BT 2008 Annual Report Download - page 35

In response to Ofcom’s strategic review of telecommunications,
we proposed a number of legally binding Undertakings that were
accepted by Ofcom and came into force in September 2005. In
Ofcom’s annual report on the impact of the Telecoms Strategic
Review, published in December 2007, Ofcom noted the real
progress we had made to date in meeting the Undertakings, and
described where we could take further action to benefit UK
consumers. A number of challenging milestones in the
Undertakings also remain to be delivered.
In the case of a breach of the Undertakings, Ofcom has the
right to seek an injunction through the courts. Third parties who
suffer losses as a result of the breach may also take action
against BT in the courts for damages. Pressure for the
introduction of next generation access services could result in BT
being forced to invest without being able to recover a fair
return on the investment.
Ofcom is conducting a review of the Openreach financial
framework during the 2009 financial year. Whilst the review is,
in our view, an opportunity to create regulatory certainty and
financial stability, there is a risk that it may adversely affect our
competitive position and future returns on our regulated copper
asset base.
Further details on the regulatory framework in which we
operate can be found in Regulation and competition on pages
24 to 27.
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 other communications providers’
networks) and 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 other communications providers, 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, profitability, 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 to continually 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 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 customer 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, thereby adversely
impacting our profit margins.
Report of the Directors Business review
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34 BT Group plc Annual Report & Form 20-F