High Court ruling has implications for operators

The likely closure of Cellular 3, which runs the Imagine mobile phone service, is bad news for its 140 employees. It will also undermine competition in a market where consumers pay high prices for mobile calls.

Surveys suggest mobile tariffs in the pre-paid market have fallen slightly because of the introduction of third network operator Meteor, but contract users in the Republic still pay more than most Europeans for calls.

For the past two-and-a-half years, Cellular 3 challenged the mobile "duopoly" in the market by undercutting Eircell and Digifone by up to 25 per cent.

The firm acted as a mobile service provider by buying mobile airtime in bulk cheaply from Eircell and selling this on to its 20,000 customers.

Eircell brokered a volume discount agreement with Cellular 3, a wholly owned subsidiary of Meridian, in 1997, partly as a counterfoil to Esat Digifone's entry to the market that year.

The assumption was that Cellular 3 could pick off potential Digifone customers and keep this traffic on the Eircell network to generate extra cash for the operator.

When Cellular 3 set up the Imagine brand and began to compete for Eircell customers, the relationship quickly turned sour. In January 1999 Eircell sought to terminate the arrangement, sparking one of the longest competition-based legal battles in the history of the High Court.

Mr Justice O'Higgins's judgment last month, which ruled that Eircell was not "dominant" in the market, spelt the end for Cellular 3 and the Imagine brand.

By not proving dominance under competition law, Cellular 3 was unable to force Eircell to provide access to its mobile network or continue to supply airtime at a discounted rate.

The Supreme Court subsequently overturned a High Court refusal to continue orders restraining Eircell from terminating its mobile phone airtime supply contract with Cellular 3 and from presenting a petition to wind up the company.

The long-running case has set a legal precedent that could prevent other so-called mobile virtual network operators (MVNOs) from gaining a foothold in the market, and providing more competition and choice for consumers.

MVNOs do not own licences to provide services and must do deals with licence-holders to gain access to base stations to carry calls.

But the three Irish network operators - Eircell, Meteor and Digifone - have so far refused to agree any deals and believe these matters are for commercial negotiation, not regulation.

"We certainly don't rule out virtual operators but we do rule out being forced upon people," says Mr Gerry Fahy, Eircell's director of strategy.

"The other operators have to bring something to the table and add value to the partnership," he says. "Otherwise there will be no incentive to invest in the mobile network."

With no legal basis to force Eircell to open its network, there is little chance for virtual operators to strike deals, according to Mr Richard Brennan, cofounder of Budget Telecom.

Budget Telecom has been involved in protracted negotiations with Eircell regarding MVNO access. But a series of technical issues involving roaming agreements and interconnect have stalled the process.

"After six months we've just reached an impasse," says Mr Brennan. "We will now try to influence the new Communications Bill to get the issue dealt with by national legislation."

Denmark and Sweden have made such provisions within national legislation for virtual operators and have encouraged their development. Sense Communications was the first MVNO in Europe, while Tele2, and recently Telia, announced plans to set up virtual operators.

The High Court judgment on the Cellular 3 case may also be important in a European context, as the European Commission intends to replace some regulatory powers with competition law from 2003.

At present, telecoms regulator Ms Etain Doyle can intervene in disputes when a firm is judged to have significant market power (25 per cent market share). Under Commission proposals, she would have to prove dominance, which is a much more difficult proposition.

Even with the current regulatory framework, Ms Doyle has been powerless to force Eircell to the negotiating table in the Imagine dispute, and has been strongly criticised by Imagine and Spirit Telecom, which asked her to intervene. Spirit Telecom was using airtime supplied by Imagine to supply 2,000 customers.

According to a spokeswoman for the regulator, the office is "operating on the margins of legislation" regarding virtual operators.

"Whether or not something can be mandated will very much depend on the exact nature of the request," she says.

Technical issues dominate this debate, with the regulator able to intervene on interconnection issues but not on the issue of national roaming.

While experts argue the rights of virtual operators to access networks, most agree MVNOs would put pressure on prices and offer more choice to consumers.

"There is no single definition of an MVNO," says Mr Ultan Ryan, telecoms consultant with Mason Communications. "But MVNOs can be used as a discount service or for special marketing purposes."

He points to the UK deal between Mr Richard Branson's Virgin and the One-to-One network. Although this is not strictly considered a full MVNO, it enables One-to-One to attract new users to its network by leveraging the power of the Virgin brand.

Although the current positions of network operators would suggest a difficult future for virtual operators, some analysts believe several factors may drive that market forward.

"As mobile penetration rates increase, the concept of MVNO becomes more attractive as the focus moves to retaining customers on their networks rather than acquiring customers," says Mr Ryan. Popular brands with strong consumer loyalty such as Dunnes Stores, ESB or Shell would offer network operators inroads into different sectors of the market, he says.

Virtual operators may find the third-generation (3G) mobile market more open for new entrants. The telecoms regulator will give preferential 3G licence terms to an operator that allows virtual operators on its network.

The huge licence fees charged across Europe will encourage operators to form partnerships to share the cost of network infrastructure. Companies with innovative data services and content will also be in a much stronger negotiating position with network operators.

There have even been signs of movement at Eircell, which recently agreed to supply Eircom with mobile airtime following its deal with Vodafone. If Eircell can do it for Eircom, why not another player?

With the demise of Imagine, and the uncertain legal and regulatory situation, potential MVNOs may want to maintain a friendly relationship with their network operator of choice.