Unbundling вт

Britain's telecoms giant must restructure to avoid surgery

As surgical procedures go, separating conjoined twins is perilous - particularly when they are joined at the head. ВТ Group, the telecoms giant that shares several vital organs between its wholesale and retail divisions, is anxious to avoid such an operation.

Later this month, ВТ will learn whether Ofcom, the industry regulator, believes it should be split in two -heralding the biggest shake up in Britain's fixed-line telecommunications industry for more than a decade. Ben Verwaayen, ВТ chief executive, has argued forcefully against such a move. He insists ВТ can only justify the multi-billion pound modernisation programme of its wholesale business -operating exchanges, local connections and long distance networks - if it retains the retail business, selling voice and data services to customers.

But the old model of running the businesses in tandem has outlived its purpose. Already, ВТ is prohibited from cross-subsidising the retail and infrastructure divisions. They have differing growth patterns, different customers and different levels of competition. And the group has parted company with big operations before, albeit reluctantly, with the demerger of its mobile division three years ago. Since then, regulatory pressures and rival technologies have made it harder to extract synergies or savings from the remaining businesses.

To BT's credit, it admits it has to change the way it does business. Hence ВТ Retail is investing aggressively in areas such as wi-fi, the wireless internet system. By doing so, it hopes to recapture market share from mobile operators by offering voice calls over the internet. On the wholesale side, the company plans to invest Ј10bn to make its fixed line systems more attractive than rival networks offered by Cable & Wireless or Colt. All that should be applauded by shareholders and consumers. As technology improves, competition should restrain prices.

The problem remains BT's "local-loop", the corporation's monopoly on fixed-line networks from local exchanges to households and businesses. Ofcom has, rightly, faced calls to end this anachronistic market dominance. Even ВТ executives - notably Pierre Danon, head of the retail business - appear to believe the market should be opened up. It is time to do so.

Given the changing shape of the industry and growing independence of ВТ Retail and ВТ Wholesale, this is an opportunity to liberalise both sides of the company. ВТ Retail could reduce its operating costs (and lift its margins) by buying the local loop connections from rival operators - rather than paying ВТ Wholesale's fixed rate. Its sister company would be released to sell as much network traffic as it can, winning enough volume to offset competition. If ВТ can adjust to that new business model, it may persuade regulators to allow both divisions to remain in the same holding company. Failure to adapt may require more radical surgery.