Monopoly and Competition in British Telecommunications

Prior to the privatisation of British Telecommunications, John Harper was Director of the firm's Inland Division, which had responsibility for all UK based telecommunications services. In 1997, his book " Monopoly and Competition in British Telecommunications", (published by Pinter, a Cassell imprint, London, ISBN 1 85567 455 6) caused a considerable stir within the industry. The article below vigorously defends BT's record prior to privatisation and comes from the concluding chapter of his book. It is reproduced with kind permission of the author.

"... telecoms is the lifeblood of the financial services sector. Furthermore, the value and concentration of business in the financial services sectors of the main industrialized countries are powerful driving forces behind competition, liberalisation and innovation across the telecoms industry."

Andrew Adonis in the Financial Times for 15 June 1994

To end the book I should like to suggest a way of my own of looking at developments in telecommunications over the last twenty-five years.

I want to start on a note almost of triumph. The British Post Office was numbered among the main PTTs of Europe. Whatever our faults in the old PTT regimes we had a job to do and we did it. The priority for us was creation and renewal of national telecommunications infrastructure. The world network which we created by our collective action is the largest single human artefact. It has been immensely satisfying to me, looking back to my eight years in charge of forward planning in the 70s and early 80s, to see how the vision to which were working has been realized on the foundations we laid. The industry HAS expanded, its services HAVE proliferated and its profits HAVE grown in the way we believed they would in the dark days of 1975; and the infrastructure we built up has been the foundation on which all this has happened.

Over a hundred years we PTT engineers and administrators created a huge base of capability, which has now passed under the control of a brisker, competitive world of managers. We are only at the beginning of the new era, even in Britain. The question is what the new generation will make of their inheritance. The jury is still a long way from a verdict.

The British state corporation of the 70s was a long way from perfect. But in terms of the challenges it faced and the progress it made in meeting them it was successful. The private company is well run today. It has benefited greatly from separation from posts and from the reform of industrial relations; and twelve years on it has naturally enough put right the most obvious deficiencies which it inherited, just as we did in terms of the situation of the 70s. The changes of the early 80s were made with boldness and many of them have been a success. Privatization and the threat of competition have certainly been followed by an improvement in the way service is offered. But as I showed in chapter 16, on proper analysis the image of a general revolution in the performance of BT due to these causes is seen to have been contrived.

It is instructive to look closely at the basics of the industry. In Britain provision of telephone connexions has always been demand driven. Even by 1987, well after privatization and with penetration at quite a high level, the real problems of the operator were still characterised by the difficulty of accurately forecasting demand and of mobilizing resources to meet it in a fluctuating economy, as distinct from those of selling service. The same goes in essence for calls. The network is essentially a blank sheet on which users paint their own enormously diverse pattern of uses; and it is they, not the operators, who generate the enormous growth of call demand. Generation after generation of Ministers and Chairmen from outside tried to push the organization into marketing lines and calls but it never had any convincingly measurable effect.

The fundamentals of the Internet are exactly the same. It owes nothing to initiatives by the carriers. It has grown up spontaneously out of cooperation between an informed group of users in the defence and academic communities in the USA. Its dramatic growth owes nothing at all to the telecommunications operating industry. There is no central organization behind the Internet at all.

Cellular mobile telephone systems and the peripherals of the telecommunications industry - PABXs, call-connect systems, advanced customer services like the BT Star services, luxury telephones and niche services like alarms by carrier and so on - are well suited to marketing as we understand it today. But the main core of the industry's activities is not. In this fundamental sense the industry is outside the general run of business; and policy for it needs to be determined with this in mind.

This conclusion is apposite to the argument in Part VI above. Monopoly tariffing patterns in the USA created the opening for a competing long distance carrier industry in that country which is highly successful operating on the normal lines of outside business. But this does not prove at all that mainstream local and short-haul operations are appropriate for the same treatment.

We are left with the question of why privatization and competition happened in the first place in Britain.

The case for freeing UK telecommunications from Whitehall in 1969 arose from obvious deficiencies of performance and from the evident inappropriateness of trying to run it directly from within government. This case was really beyond dispute and was accepted by both main parties, as chapter 3 showed. It is perfectly true that our performance in the PO passed though a bad patch about 1980, when we were hit like everyone else by the overheating of the economy before we had reformed ourselves enough to cope fully with such abrupt pressures. But we were already out of this phase by 1981 when the decision to privatize began seriously to arise; and in fact BTplc was to pass through a similar phase of its own when service deteriorated in 1987.

I wrote Part II to show how far we had come by 1980 in terms of reform of management practice and service to the general market. The only real area of persisting operational weakness was in the provision of private network facilities, which we were not good at and where as I pointed out in chapter 20 competition was warranted and already legally provided for in its own right.

There was no general sense of public outcry for constitutional change in telecommunications in 1981 - or if there was it was not apparent to me, in one of the hottest seats in the business. As Deputy Managing Director in charge of operations I had to handle some extremely critical press and broadcasting interviews at the height of the service difficulties. The criticism was justified by the facts but never once did the question of privatization or competition arise. The dialogue was all about what we were doing to rectify our failings in our capacity as a public monopoly. As I said at the end of chapter 9, internally we needed more drastic change than we had so far had if we were to get ourselves fully fit. But it cannot be said too often that Jefferson, who supplied this change, got it under way as head of the nationalised monopoly. What he was really doing was finally to enforce the logic of Benn's original 1965 conception of a separate telecommunications corporation, which is why he was so welcomed in the business. Even the decision to privatize in principle came two years later. The act of privatization occurred two years after that.

One of the most persistent and least accurate complaints about the telecommunications operations of the PO state corporation is that they were in some way supported by taxpayers' money. This is factually untrue and this ghost should once for all be laid. From 1976 onwards the current account operating expenses of telecommunications had to be and were met from income from customers; and averaging out the last six years of the PO, 1976/77 to 1981/82 even our fixed asset investment requirements were more than met by internally generated funds. In other words we ran on money generated by our own operations and efforts.

It was indeed the obvious profitability of our operations which put us at the top of the list for privatization. As the authoritative passage I quoted from Lord Howe's book in chapter 15 makes abundantly clear, the decision to privatize BT did not arise primarily from considerations internal to our industry. The special needs of the City of London for telecommunications facilities brought out by the perceptive statement quoted at the head of this chapter and their exasperation, shared by Barlow, with the power of unions in state monopolies certainly played a part. But it was general political priorities and the City's eye to a chance to make money which really led to the decision to privatize BT.

The privatization of BT was a political act. It will stand or fall on its political merits as the years go by. Judging by British experience, a lot will depend on whether the public feels that the profits of the utilities and the salaries of top managers are being sufficiently moderated in the privatized regimes. If it is felt that they are not, pressures will grow for a return to public ownership, where such matters can be directly controlled by government.

Privatization is not the key characteristic of the new era in telecommunications. What really matters is competition. There can be no going back on the principle of competition in telecommunications. The problem is to make it work.

Competition in customer apparatus and in services was a great and overdue advance and in the right environment it will deliver the goods. It is very much better to have an unrestricted number of enterprising companies thinking up ways to use and exploit telecommunications facilities than to be dependent on a single monolith. Private telecommunications services and facilities nowadays form a closely focussed market with highly knowledgeable customers which is a natural for competition. But public network infrastructure needs to be looked at in a completely different light.

The linking of competition in services to competition in public infrastructure is wrong. The present regime was grafted on to an obsolete industry structure, based on concepts dating from Edwardian times, still really rooted in monopoly thinking and dominated by the former monopoly operator. It is not surprising that it has not worked properly. A fundamentally new structure is needed, which starts from the principle that service to the public should be retailed by companies of comparable and manageable size in genuine competition with one another. I have suggested a way of achieving this.

Copyright © John Harper 1997. "Monopoly and Competition in British Telecommunications" by John Harper, published by Pinter, a Cassell imprint, London 1997. ISBN 1 85567 455 6. Reproduced with permission.

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