Friday, November 03, 2006

The first mile

Is it possible to provide improved service to customers and extract hundreds of millions of euros for owners with a single corporate strategy? The claimed answer from Eircom's new Australian owners is Yes. Friday's Wall Street Journal (subs. req'd) has a detailed report on how the owners plan to extract value from the Irish telecoms market. Rather than the traditional approach to such companies, splitting the fixed line and mobile businesses (moot in Eircom's case anyway), Eircom is apparently proposing to split the business into a line network and a services network. The line network would own all the switching and wires and would sell usage of it to service providers.

It's at this point that the rationale gets tricky. Eircom is going to claim that this is a good deal for customers, because the line network could be split off and regulated to keep prices under control -- but also a good deal for them, because the market would value the line network more highly as a separate entity than it does at the moment. That value has to be coming from somewhere. The closest we get to an explanation is this --

Because Ireland has a relatively small population of about four million spread out over the island, it would be too expensive for any competitor to build a network reaching all the homes and offices, leaving Eircom with a monopoly. The company must share the network by leasing access to competitors and others such as Internet providers, but the system for doing that is clumsy and loses money and is a headache for regulators.

"We share, but we share begrudgingly," Mr. Topfer says. The answer, he says, is to hive off the network and regulate it like a utility. For the regulator, such an outcome would be "nirvana," he adds.

i.e. the network would be a monopoly but it would be a nice one because regulators wouldn't let it do any nasty stuff like jacking up the price for network access. Which is very questionable. The entire scheme of a separate hardware network selling access to providers sounds suspicously like the UK's Network Rail/Railtrack, generally recognised as a disaster. And it also sounds a lot like the deregulated power supply market in the US, in which the monopolistic aspects were supposed to be dealt with by these same omniscient regulators. In fact, the market seems to understand this potential for monopoly power quite well, hence the high value allegedly attached to a stand-alone network.

Speaking of power supply and regulators, is anyone in Dublin looking into why big chunks of the Poolbeg power station have been offline (subs. req'd) for nearly a year, given the role that strategic power station "maintenance" shutdowns played in driving up the price of electricity in California in 2000-01? Today the ESB, tomorrow Network Eircom?

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