When Money Talks, Competition Walks

Press release
07th Oct 2007

IRISH-American bank robber Willie Sutton became a folk hero not because he was particularly good at getting away with robbing banks (he was actually better at jailbreaks). It was his perverse wit. Why did he rob banks? “Because that’s where the money is.”

Sutton’s Law is generally a useful tool for analysing why people do what they do and predict what they might do next.

Companies are just groups of people, where decisions are ultimately taken by just a small group or even one person. If you want to know why a company is doing something, the answer is almost never some hexagonal conspiracy that keeps Oliver Stone in work or keeps the Shell to Sea campaigners up at night. Companies do things to make money.

So what can we make of the latest dark mutterings from Eircom, who last week left open the exquisitely perverse prospect that it would sue the government to stop it building more broadband networks.

This former arm of the state made itself a poster child for market failure, failing to provide enough broadband, fast enough, to enough of Ireland.

To, in part, make up for the market failure, the government in 2005 did something unexpectedly bright. If Eircom wouldn’t build in more capacity, the state would. So the government decided to build Metropolitan Area Networks (MANs) . . . rings of fibreoptic cable around towns, offering greater connectivity.

Now Eircom is reportedly considering legal action to kill the MANs. Some observers assumed . . . wrongly . . . that this was an old threat recycled on a slow news day and not to be taken seriously. But Eircom sources say that all options remain on the table to stop the government from creating what they see as an unfair competitor.

Arguments are being sharpened up: it’s a waste of money, it’s old technology; it’s unfairly helping Eircom’s competitors; it breaches EU competition law. Some will wind up in newspaper articles and on blogs. Some could end up in a complaint to Brussels.

Some could wind up in court.

The only certain thing is that Eircom isn’t going to stop trying to undermine the project.

Why? Why would Eircom, under its newish Australian owners Babcock & Brown and PR-savvy chairman Pierre Danon, risk being seen as broadband spoilers? Taking its sweet time to offer worldclass high-speed broadband to the huddled masses yearning for movie downloads was one thing. But to take anybody else who tries to court in order to stop them, whining about how unfair it is? That’s the PR equivalent of a suicide bomb.

The way to the answer is to apply Sutton’s Law. Sure enough, we learn that Eircom’s owners have taken the first step towards breaking itself up into two or three parts: the wholesale network business and the retail business, which could be split between the Eircom landline and retail broadband operator and Meteor mobile. Having bought the whole package for 2.4bn 18 months ago, Babcock & Brown could get 1.8bn back by selling the retail parts they don’t want.

Babcock & Brown want to keep the wholesale part.

Because that’s where the money is.

There are dozens of retail telecoms operations in Ireland.

But there is little effective competition at a wholesale level.

Outside of Dublin, in towns where they are available, many of the retailers use the MANs . . . the government-owned fibre rings administered by a firm called e|net . . . to connect up big customers for broadbands.

Otherwise, effectively they are stuck re-selling space on Eircom’s network.

So if Babcock & Brown dispose of the messy, low-margin Eircom business of dealing with the masses, they can focus on what they do best . . . a higher-margin, more predictable cashflow wholesale business.

Eircom promise that this would free them up to ramp up investment in the network, and move us up international internet league tables away from Albania and closer to South Korea.

But they can do so, comfortable in the knowledge that they have a nice profit margin to lean on and borrow against, only if they don’t have to worry about competition. If they can stop the government from completing the MANs and no other company is willing to out-spend them, Eircom (or whatever it winds up being called) will go back to being what they were before Telecom Eireann was priviatised in the first place: a highly lucrative near-monopoly.

Because that’s where the money is.

by Richard Delevan, The Sunday Tribune