Is mobile competition a virtual certainty?

17 Feb 2004

When it comes to Irish mobile phone operators, three may not be the magic number for much longer. Market stalwarts O2 and Vodafone, along with more recent arrival Meteor, could be joined by new providers later this year, boosting competition for businesses and consumers to a level never before seen in the Irish market.

Developments are likely to happen quickly as these new operators won’t have to go to the trouble of building their own mobile networks. Instead, as virtual operators or MVNOs, they will be able to offer services to customers with their own branding and billing; only the infrastructure that carries the traffic will belong to someone else.

The telecoms regulator ComReg has been flexing its muscles on this issue of late. It issued a recent consultation paper that proposed designating O2 and Vodafone as having ‘significant market power’; as such they would be obliged to allow other operators access to their networks. The end result of this process will be to stimulate competition in a market where, according to ComReg, neither of the two have significantly changed their prices since the arrival of a third operator, Meteor.

The Minister for Communications Dermot Ahern TD has come out in support of the ComReg stance and is likely to compel the existing operators to carry other operators on their infrastructure.

Asked about this, the message from Vodafone and O2 is similar: both are coy about divulging any specifics but say that they are open to hosting another operator as long as a sound commercial proposition is in place. In practice, that means someone must be willing to pay sufficiently to use either of their networks. Both are formulating responses to the ComReg consultation document issued last month. The deadline for this is 9 March.

In a sense, Vodafone has already embraced the MVNO concept. It has drawn up an agreement with 3 Ireland by which the third-generation licence holder will be granted roaming rights on Vodafone’s Irish network. This exclusive deal, which will come into effect in a few months’ time, has surprised some who felt that Meteor’s network with its lower traffic volumes would be the obvious target for MVNO activity.

Meteor was the first to offer to host virtual operators on its network last year but the company has since gone quiet after making some initial noise. It is saying little now, beyond revealing that it too is submitting comments about ComReg’s proposal document. It has also confirmed that it has responded to request for proposals that Eircom issued last year to all three mobile operators.

Unquestionably the combined 95pc market share enjoyed by Vodafone and O2 represents a serious obstacle to any would-be mobile operator, virtual or otherwise. Despite a competitive pricing structure, Meteor has only gained 5pc share thus far. The obvious question to ask is whether any new entrant would be commercially viable. Johanna Cassells, corporate affairs manager with O2, argues that three mobile providers for a market of three million people – with a fourth player, the third-generation provider 3 Ireland, due to launch before year’s end – represents a sufficiently competitive scenario and signifies an already crowded market.

Another source in the telecoms industry disputes this line of thinking. “I think it would be a view generally held by industry players that there is room for competition.”

Ian McDonald, senior consultant with the telecoms analyst firm Mason Communications, agrees with the latter sentiment but adds an important caveat. “I think there is scope for MVNOs to survive,” he says, “but brand and reputation will be key.”

In the telecoms sphere, this has helped fuel the speculation that Eircom and Esat BT are looking to re-enter what is an extremely lucrative market. With a mobile offering to add to their existing product set, a fixed-line operator would be able to offer the full suite of voice, data and mobile services to corporate customers.

It’s no secret that Eircom is making eyes at the mobile market. Its request for proposal documents issued to all three mobile operators are still bound by confidentiality agreements and no details are available. Of course, it may sidestep all of this debate by acquiring Meteor outright. This option is still very much in play, but pursuing the MVNO route is a cheaper option to add mobile services to its portfolio. Eircom will be free to re-enter the market this May, after the non-compete agreement it signed with Vodafone after selling Eircell in 2001 runs out.

Esat BT has also thrown its hat into the ring, confirming that it will actively pursue a mobile offering within the next 12 months; “not as a mass-market player on day one but targeting small and medium sized businesses because we have had strong signals from those customers,” a spokesperson says.

By virtue of their foothold in the fixed-line market, either company would have an existing customer base to tap into with an additional – and very complementary – product. Both also have an established reputation, giving any foray into the mobile market a far greater chance of success than a startup with no track record.

However, another option that still satisfies the ‘brand’ requirement would be the arrival of an established player from outside the telecoms sector altogether. In the UK, the Tesco supermarket chain launched a mobile service last year using O2’s network. In doing so it followed the lead set by another prominent brand, Virgin, which was the first to offer a mobile service under its own name but using the T-Mobile infrastructure. “There’s nothing to rule out a retail operator doing that here,” McDonald comments.

Virgin’s success should encourage any would-be Irish MVNO player. It has been the fastest growing mobile operator in the UK for the past two years and in that time has amassed a customer base of 3.6m, helped by a keen pricing package that includes text messages for only 3p. In their own analysis of the market, Vodafone and O2 cannot fail to have noticed that Virgin has been particularly adept at winning users from rival networks – including its host T-Mobile. The companies only recently resolved a dispute that centred on the terms of their MVNO agreement, by which T-Mobile had to pay a fee to Virgin for every customer the virtual operator signed up.

Another development likely to aid competition is the fact that since last year mobile users have been able to take their number with them when they change network, removing a significant barrier to consumer adoption of any new mobile services. Since its introduction, 40,000 Irish users have switched network and interestingly the biggest beneficiary appears to be Meteor.

As far as the customer is concerned, the more definitely would be the merrier. Obeying the natural laws of economics, the higher the number of competitors in the sector, the lower prices are likely to fall, McDonald asserts. “Other operators would offer lower prices in order to gain market share,” he says, adding that there is scope for considerable reduction within the current cost structure. “You would see lower prices for voice calls and perhaps SMS, which in my opinion can really afford to come down. The high average revenue per user figures show that there is flexibility for prices to go down.”

By Gordon Smith