This report is focused on domestic telecommunications services in the UK. The sectors discussed are fixed line services, fixed radio link services, digital cellular networks, satellite services and cable networks. So far, the use of fixed radio link and satellite technology is still very limited in the domestic market. There is no coverage of the telecommunications equipment manufacturers or suppliers, except where their businesses overlap into the network services of voice and data transmission.

Despite the main focus of the report being on the UK telecommunications market, it is important to realise that the industry is one element of a highly globalised market, in which the UK plays a significant part. Therefore, this report also makes reference to European and international telecommunications markets, setting the UK market in a global context.

Industry revenue is sourced from connection fees, monthly line rental charges, call rates, charges for special residential or business services (e.g. private business circuits) and interconnection fees payable from one network operator/provider to another.

The established way in which local and national call services have been charged for has, until recently, been by time and distance. However, this pattern in some areas is slowly altering as certain operators, mainly in the cable sector, are instituting new ideas into their charging structure for services.

Already the UK telecommunications industry has experienced extraordinary changes. One of the most significant being the deregulation of the industry, starting in the early 1980s. These changes have not abated and the industry is now facing the challenge of the digital revolution and the race to connect consumers to the Internet through cellular handsets, i.e. third generation mobile communications. This has started to become reality with the new mobile Internet cellular handsets. These changes have necessarily brought about convergence within the industry and there have been casualties along the way.

There are two main groupings in the UK domestic telecommunications market — fixed line and cellular services. The percentage of households owning fixed line communications has grown year on year and, according to the Office of Telecommunications (OFTEL), stood at over 94 percent in June 1999. During the last ten years, around half a million lines per annum have been installed to residential homes. Regardless of the fact that the residential market is well furnished with fixed-line telecommunications, growth is still apparent — although slowing. As improvements within fixed line telephony have made connection cheaper, those consumers who have never yet had a fixed line are beginning to get connected. Increasingly, customers are having second and in some cases even third lines installed, modem and/or fax dedicated. It is also worth noting that some builders of new housing negotiate with network operators to install fixed lines into each new unit, thereby creating an extra sales point for the builder and instant business for the network operator.

Up until 1991, British Telecommunications (BT) held the monopoly on fixed line telephony with only Mercury, offering any sort of choice to consumers. However, in 1992 as the TV cable companies extended their infrastructure, they began to offer cheaper telephony along with their television packages. Despite the huge cost of build-out, by the end of 1988, 50 percent of UK households had the choice of being connected to cable services. The cable companies are at present attracting new customers faster than their competitors and there is no doubt that this has had an impact on the number of lines installed by BT, which has fallen. Although there are parts of the UK that will never be cabled, the scope for growth is vast.

Although competition and new technology has been good for consumers and companies alike, it has increased the level of churn (the rate at which customers connect and disconnect from services), causing concern to network operators. Churn has been exacerbated through competing operators and service providers offering keenly priced telephony packages and reasonable reconnection rates. This is in the hope of bringing on board those consumers without a telephone and challenging those with a telephony service to look at changing their provider. The strategy appears to be working.

The huge growth in cellular communications is due in greater part to residential consumers taking advantage of the increased and still increasing choice of mobile handsets and tariffs. It seems that cellular promoters have considered every way possible to induce consumers in the residential market to take part in the mobile revolution.

As the telecommunications market continues to expand, competition is increasing all the time. This has the effect of lowering prices and, therefore, Key Note is expecting revenue growth to experience a slowdown.

Although the market has experienced overall growth, it is evident that not all sectors are increasing their revenue share in real terms. For example, the fixed line sector shows a 6.3 percentage point drop in revenue share during the review period. However, the cellular sector, in comparison, has experienced an increase in revenue share of 14 percentage points, reflecting the continued up-take of mobile telephony.

Despite many homes acquiring second fixed lines for modem use, income generated within the residential exchange line sector has experienced a significant decline in connection revenues between 1999 and 2000. Cellular telephony may account for some of this decline, but increased competition from cable operators and others is also important.

Over the review period there has been strong regulatory pressure and price competition for local call traffic between BT and the cable operators. Between 1996 and 2000, revenue from both local and national calls experienced decline. This trend is set to continue as technological advances improve the quality of voice telephony via the Internet, which in turn will create downward pressure on income generated from international calling in particular.

One area showing a dramatic increase in revenue is calling via fixed line telephony to mobile handsets. Illustrating again that cellular telephony now plays a major part in many business and domestic settings.

Since 1996, growth rates have been higher for international calls than national calls and for national calls than local calls. Growth in the volume of ordinary voice calls has remained fairly steady, except for the period at the beginning of the 1990s when the recession had an inhibiting effect on growth. The fall in fixed line local call minutes in 2000 probably reflects the increased use of mobile telephones.

The increasing number of subscribers to cellular networks has resulted in high rates of growth in the volume of calls, from fixed line to cellular telephones. In other areas, growth has been driven by increased usage among existing users, rather than by any increase in the consumer penetration of the network.

The increase in revenue derived from connection and line rentals has outpaced the growth in the number of lines installed. It is clear that the fixed exchange line sector has not been overly affected by deregulation or increased competition, managing to hold onto, and possibly even raise, installation and rental charges.

There have been significant increases in revenue for both residential and business calls to cellular networks, illustrating the high degree of consumer uptake of cellular telephony in both sectors. Both residential and business call volumes to cellular phones have increased substantially.

Cellular telephony is one of the most dynamic sectors in the telecommunications industry. Go into almost any supermarket and pre-pay mobile phone packages are available to pick up and take to the checkout. In fact numerous consumer outlets, catalogues, high street shops, etc., are now selling these handsets. They have gained immense popularity, as there are no connection fees or fixed contracts and top-up vouchers can be purchased very easily. Another way in which a consumer can subscribe to cellular telephony without paying a connection charge is via one of the many mobile phone deals, which includes a waiver of the normal connection fee.

Connection revenue did not grow as fast as rental and call revenues, accounting for less than 2 percent of the total. Many of the cellular operators have been keen to contain growth in connection charges in order not to deter new customers; rental and call revenues have not been contained to the same extent.

Payments earned by cellular operators for terminating calls, which originate on other networks, have more than trebled over the review period. The level of churn in the industry has always been much higher than in the fixed sector, gross connections to the networks being much higher than the net increase in subscribers. In part this reflects the relatively high level of competition in the sector. But other factors play a part, such as the high level of subsidy on handsets and the high running costs of what for many users is still an additional and non-essential service.

Cable operators were permitted to offer telephony services for the first time at the end of the 1980s. However, at that time the focus of the cable operators was very much on the television side of the business due to the lack of co-operation between companies and the fact that cable shareholders were much more interested in promoting television services.

This attitude started to alter as cable network infrastructure neared completion and consolidation within the industry began to take off. As consolidation continued, it became much easier to offer cheap television/telephony packages, which has encouraged many subscribers. By the start of 2000, there were just two major players, NTL and TeleWest, which together account for over a third of the UK pay-TV market.

The growth of the cable industry in the UK has provided the only real source of competition to BT in the local calling market. Despite the competition posed by the cable operators, price regimes set by OFTEL have been just as instrumental in reducing local BT call costs. However, as BT has responded to successive price controls instigated by OFTEL, the cable operators have been forced to react by reducing their costs to consumers, in order that they may retain their competitive advantage over BT.

Phenomenal changes are occurring throughout the global telecommunications industry. The continuing development of multimedia and technological advances are part of the motivating force of change and the industry’s reaction to dominant trends has created fusion within some sections of the industry, i.e. the enlarging and amalgamation of services. The globalisation of telecommunications services and the pace of techno-logical development are the major forces shaping the industry.

The speed of technological advances has taken the telecommunications industry by storm. Some advances barely even thought of a couple of years ago, are being taken for granted within the business community and even, though to a lesser degree, by domestic consumers. For example, the simultaneous transmission of voice and data along optical fibres and national cellular radio systems is now expected to be the norm. Other services that are already available include voice mail (an answering service provided by the network operator); calling line identification (a caller’s name is shown on a display prior to answering); call charge advice (call costs can be retrieved immediately after each call); electronic data interchange (EDI); video conferences and online information. Their speed, range and accessibility will be enhanced, as the use of ISDN becomes increasingly widespread.

It appears that both domestic and business customers cannot fail to gain by the new era set by these advancements within information technology. Even political agendas have seen fit to endorse the changes, which have persuaded telecommunications operators, equipment manufacturers, software developers and entertainment/media organisations, to create new alliances for the benefit of all.