BT's New CEO Has Work to Do

British Telecom Chief Executive Ian Livingston faces outdated regulations and a system in need of upgrading. He says speed is top priority

BT Wholesale engineers install 21CN equipment at Cardiff's Stadium House metro node VisualMedia

by Jennifer L. Schenker

When Ben Verwaayen took over BT Group (BT) in 2002, Britain's former state-owned phone company and biggest fixed-line provider was a stuffy, bureaucratic mess. It was $20 billion in debt and had been forced to sell off its wireless unit—at the time its biggest potential growth engine—to avoid bankruptcy. The new chief executive officer got to work trimming debt, polishing the company's brand, and launching new programs. Chief among them was a campaign to persuade consumers to sign up for high-speed Internet connections, an area where Britain lagged badly behind other European countries.

The campaign was a huge hit. Although BT's broadband prices are generally the highest in Britain, it has the No. 1 market share, with 4.4 million customers. Thanks to the company's successful move into broadband and its growing information-technology (IT) services unit, Verwaayen's retirement on May 31 is happening on a high note. After a few disappointing quarters, the company announced on May 16 that earnings met targets and revenues beat expectations, rising 2%, to $10.67 billion.

But Ian Livingston, BT's new chief executive, faces major challenges. The 43-year-old Livingston is credited with helping achieve Verwaayen's "Broadband Britain" vision, and during the three years he headed up the company's retail division—which sells services to consumers—business boomed. Today the unit has roughly 12.6 million phone and Internet customers.

Market Waits for Clearer Future

The problem is, BT's overall growth has slowed to just 1% to 2% annually. To kick up the top line, the company must enter new businesses. "Livingston's mission is to make BT less reliant on telecoms," says John Delaney, a research director at market research firm IDC. "The current business mix is not going to take the company into the next decade."

Questions about the future are one reason BT's share price is down 21% since January. "The market is waiting to see where new growth and profits are going to come from," says John Davies, a telecom equity analyst in the London office of Dresdner Kleinwort (AZ).

One opportunity Livingston says he will focus on is home entertainment—that is, delivering broadcast TV and movies to customers' homes. But to succeed in that business, BT will have to boost the speed of its broadband services, potentially spending tens of billions of dollars to push fiber-optic cables into homes. The return on investment isn't entirely clear, because, as in the U.S., British regulation currently requires that if BT builds its new network, it must lease out capacity to rivals on equal terms. That could undercut the economic justification for the rollout.

Balking at Universal Service Rule

Livingston has asked British telecom regulator Ofcom to change certain rules before he will commit to investing in a new fiber network. For one thing, BT wants to be freed of the so-called "universal service" obligation that dates to its days as a monopoly and requires BT to offer fixed-line services at an affordable price to everybody in Britain.

The cost of doing that, Livingston argues, makes it harder for BT to invest in new technologies. For instance, the company could be required it to keep operating its old copper phone network alongside the new fiber infrastructure. In a competitive marketplace with a wide choice of telecom providers, he says, BT should no longer bear the entire universal obligation.