Will Eir’s €500m investment change the broadband game?

Eir takes aim at Virgin as questions about the Government’s NBP project grow

Eir’s  director of mobile networks, Fergal McCann,  and CEO, Carolan Lennon. Photograph: Chris Bellew/Fennell Photography

Eir’s director of mobile networks, Fergal McCann, and CEO, Carolan Lennon. Photograph: Chris Bellew/Fennell Photography

 

Eir announced a €500 million overhaul of its fixed broadband platform this week, pledging to build fibre lines directly into an additional 1.4 million homes and businesses within five years.

That would equip nearly 75 per cent of premises in the State with the gold standard of internet connectivity, effectively turning Ireland into Singapore, a country that leads the world in terms of broadband penetration.

But, within hours, people were scratching their heads, wondering what was actually being announced and whether the €500 million was anything more than a reheated announcement from last year.

The company’s new owners, French telecoms consortium NJJ, had pledged to invest €1 billion upgrading Eir’s infrastructure. So was the €500 million just part of that? It’s not clear.

The telecoms sector has become a public relations (PR) battleground with companies announcing bigger and bigger investments, typically in fibre. But, for consumers – both residential and business – it’s unclear what we’re actually getting; whether the investment packages are part of previous annoucements; or if anyone is checking the plans against delivery.

The figure for homes passed by fibre technologies will soon hit a million. But according to regulator Comreg, there were only 75,000 pure, end-to-end fibre connections in the State in the third quarter of 2018. That represents just 3 per cent of the State’s 2.4 million housing stock. And this despite €1.2 billion of pledged investment.

Build-out rate

Fibre, however, is a relatively new technology and the build-out rate, from a standing start, has been rapid.

ESB-Vodafone joint venture Siro has grown its fibre customer base to more than 36,000 while passing 220,000 premises with its network, which utitlises the electricity grid. The company is vying with Eir for the regional town market courtesy of a €450 million investment from its backers.

Eir said its rural broadband roll-out to 335,000 homes at a cost of €250 million would be completed in June. These homes may have been controversially removed from the National Broadband Plan (NBP) at the last minute, a move that was seen at the time as an attempt to sabotage the State-backed scheme, but they represent a sizeable chunk of rural homes that will soon have access to better connectivity than most urban households.

And Eir boss Carolan Lennon suggests, the company might take on a further 50,000 premises that are still included in the NBP.

A worry, however, is the fact that Eir’s €500 million headline investment, aimed primarily at bringing direct fibre connections to households in cities and towns, actually represents a reduction on what the company had been spending on its network before NJJ’s takeover when spread out over five years.

Eir is one of the most profitable telcos in the world. It generated an operating profit of €531 million in the year to June last year, largely on account of the high wholesale prices it is allowed charge retailers, such as Sky and Vodafone, that rely on Eir’s network for their own operations.

Up to speed

Telcos typically have to reinvest a chunk of their profits into capital every year to keep their networks modern and up to speed. The ESB spends nearly €1 billion a year on the electricity grid. Prior to its acquisition, Eir had been investing around €300 million of its profits annually in the network.

So while NJJ’s €1 billion figure sounds big, it’s actually a retreat on what the company had been doing.

In addition there doesn’t seem to be additional incoming investment from the company’s new owners. For a firm that was previously fleeced of its resources, flipped several times and driven into examinership as recently as 2012, any announcement needs to be parsed with a certain degree of caution.

NJJ, the investment vehicle of telecoms billionaire Xavier Niel, has refocused Eir on cities and towns, where take-up and revenue are easier to predict.

The company’s real battle is with Virgin, which has outgunned it in urban areas. Virgin’s broadband market share in Dublin stands at 60 per cent in contrast to Eir’s 20 per cent, an extremely low figure for a market incumbent.

Virgin came into the market under the banner of NTL, which later rebranded as UPC, shortly after Eir was privatised in 1998. While its rise has been far from smooth, it has cemented a strong foothold in broadband market via its own cable network, which has traditionally delivered stronger broadband speeds than Eir’s under-invested network.

Virgin

Virgin claims to have invested €1 billion in the Republic to date and had 375,000 broadband customers as of the third quarter of 2018. Its network is available to around 900,000 homes.*

Eir is fighting back, however, building out its fibre-to-the-cabinet infrastructure in Dublin and elsewhere. That has allowed it regain some lost market share, albeit on a wholesale basis through Sky and Vodafone, which utilise Eir’s network for their own bundles, rather than through its own retail arm.

Without disclosing an exact figure, Sky, which is seen as strong on content because of its pay TV offering, says it is investing hundreds of millions in the Irish market and claims it has eaten into Virgin’s dominance. Vodafone is using Eir’s infrastructure to cross-sell broadband packages to its mobile customers. Separately, it is investing in broadband outside cities via Siro.

Comreg figures for the third quarter of last year show Eir maintains a 32.3 per cent share of the State’s broadband market followed by Virgin Media with 26.5 per cent. Vodafone had 18.3 per cent (excluding mobile broadband subscriptions) and Sky Ireland had a 13.4 per cent market share. All others combined accounted just under 10 per cent.

There was a time when when telecommunications was just Telecom Éireann: a single entity, running a single infrastructure. Now we’ve a tangled mass of overlapping technologies and infrastructures with as many as 70 firms operating in the market and we’re about to add another significant plank in the form of the NBP.

Problem of rural broadband

While it’s become something of a national sport to decry the lack of broadband or slow broadband speeds, the Republic benchmarks reasonably well among its international peers in terms of penetration, notwithstanding the deep-seated problem of rural broadband, which is an issue in many countries.

In general, greater competition should drive down prices for the consumer, but prices here are still generally higher than in the UK. You can see that price disparity in several areas, not just telecoms.

There are various competition models in the telecoms sector, but there’s a general acceptance that while having multiple infrastructures in high-density cities is good for the consumer, the opposite is true in the countryside where multiple infrastructures is costly and unnecessary. This is probably why the Government is finding it so difficult to get its NBP process off the ground.

But it does mean that whoever gets into rural Ireland first, with fibre particularly, will be difficult to shift as the churn will be lower.

But where does all this leave the National Broadband Plan (NBP)?

The Government’s flagship communications policy, the National Broadband Plan (NBP), came in for another kicking this week. But, in a roundabout way, this may suit the Government.

Eir chief executive Carolan Lennon suggested last Monday that the scheme might take up to seven years to build, pushing the timeline for delivery out to 2026, compared to the Government’s original 2022 date.

For a process that was first announced in 2012, and which has been beset with delays and controversies, this isn’t good news.

Lennon also hinted that Eir, which exited the NBP process last year having been favourite to win the contract, might take a further 50,000 premises back from the NBP, further weakening the viability of the scheme for the eventual operator, even with a State subsidy.

The relatively low take-up of broadband in rural parts of the State makes operating costs difficult to predict and this has been a significant sticking point between US investment firm Granahan McCourt, the only bidder left in the race, and the Government.

High-speed connectivity

Also this week, Imagine Communications, the State’s largest fixed wireless broadband provider, announced a €300 million investment in rural broadband services on Wednesday. It aims to bring high-speed connectivity to more than a million homes in rural Ireland.

The company’s outspoken boss, Sean Bolger, said the new infrastructure would be able to service 400,000 of the homes currently earmarked for the NBP. Bolger has been banking on the NBP failing, claiming, from the outset, that laying fibre in rural Ireland would cost too much.

Both announcements seem to undermine the need for the NBP. And they come as Minister for Communications, Richard Bruton, weighs up Granahan McCourt’s bid for the NBP contract.

But what’s a bigger embarrassment for the Government? To say it has abandoned NBP on the grounds the model has become unwiedly; that it is not a good use of taxpayers’ money; that the telcoms market has changed since the tender was first announced, and that there is now a strong case for a different, redrawn procurement plan, perhaps around the 31 local authorities?

Drive a hard bargain

Or is it worse for the Government to come out and award the contract, which could cost anything from €1.5 billion to €3 billion, to Boston-based venture capitalist David McCourt, who, as the only bidder, was able to drive a hard bargain on price.

Amid the continuing outcry over the national children’s hospital, the Government must be extremely loathe to announce another major infrastructural project that seems to have ballooned in cost.

Both options are bad, and each will trigger serious political fallout, but the second has to be worse. So, in a roundabout way, these attacks on the NBP may help the Government out of the corner into which it seems to have boxed itself.

As Lennon told the Committee of Public Accounts (PAC) yesterday, amid queries about feasibility of the plan: “It’s taken such a long time, the technology has moved on.”

Might the writing be on the wall for the NBP?

* The figures for Virgin Media's customer numbers were corrected on February 15th, 2019.

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