Deregulation and competition are coming to telecommunications in Dublin. Kyran Fitzgerald explains how financial services companies will benefit.
Barely a decade ago, in the mid eighties, the Republic of Ireland's telephone system was languishing in the dark ages. The market was controlled by a monopoly state provider, Telecom Eireann, which had emerged from the old Department of Posts & Telegraphs as recently as 1979 and still had all the hallmarks of a traditional civil service organisation. There were still long waiting lists for telephone lines while tariffs were among the highest in Western Europe.It had been recognised by the early 1980s, however, that a massive investment programme would be required if Ireland was not to fall behind the competition, and when the new Fianna Fail government unveiled the ambitious concept for an International Financial Services Centre (IFSC) in 1987, the multi million pound investment programme was beginning to pay dividends.
It has taken a further decade, at least, for the country's telecommunications market to be opened up to competition. It is only now that companies licensed to operate down at the fast burgeoning financial centre find themselves really in a position to avail of a wide range of telecommunications services at a reasonable cost.
On 1 December 1998, the country's telephony market was liberalised with around 30 telecoms companies receiving licences. Deregulation has come more than a year ahead of schedule. In anticipation of competition, Telecom Eireann, soon to be rebranded as Eircom prior to a stock market flotation scheduled for next summer, has introduced successive reductions in charges.
The corporate market for telecommunications services is now worth around IR£1.5 billion a year. The country's top 5,000 companies reportedly account for around 70% of what is a fast growing business, which last year grew by more than 10%. The IFSC market is particularly attractive to the major players, Telecom Eireann, its main domestic rival, Esat Telecom and MCI Worldcom.
According to Sean Melly, ceo of MCI Worldcom in Ireland: “The IFSC is the single most important business park in Ireland. Our relationship with the centre goes back to when we started the business in Ireland, five years ago.”
The company, in fact, sought unsuccessfully to set up an office and switching centre within the IFSC. Instead, it found premises across the River Liffey from the centre. Initially, MCI Worldcom had to lease circuits from Telecom Eireann at a cost of IR£20,000 a year. For each large customer, a connection charge of IR£10,000 a year also applied.
Against the odds, MCI Worldcom, trading on its global presence, has built up a customer base of between 50 and 60 companies in the IFSC. These include Bank of Ireland Group, Arthur Andersen and the international futures exchange, FINEX.
In August 1997, companies were allowed to build their own infrastructure independently of that provided by Telecom Eireann. MCI became the first company apart from TE to secure a telecoms infrastructure licence. Within three months it had built a link to the border of the IFSC. It has since built a loop around the centre. However, it has yet to receive permission to build inside the centre, a source of frustration to a company, which claims that it could offer savings on telecoms charges of between 30% and 50% to customers.
Discussions with the Dublin Dockland Development Authority continue. For over a year, customers have been excluded from the full benefits of liberalisation, Mr Melly claims. “The delay has meant an extra 20% to 25% in cost either to us or to our clients.”
What is clear is that the three major providers, however, are now in a position to offer a full menu of services, voice, data and to an increasing extent, video based. MCI can offer these services, but on Telecom Eireann leased lines. Says Mr Melly: “There is concern about the cost and quality of circuits.” It is likely, however, that these problems will be resolved before long, not least because the new competition regime is now underpinned by a regulatory system, the Office of Telecommunications Regulation established a year ago. The telecoms regulator, Etain Doyle, has been adopting an increasingly interventionist position in the industry.
At the same time, a transformation of the internal organisation at Telecom Eireann is underway. A new employee stock ownership plan has been agreed and legal formalities are being worked out. Almost 15% of the company will be held in trust for employees, a move which has greatly reduced the level of resistance to change within the company. The Telecom Eirann employee share ownership programme (ESOP) trustee and Zurich Capital Markets, a division of Zurich Financial Service Group, have agreed a loan facility of up to euro 120.6 million (IR£95 million) to part finance the 14.9% stake in TE on behalf of its employees. A major managerial reorganisation is almost completed. This has involved significant delayering and reductions in the numbers of middle managers in the organisation.
The company is currently investing IR£100 million in the development of broadband infrastructure as part of a IR£350 million capital investment programme. This should lead to an 80% increase in the availability of high speed fibre optic cable. TE is set to become a major reseller of capacity to other operators at interconnect rates agreed with the regulator.
Telecom Eireann is well dug in at the IFSC with a customer base of over 200. It has an office in the IFSC allowing it to maintain an on-site sales and operational presence. According to Brian Dempsey, the company's finance sector manager, TE is now in a position to offer a full range of network services to its financial clients. These include global connectivity, a common dialling system, personal dialling plans, platforms facilitating common numbering plans and international virtual private networks.
Its latest network offering, introduced in mid 1998, is asynchronis transfer mode (ATM), the new broadband technology which provides for the integration of voice, data and video traffic. This addresses the needs of companies with a requirement to transmit high volumes of voice, data and video based information. A frame relay service more suited to data transmission is also provided.
In Mr Dempsey's view, Telecom Eireann as national provider is in a position to address the needs of all customer types ranging from those with a couple of telephones to major consumers of broadband facilities. TE's Achilles heel would appear to lie on the global service side. However, Mr Dempsey points to the existence of a series of global partnerships in Europe, the US and the Far East. “We are packaging our solutions in different ways to those of the competition.”Ireland has traditionally been a high price location from the point of view of telecoms users, though tariffs are being reduced. Says Mr Dempsey: “Ireland has been very successful in attracting multinational investment. It could not do it if prices were not competitive.” Telecom Eireann has a number of global network customers, he adds.
One of these customers is Peter Munroe, who heads up the technology division of XL Europe (XLE) at the IFSC. The company employs 250 people worldwide, including 35 in Dublin. Its telecommunications requirements are considerable. Until recently, the company had split its voice traffic from the IFSC between Telecom Eireann, which handled local calls and Esat Telecom, which handled international calls. TE has recaptured this international business by offering targeted discounts. “Telecom were offering a total solution,” according to Mr Munroe. XL moved from an analogue based system to a digital one, 18 months ago. “This gave us a direct dial service inwards and we were able to introduce voice mail.”
However, XL may soon look to a truly global provider to implement its global voice telephony strategy. “We are looking at a number of companies who will be able to supply us with a global service. We could secure discounts of 1p to 20p a minute all of which adds up.” Clearly, the liberalisation of the Irish telephone market should mean considerable savings for a company like XLE.
The plan is to have extensions to all offices across the world. Says Mr Munroe: “As a result of deregulation, we are seeing substantial drops in pricing on the voice side. Every couple of months, TE are introducing new tariffs. The rates are still higher than in the UK, but you will see further decreases in the next few months as more and more line capacity between here and the UK is availed of.”
New entrants include Ocean, the joint venture between BT and the Irish electricity authority, the ESB. To meet its data transmission needs, XL has hooked up with the international Global One consortium and with Cable and Wireless. “We are looking for a carrier diverse network. If one goes down, we will always have the other carrier. Smooth transfer of data is critical,” explains Mr Murphy. XLE is implementing a frame relay service between all its offices to meet its growing data transmission requirements. The next step is to move to ATM which will open the way to communication by voice, data and video. Use of ATM will make video conferencing more financially feasible. There is a downside, however; there will be less excuse for executives to travel to Bermuda for urgent meetings.
Firms in the IFSC are taking advantage of a fully state of the art service. There remains considerable scope for downward pressure in prices, but much progress is already taking place as the new liberalised regime is steadily put in place. In reality, true liberalisation of Ireland's telecommunications market will not be an overnight affair. The government, however, has signalled its strong commitment to the new regime. It recognises that low cost, high calibre communications will be vital in sustaining the Irish economic miracle in the next decade and beyond.
And standing in the sidelines is one of Europe's more hardline national competition authorities as well as an independent telecoms regulator. All the signs are that the real battle between upwards of 60 licensees will soon commence with the IFSC at the heart of the struggle.
Kyran Fitzgerald is a freelance business journalist based in Dublin.