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BT cuts broadband Internet prices

Britain's BT Group slashed the broadband charges for home users to 13 pounds/month from 14.75 pounds and for small businesses by more than 50 per cent.

business Updated: Apr 04, 2003 11:38 IST

Britain's dominant fixed-line telecoms operator BT Group Plc announced its second cut to wholesale broadband prices in a year on Thursday as it trains its sights on an ambitious target of five million users by 2006.

Wholesale customers felt the price cuts would have little impact on prices for end-users, unless BT followed with cuts to its retail prices for high-speed Internet access. One rival even asked industry regulator Oftel to investigate the move.

Just over a year after the former British telecoms monopoly jump-started the UK broadband market by chopping the wholesale price in half, BT said it would lower from May 1 the charge for home users to 13 pounds ($20) per month from 14.75 pounds and for small businesses by more than 50 per cent.

"These price cuts will benefit everyone from service providers to consumers and businesses and will ensure that the UK continues to have some of the lowest prices in Europe," Chief Executive Ben Verwaayen said in a statement.

Verwaayen made broadband a central part of his growth strategy in his first year in charge, since it enables much faster access to the Internet than conventional dial-up modems and therefore improved and higher-value content.

But since BT Retail operates at arm's length from Wholesale, the May price cut may not mean savings for broadband customers.

Leading Internet service providers AOL and Freeserve, which buy wholesale service from BT, were unimpressed. AOL said a corresponding retail price drop was unlikely.

"This is a case of BT giving with one hand and taking away with the other," said Jonathan Lambeth, spokesman for the UK ISP arm of media giant AOL Time Warner, referring to rising one-time installation fees that squeeze its margins.

Thus Group said BT had failed to extend the cuts to wholesale prices where rivals could partly manage the service, and said it had asked Oftel to start an investigation.

Around half of Britain's 1.6 million broadband users are on BT lines, with the rest subscribing to cable operators Telewest Communications Plc and NTL Inc.

But cable companies are limited by the reach of their networks, which together only pass around half of British homes.

Race to economies of scale
Whereas BT said on Thursday it would expand its potential broadband reach to 90 per cent of Britain from 67 per cent, Freeserve challenged BT to name the day.

"We would like BT to commit to a date when it will reach 90 per cent household coverage in the next 12 months," it said.

BT shares reversed an early decline, rising three per cent to 173p despite ABN Amro dropping its BT rating to Hold from Add, and Deutsche Bank cutting its price target to 200p from 236p.

BT will hit a target of one million broadband users by this summer easily. But there are question marks about a two million target for mid-2004 and a long-term goal of five million by 2006. Once tech-savvy "early adopters" have broadband, selling it to four million more may prove a big challenge for Verwaayen.

Line rental for ADSL (asymmetric digital subscriber line) broadband is an average 28 pounds ($44) per month in Britain, in line with continental European prices. Still, Britain trails its neighbours in consumer broadband pick-up.

"A lot of the ADSL offers in the UK are making losses," said Alexandra Lord, Internet analyst with BNP Paribas, noting that initial marketing spending drives up customer acquisition costs.

"I would imagine no immediate effect on a price reduction because ISPs need to boost their margins first, but broadband uptake is very price elastic," Lord said.

She added that one wild card -- a price cut by BT Retail on broadband -- could trigger discounts by rivals.

"I would say BT Retail is going to lead the market here. If BT Retail makes a price cut, I'd imagine the other ISPs would have to follow," she said.

But BT Retail Chief Executive Pierre Danon, asked by Reuters about the potential for retail price cuts two months ago, said broadband for 27 pounds per month was low enough for now.

"If you asked me: will this be your price for three years, perhaps not," he said in an interview. "Is it the right price for the coming year? Yes."

BT is also trying to tackle competition in its traditional home phone market, announcing on Wednesday that it would slash certain call prices to keep hold of its 73 per cent market share.

Leading mobile phone retailer Carphone Warehouse Group Plc is nipping at its heels, launching residential phone service talktalk in February. Supermarket J. Sainsbury also plans to sell a Carphone-operated service.

First Published: Apr 04, 2003 11:38 IST