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The
business of BT is affected by a number of factors, not
all of which are wholly within BT’s control. Although
many of the factors influencing BT’s performance
are macro economic and likely to affect the performance
of businesses generally, some aspects of BT’s business
make it particularly sensitive to certain areas of business
risk. This section highlights some of those specific
areas. However, it does not purport to be an extensive
analysis of the factors affecting the business and some
risks may be unknown to us and other risks, currently
believed to be immaterial, could turn out to be material.
All of these could materially adversely affect our business,
turnover, profits, assets, liquidity and capital resources.
They should also be considered in connection with the
forward looking statements in this document and the
cautionary
statement
regarding forward-looking statements.
| If
BT’s activities are subject to significant
price controls, its market share, competitive position
and future profitability may be affected |
| Most
of BT’s fixed network activities in the UK
are subject to significant regulatory controls.
The controls regulate, among other things, the prices
BT may charge for many of its services and the extent
to which it has to provide services to its competitors.
In recent years, the effect of these controls has
been to cause BT to reduce its prices. BT cannot
assure its 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 BT may offer in
the future), nor extend the services which it has
to provide its competitors. These controls may adversely
affect BT’s market share, the severity of competition
and its future profitability. Further details on
the regulatory framework in which BT operates can
be found in ‘‘Business
Review – regulation, competition and prices’’.
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| BT
faces strong competition in UK fixed network services |
| BT
continues to have a significant market share in
some aspects of UK fixed network services. In particular,
in the 2003 financial year we estimate we had a
market share of 73% of consumer calls and 45% of
business calls in the UK and approximately 81% of
exchange lines in the UK were in the BT network
as at 31 March 2003. Regulators have promoted competition
in this area by allowing BT’s competitors to
site equipment in or adjacent to its exchanges (local
loop unbundling) and to make it easier for BT’s
customers to route some or all of their calls over
competitors’ networks (carrier pre-selection)
and by the introduction of a wholesale access product.
Reduction in BT’s market share in the fixed
network may lead to a fall in BT’s turnover
and an adverse effect on profitability. Unlike its
competitors, BT continues to be obliged by the current
regulatory regime to serve customers in the United
Kingdom, whether or not such provision of service
is economic, and the two competitive measures described
above may have the effect of accelerating the diversion
of its more profitable existing customers without
it being able to reduce its costs commensurately.
These changes in the regulatory environment and
ensuing increased competition on its fixed network
may cause adverse effects on its business, results
of operations, financial condition and prospects.
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| BT’s
business is dependent on the ability to exploit
technological advances quickly and successfully |
|
BT
operates in an industry with a recent history of
fast technological changes. It expects that new
products and technologies will emerge and that existing
products and technologies will develop further.
BT needs to continually develop its services and
products to exploit those next generation technologies.
However, BT cannot predict the actual effect of
these technological changes on its business or on
its ability to provide competitive services. For
example, presently 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. Additionally, some calls are now
being routed over the internet in place of the traditional
switched network. If these trends accelerate, BT’s
fixed network assets may be used uneconomically
and its investment in these assets may not be recovered
through profits on fixed-network calls and line
rentals. Impairment write-downs may be incurred
and margins may decline if fixed costs cannot be
reduced in line with falling turnover. |
BT
has targeted significant growth in new business areas,
such as broadband technology. In view of the likely
level of competition and uncertainties regarding the
level of economic activity, there can be no certainty
that BT will meet these growth targets, with a consequential
impact on future turnover and profitability.
| BT’s
businesses may be adversely affected if their networks
or systems experience any significant failures or
interruptions |
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BT’s
businesses are dependent on their ability to transfer
substantial volumes of data speedily and without
interruption. Any significant failure or interruption
of such data transfer due to factors outside their
control could have a material adverse effect on
the businesses and their results from operations.
BT has a business continuity strategy designed to
deal with such catastrophic events, including major
terrorist action, industrial action, extreme virus
attack, hurricane or flooding, that may impact the
ability to maintain an effective service to customers.
Any such strategy can provide only reasonable and
not absolute assurance against material loss and
there can be no assurance that material adverse
events will not occur. |
| Declining
investment returns may result in the funding cost
of the defined benefit pension scheme becoming a
significant burden on the financial resources of
BT |
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The
defined benefit pension scheme, the BT Pension
Scheme (BTPS), was closed to new members on 31
March 2001 and has been replaced by a defined
contribution scheme (BTRP). The latest full triennial
actuarial valuation of the BTPS was completed
as at 31 December 2002. As a result, the schedule
of contributions has been agreed with the scheme
trustees under which BT will make normal contributions
of 12.2% of pensionable pay and annual deficiency
payments of £232 million. This will apply
until the next triennial actuarial valuation is
completed as at 31 December 2005. The results
of future scheme valuations will be impacted by
the future investment market performance, interest
rates and the general trend towards longer life
expectancy, all of which are outside the control
of BT. In the event that investment returns decline,
the cash funding cost to BT may increase and may
have a significant effect on the financial resources
of BT.
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