Chairman’s Statement
Where better to begin this review of a tumultuous year than to welcome eircom back? Back to the stock market as a publicly quoted company and back to the heart of Ireland’s economic life as the builder of the key infrastructure for the 21st century.
There was much to be proud of over the twelve months. The central corporate event was the return of your company to public ownership in March. But that was just the culmination of a year in which much else was achieved.
For consumers
We reduced the cost of the average bill by over a third in real terms compared to five years previously, via a network whose fault rate has fallen by 20%. We rolled out broadband, triggering the fastest take-up rate in Europe last year.
For investors
We completed the largest euro denominated bond refinancing. We took the company public, the first successful flotation of a telecommunications company in Europe in two years.
For Ireland
Through all this we renewed our commitment to play a full part in the life of the nation through such projects as our sponsorship of the Special Olympics, People in Need, and the Irish soccer team.
Of course, Irish success is not unique but eircom as a success story is something new. As someone who worked for state enterprises for most of the 1960’s, I have felt especially privileged over the last three years to witness the transformation of eircom from former state monopoly into a vibrant, commercial business at the centre of the Irish economy. I particularly want to celebrate that transformation because eircom’s public image, tarnished by its previous experience as a public company, has not yet caught up with its performance.
When the Valentia consortium acquired eircom in 2001, the company had experienced two exhausting years in the worldwide boom-to-bust telecoms cycle. At the time, as chairman of and investor in Valentia, I was constantly reminded that, in the words of one analyst, we had paid too much for eircom after an “overheated bidding process”. However, I was confident that we had recognised eircom’s underlying value.
When Valentia eventually bought eircom, I reminded management of the original exhortation of Henry J. Heinz of Pittsburgh to his co-workers “to do the common things uncommonly well”. That has been the basis for the achievement of the management team led by Dr Philip Nolan and well supported by Valentia’s investors.
So what is eircom? What persuaded professional investors on every continent to buy its shares? eircom is now a focused telecoms company, having sold or closed a wide range of non-core businesses. It is a smaller and more efficient company with the number of employees reduced from over 11,000 in 2001 to below 8,000 today. The price of the average telephone bill has continued to reduce in real terms each year. The average Irish phone bill is below the European average. Our market is among the most liberalised in Europe. We have led the drive to connect the country to the digital world so that broadband is now being rolled-out nationally, and the take-up rate is impressive.
It is the transformation into a solid, reliable commercial enterprise that has attracted investors. With a proven management team, strong operational momentum and a clear strategy, eircom has returned to public ownership with confidence. But your board recognises that the job is not yet complete. Management will remain focused on “the common things” but will also look for breakthroughs on three fronts: regulatory reform, broadband deployment and re-entry to mobile.
eircom has begun to strengthen customer confidence in the company. Progress has and will be accelerated through more efficient customer service coupled with increased relevance in products and pricing packages. The quality of the network will continue to improve, thus achieving the targets set two years ago with the upgrade programme.
We aim for better service and fewer faults, but most importantly, we aim to provide good value for customers. The recent launch of talktime pricing packages and broadband promotions show management’s commitment to the most common of all tasks - looking after our customer’s pocket.
Yet your management operates under heavy regulation. No management team has worked harder to co-operate with the national regulator and indeed to meet the government’s aims; yet many of the errors experienced by the cable industry risk being repeated. eircom is fully regulated, unbelievably, competitors, fixed and mobile, are not, but this despite ComReg’s designation of the main mobile operators as having significant market power.
eircom is forced to sell access to its network to other operators below cost. Imagine if brewers or builders or bakers were forced to sell at less than the cost of production to encourage other companies, ‘to develop competition’.
Consider the following: the eircom network, which hosts at least thirty fixed line competitors of eircom, is restricted to a regulated rate of return. This allowed rate of return does not recognise the reality of the investment required to improve a core telecoms network. And the regulator assumes a valuation of the network which bears no relation to its replacement cost. There is a double injustice: while eircom competes with thirty enterprises that use the eircom network, the mobile companies are almost unregulated and enjoy extraordinary pricing power. For example, the termination rate on a mobile network in Ireland is up to fifteen times more expensive than using the eircom network. One sided regulation does not work and will not encourage investment.
There are some positive developments. The deregulation of international leased lines recognises the reality of a competitive market; a more responsive approach to price promotions is delivering growth in the broadband market; and ComReg’s relaxation of the price cap from a homicidal CPI minus 8% to relatively tolerable CPI minus 0% is an improvement that benefits the whole market.
The process of deregulation is much too slow. Investment is threatened and customers will suffer. If it is a priority for your management team to continue to deliver a high quality service to customers then regulatory reform is a pre-requisite this year.
The current good news story is eircom’s rollout of broadband. Internet usage is higher than in the UK and above the European average. eircom is now connecting the nation with broadband technology. Last June we set an industry target to achieve 100,000 connections by December 2004. We are on track to achieve or better this target. Our rollout covers nearly 70% of the population and is being extended. We can also offer satellite broadband to all customers.
Later this year management will be in a position to assess the status of the rollout and set targets for 2005 and beyond. eircom has built ‘Broadband Ireland’ because connecting people is our business and is a key platform for national growth.
We are considering re-entry into the mobile market. Advances in technology are blurring the distinction between wireless and fixed networks so that, for consumers, telephone usage can become a seamless experience. eircom as a fixed line business only addresses half of the telecoms market in Ireland. Your chief executive, Dr Philp Nolan has been consistent in expressing the company’s strategy: eircom will get back into the mobile business but only when a commercially viable option emerges, either directly or through convergence.
While I’m delighted by what we have achieved, I want to be realistic about the future. eircom is performing solidly and will continue to do so by delivering value to customers. Against an industry-wide backdrop of pressure on fixed line telecoms, more needs to be done. Costs must continue to be reduced. Regulation must be reformed to encourage investment in the networks; broadband takeup accelerated to strengthen our customer franchise; and a viable route negotiated back into mobile.
eircom is not just another telecoms or technology company: It is a central part of national life. The company has been transformed and I acknowledge the co-operation of our excellent work force and the Employee Share Ownership Trust in effecting this change.
We now have a stable platform for progress under the stewardship of a first rate management supervised by an international board of the highest calibre. It is good to be back but it will be even better to move forward, with sensible regulation, to meet the demands and opportunities of the transforming telecommunications market.
Sir Anthony O’Reilly