Sale of local exchanges to public-private partnership may lead to cheaper broadband

NET RESULTS: Accepted wisdom - such as it is - is that the sale of Eircom was the worst possible development that could have happened to our woeful domestic broadband market.

At least before its sale, the company had the unusual distinction of being debt-free in a sector where nearly all other players were reeling under debt and capital expenditure. It also had been putting in fibre-optic networks, and had upgraded its Dublin exchanges and some others, enabling them to offer high-speed digital subscriber line (DSL) internet access.

Then the company was sold to a group of venture capitalists in the US whose past track record is to buy cheap, "sweat the assets", as they say, get as much money as they can from their investment, and sell it on again.

That scenario promised little to those in the State hoping for some progression from the broadband impasse we have had now for months, where competition has gone out of the market. That has dashed hopes that domestic broadband prices for large companies would be pushed down, and stalled DSL rollout for consumers and smaller businesses.

The general view in many quarters has been that nothing much of promise lies ahead and that any change will have to come entirely from large-scale State intervention of some sort. However, perhaps this is not the case at all and, in reality, the market is about to shift, rather dramatically, of its own accord.

Certainly creative Government initiatives are needed to stimulate change.

The proposal to build out a network comprising several local access broadband rings around regional towns and cities, as well as Dublin, is a key part of such a plan. The rings, which would be connected to a larger broadband grid of other pieces of fibre network around the State, would be overseen by a single, public-private partnership entity, not by the big telecom companies.

Because no company would be trying to get its investment back from the actual network, the charge to use the network - to offer services, or get broadband access - would accordingly be very low.

And while some people are concerned that it will take years to build such rings and connect up such a network, this is not actually the case.

As anyone within the telecoms industry will admit, there is plenty of fibre installed all over the State - it is just lying unused (so-called "dark fibre"), because the big companies don't see an economic argument for using it. In other words, more capacity would drive down prices. The report this week from the Government's Advisory Committee on Information and Communication recommends the telecommunications regulator be given the powers to force companies to put this fibre into the market.

But back to Eircom. While the accepted perspective now is to see the company as even more reluctant to budge on such issues as unbundling, DSL or flat rate, dial-up internet access, there is another angle. Precisely the same forces that one might think will stall action may be exactly those that will force change.

The first objective of Eircom's new investors will be to start getting money out of the company. How can they do this? An obvious route is to sell some of the company's assets. A prime asset - but one that is rapidly losing value - is the local exchanges, the points at which Eircom manages the phone lines that enter individual homes and businesses. Access to the local exchanges is central to "unbundling the local loop", allowing competition for service on those local lines.

To date, one of Eircom's strongest arguments for pricing its wholesale DSL offering (which would allow competitors such as Esat/BT to also offer a commercial DSL package to customers) at a figure four to five times higher than countries such as Germany and Britain is that it had to pay the huge development costs of those exchanges.

Why, it has asked, should it then have to share its networks at a price that doesn't return the value it put into them to begin with?

Many arguments can be brought in here, but set them aside. Let's just take this argument at face value. While an incumbent player might stick by this particular defence, it makes no sense whatsoever in a changed global telecommunications market, from a now-indebted company that has been sold to new investors.

As Eircom can be only too painfully aware, the bottom has dropped out of this market and the value of networks has plummeted. Just ask Global Crossing or 360 Networks. Networks and exchanges are going cheap - to venture capitalist investor consortia, for example, who simply want to get as much value as they can out of their purchases. In the current market, and given Eircom's new investors, the argument that there is huge value in the local exchanges and the existing networks makes no real financial sense.

It perhaps makes far more sense to Eircom's investors to sell its local exchanges to, say, a public-private partnership that could then hire back Eircom to manage their operation. This kind of deal is routine for the US government, for example. The Department of Defence has such an arrangement with big network operators who install the network for the department and then are paid to manage it for them; the department, like the Irish Government, is hardly eager to become a mini-telco itself.

If such a situation happens here - and there are those who believe this will be the case - local exchanges would suddenly be directly open to competition, which would spur service offerings, while driving prices down precipitously for, say, DSL.

If one of the primary reasons for Eircom's wholesale price for DSL to be €75 per month - as opposed to £14.75 sterling (€24) in Britain - is the greater expense they had of building out Irish networks and a lack of economies of scale (or whatever else they choose to throw out there), these defences would evaporate.

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Finally, a cheerful congratulations to Rebecca Anne Butler, a student at St Mary's College, Naas, Co Kildare. Rebecca was presented with the 2001 Junior Certificate Science Medal for the best Junior Certificate science paper, at a ceremony at Birr Castle's Science Centre this week. The award is an initiative of the MIT Club of Ireland - an organisation for Irish graduates of the Massachusetts Institute of Technology - and Rebecca has the added distinction of being the first girl to receive the award since its inception in 1994.