British Telecom, Back on the Offensive
The formerly hidebound 160-year old utility is remaking itself into the very model of a modern major phone company.
By Om Malik, Business 2.0 Magazine senior writer

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Ben Verwaayen and Matt Bross agreed to meet in a New Jersey cafe in 2002 to talk turkey. They were both telecom veterans, but they made an unlikely duo: Verwaayen was a Dutchman, Bross an Oklahoman. Verwaayen had recently been named chief executive of British Telecom, the venerable but doddering phone company, and he wanted Bross, a retired networking wiz, to come to London to help him fix BT. Bross wasn't interested - until Verwaayen grabbed a napkin and started scribbling.

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That napkin is now being prepared for preservation in the 160-year-old BT's corporate museum, as befits a document that will likely prove a historic turning point for BT (Charts) and possibly for the telecom industry as a whole. Soon after that New Jersey meeting, Bross did indeed move to London and join BT, and Verwaayen's team is now well into a startling transformation of the company.

BT, burdened by massive debt and persistent legacies from its past as a government-owned monopoly, lost $4.3 billion in 2001 and seemed hopelessly in retreat. But Verwaayen's napkin plan put the company back on the offensive.

BT would remake itself based on the latest evolution in Web technologies, building a single Internet protocol network to handle all of a customer's needs: voice, data, e-mail, movies, everything. It would create-and let customers, from a single individual to giant corporations, create-a menu of services and capabilities tailored to the Web 2.0 era of mashups, remixes, and user-generated content. It would operate not like a bloated bureaucracy but like a hungry startup fighting for survival.

Other big telecoms, from AT&T (Charts) to Verizon (Charts) to NTT DoCoMo (Charts), have talked of a similar need for user-centric networks and startup-like zeal. But implausibly, it's BT that now appears to be closest to achieving both.

The financial payoff has already been dramatic. The company has had 16 straight quarters of earnings growth; for the fiscal year that ended March 31, its operating profit before restructuring charges was up 5 percent to $4 billion.

What's more, revenue in what BT calls its "new wave" divisions, the parts of the company dedicated to Internet-focused network services, broadband, and mobile communications, rose 38 percent to $12 billion and now makes up roughly a third of the company's sales. In addition, BT has cleaned up its balance sheet through merciless cost cutting - "one of the few acts of sanity in the telecom business lately," says Daiwa Securities analyst James Enck.

BT's revival is far from complete. But the basic infrastructure for its pioneering all-IP network is in place, and BT's makeover already represents one of the most instructive corporate turnarounds going. It pounds home one overarching lesson, at least in Verwaayen's view. "To do something like this," he says, "you have to be radical."

The flying Dutchman

Verwaayen's presence at BT is itself considered audacious. He is its first non-British CEO. Though the 54-year-old has worked in telecom for more than two decades, when he got the job the reaction from the British press and even some BT veterans was, as he puts it, "Ben who?"

For a telecom exec, however, Verwaayen was early to detect the Web 2.0 phenomenon, particularly how end users in all media would come to assert more control over services. He saw it firsthand as a director of Endemol, the U.K. television production firm responsible for the hit reality show Big Brother, for which contestants vote on which of them should be drummed out of a shared house. "The epiphany was that users would demand more participation and more control," he says. Even phone companies, he understood, would have to adapt.

Verwaayen's starting point was an adaptation that BT had resisted for years. BT had been locked in an enervating fight with U.K. regulator Ofcom over demands that the company open up its network to rival phone companies. Relations were so bitter that the two sides sometimes had lengthy standoffs over where to hold meetings.

Verwaayen essentially sued for peace, agreeing to 247 regulatory directives that opened up the BT network - and let the company get on with the transformation he had in mind. Moreover, leasing its network to rivals has turned into a cash cow for BT; last year lease payments and other wholesale revenue generated operating profit of almost $1 billion.

Verwaayen has always known that wouldn't last, because rivals are building their own infrastructure and attacking BT's old dominance in Britain's local phone market. So he set his sights on vastly expanding BT's position among global corporations. He thought BT, with its financial restructuring largely behind it, could pick off clients from rivals that were still deep in the throes of the industry bust. But first he needed his new all-IP network, and for that he turned to Bross.

It was an adventuresome choice. Bross had helped turn energy firm Williams (Charts) into a major Web backbone by laying fiber alongside its gas pipelines. But after he left Williams's broadband spinoff in 2002, word emerged that the parent company had bought optical gear from firms that gave Williams executives, including Bross, stock for buying their gear. Bross reportedly made millions on the stock. Though the practice came under fire in the press and prompted shareholder lawsuits, no enforcement action ever resulted.

Bross declines to comment on the situation, but it clearly didn't faze Verwaayen. "In Matt I saw the evangelist for the new BT," he says, "and also someone who could build the network."

All-in-one network

Bross describes what he's building as a one-size-fits-all network that carries video, voice, and data at turbocharged speed to any destination, be it a British home or a Siberian nickel smelter. He thinks of it as a "Lego-block" construction: BT provides the building blocks of digital infrastructure-digital rights management, security, VOIP, data storage, processing power-and allows customers to tailor that infrastructure to their needs through open software APIs. "It's a software world, and a lot of telecoms are still thinking hardware," Bross says.

Indeed, most big telecoms are still operating multiple networks-one for voice, one for data, and sometimes others. That makes it difficult, if not impossible, to do many of the things the BT all-in-one network can enable.

For instance, a kid in London with BT service could become his own music label on the cheap by uploading his favorite mashups to a BT data center; BT provides digital rights protection, storage, and billing software. Most other telecoms aren't providing that right now; the kid would have to sell through iTunes or Rhapsody, which is almost impossible for a low-budget solo practitioner.

More impressive is what the network can do for big corporations. For example, say that Accenture wanted to roll out applications for financial services to all of its hundreds of global locations. That remains maddeningly hard to do today because the data must travel through poorly coordinated networks controlled by different companies in different countries; BT's network software is meant to dramatically ease the problem.

BT has been rolling out its $18 billion IP network in stages; it won't be ready for all the new services and uses BT currently envisions until 2010. But the network is already helping to boost the company's corporate business, where revenue is up about 15 percent since last year.

It is negotiating contracts potentially worth billions for global communications services, with Merrill Lynch, Panasonic, and Visa, among others, having signed up in the European and Asian markets. Early last year BT spent nearly $1 billion to buy Infonet, an Internet service provider with a big North American network, to help it attack the U.S. corporate market.

B2B

The global corporation clearly is the linchpin of BT's strategy, but that's not to say the company has abandoned retail customers. And there, too, it's trying to get ahead of the pack with cutting-edge technology.

To counter Internet telephony challenges from the likes of Skype, BT is selling a DSL service that comes with a built-in VOIP phone and gives consumers the ability to call free during evenings and weekends. It's also launching a podcasting service and will soon deliver TV over its network.

Will all this be enough to keep BT out front? The company has a three-year head start in creating an all-IP network. But rivals like British DSL provider Tiscali have begun to build their own IP networks, and powers like AT&T and Deutsche Telecom will eventually follow suit. And there are lingering fears that smothering, bureaucratic British management habits might somehow resurface.

Bross, for one, sees little peril. Sitting in his London office near an antique bow and arrow he brought with him from Oklahoma, Bross insists that "diversity of our management and our business geographically shows we're committed to cutting-edge global strategies." Put another way, the un-British are coming.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.