Eircom Under Pressure (Sunday Times)

DonegalMan

In yesterday's Sunday Times Business Section:

American private equity firms will ditch Eircom stake

PROVIDENCE Equity Partners and Soros Fund Management, the private equity firms which bought and then refloated Eircom, are set to offload their remaining 7% stake in the company, amounting to 51m shares, writes Tom McEnaney.

The sale of such a large portfolio of shares is likely to depress the Eircom share price, which has struggled to stay above the €1.55 level at which it floated in March.

There's also a full page spread Feeling the Squeeze about the increasing competition that Eircom is facing, too much to include here other than a few snippets:

The long-established incumbent still controls 80% of the fixed-line market, earning nearly 40% of its €1.6 billion annual revenues from this business. But all that is set to change....

Last Wednesday, Tele2, a quoted Swedish-based telco with annual revenues of €4 billion, entered the Irish market offering users up to 77% off the price of their phone calls. Over time, it may also offer single billing, broadband and mobile services...

While the 1.6m-line residential market has been open to some form of competition for at least five years, Pat Duggan, a telecom analyst at Dolmen Securities, believes that rival operators might finally be about to make a breakthrough...

David McRedmond, Eircom’s commercial director, acknowledges that the competition has upped its game but rejects suggestions that Eircom is losing significant market share or that its business model is under threat...

“We’re constantly innovating and offering our customers new services,” he said.

While welcoming the liberalisation of the market, McRedmond is critical of the constraints under which Eircom has to operate. ..

“We’ve no problem with competition but it’s perverse that in a fully liberalised market Eircom is prevented from competing fully in this market,” said McRedmond. “Why is a company like Tele2, which has a handful of Irish employees and has made zero investment in infrastructure here, able to take advantage of the overregulation of Eircom?”

It’s a claim that irritates Oisin Fanning, the founder of Smart Telecom, which is now the No 3 player in the residential market.

Smart Telecom is a good example of the changes that have taken place in the Irish telecoms market in recent years. Launched in 2000, the company had ambitious plans to take on Eircom.

It began selling services in June 2001 and quickly signed up 14,000 customers. Fanning, however, soon discovered the harsh realities of doing business in the market at that time.

No sooner had Smart poached a customer from Eircom, than the former state-owned monopoly, not unreasonably in the eyes of McRedmond, was offering the same person a sweetheart deal to return to its fold. “Eircom would be knocking on their doors within a week and we lost about 8,000 customers back to them,” said Fanning.

Three years on, the landscape has changed completely. New rules from ComReg mean that Eircom is now barred from contacting old customers for 90 days, while customers can no longer move telco unless they have paid their dues to their existing provider.

Fanning would like to see this window extended to 12 months. “It’s too short a time frame. Customers are being bombarded by Eircom to return to them,” he said. “If it was banned from contacting customers for 12 months we’d have a proper opportunity to build a relationship with a customer.” ...

McRedmond believes the 90-day bar unfairly inhibits Eircom...

Meanwhile, Esat BT, Eircom’s biggest rival with 60,000 residential customers and a 5% market share, will begin offering line rental to consumers on October 18....

EIRCOM’S rivals have plenty of common ground, including a belief that the incumbent’s share of the residential market will shrink over the next three to five years. “About one-third of the market will eventually move away from Eircom,” predicts McCabe (sales manager at Esat BT). “That could be the point where Eircom won’t tolerate losing any more market share and starts to really challenge ComReg.”

Meanwhile Fanning believes Smart Telecom can grab at least 15% of the market over the next five years and become the No 2 player. “I’d expect us to have between 250,000 and 300,000 customers by then.” As for Eircom, he believes that “bit by bit” it will lose market share and could ultimately end up as a wholesaler of phone lines and the manager of the fixed-line network.

“Eircom could end up as the manager of the copper wire,” said Fanning. “It’d still be phenomenally profitable for them when you consider that line rental yields about €450m a year.”

It’s a scenario that McRedmond dismisses. “We’re pretty confident about our ability to retain our customers. We’re committed to this market and as long as we develop something attractive for our customers then they will stay with us.”

damien

We’re pretty confident about our ability to retain our customers. We’re committed to this market and as long as we develop something attractive for our customers then they will stay with us.

At the rate they are losing customers they are either going to have to innovate to get and retain customers or up line rental again and cut even more costs by slashing reinvestment costs and selling off more assets.

Guess what they are going to do ?

Sleipnir

what "innovations" have Eircom come up with exactly?
Broadband was a neccessity, simply the next step.
Their pricing is still way off-line compared to the competition and line rental
is all they have left.

dahamsta

damien.m wrote:

At the rate they are losing customers they are either going to have to innovate to get and retain customers or up line rental again and cut even more costs by slashing reinvestment costs and selling off more assets.

Guess what they are going to do ?

But then John Doherty would have to break a promise we all heard him make on national radio Damien. We should dust off that recording just in case.

adam

damien

dahamsta wrote:

But then John Doherty would have to break a promise we all heard him make on national radio Damien. We should dust off that recording just in case.

Can you remind me ? (Jesus this sounds like some tv infomercial, but I really don't recall)

damien

Interesting quote from McRedmond on SiliconRepublic in an article about single billing:

McRedmond argues that the 10pc margin is reasonable from a commercial standpoint. “Since other operators are not investing in the network, we have to very much ensure on behalf of the whole industry that there is sufficient return for Eircom. If Eircom doesn’t invest, who will? There is no issue around whether we are in position to wholesale, the issue is at what price? It is a question of coming up with a price that would encourage investment in the network for the future. "

So where do you invest David ?

Ripwave

Does anyone know why eircom gets to own all the telphone exchanges in the country? Surely with all the new house building done over the lats few years, there must have been some new exchanges built, rather than just expansion of existing eircmo facilities.

Is there some legal provision preventing any other company building new exchanges, or do they just not consider it to be worth the effort?

damien

Good point that.

*Notes it down*

spongebob

Very Very Good Point Ripwave. Local authorities should mandate that they be included in developments over a certain size (say 100 homes or 20,000 sq ft of offices) and thereafter transferred to local authority ownership like the rest of the sewage system

The Local authority should also mandate that the telecoms ducts in the development 'pass through ' this building, about the size of a garage wnhen houses used to be built with garages <sigh> lest any sneaky rat try to bypass it...... like.

Given Cullens record on Mandatory Carrier Neutral Ducting in the past I would suspect that such an intelligent modification to the planning laws is impossible, that man is a prattling moron as we saw with his e-Voting through Microsoft Access fiasco a few months back.

M

jwt

“That could be the point where Eircom won’t tolerate losing any more market share and starts to really challenge ComReg.”

So can we take it from that comment that up til now Eircom hasn't been really challenging ComReg. Because if that's the case God help us

John