Last month the new chairwoman of the Commission for Communications Regulation (ComReg), Isolde Goggin, proved that her year at the helm was going to be no ordinary year. Operators such as Vodafone and O2 must surely have choked on their mince pies when they heard that the regulator had decided that because they share 94pc of the mobile market in Ireland they had “significant market power” and, therefore, she was instructing them to allow for the hosting of mobile virtual network operators (MVNOs).
This move is calculated to lead to a 25pc reduction in call costs for Irish mobile users.
ComReg came to its decision following a comprehensive analysis of the Irish mobile market. Goggin warned that there was insufficient competition in the Irish market, particularly in the post-paid mobile sector where prices have not moved in years, and that O2 and Vodafone are enjoying the highest average revenue per user (ARPU) levels in Europe. Her colleague Gary Healy, director of market development at ComReg, said smaller operators such as 3 and Meteor may gain market share as a result of national roaming agreements, but not enough to shake up the marketplace. As a result ComReg proposes opening up the networks of Vodafone and O2 to such indirect access seekers as MVNOs.
Healy pointed to research from Merrill Lynch that highlighted Ireland as providing the highest levels of ARPU of €44.28 a month for such operators as O2 and Vodafone compared with €31.98 in the UK, €22.96 in Germany, €32.80 in France and €35.26 in Finland. Healy indicated that while the majority of Irish mobile users are prepaid, income from post-paid customers accounts for more than 50pc of O2 and Vodafone’s revenues.
MVNOs – companies that offer mobile services on the back of the infrastructure of an existing mobile operator – are enjoying widespread success across Europe. In the UK MVNO Virgin Mobile floated on the London Stock Exchange on the success of signing up 4.5 million customers in the UK marketplace and is currently targeting MVNO opportunities in the US and Canada and is also looking at Mexico, Nigeria and South Africa. Also in the UK, retail giant Tesco has claimed to have signed up more than 500,000 subscribers for its MVNO service just 15 months after entering the market.
Goggin cited Denmark, with a population of five million people, as an example of a marketplace where several operators are competing for business. However, in recent months it has emerged that the Danish mobile market – while consumers have enjoyed enormous price drops with text messages costing less than 2 cent – is now saturated. While Denmark is the most competitive market in Europe due to regulatory pressure, it has emerged that Orange Denmark was forced to merge with TeliaSonera because narrowing margins made operating as separate entities unsustainable.
Vodafone Ireland strategy director Gerry Fahy points out: “No-frills MVNOs invariably operate in the prepay market. Even ComReg accepts that Irish prepay rates are among the lowest in Europe. Given the intense price and non-price competition in the Irish marketplace already, a successful MVNO would need to differentiate itself on something other
Fahy also argues that branding will be a key factor: “Given the projected level of increasing competition, there could be an opportunity for an additional player that combines a strong brand, an existing customer franchise and unique and differentiated services. Solely price-based competition would not provide a long-term sustainable business model.”
O2 Ireland chief executive Danuta Gray believes that the Irish market is competitive enough: “With three network operators and a fourth scheduled for launch later this year, customers already enjoy the benefits of competition and this is set to increase over the next 12 months. We believe competition is thriving in this market as seen by continually falling prices for mobile services.
“Potential MVNOs would need to consider issues such as the overall size of the market, current penetration that is standing at just under 90pc and the substantial costs involved in investing in a full virtual network operation. O2 currently invests €4m per week on our 2G and 3G network and we believe that a long-term approach is required to reap the benefit of this ongoing investment,” she says.
Market observers believe that Ireland’s third operator, Meteor, with less than 10pc market share has most to gain from the advent of MVNOs and could be a potential takeover target by a player such as Eircom. Despite this, Meteor’s local management team has maintained a stout defence in the face of an unrelenting rumour mill. Meteor head of regulator affairs Andrew Kelly echoes Gray’s sentiment that competition is already happening in the Irish market. “In September Meteor launched national coverage based on a national roaming deal that ComReg helped broker. Inexplicably, ComReg ignored the very positive impact this had on competition and based what, therefore, became a flawed analysis on very outdated data.
“With four network operators and potentially a 3G MVNO competing vigorously next year, sustaining profitability in a highly penetrated market as the 6th or 7th player will be difficult. As with Denmark, some players will struggle resulting in closures or consolidation. Vodafone and O2 may try to protect themselves by bringing on no-frills MVNOs but this will do nothing for the competition in the bill-pay/business market and as Meteor already offers 69pc savings the prepay market here will not be as attractive to no-frills MVNOs,” Kelly says.
Hutchison 3G subsidiary 3 Ireland, which holds Ireland’s third 3G licence and is itself obliged to host an MVNO, is understood to be reconsidering entering the Irish market due to the fact that the landscape could have changed completely by the time it gets around to launching 3G services. London-based spokesman Ed Brewster, however, says that investment in 3 Ireland’s network is proceeding. In terms of the competitive threat that MVNOs present to 3 in the Irish market, Brewster would not be drawn to comment. However, he argues that the real advantage in the mobile business lies in an operator owning its own network.
“Other than that they are offering a service ‘plus cost’. The only reason Virgin has been so successful in the UK is because it has a great brand. However, MVNOs don’t control their own network or cost base, plus they have to negotiate a rate that is going to make money for the company that owns the network. That is the fundamental problem facing MVNOs: it is always going to be plus cost,” Brewster says.
Despite this, market observers such as Iarla Flynn of the association of Alternative Licensed Telecom Operators reckon that the Irish market is too profitable for the existing operators and needs an influx of MVNOs to shake things up. “Between them, O2 and Vodafone enjoy a joint dominance of the Irish mobile market and ComReg is blazing a trail in European competition law by making an issue of this. Each player is making a return on capital investment of 40pc; by European standards this is stratospheric. The writing has been on the wall for some time now. The only clear winner in time will be the consumer.”
Flynn’s sentiments have been shared by the managing director of Mason Communications in Ireland, Padraig Coakley. “Before we can talk of MVNOs being successful, the regulator will need to pave the way for a reasonable wholesale market for virtual operators to play in. Looking at the situation in the fixed-line market, that could take a lot of time. But judging by the rates in the Irish market, MVNOs could cause a lot of competition.”
No matter how stringent a defence operators such as Vodafone, O2 or Meteor place in the way of an aspiring MVNO market, observers reckon that eventually one of them will break ranks to pursue an obvious business opportunity in this field and the rest will then follow. The true victor? The Irish consumer.
By John Kennedy