Competition gives the consumer more choice for less

The telecommunications sector will see further frenetic activity this year, with the consumer set to reap the rewards from changes in the sector, through lower prices for domestic and business users.

Industry analysts predict further cuts in phone rates, both domestically and internationally and more intense competition among telecoms companies vying for business from the corporate sector.

Many of the changes are being driven by the EU, through liberalised services. However, as one industry expert put it, the alliances which took place last year - most notably WorldCom buying MCI and snatching from under British Telecom's nose - will also begin to take shape, as they are bedded down.

In Ireland, Telecom Eireann has made no secret of the fact that it will slash costs this year - in fact by £210 million over the next three years. In December, the company announced a series of price cuts which saw the price of trunk (national long-distance calls) reduced by 33 per cent, down to around 12p per minute.

It is likely that these calls will fall to single figures next year. Also set for further reductions is the price of international calls. Calls to Britain, which account for approximately 60 per cent of the traffic out of Ireland will also fall further.

Telecom's rivals often argue that they are cheaper than the state-owned operator, but if they are not, they will be forced to follow suit.

Another factor driving down the price of calls internationally is what is known as accounting rates - the rate charged by telecoms operators to deliver calls originating from another country - are expected to fall sharply. This should result in further savings for the consumer.

From this month the EU is allowing full competition in fixed and mobile telephony and in services and infrastructure. Full foreign ownership of national carriers will also be allowed. Ireland has a derogation until the year 2000, but it is only on switched telephony. In reality the only real monopoly Telecom has is in the residential market.

Even this is being challenged through what is known as value-added services - Esat Telecom, one of Telecom's biggest rivals is now entering the market. Others like Swiftcall are already in it.

From last July, operators are allowed to build their own infrastructure. They have not been slow to swing into action. Esat is currently constructing fibre optic networks in six major cities and is using CIE's rail network to build a nationwide network.

WorldCom, who bought out TCL Telecom, have also built a fibre optic link in Dublin. WorldCom, will target the business market, and is expected to use the considerable muscle of the WorldCom/MCI merger - the $36 billion (£25 billion) merger was the world's biggest - to add on further services in the coming year.

Esat is building a £7.5 million fibre optic cable to Britain. Telecoms companies who build their own infrastructure can carry their own traffic further, thus cutting costs. Although the outlay can be considerable initially, the theory is it provides huge costsavings in the longer term.

This is also the reason why alliances are so important. Customers want a seamless service and if one operator can offer a complete service, this can be more attractive. It is also cheaper for operators to carry calls on each others networks when some alliance exists.

One question some analysts are posing is whether Esat will seek a strategic alliance with a big operator next year, or will an operator offer to take the company over. Esat founder Denis O'Brien has argued in the past that many of these alliances will break down and will disappear in the next few years. Certainly some of them have had their problems - including one which Telecom is loosely linked to Unisource which was weakened somewhat when Telefonica, the Spanish telecoms company left the alliance.

This year will also see the full-scale entry of British Telecom into the market. The company has formed a joint venture with the ESB and will use its infrastructure to compete in the market. Some observers have expressed surprise that it is only going to invest £130 million over the next 10 years.

However, the company will have immediate access to the ESB's microwave network country wide and will be able to offer services very quickly. It will target large multinationals initially.

BT is an extremely well-regarded competitor worldwide and has the benefit of having been a monopoly which has been competing in the most liberalised market in the world - Britain - for many years.

It is likely that BT will also enter the residential market when this is fully liberalised - if not before.

BT is also being tipped as a contender for the third mobile phone licence. Its new partner, the ESB, was part of the Persona consortium which bids for the second licence.

The third mobile phone licence will be awarded at the end of March. It is expected that the new operator could be up and running one year later. However, whoever gets the licence will find themselves facing two formidable operators - Esat Digifone and Eircell. Digifone is 45 per cent owned by Esat Telecom. In the nine months it has been operating its GSM or digital system has gained 100,000 customers. Even its rivals say this is a commendable performance.

Digifone chief executive Mr Barry Maloney believes the market will continue to grow at a similar level next year. He said Digifone had taken 23 per cent of the mobile market in the first nine months - compared with the European average of 9-10 per cent for a second operator entering the market.

Digifone's rival Eircell, which is owned by Telecom Eireann, claims around 350,000 customers, around 60 per cent of whom are on the old analogue or wireless system. Its prepaid mobile phone sold 60,000 in the two months up to Christmas. Eircell chief executive Stephen Brewer says the company will introduce pre-paid GSM phones next year.

Opinion is divided as to whether it would be worth anyone's while to come in as a third operator, given the strong performance by Digifone and Eircell.

Industry sources believe the advent of a third operator will certainly lead price cutting in the mobile market next year. "There has been a lot of tinkering around the edges of competition in 1997," says one source, "but no real competition on price yet."

Mr Maloney himself forecasts price reductions next year, but believes there will be few further reductions on the price of handsets. He says good quality handsets are now around the same price as they are in Britain and prices are unlikely to fall.

For Telecom a major issue will be finally agreeing an Employee Share Option Scheme (ESOP). Public Enterprise Minister Ms O'Rourke wants a deal done by the end of January. The employees unions want 14.9 per cent of the company in return for certain changes. The Government has offered 5 per cent, with the balance at fair value.

How this will be valued and paid for is an issue which will be thrashed out this month. The deal is important because it will be the catalyst for radical restructuring of the State company.

There is also the issue of what the Government will do with Cablelink. It is 75 per cent owned by Telecom and is seen as an important asset by rival telecoms companies for the provision of telecoms services, pay-per-view, Internet and home shopping services.

If put up for sale, it will be highly sought after, with rivals such as Esat vying to buy it.

Whatever happens, the world of telecoms will not remain static in 1998.