BT 2006 Annual Report Download - page 23

Competition in UK fixed-network services
We face strong competition in UK fixed-network services.
Ofcom considers that we have significant market power in
various parts of the UK fixed telecommunications market. In
these areas Ofcom can enforce obligations to meet reasonable
requests to supply services to other communications providers,
not to discriminate unduly, to notify price changes and in some
cases it can also impose extra obligations such as price controls.
Ofcom has promoted competition in the fixed-network area
by measures including local loop unbundling, carrier
pre-selection (making it easier for BT customers to route some
or all of their calls over our competitors’ networks) and the
introduction of wholesale access products.
Reduction in our share of the fixed-network market may lead
to a fall in our revenue and an adverse effect on profitability.
Unlike our competitors, we continue to be obliged by the
current regulatory regime to serve customers in the UK,
whether or not such provision of service is economic.
There is also competition for voice and data traffic volumes
between fixed-network operators and those operators offering
VoIP and mobile services.
The impact of all these factors may be to accelerate the
diversion of our more profitable customers without being able
to reduce our costs commensurately, which may cause adverse
effects on our business, results of operations, financial condition
and prospects.
Technological advances
Our continued success depends on our ability to exploit new
technology rapidly.
We operate in an industry with a recent history of rapid
technological changes and we expect this to continue –
new technologies and products will emerge, and existing
technologies and products will develop further.
We need continually to exploit next-generation technologies
in order to develop our existing and future services and
products.
However, we cannot predict the actual impact of these
future technological changes on our business or our ability to
provide competitive services.
For example, there is evidence of substitution by customers
using mobile phones for day-to-day voice calls in place of
making such calls over the fixed network and of calls being
routed over the internet in place of the traditional switched
network.
If these trends accelerate, our fixed-network assets may be
used uneconomically and our investment in these assets may
not be recovered through profits on fixed-network calls and line
rentals.
The complexity of the 21CN programme may also result in
delays to the delivery of expected benefits. Impairment
write-downs may be incurred and margins may decline if fixed
costs cannot be reduced in line with falling revenue.
Transformation strategy
Our strategy for transformation includes the targeting of
significant growth in new wave business areas. This may result
in changes to our products, services, markets and culture. If this
transformation strategy is unsuccessful there is a risk that
future revenue and profitability will decline.
In particular, we have targeted significant growth in new
business areas, such as networked IT services, broadband and
mobility. In view of the likely level of competition and
uncertainties regarding the level of economic activity, there can
be no certainty that we will meet our growth targets in these
areas, with a consequential impact on future revenue and
profitability.
Major contracts
Our business may be adversely affected if we fail to perform on
major contracts.
We have entered into a number of complex and high-value
networked IT services contracts with customers. Our pricing,
cost and profitability estimates for major contracts generally
include anticipated long-term cost savings that we expect to
achieve over the life of the contract.
These estimates are based on our best judgement of the
efficiencies we plan to deploy. Any increased costs, delays or
failures to achieve the anticipated savings could make these
contracts less profitable or loss making, adversely impacting our
profit margins.
In some cases, our products and services incorporate
software or system requirements from other suppliers or service
providers. Our ability to meet our commitments in a timely
manner may depend on the ability of these suppliers and service
providers to meet their obligations. Failure to manage and meet
our commitments under these contracts may lead to a
reduction in our future revenue, profitability and cash
generation.
Networks and systems failures
Our business depends on our ability to transfer substantial
volumes of data speedily and without interruption. Any
significant failure or interruption of such data transfer as a
result of factors outside our control could have a material
adverse effect on the business and our results from operations.
We have a business continuity strategy in place, designed to
deal with such catastrophic events including, for example, major
terrorist action, industrial action, extreme computer virus
attack, hurricane or flooding. A failure to deliver that strategy
may result in a material loss and there can be no assurance that
material adverse events will not occur.
Pensions
Declining investment returns and longer life expectancy may
result in the cost of funding BT’sdefined benefit pension
scheme becoming a significant burden on our financial
resources.
As a result of the triennial actuarial valuation of the BTPS at
31 December 2002, BT agreed to make annual deficiency
payments of £232 million. The triennial actuarial valuation at
31 December 2005 is currently being reviewed in the context of
recent regulatory developments and the impact of the Crown
Guarantee granted on privatisation in 1984.
The results of future scheme valuations will be impacted by
the future performance of investment markets, interest and
inflation rates and the general trend towards longer life
expectancy, as well as regulatory changes, all of which are
outside our control.
Operating and financial review BT Group plc Annual Report and Form 20-F 2006 21