European Commission urged to block proposed split of Irish telecoms market

22 Nov 2012

Organisations representing Irish telecoms companies and consumers have written to the European Commission warning that a two-tier telecoms market is about to emerge in Ireland. They warn the changes proposed by ComReg could mean consumers in rural areas will be paying higher prices to subsidise cheaper but superior superior broadband services for consumers in urban areas.

A senior source in the telecoms industry who wished not to be named described the proposed market changes as “sub-dividing the market into the haves and have-nots – the people who have fast broadband services like UPC and those that have not.”

Letters have been written by the European Competitive Telecoms Association (ECTA), Ireland Offline and ALTO, which represents firms like BT, Vodafone and Magnet, to Reinald Krüger, director general of information Society and Media at the European Commission, expressing grave concerns about the potentially distortive effect the proposed changes could have.

In recent weeks, ComReg published a consultation 11/72 “Price Regulation of Bundled Offers” that proposes to create a Larger Exchange Area (LEA) and relax existing remedies on Eircom, such as net revenue test and margin-squeeze test while retaining Eircom’s status as ‘significant market power.’

ComReg last night emphasised that the changes are just proposals at this point and said no final decision has been taken.

The proposals involve redefining Market 1 (the public telephone network for residential and business customers) and Market 4 (the wholesale network, including DSL broadband services, both unbundled local loop – LLU – and bitstream).

What this means in plain English is ComReg is proposing to make it easier for Eircom to compete in the superfast broadband market in large urban areas where it already faces mounting competition from players like UPC, Magnet, BT, Vodafone and, very soon, Sky.

Dividing up the Irish telecoms market

The various bodies have their own interpretations of what the creation of a LEA with different market definitions for competition could mean for the ordinary consumer in Ireland.

IrelandOffline reckons it could mean higher line rental charges for consumers in rural areas, as Eircom is allowed to offer lower price bundles to compete with UPC and Sky.

ALTO warns that the proper procedure of a market review hasn’t been applied and that ComReg has submitted to the European Commission a similar precedent set in Austria that initially was approved by the European Commission but eventually annulled by the Austrian Administrative Court.

It warns of a commercial vacuum and warns of the risk of potential for Eircom “to aggressively foreclose current generation services through a combination of mass migration of customers to NGA (next-generation access) and discount pricing.”

ECTA warns that the criteria put forward by ComReg are tailored to grant as much regulatory relief to Eircom as possible, as quickly as possible.

Higher prices in non-urban areas?

Eamonn Wallace of IrelandOffline said the likelihood of higher charges versus the areas of the market where Eircom is investing in NGA is the logical analysis that his organisation has arrived at. He also added he believes even Eircom is not in favour of the proposed changes as it creates a lot of complexity.

Ronan Lupton of ALTO tells that there is a danger that Eircom will be allowed migrate its Market 1 legacy services to NGA services by early next year, before the rest of the market can react, and will thereby allow Eircom to ring fence its contract customer base.

“The rest of the industry will be forced to suck eggs while this happens,” Lupton warns.

ComReg responds

However, ComReg has defended the proposals and says they are also aimed at protecting market entrants that do not have the same scale economies as Eircom.

“The reality is that competition based on platforms such as LLU and cable is very unlikely to emerge outside more densely populated areas, hence the need to define the LEA. The most material difference nationally is that outside the LEA we accept that LLU will probably never be used and that operators will use Eircom’s wholesale line rental and wholesale broadband services.

“Within the LEA the test will reflect pro rata the use of LLU as it is taken up but not before. If LLU usage remains low not much will change. The tests are designed to evolve as competition itself evolves.”

ComReg also said Eircom will be obliged to charge for line rental at the same price across the entire country under separate obligations.

“It is inevitable that some services, such as next-generation access, will be offered first in urban areas because these areas are cheaper to serve and competition is most intense.”

Market review

At the core of ALTO’s concerns is the lack of a proper market review and Wallace says a consultation just before applying to the European Commission to instigate the changes by early next year is insufficient and if the measures are imposed this will create a competitive vacuum in the market.

A senior telecoms industry source said the frustration among senior leaders across licensed telecoms companies that are planning to invest heavily in Ireland is palpable.

“We have no problem with Eircom reducing its prices if it can do so across the entire country. To do so only where they have competition (phases 1 and 2 of its NGA investments so far are in locations where it competes with UPC) is unfair on the rest of the market.

“We fear that they will continue to charge high prices in the other areas because they have no competition in those areas. The danger is this is going to kill competition at a network level.”

A potential motive for the proposed division of the market in this way, it has been suggested by sources, is that it could be aimed at improving Ireland’s broadband ranking in Europe at a time when next-generation and superfast networks are rolling out at a rapid pace.

Another motive could be to take pressure off Eircom, which in recent weeks revealed 2,000 job cuts as part of an accelerated cost-savings plan.

In June, Eircom exited examinership with new capital and shareholders in place. The examinership process removed €1.7bn worth of debt from Eircom’s balance sheet, about 40pc of group debt. At the time, Eircom said it would be now embarking on a five-year business plan that would include a €1bn home-fibre broadband rollout.

Future capital investment in Irish telecoms

But senior telecoms industry sources remain unmoved. “If prices need to be reduced to make Eircom competitive it should be done across the whole country as we are one small market, not just in areas with high speed broadband.

“If this happens, we will have a situation where the have-nots will be subsidising the haves and it’s going to kill off investment by operators.”

Last week, ComReg awarded fourth generation (4G) mobile licences to Eircom, Vodafone, O2 and Hutchison 3G Ireland, netting a €854.6m windfall, out of which €450m will go into the exchequer this year.

Both O2 and Vodafone, which also compete in the LLU market, at the time of winning the licences revealed considerable capital expenditure plans for the years ahead. Vodafone aims to invest €500m in its network in Ireland over the next five years and O2 aims to spend €200m on its network over the next three years.

The controversy arises at a pivotal time for Irish telecoms. The question ultimately is whether Ireland wants to create a national digital infrastructure that will power economic growth and job creation for the next 10 years or whether it wants to turn back the clocks and see a repeat of the past 10 years of broadband market failure.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years