BT 2007 Annual Report Download - page 28

GROUP RISK FACTORS
In common with all businesses, BT is affected by a number of
risk factors, not all of which are wholly within our control.
Although many of the risk factors influencing our performance
are macroeconomic and likely to affect the performance of
businesses generally, others are particular to our operations.
This section highlights some of those particular risks but it is
not intended to be an extensive analysis of all risks affecting the
business. Some risks may be unknown to us and other risks,
currently regarded as immaterial, could turn out to be material.
All of them have the potential to impact our business, revenue,
profits, assets, liquidity and capital resources adversely.
They should also be considered in connection with the
statement on Internal control and risk management on page
71, the forward-looking statements in this document and the
Cautionary statement regarding forward-looking statements
on page 158.
Regulatory controls
If our activities are subject to significant price and other
regulatory controls, our market share, competitive position and
future profitability may be affected.
Most of BT’s wholesale fixed-network activities in the UK are
subject to significant regulatory controls. The controls regulate,
among other things, the prices we may charge for many of our
services and the extent to which we have to provide services to
our competitors. In recent years, the effect of these controls has
been to cause us to reduce our prices. We cannot assure our
shareholders that the regulatory authorities will not increase the
severity of the price controls, nor extend the services to which
controls apply (including any new services that we may offer in
the future), nor extend the services which we have to provide to
our competitors. These controls may adversely affect our market
share, the severity of competition and our future profitability. In
response to Ofcom’s strategic review of telecommunications, we
proposed a number of legally binding Undertakings under the
Enterprise Act 2002. These Undertakings were accepted by
Ofcom and came into force in September 2005. In the case of a
breach of the Undertakings, Ofcom has the right to seek an
injunction through the courts or issue a direction. Third parties
who suffer losses as a result of the breach may also take action
against BT in the courts for damages. The timescales for
achievement of a number of the milestones in the Undertakings
are very challenging. Further details on the regulatory
framework in which BT operates can be found in Regulation,
competition and prices on page 20.
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 provide certain services to
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, and the risk that our
major suppliers fail to meet their obligations, may result in
delays to the delivery of the 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.
We have announced a new organisational structure to help
deliver faster, more resilient and more cost-effective services to
all our customers wherever they are. Failure to complete this
programme of organisational change may reduce our
competitiveness, with a consequential impact on our future
revenue and profitability.
BT Group plc Annual Report & Form 20-F 27
Report of the Directors Business