UK comms sector shows signs of 'spring revival'

12 May 2003 Boston, MA Lightwave Europe--The UK's competitive carriers are finally emerging from a period in which so many of companies withered and died, says a new report from Yankee Group.

12 May 2003 Boston, MA--The UK's competitive carriers are finally emerging from a period in which so many of companies withered and died, says a new report from Yankee Group, the technology research, analysis, and consulting group.

Although the giant BT Group still leads the provision of communications services to UK businesses and consumers, competitors are repopulating the market with renewed energy.

The purchase of Neos - one of the UK's most innovative competitive carriers - by a little-known Scottish energy conglomerate, is for once, not a sale of distressed assets.

The GBP13.4 million (USD20.8 million) deal, announced on 2 April 2003, means that Ethernet service provider Neos will be subsumed into SSE Telecommunications, the telecom subsidiary of Scottish and Southern Energy, a fibre-rich operator with assets in northern Scotland and central southern England.

The deal, which grew from an earlier joint marketing agreement, creates an entity with turnover in excess of GBP50 million (USD77.7 million), a national network, and 500 Neos customers.

Yanmkee Group says this is "small beer" compared to BT's revenues and customer base. Nevertheless, the Neos deal signals a mood of optimism growing in the UK business communications sector.

Other positive signs include:
Carriers restaffing in key areas: For example, restructured UK business carrier Energis has launched a hiring program to fill 100 positions after slashing 400 in 2002.

Business contract wins growing for competitive carriers: Carriers such as Easynet, Energis, Fibernet, and Telewest Business are starting to win deals providing legacy and increasingly IP VPN services, not only in the SMB space, but also to larger companies such as Bristol and West, WH Smith, and DHL.

New regulations helping competitive carriers lower operational costs: UK telecom regulator Oftel has directed BT to reduce wholesale leased line prices, wholesale line rental, and is enforcing ADSL equipment installation at local exchanges. In addition, modest signs of a return on investment can be seen in customer numbers at least for those few, such as Easynet, which has adopted xDSL unbundling.

Trend Impact
Yankee says that the UK remains an "interesting study" because its incumbent has arguably undergone greater introspection and restructuring than most (we will detail that in a forthcoming CCE report on incumbent restructuring strategies).

Therefore the UK should be better prepared for a new onslaught of sharpened competition. Under the hard-headed stewardship of Ben Verwaayen, BT is zeroing in on what it should care about most. This is a major achievement in an incumbent, where management egos are usually large and goals often schizophrenic.

The margin opportunity in the SMB sector is an area BT holds dear, so the real battle begins now: Many competitive carriers are also focusing on this sector, rather than the residential sector that has seen household names such as supermarkets Sainsbury's and Tesco's vie with utilities such as Centrica and Powergen for a slice of BT's lower-value customers.

The report offers a number of recommendations to competitive carriers:
- Calculating customer lifetime value in the SMB space is tricky. This process will be flawed if based wholly on selling broadband access. Incumbents can still manipulate pricing to their advantage, meaning competitors must cut margin to mirror offers--unless the margin lies elsewhere in a service bundle, as it should.

- Selling IP VPN solutions may be a panacea, but has its own dangers. Although it is an increasingly attractive sale to large and small enterprises, bundling IP VPNs with broadband access is not a trivial undertaking. Ensure margin lies not only in the access piece, but also in the setup and management of the service. Ensure there is a growth path for layering of additional services such as management and security for incremental business. Consider that IP VPNs can be bundled and sold
successfully with Ethernet, as well as xDSL.

- Developing partnerships with local systems integrators and software companies can be a differentiator. Competitive carriers should partner with companies that can provide local support or vertical expertise from an industry or application perspective. Be aware, however, that incumbents like BT also recognize this as a tactical approach, although their weakness is often managing channels effectively and crafting equitable partnership deals.

Enterprise Recommendations
- Ask who owns you in the deal. If approached for a bundled deal involving several parties, be sure to know who has overall responsibility if service fails, or you will want to make amendments to the service. Insist that overall responsibility lies with one entity to prevent finger pointing if things go wrong.

- Consider competitive carriers, but scrutinize the balance sheet. Several restructured carriers are emerging as long-term players, but some are simply being propped up for a finite period until an eventual buyer can be found. Look at the management track record and probe corporate strategic roadmaps for signs of consistency and longevity.

- Follow your nose, not just your wallet. Whether a competitive carrier or an incumbent is vying for your business, choose the company that fields the best account team and the best contract, not the best price. Smart, durable competitors compete on tailored solutions, not just cost.

Further information is available at www.yankeegroup.com

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