In common with all businesses, BT
is affected by a number of risk factors, not all of which are wholly within
our control. Although many of the risk factors influencing our performance are
macroeconomic and likely to affect the performance of businesses generally,
others are particular to our operations.
This
section highlights some of those particular risks but it is not intended to
be an extensive analysis of all risks affecting the business. Some risks may
be unknown to us and other risks, currently regarded as immaterial, could turn
out to be material. All of them have the potential to impact our business, revenue,
profits, assets, liquidity and capital resources adversely.
They
should also be considered in connection with the statement on
Internal control
and risk management, the forward-looking statements in this document
and the
Cautionary statement regarding forward-looking statements.
Regulatory controls
If our activities are subject to significant
price and other regulatory controls, our market share, competitive position
and future profitability may be affected.
Most
of BT’s wholesale fixed-network activities in the UK are subject to significant
regulatory controls. The controls regulate, among other things, the prices we
may charge for many of our services and the extent to which we have to provide
services to our competitors. In recent years, the effect of these controls has
been to cause us to reduce our prices. We cannot assure our shareholders that
the regulatory authorities will not increase the severity of the price controls,
nor extend the services to which controls apply (including any new services
that we may offer in the future), nor extend the services which we have to provide
to our competitors. These controls may adversely affect our market share, the
severity of competition and our future profitability. In response to Ofcom’s
strategic review of telecommunications, we proposed a number of legally binding
Undertakings under the Enterprise Act 2002. These Undertakings were accepted
by Ofcom and came into force in September 2005. In the case of a breach of the
Undertakings, Ofcom has the right to seek an injunction through the courts or
issue a direction. Third parties who suffer losses as a result of the breach
may also take action against BT in the courts for damages. The timescales for
achievement of a number of the milestones in the Undertakings are very challenging.
Further details on the regulatory framework in which BT operates can be found
in Regulation, competition and prices.
Competition in UK fixed-network
services
We face strong competition in UK fixed-network
services. Ofcom considers that we have significant market power in various parts
of the UK fixed telecommunications market. In these areas Ofcom can enforce
obligations to meet reasonable requests to supply services to other communications
providers, not to discriminate unduly, to notify price changes and in some cases
it can also impose extra obligations such as price controls.
Ofcom
has promoted competition in the fixed-network area by measures including local
loop unbundling, carrier pre-selection (making it easier for BT customers to
route some or all of their calls over our competitors’ networks) and the
introduction of wholesale access products.
Reduction
in our share of the fixed-network market may lead to a fall in our revenue and
an adverse effect on profitability. Unlike our competitors, we continue to be
obliged by the current regulatory regime to provide certain services to customers
in the UK, whether or not such provision of service is economic.
There
is also competition for voice and data traffic volumes between fixed-network
operators and those operators offering VoIP and mobile services.
The
impact of all these factors may be to accelerate the diversion of our more profitable
customers without being able to reduce our costs commensurately, which may cause
adverse effects on our business, results of operations, financial condition
and prospects.
Technological advances
Our continued success depends on our
ability to exploit new technology rapidly.
We operate
in an industry with a recent history of rapid technological changes and we expect
this to continue – new technologies and products will emerge, and existing
technologies and products will develop further.
We need
continually to exploit next-generation technologies in order to develop our
existing and future services and products.
However,
we cannot predict the actual impact of these future technological changes on
our business or our ability to provide competitive services.
For
example, there is evidence of substitution by customers using mobile phones
for day-to-day voice calls in place of making such calls over the fixed network
and of calls being routed over the internet in place of the traditional switched
network.
If these
trends accelerate, our fixed-network assets may be used uneconomically and our
investment in these assets may not be recovered through profits on fixed-network
calls and line rentals.
The
complexity of the 21CN programme, and the risk that our major suppliers fail
to meet their obligations, may result in delays to the delivery of the expected
benefits. Impairment write-downs may be incurred and margins may decline if
fixed costs cannot be reduced in line with falling revenue.
Transformation strategy
Our strategy for transformation includes
the targeting of significant growth in new wave business areas. This may result
in changes to our products, services, markets and culture. If this transformation
strategy is unsuccessful there is a risk that future revenue and profitability
will decline.
In particular,
we have targeted significant growth in new business areas, such as networked
IT services, broadband and mobility. In view of the likely level of competition
and uncertainties regarding the level of economic activity, there can be no
certainty that we will meet our growth targets in these areas, with a consequential
impact on future revenue and profitability.
We have
announced a new organisational structure to help deliver faster, more resilient
and more cost-effective services to all our customers wherever they are. Failure
to complete this programme of organisational change may reduce our competitiveness,
with a consequential impact on our future revenue and profitability.
Major contracts
Our business may be adversely affected if we fail to perform on major contracts.
We have entered into a number of complex and high-value networked IT services contracts with customers. Our pricing, cost and profitability estimates for major contracts generally include anticipated long-term cost savings that we expect to achieve over the life of the contract.
These estimates are based on our best judgment of the efficiencies we plan to deploy. Any increased costs, delays or failures to achieve the anticipated savings could make these contracts less profitable or loss making, adversely impacting our profit margins.
In some cases, our products and services incorporate software or system requirements from other suppliers or service providers. Our ability to meet our commitments in a timely manner may depend on the ability of these suppliers and service providers to meet their obligations. Failure to manage and meet our
commitments under these contracts may lead to a reduction in our future revenue, profitability and cash generation.
Networks and systems failures
Our business depends on our ability to transfer substantial volumes of data speedily and without interruption. Any significant failure or interruption of such data transfer as a result of factors outside our control could have a material adverse effect on the business and our results from operations, including the
deployment of 21CN. We have a business continuity strategy in place, designed to deal with such catastrophic events including, for example, major terrorist action, industrial action, extreme computer virus attack, hurricane or flooding. A failure to deliver that strategy may result in a material loss and there can be no
assurance that material adverse events will not occur.
Pensions
Declining investment returns and longer life expectancy may result in the cost of funding BT’s defined benefit pension scheme becoming a significant burden on our financial resources.
As a result of the triennial actuarial valuation of the BTPS at 31 December 2005, BT agreed to make annual deficiency payments of £280 million over ten years. The first three instalments have been paid up front with £520 million paid in the 2007 financial year and a further £320 million was paid in April 2007.
The results of future scheme valuations will be impacted by the future performance of investment markets, interest and inflation rates and the general trend towards longer life expectancy, as well as regulatory changes, all of which are outside our control. |
