BT 2000 Annual Report Download - page 29

Financial review
28 Annual report and Form 20-F
communication needs of a number of our multinational
corporate customers. It also acquired the Concert
Communications Services group (Concert Communications)
from BT. As a consequence, for the last quarter of the 2000
¢nancial year, certain of the group's former turnover is
now reported as part of our proportionate share of our joint
ventures' turnover. We have revised our main turnover
analysis of products and services to re£ect these changes.
Total operating pro¢t, including our share of ventures'
results, has not been signi¢cantly a¡ected by the formation
of the venture. Also in the 2000 ¢nancial year, BT took a
30% interest, jointly with AT&T, in Japan Telecom,
acquired the remaining 40% interest in BT Cellnet which it
did not already own, and acquired control of Esat Telecom
Group, a leading Irish communications group.
In the 1999 ¢nancial year, the group's interest in
MCI, held since 1994, was sold on the completion of
the MCI/WorldCom merger. We recognised a pre-tax
pro¢t of »1,133 million on this sale; this followed the
»273 million fee we received in November 1997 on the
announcement of their agreed merger, as compensation
for the break-o¡ of the merger we had planned with MCI.
We ceased equity accounting for MCI as an associate on
31 October 1997. At the same time as we disposed of our
interest in MCI in September 1998, we acquired the
minority interest owned by MCI in Concert
Communications.
Regulation and prices
BT has been operating under the existing 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 2000 ¢nancial
year. In the current price control year to 31 July 2000, BT
has already reduced its prices by 3.24%, which is more
than the required reduction of 3.15%. The equivalent
reduction in the previous control year was 0.73%.
Most of BT's interconnect (network) charges to other
UK operators are based on long-run incremental costs.
There are annual reductions in these charges based on a
RPI minus 8 price cap.
The Competition Commission (CC) required BT to
reduce charges from a BT line to mobile phones by around
25% in the 2000 ¢nancial year and an e¡ective annual RPI
minus 8.5 reduction for a further two years.
The regulatory environment in the UK has had, and
will continue to have, a signi¢cant adverse impact on the
group's turnover and operating pro¢t. As the group has
extended its activities to other countries, BT is required
to consider the regulatory regimes in those countries.
Competition and the UK economy
BT has a signi¢cant market share in its main UK markets
for ¢xed-network calls and provision of exchange lines.
Competition has eroded BT's market share signi¢cantly in
key market sectors, in particular areas of the UK and for
certain products and services. We estimate that BT had
64% of the market for national calls in the 2000 ¢nancial
year, compared with 69% and 75% in the 1999 and 1998
¢nancial years, respectively, and supplied 84% of the
exchange lines in the UK at 31 March 2000, compared with
86% and 87% at 31 March 1999 and 1998, respectively.
Additionally, we estimate that BT had 73% of the market
for local calls in the 2000 ¢nancial year, compared with
78% and 84% in the 1999 and 1998 ¢nancial years,
respectively.
The growth in cable operators' networks in the UK is
having an adverse e¡ect on BT's share of the residential
market. In each of the last ¢ve ¢nancial 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 27% of the market based on the number of customer
connections at 31 March 2000, compared with 30% at
31 March 1999 and 34% at 31 March 1998. There has also
been a downward pressure on prices.
The group has seen some diversion of demand from its
¢xed network as a result of the growth of other licensed
operators' activities. This diversion might intensify
now that BT's ¢xed-line customers are able to pre-select
their carrier, as required under a European Commission
directive, from 1 April 2000.
Additionally, BT's Licence was amended in April 2000
to require BT to provide other operators with use of the
lines connecting BT's local exchanges to its customers and
allow operators to install equipment in BT's exchanges
(local loop unbundling). This amendment is due to take
e¡ect in July 2001. This could result in further
intensi¢cation of competition and have an adverse e¡ect on
BT's results.
For its operations as a whole, BT expects the
competitive pressure to persist and it will continue to
defend its market share vigorously and fairly.
The strength of the UK economy is an important
determinant of BT's business volumes and the gross