Struggling through a Meteor storm

25 Mar 2003

This is Ireland and mud sticks. And third mobile operator Meteor Communications should know all about it. Late into the market after being held up by legal rows over its GSM licence award, the company missed out on the watershed years of 1999 and 2000 that saw the Irish mobile market reach its present 79pc population penetration and its competitors, Vodafone and O2, take a 96pc share of the available market.

This critical delay meant that the company was delayed in ratcheting up the customer numbers (so far 118,000 people, about 4pc of the Irish mobile market), despite innovative call and short messaging service (SMS) pricing options as well as in rolling out its voice network. For this reason, the company has been the victim of speculation that it may be the target acquisition of another mobile operator and in many cases it has been suggested Hutchison 3G or 3 may be that operator. As well as this, efforts to grow customer numbers have also been hampered by a growing perception amongst consumers that the company can’t guarantee total population coverage – even though the only county it doesn’t cover is Donegal. Yes, mud does stick.

Last week, the company reiterated its call for the Commission for Communications Regulation to intervene in its request to the two larger operators, Vodafone and O2, to agree to a reciprocal roaming agreement that would give Meteor total countrywide coverage and help the two operators deal with overcrowding on their networks. So far, both Vodafone and O2 have refused.

According to Meteor’s corporate affairs manager, Andrew Kelly, the company, which is a subsidiary of US telco Western Wireless International, has succeeded in building a high-quality, state-of-the-art network that has plenty of room to help O2 and Vodafone deal with overcrowding – and hence dropped calls – in busy urban areas. In return, Meteor is seeking access to networks in rural areas like Donegal where customer numbers don’t justify the construction of a third cellular network, yet would allow Meteor to win the perception battle and claim total population coverage.

“They don’t see it that way,” Kelly says. “They just don’t want us to have national coverage. There are rural areas where they have networks that are under utilised, yet in urban areas they can’t cope. It makes no sense for us to build in Donegal, where both operators have coverage. They have capacity issues in Dublin, we don’t.”

As well dealing with the customer numbers battle, there has been plenty of talk of Meteor being up for sale, which the company management hotly denies. In a recent missive on the future of mobile in Europe, Ovum consultant director David Lewin predicted the demise of many of the small 2G operators in Europe, with the eventual sale of them to a second or third national operator. “So in Ireland MmO2 might buy Meteor and in Germany Vodafone or Deutsche Telecom might buy MmO2. To see why this will happen we only need to look at the profit margins that these different businesses generate. Earnings before interest, tax depreciation and amortisation (EBITDA) as a percentage of revenue are a good indicator of a company’s ability to generate cash. Small mobile operators with a market share of 15pc or less now generate EBITDA margins of less than 10pc,” Lewin says.

“In contrast the market leader typically manages 40 to 45pc per annum. The low EBITDA margins of the small operators reflect the fact that there are substantial fixed costs in running a mobile network – first in providing national coverage and then in developing the data applications, which are needed to be competitive in today’s marketplace.

“If these fixed costs are spread over only a small number of subscribers the result is high unit costs and low profitability. Now that the mobile markets are reaching maturity it is virtually impossible for these small operators to win enough market share to become profitable. In these circumstances the best course is to sell to, for example, the second operator in the country that is keen to overtake the market leader,” Lewin reasons.

However, Lewin also expects to see 3G greenfield operators – operators with a 3G licence but no 2G network – to disappear rapidly. He argues that 2G players with 3G licences have lower customer acquisition costs and can manage quicker network rollouts. Many of the 3G greenfield licensees have looked at these problems and decided not to enter the market. Hutchison 3G or 3 as it is now known has decided differently. It hopes no doubt for significant first mover advantage. But behind 3 are rational and hard-headed businessmen who will “set clear performance goals and pull the plug on their investment if it does not perform well rather than allow it to haemorrhage cash from their global business portfolio,” Lewin predicts.

On the subject of a potential acquisition of Meteor, Kelly was adamant. “That is for the shareholders of Western Wireless to decide, not for us. They have been consistent in that they are committed to Ireland and the Irish market. At present a sale of the company is not on the horizon.”

He reasons that the market for voice, for which Meteor has plenty of capacity, actually has more value than that of 3G. “I have seen research that indicates that in five years time, some 60pc of mobile communications will still be voice. As well as this, there are still no killer applications for 3G.

Kelly also hints that Meteor would be looking to switch on the GPRS (2.5G) capacity on its network later this year. “We haven’t launched GPRS or multimedia messaging (MMS) because we feel the market wasn’t ready. MMS will be big later this year. Last year was too soon. We will launch when the time is right and we believe that the market could be very successful later this year.

“We didn’t bid for a 3G licence. We are hearing constant comments from all over Europe that in not bidding for a 3G licence, we took the wise and correct approach.”