The acquisition of Eircell by Vodafone, together with renewed recent interest in the wireline operators of Eircom as an acquisition target, underline a coming of age of the Irish telecommunications industry. Telecommunications is a global business, and the era of national "islands" of connectivity is past.
There is now little customer tolerance for the plethora of incompatible telecommunications standards and expensive idiomatic services that previously prevailed. Customer demand has given rise to seamless services available continent-wide, and, imminently, worldwide.
This has in turn given rise to consolidation of the telecommunications industry which now extends to Ireland, having commenced with BT's acquisition of the Esat Telecom group in early 2000.
Vodafone's acquisition of Eircell is best seen against this backdrop. Of the constituents of the telecommunications industry, mobile has exhibited the fastest consolidation. Mobile trends serve as a bellwether for the industry overall.
As mobile telephony gains popularity, some interesting phenomena emerge. When population penetration of mobile telephones is below 20 per cent, telecommunications traffic generated is incremental. Between 20 per cent and 40 per cent, mobile traffic substitutes for traffic which would otherwise be carried by traditional wireline.
When penetration exceeds 40 per cent, mobile telephones actually begin to substitute for wireline connections. When mobile begins to substitute for wireline, demand for lower prices intensifies. High per-minute prices become unacceptable.
Some of the mobile tariffs available in Ireland are, in specific instances, similar to wireline. This is also the case in Britain and in Finland. Aggressive mobile operators have taken note. Vodafone is amongst the most aggressive. The company follows an overtly wireless strategy. It has stated objectives of implementing identical tariffs across Europe, and intends to bring all tariffs to levels comparable to wireline. Benefits will accrue to Irish users in the form of reduced prices. There is little reason that unitary tariffication between Ireland and the UK should not be implemented in the very near term.
Vodafone's aggression is underlined by the price paid for Eircell. Irish mobile penetration is now approaching 50 per cent. The price paid by Vodafone - €4.5 billion (based on Vodafone's share price on December 20th and the euro/sterling exchange rate on that date), or approximately €4,500 per subscriber - corresponds to a multiple of 9.2 of revenues. This is reasonable in absolute terms, and is eminently so given the current volatility in technology company valuations. By way of comparison, Deutsche Telekom paid €4,850 per subscriber to acquire UK operator One-2-One in August 1999, and France Telecom paid €6,700 per subscriber to acquire Orange in May 2000.
In each of these instances, the acquired companies operated in markets featuring penetration levels considerably below the 50 per cent now obtaining in Ireland. Penetration level influences valuation as measured by price per subscriber. According as penetration increases, Average Revenue per User - ARPU - decreases.
New subscribers coming on to the Eircell network generate low ARPUs - in the region of €160 to €180. The price paid by Vodafone - 93 per cent of that paid by Deutsche Telekom for an operator of larger market potential, and during a time of high valuation of technology equities - must be considered as a significant success by the Eircell negotiating team.
Vodafone will have two immediate strategic objectives in Ireland. The first will be to accelerate deployment of fast data access over the Eircell network. Current data access is slow. A typical word processing file takes three minutes to download to a personal computer over a mobile connection. On a dial-up wireline connection, the corresponding time is 40 seconds. User frustration can be and is engendered - 5 per cent of mobile users access the Internet via GSM-enabled laptop computers.
Interim improvements have been implemented by Eircell in the form of allowing single devices to communicate over multiple radio channels. These work, but they are expensive and inefficient. A definitive measure will be deployment of a technology known as GPRS, for Generalised Packet Radio Service. "Packet" transmissions mirror the operation of the Internet, and are efficient in use of radio spectrum. GPRS will allow a typical word processing file to be downloaded in about 12 seconds. Services which will be made available over GPRS will be close, in functional terms, to those which will be available over Third Generation - 3G - mobile systems.
Vodafone's second objective will be to secure a 3G operating licence. 3G systems will ultimately provide speeds 7 times faster than wireline dial-up to mobile users, and 40 times faster than wireline dial-up to stationary users. This latter factor of 40 - corresponding to a speed of 2 million bits per second - is fast enough to transmit moving images at the quality standard of commercial videotape.
In mid-2001, four 3G licences will be awarded by the Office of the Director of Telecommunications Regulation following an open competition - a process referred to by the telecommunications industry as a "Beauty Contest". The Director of Telecommunications Regulation, Etain Doyle, has incurred some criticism for her choice of this process. Some, but not all, European countries have opted for auctions rather than beauty contests. Two auctions in particular achieved significant press coverage. In the UK and in Germany, successful bids ran to $8 billion for individual licences. These amounts were patently absurd.
Vodafone's bid for Eircell occasioned renewed interest in other elements of Eircom by putative buyers. Industry observers and analysts have been bemused by a seeming lack of interest by major carriers, given Eircom's effective management, strong cash flows, and commanding market position in a booming economy.
With his unerring instinct for timing, Denis O'Brien has declared interest, and, in a remarkable volte-face from his erstwhile vocation of Eircom's chief critic, has offered just more than €1 per share. This is probably a little low - more realistic valuations run to €1.3-1.5 per share. Eircom's board is not at this time enthusiastic, and neither are institutional shareholders. These latter might be inclined to a more benign view were Mr O'Brien to secure an alliance with a major telecommunications carrier.
Other contenders for Eircom's wireline operations will doubtless emerge. Tony O'Reilly has denied rumours of interest, but his aspirations to extend his newspaper interests to modern media are well known. Dr O'Reilly's Independent Newspaper group is a major shareholder in Chorus, the cable TV operator now expanding into telecommunications.
International carriers who have in the past evinced interest in Ireland, and which may do so again, include Deutsche Telekom, France Telecom, NTT of Japan and the US group SBC/Ameritech. The first quarter of 2001 may prove interesting indeed.
Enda Hardiman is chief executive of Hardiman Telecommunications Ltd. (http://www.telecoms.net), a strategy consultancy with offices in Dublin, London and Tokyo.
