Subsidy of BT's Managed Network Services business - Statement

1. The Director General of Telecommunications has directed BT to take steps to ensure that it does not unfairly subsidise parts of its Managed Network Services (MNS) business.

2. After detailed investigations, including the use of powers under Condition 20.B.15 (Separate Accounts) of BT's Licence, the Director General is satisfied that:

• the following product lines offered by MNS constituted 'parts' of its business for the purposes of Condition 20.B.15: Transborder, High Speed National, Cardway, Frame Relay International, and Low Speed Networks (including High Street Networks and Mid Sized Networks);
• at least some of these product offerings were, or are, being either subsidised or cross-subsidised;
• such subsidy or cross-subsidy was unfair in that it did, or does, deprive third parties of opportunities to gain contracts;
• any such subsidy or cross-subsidy has, or could have, a material effect on competition in the United Kingdom.

3. The Director General has accordingly directed BT, under Condition 20.B.15 to:

• make an appropriate return on each of the activities listed in the Direction (i.e. the product lines listed above, plus product lines which replace any, or any combination of, those product lines)
• provide him with a business plan showing how this is to be achieved
• keep records and provide ongoing information on the financial performance of the activities
• show that charges between MNS and other parts of BT's businesses are properly based and charged, in particular by providing an external audit report.

4. In 1992 four complainants alleged anti-competitive practice by MNS, centering on unfair subsidy of MNS's activities from its systems business and predatory pricing in the provision of value-added data services. In December 1994 the Director General expressed his concern that a lengthy investigation had proved inconclusive because of limitations in the information available to him. He stated his intention to verify the adequacy of accounting improvements BT was making in 1994/5 and 1995/6, and to return to the original allegations.

5. The Director General has now been satisfied in six of the eight areas examined. However, in two important areas he did not find it possible to reach favourable conclusions: adequacy of internal accounting controls within BT's core business over charges to other parts of BT (such as MNS), and whether customers were charged all relevant costs for services offered by MNS.

6. Complaints were also made about the transfer of customer information from BT's systems business to MNS. The Director General concluded that there was no evidence of an organised system for the transfer of such information. However, the acquisition and use of customer information by individuals - such as account managers - whose work crosses boundaries between BT's systems business and other of its businesses, will be the subject of a broader examination.

7. A copy of the Direction is available for inspection in the Public Register in Oftel's library.