Mercury Communications, Ltd. History

Company History:

Mercury Communications, Ltd. is one of the largest providers of telephone services--local, long distance, and international--in the United Kingdom. Both an ambitious business venture and an experiment in telecommunications competition, Mercury was created in 1982 and competes chiefly with British Telecommunications plc, the British telephone company, recently privatized after nearly 100 years as a division of the general post office.

Soon after the first telephone exchange in England was established in 1879, the British government placed the Postmaster General's office in charge of licensing telephone companies. In 1898 the Postmaster General issued licenses to 13 new telephone companies, hoping that they would break the near monopoly on telephone service held by the then dominant National Telephone Company. But by 1913 five of the six competitors that succeeded in building networks had been taken over by the post office or National Telephone. The following year the post office took control of National and created a state-run monopoly that would run nearly all of Britain's telephone services for the next 70 years. The British government determined that telephone networks were "natural monopolies," and ended its experiment with telecommunications competition.

In 1981, however, the British government under Prime Minister Margaret Thatcher undertook an effort to privatize nearly all the country's state-run industries, including British Airways, British Steel, British Aerospace, and the post office's telephone monopoly. The British Telecommunications Act that year reincorporated the telephone company as British Telecom in preparation for its sale to the public. The act also began the privatization of Cable & Wireless, the state-run offshore telephone company, which did most of its business in Hong Kong.

During this time, the British Department of Trade & Industry invited newcomers to file for licenses to compete with British Telecom. Cable & Wireless, Barclays PLC, and British Petroleum (BP) applied for one of these licenses after setting up a joint subsidiary called Mercury Communications, through which they planned to go head-to-head with BT.

The launch document describing Mercury proposed establishing a digital trunk network aimed only at high volume corporate users. The proposal specifically dismissed the notion of offering nationwide switched services, which would enable virtually any customer to bypass the BT network.

In February 1982, after no other companies applied for permission to challenge BT, Mercury received an interim operating license. The consortium named Sir Michael Edwardes, renowned for his success in turning around British Leyland, as Mercury's new chairperson.

At this time, three other companies applied for and received permission to operate as Public Telecommunications Operators, or PTOs. But because the government did not want to complicate the emerging "duopoly," the licenses for these companies, Vodaphone and Cellnet, were limited to cellular telephony. The third, Kingston Communications, was an independent local service provider.

Mercury began constructing its primary network, and in 1983 completed a microwave link between London and Birmingham. The following year Mercury began laying fiber optic cable along British Rail tracks, completing what became known as the "Figure of Eight," a double loop network extending north to Manchester, Leeds, and Nottingham, and south to Milton Keynes, London, and Bristol. At the center was Birmingham, where Mercury established its National Operations Center.

After Mercury negotiated an agreement to interconnect its network with BT, it encountered serious difficulties from the monopoly's workforce. Members of the Post Office Engineering Union (now the National Communications Union) refused to build the links between the two networks out of fear that Mercury would destroy BT's profitability, forcing large-scale employee layoffs.

The union hit Mercury from every side, at one point inciting fear that microwave radiation was potentially lethal. But, after mollifying the public with a scientific explanation of the nature of microwaves, and pointing out that BT operated a microwave network far more massive than anything Mercury had proposed, the union abandoned the issue. The media later chastised the union for failing to recognize that competition could cause the market to expand. Mercury, meanwhile, won a settlement with the union after threatening to take the matter to court.

During this time, the companies involved in the Mercury venture were often at odds and had great difficulty cooperating. In May 1984 Barclays suddenly withdrew from the consortium, claiming it had achieved its investment goals, but also apparently tired of battling BP. Consequently, Cable & Wireless and BP split Barclays 20 percent share of the venture. Then in August BP announced that it too would leave the consortium, offering no explanation. It was rumored at the time that BP was involved in negotiations to establish a rival network in cooperation with Pacific Telesis, but this was never substantiated.

Now in complete control of the company, Cable & Wireless installed Gordon Owen as Mercury's new managing director, instructing him to re-establish order. A month later, the government passed the 1984 Telecommunications Act, which privatized

Owen was known as a demanding manager, and he was appropriately suited to the task of making Mercury work. The company invested heavily in its network during 1984 and 1985, when it made a fundamental change in strategy. Instead of limiting itself to dedicated lines for high-volume business users, Mercury elected to build a switched network that would enable any caller, even residential customers, to use Mercury.

This strategy posed a new, more ominous threat to BT. Moving well beyond the lucrative but limited private line market, Mercury's entry into switched services stood to bring choice to millions of Britons who had been captive to BT. When Mercury began offering switched services in 1986,

In this one bold step, Mercury placed itself at the forefront of the world telecommunications competition curve. The company was not only able to compete for private line services, but stood ready to handle literally millions of local, long distance, and international calls.

By contrast, while the U. S. government had succeeded in breaking up AT&T's monopoly, introducing long distance competition, local calls remained under smaller local monopolies, operated mostly by former Bell System companies.

In order to use Mercury service, customers had to instruct their local BT exchange that the call should be handed off to Mer-cury. This was done by dialing a special touch tone code. Seeing this extra button-pushing as a potential competitive disadvantage, Mercury arranged for the manufacture of special telephones equipped with a blue button. By pressing this button, the special code was entered automatically.

Mercury introduced switched international services in May 1987. The following year, it installed its first 26 public telephones at London's Waterloo train station. This number later grew to more than 4,500, supplanting BT's traditional red phone booths and other more modern public phones.

Between 1986 and 1988, Mercury had amassed a three-year operating loss of more than £66 million. A year later, however, the company recorded a profit of £18 million. This grew to £66 million in 1990, and doubled a year later.

Leadership at Mercury rotated quickly during the late 1980s. Gordon Owen was replaced by Peter van Cuylenburg, a former executive at Texas Instruments. Thoroughly steeped in modern electronic technology, van Cuylenburg treated the public network as a computer, rather than as a collection of switching centers. He also is credited with building the company's marketing and customer service operations, seeing them as one area where Mercury could clearly excel over BT.

In 1992, after only a short tenure, however, van Cuylenburg left Mercury and was replaced by Mike Harris, a former head of First Direct Bank. Harris emphasized financial strength in Mercury, and helped to keep the company's costs down during its initial years of heady growth. Under Harris, Mercury acted upon its desire to operate a network completely separate from BT.

Until this time, Mercury was forced to route the first and last leg of each call over BT facilities. These "local loops" (essentially the cable from a switching center to a customer's telephone) were far too expensive for Mercury to replicate. The cheaper alternative was to use the loops that

During the 1980s, however, a new industry began to grow in Britain that also required loops, albeit very different loops. Transmission of cable television signals required a thicker coaxial cable with sufficient bandwidth to carry as many as 30 different channels. Even occupied with 30 channels, these cables left sufficient bandwidth to carry a simple voice signal.

By connecting customers' telephones to cable loops, Mercury could switch and route calls over its network without ever having to cross BT's doorstep. Of course, the call would have to be handed off to BT if the receiver was a BT customer. Similarly, BT would have to hand off any calls from its customers to a Mercury customer.

Mercury entered into alliances with 16 cable companies throughout the U.K., who were then able to offer telephone as well as television services to their customers. At the end of January, 1993, Mercury had supplied over 117,000 telephone lines to cable operators. Cable operators, already licensed for telecommunications, benefited greatly by being able to offer two services on one network infrastructure. The cable industry was also promised favorable government regulations over the next decade.

In November of 1992, Cable & Wireless sold a 20 percent share in the enterprise to the Canadian company BCEbc, the parent company of Bell Canada, for about £480 million. In addition to bringing more than 100 years of telecommunications expertise to Mercury, BCE owns two large cable television systems in the United Kingdom.

Mercury then began work on personal communications networks, or PCNs, that will be able to handle a call anywhere it is taken. PCNs improve upon cellular phone technology by giving the customer total portability, able to make or take calls in the home or car, in an airplane, or even while on vacation thousands of miles from home. PCN technology will use smaller phone sets that operate at cheaper airtime rates than cellular phones.

Because PCNs are likely to replace conventional land-based and even cellular telephones, many companies waged heated competitions for the highly coveted rights to build PCN networks. Mercury's sister company, Mercury Personal Communications, was awarded a PCN license by the government in July 1991.

With a quarter million registered residential customers and more than 60,000 business customers, Mercury controls about ten percent of the British telecommunications market.

Principal Subsidiaries: Mercury Link 7500 Limited; Mercury Data Networks Limited; Mercury Communications (Enterprises) Limited; Mercury Payphones Limited; Direct Call Limited (trading as Adlink); TR Financial Communications plc (trading as Mercury Dealing Systems).

Source: International Directory of Company Histories, Vol. 7. St. James Press, 1993.

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