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The next-generation network will rely on IP technology and help BT offer new data and voice services such as voice over IP and video-on-demand to a wider audience.
BT will migrate 350,000 customer lines in the Cardiff area to its 21CN infrastructure, including many served by other telephone and internet service providers and mobile operators. BT said the experience and customer feedback from the first mass 21CN customer migration project will help it finalise plans to roll out 21CN to customers across the UK by the end of the decade.
The migration of Cardiff lines to the new infrastructure is expected to begin during the second half of 2006.
More than 50 local phone exchanges will be upgraded and BT will implement new IT systems to support the 21CN infrastructure.
Three metro area nodes or "super exchanges" will also be built in Cardiff, Swansea and Newport.