Business outlook: Competition set to intensify as Europe rings in changes

It must seem hard to believe that the pace of activity and change this year in the telecommunications industry can match the hectic level of 1997, which saw some massive mergers and acquisitions in the US and some ambitious attempts at cross-border consolidation. But if anything, things look set to accelerate yet further, with the market for telecoms thrown open to full-blooded competition throughout the European Union from today.

Competition has been a reality in Britain since the market was opened up fully in 1991, but seven years on BT has largely managed to maintain its dominant market position, with just over 90 per cent of residential exchange lines. This seems about to change as the cable operators, who have for so long fallen short of critical mass in the market, make greater in-roads into BT's near-monopoly.

Oftel, the watchdog, recently predicted BT's share of residential phone lines would fall to 70 per cent by 2000. For consumers, this means even more generous price cuts from BT and the cable companies. Mobile operators are also reducing their tariffs, with signs that the last quarter of 1997 will reverse recent industry gloom and show record subscriber growth.

Mark Lambert, from Merrill Lynch says: "BT will feel the pinch from competitors more in 1998 than it ever has done. The depth and breadth of competition will intensify by the month."

For business customers cut-throat competition is already a reality, with BT's market share down to around two-thirds. David Oertle, chief executive of Esprit Telecom, the rapidly growing Reading-based business phones company, predicts BT's share of the company phone market will fall even faster. "We've grown our business by 80 per cent over two years and that kind of substantial growth shows no sign of slowing.

BT's challenge is to prevent the decline in its UK customer base turning into a rout, while building a strong foothold in emerging European markets. In France and Germany BT looks well placed to become a leading rival to the monopolists, but disputes over the cost of access to incumbent operators' networks could slow competition. BT is unlikely to see significant profits in continental Europe until well into the next millennium.

The departure of Don Cruickshank as telecoms regulator at the end of March is unlikely to herald a shift in policy. But Oftel's advice would be important for two big decisions expected from Labour.

BT is likely to be cleared to run entertainment programmes down its phone lines, though whether it still wants to offer such a service is unclear. Meanwhile, all eyes will remain on BT's attempts to find a new US partner to replace MCI, after the two companies' merger was trumped by a $40bn bid from WorldCom.

Options for BT include another large scale merger with a US giant such as GTE, a deal to buy one or more smaller emerging groups, or an alliance stopping short of an equity stake. More trips to the States are in prospect for BT executives.

- Chris Godsmark