Just over four years ago Tony Blair stole a march on the Tory government by announcing plans to link thousands of schools, colleges and hospitals to the internet. His chosen vehicle was British Telecom.

Yesterday, in a clear dig at his erstwhile ally, the prime minister urged BT - and others - to bring the cost of internet access down to US levels, in a reprise of the attack by the chancellor, Gordon Brown, on the former state monopoly.

The chancellor's demand that BT open up its local network to cheaper, faster suppliers helped wipe billions off its market value. BT feels under siege: from the government, the city and its competitors.

Yesterday the company defended itself against this barrage of criticism, claiming it is developing products that are competitive and will lower the cost of connecting to the internet. But the City believes that BT, which claims to have 2.5m online customers already, will be forced to adopt more radical change.

Dresdner Kleinwort Benson, a stockbroking firm, said the move towards free internet services would force suppliers such as BT to offer free voice connections - much as in the US, where local calls are free. This would severely dent BT's revenue.

Steve Thorpe of the Telecommunications Users Association said: "I would expect to see BT alter its position. It wouldn't want to be left out of this with a package that could be seen as old hat."

But a BT spokesman denied the company faced pressure from government and industry. "We've got no beef with the government. We are pretty much at the forefront of this and in what we are offering people," he said.

BT has an internet package priced at £6.99 per month that offers customers a flat rate and unlimited access at night and at the weekend. It is also developing a package called SurfTime for users to surf the net on an unmetered basis for £34.99 a month plus VAT.

The onslaught of service providers such as Freeserve, AOL UK and AltaVista which offer free unmetered access, threatens BT's internet market share, said Doug Wight, an analyst at Commerzbank AG.

"I think the competition will bring down prices in parallel with the US," said Mr Wight, who predicted that the emergence of faster internet connections in the next year would lead some customers to prefer metered access to the web rather than a monthly fee.

Government dissatisfaction with BT's internet charges comes at a bad time for the company. It has been overtaken by European former state monopolies and is considering a management shake-up and the float of businesses such as Cellnet, its mobile phones network, to boost its value. Probably not something Mr Blair contemplated when in opposition.



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