Thursday 25 December 2014

Three may not be the magic number for Irish consumers

Published 01/06/2014 | 02:30

O2
O2 advertsing signage
A construction worker speaks on a mobile handset outside an O2 mobile phone store

IS 3 Ireland's €780m takeover of O2 a good thing or not? Will it lead to less competition and higher prices or a sustainable market that matches a weakened industry?

A dispassionate observer might conclude the latter, for a number of reasons. First, mobile telecoms are not the cash cow business they once were. Free online alternatives to calls and texts have ransacked monthly revenue rates: Ireland's operators have seen a 50 per cent fall in monthly average revenue per user (ARPU) over the last six years. EU-led roaming charge reductions are also biting.

I'm not saying we should feel sorry for the mobile companies here, but it does mean they have a much tighter market in which to operate.

Indeed, there's only one operator (Vodafone) that's really making any money in Ireland at present. O2's profits have collapsed, Meteor's profits are marginal and 3 Ireland has lost an absolute fortune. As none of them could be described as shrinking violets in the way they approach their business here, it's a valid question to ask whether the country can sustain four full-on mobile networks. Or, putting it another way, if there were only three networks in the Irish market at present, would a fourth be seeking to enter, starting from zero?

There are few who think so. Ireland is a market of four million people, with current investment requirements of hundreds of millions (per operator) for 4G upgrades. Existing 'virtual' operators such as Tesco Mobile (which has four per cent of the market) are already eating away at the fringes.

Indeed, although they did not say so publicly during the European Commission process, there were plenty of indications that 3 Ireland's owner, Hutchison Whampoa, was ready to chuck it in here. €1.1bn sunk into a loss-making network that has yielded a measly nine per cent market share in a decade? In an era when industry revenues are declining anyway? There would have been no reason to stay. That would have left two networks (O2 and 3 Ireland) up for sale, with fewer buyers willing to take the plunge into that type of risky business.

Instead, the Commission has allowed 3 Ireland to take one last shot at the market, with a €780m acquisition of O2's two million customers. That works out at around €400 per O2 customer, the equivalent or 16 months' revenue per customer. In this market, that still looks like a pricey gamble.

Furthermore, 3 Ireland has to "facilitate" two new 'virtual' mobile operators on its network with a huge chunk of spectrum. And the first mobile operator (almost certain to be UPC) has to be in place for the deal to legally complete, which is expected to happen in the next four weeks.

But not everyone is happy. The communications regulator, Comreg, issued an unusually negative assessment of the European Commission's greenlighting of the deal warning of "significant negative consequences for Irish consumer welfare" and, ultimately, "higher prices". The deal, it said, "appears inadequate and ineffective to address the serious competition concerns and consumer harm identified by the European Commission".

In other words, Comreg believes that paring down Ireland's network operators from four to three will naturally cause prices to rise. And it doesn't believe that the 'two new virtual operators' clause is good enough to safeguard against this.

Comreg isn't alone in its ire. Vodafone, which now finds itself back in a two-horse race after clearly pulling ahead of O2 Ireland in recent years, sent out an angry statement after the Commission's deal was announced.

"The Commission's decision points in the wrong direction by favouring operators who do not invest in infrastructure over those that do," it said.

And Vodafone is withering about the idea of two new virtual operators.

"We would question the rationale for approving a merger if the remedies include the creation of a new network operator, thereby reversing the benefits of consolidation for investment and sustainable competition," it said.

"The virtual operator will have little incentive to take on the burden of spectrum and network, given the investment required and the availability of mandated MVNO access terms. Vodafone, therefore, seriously doubts that this network option will ever be taken up. As a result, Hutchison will likely retain all the current spectrum holdings of Hutchison and O2 in Ireland, which is an inefficient and ineffective use of spectrum, will distort competition and will discourage investment in mobile networks in Ireland."

Time will tell whether Vodafone is right about virtual operators' intentions here or Comreg's belief that prices are set to rise with fewer operators. But the operators' profit-and-loss accounts will be worth watching, too: right now, only one of them is actually doing its corporate owners proud.

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