BT Group's 21CN: Reinvigorating the UK

Dec.11.06 | About: BT Group (BT)

The ever excellent Gordon Cook seems to be a big fan of BTs 21CN and so am I, but not for the same reasons as him, BT Group (NYSE:BT) is restoring my faith in elephants. As the great Charles Dickens once wrote:

“Every man for himself and God for all of us,” as the elephant said when he danced among the chickens.

Yes, BT is building itself a brand new core but the sole purpose of this core is to throw away the shackles of the old allowing BT to innovate at the application level.

I disagree with Gordon that BT is not innovating at the wireless end. Here BT is busy convincing the some of largest local councils [municipalities] in the UK to allow it build municipal WiFi networks. Not for BT the pain of planning permission, site acquisition and cost of providing power – just use council assets with a nebulous promise to lower telecoms costs in the future. It is noticeable the services that BT are touting as the benefits – wireless CCTV and mobile calls. Both of these services are big ticket expense items for local councils and are both significant markets that BT has their eyes on with current poor market share

BT cannot be blamed for its plans for making CCTV in the UK more efficient. If Big Brother is watching us then I say the minimum BT can do is to make sure it costs us the tax payer the absolute minimum. And CCTV is not the only Big Brother scheme that BT is sniffing around at. The controversial government plans for identity cards are almost certainly on BTs list of must-have government projects, although BT are fully aware that this is a dangerous tightrope to walk.

The OECD estimates that public spending in the UK is 43% of total GDP and BT have big plans to secure a large part of the IT budget. BT has a central role in the largest IT project in Western Europe – the digitization of the UK public health service. The NHS project will provide a template for future public sector projects which will elevate BT to being a key applications provider to the public sector rather than a mere bit shifter – it is moving up the stack and probably in the process guaranteeing high lower stack profits.

BT is also innovating at the application layer for the consumer market. The BTVision video-on-demand service has recently been in the news and is starting off pretty basic, however I’m sure there will be plenty of innovations in the pipeline. A more interesting vision of the BT consumer future is BTContact which is a personal communication hub currently in beta. If anyone doubts BT plans to reengineer its Retail division to the Application end of stack then the Light Reading interview of Stephen Sokols is an absolute must watch.

This leads to the biggest criticism of 21CN in that it is only going to deliver ADSL2+ to the home. This is true and I don’t believe Ben Verwaayen for one second when he said at the recent OFCOM conference that ADSL2+ was more than enough and we should wait until services are available that require more bandwidth.

I think the problem is that BT’s capital is limited and he would rather invest it developing differentiation and barriers to entry at the Application Layer. The 21CN will pay off in short [2-3 year] term, by just ridding the company of its legacy costs. This is exactly the sort of project that the City of London applauds. Once the 21CN is complete and BT has the competitive advantage at the application layer then the economics of the last mile becomes revamped.

There is another problem which will scare BT away from investment in the last mile and that is that no one knows how a consumer will behave once 100meg to the home is available. Furthermore, no one knows what business models will be able to support this 100meg to the home. We are effectively in a trial and error phase and few in the City of London will invest in that proposition.

This is where BT is playing it smart, because if there is a large public demand for 100meg bandwidth BT will just say “We’d love to provide it, but the capital markets won’t allow us”. Logically, the next step is exactly the same step as it has taken in wireless arena – get the public sector or government to pay. This thought as a taxpayer completely terrifies me.

In my opinion this is the biggest challenge in UK Telecoms – “How do we finance replacing the copper local loop with fiber without resorting to public sector financing?” This is as big of a challenge as “What do we do with these huge public sector monopolies?” The answer to that question was to privatize and introduce competition and, as Gordon Cook says, this spawned a huge consulting industry in the UK. It is time to reinvigorate that consulting industry with a new vision.

BT 1-yr chart
BT 1-yr chart