Eircom: Between a rock and a regulator

19 Dec 2002

Does deregulation work? It’s a big question for anyone, but maybe more so for the chief executive of an incumbent telecommunications company (telco). Eircom chief executive, Philip Nolan (pictured) takes it apart with the precision you might expect from a former geologist who has spent much of his more recent past chipping away at regulators rather than rocks.

“It depends what you mean by ‘work’,” he says. (Uh-oh. This could be a very long interview.) “Think back to the way utilities were privatised,” he continues, rising to a topic he knows well, having experienced the transition first hand in his previous job at the Lattice Group, a spin-off of British Gas.

“Companies were privatised because the market was capable of offering capital for investment in them and it seemed more sensible to do that than leave them on the government’s books competing for capital with hospitals and roads,” he explains.

In the good old days, regulators and operators all took this starting point as a given and then sang from the same hymn sheet about deregulation offering more choice and innovation, better services and improved efficiencies. Judged on these counts, Nolan is in rare agreement with the regulator when he makes the case that it has worked.

“By definition of the original objectives you’d have to say it’s been pretty successful,” he reasons, citing a recent EU survey that places Ireland at the top in terms of deregulation and a Forfas report that says telecommunications is the only privatised utility to deliver tangible benefits to its customers.

Nolan is, however, very aware that there is another way of looking at it. “On the other hand, if you think deregulation can only be successful when the incumbent has dropped to a 50pc market share, then that’s different,” he says. “But there’s an assertion that competition hasn’t worked if the incumbent still dominates and I don’t find that very convincing. If we’d set out with that as the objective at the beginning you might end up with an incumbent who had 10pc market share, but you wouldn’t have much investment in infrastructure. In some people’s minds competition has become the end rather than the means.”

The fact is that incumbents all across Europe retain the lion’s share of their markets despite deregulation; in Eircom’s case it holds on to around 90pc of the country’s fixed line business and the local telco graveyard is stacked with new entrants who tried to compete and failed. Only two weeks ago, NTL announced it was halting the rollout of its residential telephone service because it claimed Eircom was making it unworkable because of aggressive ‘win-back’ tactics.

“There is still a lot of churn – people switching from one company to another,” argues Nolan. “In any market you have successes and failures. Nobody is forced to use Eircom. They choose to use Eircom.”

In the past, NTL put down some of its difficulties to the country’s planning procedures, but Nolan doesn’t see it as a problem peculiar to Ireland. “For all utilities, all over the world, planning problems are getting more acute. You can’t work on the roads as easily as you could in the past. That all adds cost,” he says.

If there is anything resembling a concession to the failure of Eircom’s competitors it is the acknowledgement that bigger market forces have played their part. “It may be that the business models that were viable during a boom won’t work during a bust. That’s life,” he says abruptly. “The biggest issue is the state of the industry. It’s been in crisis for a couple of years and has deteriorated significantly from last December.”

As luck would have it, Nolan took over the chief executive position from Alfie Kane in January 2002. He can remember coming to work on Monday mornings mildly comforted by the fact that things couldn’t get much worse. Unfortunately, they did.

“The major thing that has happened is the collapse in telecom share prices caused by a flight of equity capital. In my experience, the capital markets go by trend and correction and once they have decided that this [telco sector] is not somewhere to put money it can take a long time to come back. They have to be sure that they can make a return before they start investing in it again,” he comments.

While shareholders are starkly familiar with the impact of the downturn, Nolan believes that other interested parties, such as the regulators, have not grasped the real significance of events.

“It is in the context of the state of the sector that we have to view broadband rollout and infrastructure. The world has changed so much I believe we need to rethink an awful lot of what we do in this industry,” he adds.

Pivotal to its progress is the regulatory framework, he says. “The framework that has been in place for much of the recent past has been about focusing on reducing prices to the lowest because there was huge demand and capital was easy to attract. Now it’s moved away from that,” he explains.

Nolan calls for collaboration from all parties to ensure that the right way forward is carefully plotted and he makes no secret of his belief that the Commission for Communications Regulation (CCR), the body that has replaced the Office of the Director of Telecommunications Regulation (ODTR), must adapt to the new landscape.

“When markets are uncertain you have to retain flexibility, which is difficult in regulated regimes that tend to be rigid. Market development has raced ahead of regulation. Regulation still defines markets in terms of fixed and mobile, for example, whereas voice has moved to a single market. This lag is a cause for concern,” he says.

“It’s very questionable if regulatory regimes that have their origins in the mid-Eighties are still appropriate after the business cycles we’ve been through. It would be asking a lot of those regimes to think they would be totally impervious to significant changes in the market. I do think that it’s time to look at change. We need to learn and move on and make progress,” he continues.

A very specific and short-term issue with the regulator is the price cap on Eircom, now being re-evaluated in a consultation period that will come to an end on 10 January. Unsurprisingly, Nolan believes the time is right to lift the cap. “We argue that you don’t need retail price controls. There is enough competition in the market to allow prices to find their own level. The time for sweating assets and stringent price controls has gone. We now need to attract capital back to the industry,” he says.

Not for the first time, one suspects, Nolan plucks out examples from around Europe where price caps have been removed and the consumer price index has set the agenda. He goes as far as suggesting that removing the cap will make it easier for other operators to fight the fight with Eircom, thus increasing competition.

It remains to be seen if the CCR will share Nolan’s opinion. In the past, disputes between the ODTR and Eircom have become a feature of the deregulated landscape. Nolan believes it’s a failing of the Irish system that confrontations have occasionally found themselves in the courtroom.

“What I lament in Ireland is a lack of any arbitration procedure on content. You can go to the courts and argue lack of due process, but you don’t have a way of getting a second opinion from an expert panel on the content,” he says. “In the UK, if two parties can’t agree, it’s referred to a panel that knows something about the industry and tries to make a wise decision.”

Since such an appeals process is mandated on an EU directive that should be implemented shortly, Nolan is cautiously optimistic. He knows, however, that there is a lot of discretion left to the national regulatory authority and the Government.

Generally speaking, he is happy to report an increasingly healthy dialogue between the various bodies involved in communications. Potential banana skins, such as the possibility of replicating infrastructure in the Government’s 19-town plan for metropolitan area networks, look like they will be avoided.

“The discussions I’ve had suggest everybody recognises the problem of duplication and they are trying to avoid it. The problem with duplication is it could crowd out private investment, which is not a good thing,” he points out.

As for the Government’s much-mooted strategy of PPPs (public private partnerships) to make broadband infrastructure viable, Nolan is less convinced. “They are one way forward, but tend to mean all things to all men. There’s a lot of water between the statement and getting somewhere. The real agenda is how do we get telecoms healthy again and broadband out there,” he says.

In the case of broadband and Eircom’s ADSL (asymmetric digital subscriber line) service, branded i-Stream, Nolan clearly believes his company has played its part by committing Û125m to its rollout and is now looking for the Government to help generate demand.

“Everybody argues it’s chicken and egg. I think it’s a pull-push,” he says. “If you’re pulling and pushing you’ve got a much better chance of getting it from A to B. Some focus on the demand side would be very welcome. E-commerce and the spread of e-government would be important in driving demand. In the UK, Tony Blair committed a billion on the demand side,” he adds.

He doesn’t, however, think that competition is the key to widespread adoption of ADSL. “One of the most extensive DSL rollouts was in Germany, one of the least competitive markets. The EU has just taken them to court because they still don’t have competition on local calls! So it seems to me that there is no correlation between competition and broadband rollout,” he says.

Neither is he entirely convinced of another recurring line of argument. The absence of widely available flat-rate internet access (FRIACO) has long been blamed for damaging Ireland’s e-business/internet credentials. Many were heartened when Minister of Communications, Dermot Ahern TD, issued a policy directive to the CCR to make it a priority.

“We’ve read the Minister’s statement and we’ll work with the Government and the regulator to move forward,” says Nolan. “But the real question for me is where is your investment best made? It seems to me that technology of the future is broadband and FRIACO is narrowband.”

On the broader issue of e-business and Ireland’s long-standing ambitions to be a hub for Europe, Nolan sees little to get excited about in the suggestion that the collapse of the Irish data centre sector bodes well for Eircom and its hosting business.

“Those aspirations for e-business were some time ago and I think the Government and its agencies are dealing with the transition and recognising the realities of the environment we now find ourselves in,” Nolan adds.

He continues: “There are still lots of assets. There’s a huge amount of unlit fibre. As the take-up happens it will be absorbed by the capacity that’s not in use. We’re looking at a reasonably long period between supply and demand getting back into balance.”

Describing himself as an optimist, it’s a trait that comes to the fore when Nolan talks about another much-maligned technology: 3G (third generation). Make no mistake, when the non-competitive agreement that was attached to Vodafone buying Eircell from Eircom comes to an end in 2004, Nolan has big plans for re-entering the sector.

“It’s very clear, as we go forward, that customers will want fixed and mobile. There is just one voice market and at the moment fixed and mobile compete for it,” he explains. “As we begin to mature, data will become available over mobile and as 3G rolls out there will be a single market _ a single market that won’t differentiate between voice and data. Consumers will want someone to look after all their communication needs.”

With Hutchison’s Irish 3G type A licence, the new entrant has to make provision for hosting a mobile virtual network operator. Eircom would be a prime contender. “We don’t have any deals with anybody. We’re not partner specific,” says Nolan.

“We will basically go with anyone who can make us the best proposition,” he adds, leaving no doubt as to Eircom’s commitment to a service. “Selling a single bill with fixed and mobile will become very attractive to consumers and if that’s the case we’ll have to find a way to provide a mobile service.”

Who knows, if no one has picked up the spare 3G licence by 2004, Eircom could put in a bid. It is, after all, one of the few European telcos that is unburdened with crippling debts largely because it didn’t splash out on a licence when the market was at a high. That could prove to be of Eircom’s most prudent decisions and Nolan’s greatest inheritance.