, BT has to consider the
regulatory regimes in those countries. Generally, most
countries have regulatory regimes that are currently less
liberal than those in the UK and the United States.
Competition and the UK economy
BT has a significant market share in its main UK markets
for telephone calls and provision of exchange lines.
Competition has eroded BT’s market share significantly in
key market sectors, in particular areas of the UK and for
certain products and services. We estimate that BT had 70%
of the market for national calls for the 1999 financial year,
compared with 75% and 79% in the 1998 and 1997 financial
years, respectively, and supplied 86% of the exchange lines
in the UK at 31 March 1999, compared with 89% and 90% at
31 March 1998 and 1997, respectively. Additionally, we
estimate that BT had 81% of the market for local calls for
the 1999 financial year, compared with 85% and 90% in the
1998 and 1997 financial years, respectively. We believe that
we no longer have a dominant market position for outgoing
international calls from the UK.
The growth in cable operators’ networks in the UK is
having an adverse effect on BT’s share of the residential
market. In each of the last four financial years, BT has
experienced a small net reduction in residential exchange
line connections as a result of increasing competition from
these cable operators in certain geographic areas. This
small rate of reduction is expected to continue as they
complete building out their networks.
In an environment of strong competition, BT Cellnet had
30% of the market based on the number of customer
connections at 31 March 1999, compared with 34% at
31 March 1998 and 38% at 31 March 1997. There has also
been a downward pressure on prices.
The group has seen some diversion of demand from its
fixed network as a result of the growth of other licensed
operators’ activities. This diversion might intensify once
BT’s fixed-line customers are able to pre-select their carrier
for national and international calls, as required under an EU
directive, expected to be implemented by BT in 2000.
disclosures on segmental reporting and pensions have
been included in accordance with two new US accounting
standards, SFASs Nos. 131 and 132. We have also taken the
opportunity to expand the turnover analysis to reflect the
changing nature of the group. Prior year figures have been
restated where necessary and practical, but there have
been no significant changes to previously reported profits
or earnings per share. Further details are set out in note 1
to the financial statements.
Regulation and prices
BT has been operating under a new retail price control
from 1 August 1997 under which a cap of RPI minus 4.5
applies to the services used by the lowest 80% of BT’s
residential customers by bill size. This retail price control
is estimated to have covered services representing about
16% of the group’s turnover for the year to 31 March 1999.
In the current price control year to 31 July 1999, BT has
reduced its prices by the required reduction of 0.73%. The
equivalent reduction in the previous control year was 1.56%.
The determination of most of BT’s interconnect charges
with other UK operators was changed, from 1 October 1997,
from one based on fully allocated historical costs to a long-
run incremental cost basis. Annual determinations have
been replaced with a system based on RPI minus price caps.
There was an initial reduction in charges of 10% in the 1998
financial year and this is being followed by annual reductions
over a four-year period based on a RPI minus 8 price cap.
The period to 31 July 1997, affecting the 1997 and 1998
financial years, was the last in which the majority of BT’s
main UK services were subject to price regulation. Under
the price controls which were in force up to that date, BT
had to reduce its overall prices for its main UK services,
principally inland and outgoing international call services
and exchange line rentals, under the RPI minus 7.5 formula.
In the final price control year under this formula, BT
reduced its prices by about 5% in the year to 31 July 1997.
In March 1998, Oftel referred BT, BT Cellnet and Vodafone,
BT Cellnet’s direct competitor, to the MMC for
investigation into the charges for calls made from BT’s
fixed network to BT Cellnet and Vodafone’s networks.
In its report, the MMC required BT to reduce its charges
to its customers by around 25% in the 2000 financial year
and an effective annual RPI minus 8.5 cut for a further two
years. The initial 25% reduction took effect on 30 April 1999.
The company believes that the impact of these price
reductions is not likely to be significant to the group’s