JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate

Mobile Telephone Market: Presentations.

Chairman

Today we will hear a presentation by the mobile phone operators. As members will be aware, the committee has decided to conduct a review as part of the communications module of the mobile telephone market to include quality of coverage on a regional basis, number migration, portability, charges for calls and services, such as international calls, pre-paid phones, text messaging, roaming, national and international, voicemail, phone forwarding, call following and development plans for the mobile telephone sector over the mid-term period of three to five years, including the delivery of broadband services. To structure this review and highlight for members the issues that may be of concern, it was decided to obtain the views of the Consumers Association and ComReg before the mobile phone operators made a presentation to the committee. Accordingly, at the last meeting of the joint committee we heard presentations from the Consumers Association of Ireland and ComReg. The format of today's meeting is that we will hear a short presentation, lasting no more than ten to 15 minutes, which will be followed by a question and answer session.

I want to welcome the mobile telephone operators O2, as well as Vodafone, Meteor and Hutchinson-3G to the committee. We will start with O2 but before doing so, I want to declare that some years ago, like many hundreds of thousands of people, I purchased Eircom shares. As you know, the Eircell side of the network was sold off to Vodafone in the UK. I still have some shares - I do not know how many - but from time to time I receive a dividend. I am sure it is the same for the hundreds of thousands of people who purchased the shares when Eircom was floated. If other members of the committee are in the same position they can make a declaration now. Nobody was as foolish as me? Okay.

Before I ask Ms Gray to introduce her colleagues, I wish to draw attention to the fact that members of this committee have absolute privilege but this same privilege does not apply to witnesses appearing before the committee. It is generally accepted that witnesses would have qualified privilege but the committee cannot guarantee any level of privilege to witnesses appearing before it. Furthermore, members are reminded of the long standing parliamentary practice to the effect that members should not comment on, criticise, or make charges against a person outside the House or any official by name or in such a way as to make him or her identifiable.

You are very welcome, Ms Gray, and I invite you to begin the presentation.

Ms Danuta Gray

We thank the committee for this opportunity to present the facts about our industry and business. I and Mr. Niall Norton, who is the chief financial officer, will provide a short presentation lasting no more than ten to 15 minutes. Our technology director, Mr. Oliver Coughlan, is also here to answer questions, if there are any, about our network and future technologies. We take the issues raised by the committee very seriously so it is our intention to answer a number of the points that were raised last week and which have been raised previously.

This business, O2, was previously known as Digifone and we launched six and a half years ago. We have grown from 0% to a 40% market share in that period by competing. We will present some background on the industry and our company but more importantly we will talk about our pricing, how we charge our customers and the usage levels we measure here in Ireland compared to other countries. We will also talk about roaming and I will summarise before handing back to you, Chairman, for questions.

Since we launched, we have invested nearly €1 billion in capital to create the business. The vast majority of that capital has gone into building a high quality national network but we did not stop in the early days. We continued to invest in our network, to improve its quality, coverage and capacity at the rate of €3.3 million per week. We are a large employer of people nationwide. We have 1,400 people in our business and not just in Dublin. In Limerick we have our customer care centre, which is a 24-hour operation employing around 400 people. We have regional offices in Cork and Galway and we have a nationwide retail chain of 62 outlets, so we are still very much on the high street. We are also committed to future investment, which we will talk about later.

Currently we have just over 1.25 million customers while we continue to add, but also lose, customers every year. Some 71% of those are pre-paid customers, which means that they choose to pre-pay for their mobile phone service by topping up through vouchers and credit card mechanisms over the phone. With regard to some of the comments made last week that pre-paid is 400% more expensive than post-paid, I will present some figures but that is not what we see. What we measure in terms of the average price paid by a pre-paid customer is 24 cent per minute compared to a post-paid customer of 18 cent. Customers prefer to be pre-paid because it gives them a form of control, as they see it, by buying an amount of money up front and then controlling how much they spend over a period of time. We contact high spending pre-paid customers to let them know that, in a number of cases, they would be better off if they switched to post-paid. Earlier this year we did quite a significant campaign and only 5% of the customers we contacted moved to post-paid. The vast majority gave the reason that they wanted to remain in control of their spend levels. For that, they have a live phone with no commitment and no subscription charges. When they buy their top-ups there is no expiry date, so when they put the credit onto their phone there is no expiry date on the pre-paid phones.

Post-paid customers, which constitute about 31% of our customers, are typically higher users. They pay a monthly subscription and then pay for their calls and messages monthly in arrears by bill. With their monthly subscription they get an amount of free call value on which there is no expiry.

The young, mobile population in Ireland have taken to the mobile phone and use it a lot. Mr. Norton will present new figures which we compare with our operations in the UK and Germany. Customers have chosen mobile over fixed because it gives them mobility and offers good value for money.

On the next slide we talk about the development of the Irish mobile market. When we launched as Digifone, penetration was around 7% whereas today it is over 80%. That is a high penetration level. There are countries that have higher levels but 80% is significant. The flattening of the graph disguises the fact that we are not standing still. We have a lot of measures in our industry, one of which measures customers leaving us within a year. In our last end of year results, around one-third of prepaid customers would leave our network within an annual period. Around 16% to 17% of our post-paid customers would leave us in an annual period. The flattening of the graph disguises the fact that we have to compete hard not just to gain new customers but also to keep the ones we have, yet, within that mature market we are still growing. Last year alone, we added a further 75,000 customers to our base. We cannot do that unless we continue to compete with our opposite numbers.

Since launching in this marketplace, we have invested approximately €1 billion on the network and we continue to invest over €3 million a week. We now have a high quality network that covers 99% of the population and 95% of the Republic's geographical area. Some 70% of our network sites are shared with other organisations. We handle 6.5 million calls and 4.2 million text messages per day. We could not continue to deliver the level of service our customers expect unless we continued to invest in the network at the rate we do.

I will now ask Mr. Norton to talk through profitability, pricing, usage levels of our customers and roaming, before I summarise.

Mr. Niall Norton

I would like to talk briefly about our financial results and I would also like to cover in this part of the presentation pricing, value and the issue of roaming. As it has been in the headlines, members of the committee will know that our profits after tax for the year just ended amounted to €90.3 million. Since we launched the business back in 1997 cumulatively we have had an excess of profits over losses of €44 million. In that time our shareholders have invested a net total of €459 million by way of loans and share capital directly invested in our business in Ireland. That excludes goodwill that BT would have paid to Esat Telecom at the time it took over, so this is real cash invested in the business. At this point, the return on the investment to date, since the business opened in 1997, averages less than 1% per annum. The commercial return that mobile companies are expected to generate in order to attract funding from capital markets runs to around 12% per annum. We are quite pleased that we are in line with our business plan but we hope this highlights that the investment in the wireless business by Digifone and subsequently O2 is actually a long-term commitment to investment in Ireland. The business plan for O2 in our 2G business is 15 years' duration before we expect a full payback. For 3G it is even longer - we will have a 20 year investment cycle. All our profits generated to date have been reinvested in the Irish business, in 2G, GPRS or high-speed data, wireless and 3G. We are a real company in Ireland, not just a sales office, and we have a long-term commitment to the Irish Republic.

Putting it in a slightly different way, our investment has allowed us to spend about €1,000 for every customer we have acquired to date. On a cumulative basis, we have generated about €40 profit per subscriber in the same period.

ARPU - average revenue per user - is one of those four letter buzz-words common to this business but not necessarily well understood, even by people in our own company. I thought it might be useful to drop a slide in here. The average revenue per user is effectively made up of the number of units a customer uses, multiplied by the price per unit. Higher ARPU is a reflection either of high numbers of units used or high price, or both. A lowering of ARPU will represent a drop in either. In Ireland, the high number of minutes used accounts for the much reported high ARPUs in the country. This is not our opinion, it is a fact. Simply put, higher bills in Ireland result from higher usage.

Chairman

You might let the committee know where your facts are coming from.

Mr. Norton

I beg your pardon, Chairman.

Chairman

Source your facts, please.

Mr. Norton

Absolutely. On the next slide I have set out the data our group released to the Stock Exchange for the year ended 31 March 2003. These are audited numbers which refer to Ireland and our sister operations in Germany and the UK. In the UK, the average subscriber uses each month about 107 minutes and pays approximately 27 cent per minute. In Germany, the average subscriber uses about 109 minutes and pays approximately 26 cent per minute. In Ireland, our subscribers use 188 minutes - 76% higher than the UK - yet they pay 22 cent per minute on average. This is the charge the customer pays; it is not a low or high rate but the average rate. While our usage is 76% higher than the UK's, our charges are 41% lower.

To put those charges in perspective, it is worth bearing in mind that in 1997 we launched a €1 per minute rate for voice calls. As regards the themes that Ms Gray raised, our entry into the market has been significant in terms of helping to develop the market and bring competition to it. At the same time, the number of text messages our subscribers send is also correspondingly higher than in either of the two networks we know. We focused on these numbers largely on the grounds that we know in detail what our sister companies charge. These are competitive markets and, while we are able to produce these numbers and intend doing so again, they demonstrate the competitiveness I referred to in the previous slide.

Since January 2000, our average price per minute for pre-paid customers, who represent 71% of our base, has been reduced by 28% from 33 to 24 cent per minute. In the same period, the average price per minute paid by our post-paid customers has been reduced by 25% from 24 to 18 cent. Our price for texts, which have grown enormously in volume, has been reduced by 58% from 19 cent when we launched in 1997 to 8 cent today.

In the same period, from January 2000 to date, the majority of utilities in the State have seen price increases of about 20%. Further to bringing competition to the market, the fact that we have been able to price at an ever decreasing rate for ever increasing sales volumes is demonstrated by these numbers.

As regards roaming, what our customers pay abroad largely depends on the cost charged to us by foreign networks. There is no doubt that it is a confusing issue for customers but we have constant programmes to try to educate our customers on what to be aware of and how to control costs. Some 70% of our roaming traffic - our customers going overseas - is to Northern Ireland and the UK. We have taken a lead in developing initiatives to try to deal with this big pot of roaming business that our customers do by introducing flat rate tariffs to the UK, additional post-paid extra value offerings that subscribers can sign up to, and the all-island rate that effectively abolished roaming on the island of Ireland. There has been a positive start to our dealing with this last big issue that has yet to be addressed.

In the last couple of weeks, we signed up to a European operator alliance. O2 has effectively four territories in Europe - Ireland, England, Germany and the Isle of Man. The European operator alliance to which we have signed up with countries across Europe, should allow us to develop further links that will allow common technology extra value pricing for our customers.

This is the start rather than the end of the initiatives but it is a hugely complex technical area. I will now hand back to Ms Gray to cover the remainder of the presentation.

Chairman

I am conscious of the time.

Ms Gray

I will cover these points very briefly. The point of this slide is that we believe there is real competition in Ireland and that we have provided competition since the day we launched. Some 71% of our customers are pre-paid and according to statistics produced by ComReg in its quarterly report, pre-paid tariffs in Ireland are the third cheapest in Europe. We have quoted another source, Prodata Partners, which indicates that we have the lowest text price in Europe. The data we have indicate that post-paid tariffs are in line with the average in Europe. It is extremely difficult for us to compare those in terms of published tariffs because they do not take account of the discount levels and line rentals that people pay as opposed to the published retail rates.

We have included some detail about our competitiveness for small and medium businesses, which was tackled last week. Suffice it to say that with full number portability coming into the market, this is an area in which we have increased our competitiveness. It is still an area where O2 feels it does not have sufficient market share. We have provided some examples of how we are tackling that particular market sector.

Last year, we bought a 3G licence for which we paid €44 million up front. In the medium term we are planning to spend in excess of €500 million in capital in order to roll out that network. We are on track to meet our licence obligations and we will launch services as and when the technology is stable enough for them to be right in terms of the service levels they would give to our customers. We have also invested in technology which allows customers to transmit data.

Earlier in the year we launched what is known as WiFi which is a technology very popular in the United States. We have worked with the Government on a pilot programme for five sites, some of which will go live later this month, using this technology to provide broadband services to different populations across the country.

In summary, what we wanted to do today, and I think we have done it, was to provide the committee with information that shows that in Ireland the spend levels on mobile communications are high but that should not be mistaken for a lack of value for money. The usage levels are also very high. We compare those with the data we know we have, which we published with our year end results and previously two years ago, with the data of our sister operations in the UK and Germany. From that we can see that the rate per minute that an Irish customer pays is cheaper than those in the UK and Germany.

Without further ado and in the interest of time, I conclude our presentation.

Chairman

Senator Finucane

I have questions regarding some practices which I believe are restrictive and detrimental to the consumer. In regard to mobile phone retailers who want to get their clients connected to the O2network, why does O2 insist that the only two mobile phone distributors from whom hand sets can be purchased are Radius Communications (Ireland) and Brightpoint Ireland? Surely that is detrimental to the consumer. If mobile phone retailers were allowed to purchase on the open market rather than being dictated to and forced to purchase from these distributors, they could purchase most handset models cheaper than the distributor price. Therefore the customer would benefit.

In the handset market there are legitimate handset suppliers and also what is known as the grey market which can be handsets, surplus runs and so on that can be diverted to other market places. We protect our customers by ensuring quality distribution from the handset manufacturers through to distributors, sold to dealers and on to our customers. It is very important to have that quality piece totally sorted out. A badly configured handset will drop calls and more often will not be able to pick up signals and so on. We go through a process of auditing our distributors, all of them that have been appointed so far, to make sure that we are certain they are actually buying legitimately sourced handsets and that our customers will end up with properly configured handsets.

We have been approached by three distributors so far and have three distributors. If more people approach us we are open to having as many distributors as our dealers want to have in the marketplace. I reject the suggestion that we have in some way corralled it around three. That is simply not the case. In regard to the handset manufacturers, we basically take nothing from handsets. We do not make profits on handset sales. Our O2 retail chain is managed on exactly the same basis, at an arm's length basis, as any other retail store. As it turns out, we actually supply quite a degree of the signage and point of sales and marketing literature for all of our dealers and not just the O2 retailers. All our dealers have signage supplied by us which allows the public know if they are O2 approved dealers.

Chairman

I realise Mr. Norton received no prior notice regarding these particular questions; we may have to return to these questions if there is concern among the retailers or operators. With respect, we did not give notice in regard to this question.

Senator Finucane

Did they answer the question concerning 1 October and the objective of attracting and retaining customers who spend more than €130 a month?

Mr. Norton

Ms Gray referred to this in the presentation. Typically our bigger users will opt for the post-pay offering rather than the pre-pay offering. Our commission structure effectively reflects that we will want to put more money on the table for our higher spending customers, to make handsets more available and more complex devices - car kits and so on - available to them. We restructure once a year, every year, to reflect the changing patterns of our customer base. I respectfully suggest that this allows us put more money into the hands of customers who all the time spend more with us. It does not necessarily discriminate against anyone because there is a significant amount of money available for all customers who come into the store. We have pre-pay offerings for those customers who do not want to sign up to high spending tariffs.

Chairman

Quite a number of members have been contacted about the questions raised by Senator Finucane. We may have to come back to the area of distribution at a later stage. Mr.Norton should take note of what he has said.

Mr. Norton

Very well.

Deputy Broughan

I welcome the delegation from O2. The presentation was persuasive but it does not seem to square with some of the information we have from ComReg. The ComReg key market data of September show that in regard to post-paid specific packages the Irish mobile phone market is the third dearest among the OECD countries and in regard to pre-paid packages we are among the third cheapest although we are significantly more expensive than Denmark and Luxembourg. How does that information square with what O2 is telling us? As the Chairman said, the O2 figures do not seem to square up with what we heard last week.

O2's sister company MMO2 is based in Germany and has a sister company in the United Kingdom, both of which countries have regulatory regimes. Would it be fair to say that O2 has had a very easy ride in the Irish market? Would that not be true of the last few years given that last week we heard that ComReg and the Minister have only decided now to have a market analysis? I found it incredible that there had been no market analysis when Ms Doyle informed us of that last week. It is only now that we are getting to any kind of analysis of the market. Is it not fair to say that O2 has had an easy ride and that both itself and Vodafone have significant market power? Basically they determine the fairly valuable mobile phone market here.

How do O2 profits for Ireland compare with those in the United Kingdom and Germany? In regard to Vodafone, we were struck by reports from our colleagues in the media about how profitable the Irish market is, even allowing for the fact that we like to talk.

In regard to churning, I find it astonishing that about one third of pre-paid customers leave the network. Are there people who come and go as appears to happen with children? Part of the reason for the annoyance or anger - as happened last week when we listened to the Consumers' Association - derives from the pre-paid issue. We know it is often children and young people who depend on pre-paid mobile phones for vital communication. Are kids churning through the three companies? Is that what tends to happen?

Mr. Norton

I will talk about the ComReg question first. The Irish regulator is certainly not easy. We would absolutely dispute that notion. The regulator is quite a tough lady and it is a tough office to deal with.

The market analysis issue is a new EU led exercise. We have had market definitions, since we launched, as part of regulation. In the markets we operate, voice and interconnect, etc., we were designated as a significant market power along with Vodafone and had extra regulatory obligations placed on us for that reason. The new market analysis is part of an EU wide framework so it is not, so to speak, unusual. It is not catch up in this market. We are engaged with ComReg as are the other operators in that regard.

In regard to profits from Ireland, we are a small size in the group in some respects. We are at a different stage to our sister companies in Ireland because when O2 was launched as Digifone six and a half years ago we launched basically as an entrepreneurial base company. We did not have a parent overseeing us. As a result we came to the market aggressively, competed aggressively and grew our market share from 0% to 40%, as it is today. All through that period——

Deputy Broughan

Would O2's ARPU - average revenue per user - for Ireland be the highest?

Mr. Norton

The ARPU in Ireland is really a result of having managed to succeed in getting customers to talk more and to prefer our services over fixed line alternatives or our competitors' alternatives. We have managed to sell an increasing amount of an ever decreasing price product in that period of time. We have really used the price elasticity. Compared to our sister companies in the group we are more profitable at a kind of margin level. That stems from the fact that we are at a different market position. Our German operation is very much still in start up mode. It has got an 8% market share. Our UK operation - I do not necessarily want to talk it down in this forum - came as a subsidiary from BT where it was not necessarily managed as a stand alone business in the way O2 here had always been. The UK operation has only been in the market, floating, for two years now and it has grown. Its operating efficiency has improved tremendously in that period. It has gone from an 18% margin to close to what I understand it is guiding for a late 20% or perhaps a 30% operating margin. All operating companies are heading towards the same flight. We are just further along the track, in some respects, than our sister companies.

In regard to the prepay churn, the figures quoted by Ms Gray are in line with what other operators experience and other countries experience. On an annual basis people make the choice to stay with or leave us and go to another network or decide they no longer need a mobile phone. We have people who come in and out on that basis the whole time. In terms of the market share slide presented as part of our pack, it is worth noting that it is not a stable base. Customers are not there forever. Underneath the surface there is a lot of turbulence and people are making choices the whole time. With regard to ComReg, we aggressively pursued the FNP, full number portability, programme, which was launched during the summer. That will remove a barrier to choice and competition in the marketplace. Our aim is to be No. 1 and there is no question about that. We always have been and continue to be focused on that.

Ms Gray

We agree with the pre-paid statistics produced by ComReg last week. On post-paid, it is quite difficult to compare published rates because those are not what the customers pay in reality. We check data and publish them and, if it is not in the slides, we will provide it to the committee. We compare usage figures, the spend level by customer with our other operations and, hence, the average rate they pay. By examining that and the ComReg statistics, our post-pay rates are around average for Europe.

Deputy Coveney

I welcome the O2 representatives. I have four questions, the first of which relates to roaming charges. The submission states it undertakes constant education campaigns to make customers aware of roaming charge and to control them. What are those campaigns? I am reasonably aware of mobile telephone operations. I am always on the look out for such information but I have not witnessed such a campaign. Will customers be able to pre-pay for roaming charges at some stage, in other words, they would inform O2 that they are travelling to a foreign country and they could buy minutes in advance?

My second question relates to the cost of handsets and upgrading. For example, why is the cost of post-pay handsets significantly higher in Ireland that in the UK? It is significantly cheaper to purchase a handset from O2 in the UK and it may be even be free on occasion. Evidence was given to the committee a few weeks ago that both O2 and Vodafone charge €120 for a Sony Ericsson telephone. Is that a coincidence or is there an arrangement between both companies regarding handset charges? I assume there is not but I seek clarity on this issue. It is expensive to upgrade a handset in Ireland. If one upgrades to the latest model and remain on the same network, it is only €20 or €30 cheaper than buying a new handset. Why? It is incredible that should be the case. Is there sufficient competition in this area?

I seek clarification on the price differential between pre-pay and post-pay options. Mr. Norton stated he accepts ComReg's figures regarding the pre-pay basket in Europe. Ireland is the third most competitive country but is still a long way behind Luxembourg and Denmark. However, Mr. Norton does not accept ComReg's figures for high user post-paid customers, which rank Ireland as the third worst. It is convenient that O2 accepts the figures that show it in a reasonably good light but not the other figures. Why is there is such a differential between the two? Can Mr. Norton shed light on why Ireland is not competitive with its European neighbours in terms of post - paid options? What profit margins does O2 generate from both pre-pay and post-paid customers?

Has the domestic market bottomed out in terms of pricing or will prices continue to reduce? ComReg provided a graph to the committee which highlighted that in other European countries in which there had been competition for a long time with more than three operators prices levelled out between 2001 and 2002 while prices are still reducing in Ireland. That suggests competition is only beginning to bite here. Will prices continue to fall?

Senator MacSharry

The Consumers Association appeared before the committee a number of weeks ago and serious allegations were made that customers are paying up to four times more than those in other countries. Mr. Norton stated those figures were based on usage rather than on price. I do not understand that because the more people use their mobiles, the greater the opportunity for the company to offer more competitive rates. I have a copy of the O2 flyer entitled "Free Calls for Life". Presumably this is only offered to customers on the basis of usage in the first place. Why can O2 not reduce tariffs to lower levels? What needs to be done to target reduced prices? Mr. Norton states Yankee is a good consultancy firm but, having not read the report, he cannot agree customers are paying up to four times more in terms of tariffs. Somebody is being economical with the truth and I would like an explanation. Assuming that Yankee has lazy consultants because they do not have a vested interest in the Irish market, the committee is not in receipt of the full picture. Will Mr. Norton comment on that?

Deputy Kelly

I welcome the delegation. Customers have become price conscious and that is only right and proper because that is for their own good and the good of the economy. Ireland needs to provide the best value in terms of services. Customers must get value for money and the word must be spread that Ireland gives the best value in terms of sales and services in the world. I use a mobile telephone and it is a valuable tool as it means that I am available 24 hours a day, seven days a week. I have contacted numerous people as the debate on prices has evolved and most believe mobile tariffs are too high. What is the cost of calls from one mobile phone to another, a mobile to a land line and a land line to a mobile? How many tariffs does O2 offer? How much business does O2 do with the Government? How many handsets does O2 supply to the Government? I spoke to someone earlier who pointed out I would receive a mobile if I attended this meeting but I have not been given one yet.

Chairman

The Deputy would have to declare it.

Deputy Kelly

I have no problem with that. The Chairman led by example when he declared his shareholdings at the beginning of the year, although I thought he was a smarter man than that. Are customers paying for the introduction of 3G technology? It is not considered to be the greatest financial brainwave of all time. Many companies located their head offices offshore in the past and, if they made a financial blunder, they would say, "It's okay, Paddy will pay for it." Paddy paid for many mistakes over the years but he is fed up paying over the odds for products and services.

Ms Gray

Deputy Coveney referred to education programmes. We provide information on roaming on our website. We have also in the past year provided leaflets at the airport if people are going away and we provide information in conjunction with travel agencies to try to cover the majority of the travelling public. We provide together with organisations such as Budget Travel roaming leaflets that tell people how to ensure they can control their costs effectively. It is something we take seriously, do not do perfectly and will have to do more of but we try hard and spend money on educating customers before they go abroad on the best way to stay in touch.

Deputy Coveney

Are leaflets available in Dublin Airport?

Ms Gray

Yes, we have people who stand there and hand out leaflets to people as they leave the airport.

Deputy Coveney

I have just come through Dublin Airport and I did not notice that. Is that happening on a regular basis?

Ms Gray

It happens on a regular basis. We have spent €50,000 over the past few months on that work. We put quite a lot of money behind it and we have given examples of the information we put out in the education packs.

Pre-pay customers can roam. Mr. Norton explained we have taken initiatives on roaming. We put in a flat rate to the UK 18 months ago and we have started to tackle the issues of Border roaming with an all-Ireland tariff. We announced an alliance of European operators ten days ago because we are one of the smaller groups and we must work in conjunction with others. It is our plan that we start to deliver services for customers that are more cost effective, easier to use and will be available as we go from the ski season through to next summer. There is no doubt roaming will become easier and prices will come down over the next year.

Deputy Coveney

When a person arrives in a foreign country, he or she receives a text message from local mobile operators welcoming him or her. That is an obvious way to warn people about roaming charges.

Ms Gray

We do some of that. We will make sure in conjunction with the alliance partners that customers will know which network they should be on in terms of the cheapest tariffs and will give them information on how best to control their costs while roaming. Mr. Norton will take Deputy Coveney's question on handsets.

Mr. Norton

I refer to the price differential on handsets between here and the UK. We have examined this question because it has caused us to scratch our heads from time to time and customers ask us about it from time to time. Packages that typically offer free or zero priced handsets on an ongoing basis will have strings attached and will generally involve prolonged periods of higher rentals to get customers to take them. Alternatively, they may be short periods during which a particular handset may be available at little or no cost. Our pricing is aggressive in that regard. We operate a no strings policy and we are as clear as we can be. Therefore, what one sees is what one gets. There are no surprises for our customers if they take up one of our offerings. We offer handsets at different ranges from as low as €25 all they way up to more sophisticated, expensive handsets. Occasionally, we do deals with manufacturers that allow us to offer cheaper prices on specific higher tech handsets.

Deputy Coveney

Is Mr. Norton saying there is not a significant price differential between post-paid offers in the UK and Ireland for a 12 month contract?

Mr. Norton

No, I am saying precisely the opposite. There can be pricing differential. We do not believe it is necessarily like for like in that our offering that goes with handsets and pricing is more clear and transparent for the consumer. No strings are attached to such offers whereas handsets deals involving zero or low priced handsets in the zero to €10 range tend to have strings attached or biters on them.

Deputy Coveney

Such as?

Mr. Norton

Typically, higher rent or minimum duration contracts. With regard to the Deputy's question on upgrades, a handset in the Irish market is considerably more expensive. If one ever tries to buy a handset without a connection - a new activation or an upgrade - the price is higher than one would pay to join or upgrade on a network. The price differential is made up by handset subsidies that we pay our dealers to allow them discount the handsets to make them attractive for customers. We vary the commissions we pay to the market from time to time depending on market trends and what our marketing and customer research tells us about the direction in which we should go. We try to discount those handsets so that the segment can pick up the handsets most appropriate to them. It is not a big surprise that we price upgrades at or around the same price as a first time activation because we like customers to stay with us and we do not want to disadvantage them because they are an existing customer over and above the economics of joining a new network or joining us as a brand new connection. We would like the relationship to continue.

With regard to 3G, there was a beauty contest. We paid a substantial licence fee but the kicker in regard to the 3G business is it requires us to roll out huge geographic and population coverage and other quality measures. While we bought into 3G, we did not pay the enormous sums paid in other markets a few years previously. The Irish licences were issued on the basis of ensuring quality of service for Ireland Inc. While at face value we paid a significant amount, it is small by international comparisons. However, we are required to provide a high quality service to a large part of the country and we are fully committed to doing that.

We will suspend for five minutes to allow the Vodafone representatives to prepare their presentation.

Sitting suspended at 4.33 p.m. and resumed at 4.39 p.m.

Chairman

I welcome Mr. Paul Donovan and Mr. Gerry Fahy from Vodafone. I draw everyone's attention to the fact that members of the committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. It is generally accepted that witnesses will have qualified privilege but the committee cannot guarantee any level of privilege to witnesses appearing before it. Further, members are reminded again of the long standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House, or an official by name, in such a way as to make him or her identifiable.

Mr. Donovan, I am not sure if you were sitting in the Public Gallery for the previous presentation but it did take a rather long time. I ask you to take between 12 and 15 minutes to make your presentation, following which we will allow questions from members.

Mr. Paul Donovan

Chairman, I will be as brief as possible. My name is Paul Donovan. I am the chief executive officer of Vodafone Ireland and I am joined by my colleague, Gerry Fahy, who is our strategy and business planning director.

Our presentation today covers a number of aspects of the Irish mobile communications market which we believe it would be valuable for the committee to consider. I am sure there will be a number of questions from members which we can deal with during the subsequent question and answer session.

Vodafone, as I am sure many members will know, is the world's leading company in mobile communications, with 123 million customers worldwide. The companies in which we have a shareholding represent one in four mobile customers worldwide. We operate in 26 countries across five continents. In 14 of those we are the market leader and in ten we are the number two player.

We have a brief history in Ireland, having acquired Eircell for €4.5 billion in early 2001 in what was and still is Ireland's largest ever corporate transaction. We operate here as an independent subsidiary, with the majority of Irish based directors, and represent 2% of Vodafone's global revenues. We have 1.8 million customers, 70% of whom are on pre-pay or, as we call it, ready to go. Across the country we employ 1,700 people with major operations in Dublin and Dundalk but with retail engineering and sales staff located countrywide.

Taking our investment in network, IT, our wage bill and other expenditure into account, we estimate that we inject approximately €500 million annually into the Irish economy. We invested very heavily during the past three years in developing what we believe is a wireless communications infrastructure here which is second to none. We benchmark all of the networks against quality criteria across the Vodafone group and we benchmark across all key attributes in the top quartile. This investment is particularly important in Ireland given the very low population density which requires an above average investment in network per customer to achieve the ubiquitous coverage demanded by our customers. Our coverage is 99% of the population, approximately 95% of the surface area of the country. We have also recently acquired a licence to operate 3G services and in addition to the €1.1 billion invested in our 2G network to date, we estimate a further €1 billion investment will be necessary to complete the roll-out of 3G. We believe this makes us one of the largest telecoms investors in Ireland.

The communications industry is an exciting one and one which is developing all the time. This chart shows the development of the overall category of communications across OECD countries using 1991 as its starting point. What it shows - looking at the top line, which is "Communications" - is that customers everywhere are communicating more and communications as a whole is taking a greater share of total spending. This profile would be true also of Ireland, a market which has shown remarkable development, particularly in mobile terms, in the past few years.

We are one of the most developed markets in the world today, with ownership of mobile phones well over 80% of the population. There are a number of factors behind that. In addition to the very heavy investment in infrastructure by the mobile operators, Ireland is characterised by one of the lowest penetrations of fixed lines per head of population in Europe. If that is combined with one of the youngest populations in Europe - 16% below the European average but with an even more marked difference in the 16 to 25 years age group - we have a situation where mobile will play a much more central role in the communication lives of customers.

If we add to this low penetration of fixed lines and the very young age profile and look at GDP per capita, which is above the European average, purchasing power, which trails only Luxembourg, as measured by UBS prices and earnings, a high propensity to adopt new technology products if appropriately priced and marketed, with the highest penetration of Sony play stations outside Japan, the second highest penetration of digital TV in Europe and video rentals at over 200% of UK levels, what we see is a young population keen to embrace new technology. That is one of the reasons Irish consumers are among the most mobile in Europe, showing voice usage well above the European average and text usage which is among the highest in the world. It is the combination of high quality mobile infrastructure, low fixed line penetration, a young population and high purchasing power, particularly for technology products, which makes Ireland one of Europe’s most mobile societies where customers are actively choosing to spend on mobile communications.

This concentration index, which is known as the Herfindahl index, is set to change dramatically here in Ireland as the market moves to its next phase of development.

Ireland is a relatively small country yet operating today we have four infrastructure based mobile operators across both 2G and 3G - Vodafone and O2, Meteor and 3Ireland. In Italy, Germany, France, Spain and the United Kingdom, there is on average one operator for every 8 million customers in an industry which is characterised by scale. In Ireland we currently have four operators but with the potential for that to be increased to six shortly because Eircom has a clearly stated strategy to enter the mobile market after May 2004 and 3Ireland carries the obligation under its licence to make an offer to a virtual mobile network operator. The highly competitive marketplace we see today is poised to become hyper competitive going forward as dramatic increases in operator capacity chases a fixed universe of customers.

As has been discussed already, there are a number of ways customers can go mobile. These are generally broken down into a choice of contract on the one hand or pre-pay on the other. Contract, which is the preferred option of around one-third of our customers, is generally preferred by those who are medium to heavy users. For a fixed monthly fee, which will vary by package, they receive a bundle of minutes and texts which, if not used, can be rolled over to the next month. They also have access to a number of free offers, for example, the opportunity for businesses to call the number most used from that mobile for free - we call that business contact for free - or for consumers to have up to 300 minutes of calls each month to the number of their choice, which we call best friend for free.

Pre-pay is the optimum package for those customers who have low or infrequent usage or who want to have the flexibility that a no-commitment offer can give them. These represent approximately 70% of our customers. Air time is topped up in most cases through retailers who earn anything from 6.5% to 10.5% commission on air time, depending on the denomination of the top-up. Even though customers may not make calls, they can always receive them without charge and any unused balance on their account can be rolled forward indefinitely.

This chart shows that for a light user, say, typically someone making 50 minutes of calls per month, mainly in the evenings and at weekends, pre-pay is by far the best value service. It is cheaper than a mobile contract, which has a minimum fee, and far cheaper than the Eircom fixed line with its rental at around €22.50. This means that for many people on low incomes, such as pensioners and students, pre-pay represents a value for money communications lifeline as well as the opportunity for everyone to control their finances. There are also options on pre-pay to register for additional savings via our friends for less offer, giving savings of up to 30% on three nominated numbers which can further improve the value for money equation.

For the higher user, say, someone with around 200 minutes of usage per month with significant daytime usage, contract delivers a better option. At 200 minutes per month there is a substantial difference versus pre-pay, reflecting the monthly commitment of the customer and the subsidy paid to acquisition channels. A fixed line phone is even cheaper but without the flexibility and value of a truly mobile personal communications service. It is perhaps a simplistic analogy but the difference between contract and pre-pay might be described as the difference between owning a car and taking a taxi. One requires an up-front commitment and gets cheaper on a cost per mile basis the more one drives it; the other provides the flexibility that one can hail one at any time and if one has infrequent usage, that would generate substantial savings.

There has been much talk in the press in recent months about price and mobile charges. Our customer research and the many thousands of interactions we have with our customers on a daily basis tells us that customers generally make informed choices. Those are choices which include the important element of price but which are also based on value. They include the extent and quality of network coverage, the choice of tariff options to meet specific customer needs, for example, a small business versus a housewife, the availability of unique handsets, the range of value added services on offer such as picture messaging or remote e-mail access, the quality of customer service they expect to have or the quality of account management in the case of a business customer, the helpfulness and knowledge of staff in retail outlets and the customer's view of the network's commitment to ongoing product and service innovation. The message is not about price. It is about value, of which price is a component. Price is nonetheless important. I will now hand over to Gerry Fahy who will cover the issue of relative pricing in Ireland.

Mr. Gerry Fahy

I would like to outline for the committee some benchmark comparisons on the cost of different packages of mobile services which compare the prices of leading operators across Europe. These comparisons are prepared by Teligen on behalf of the OECD and are updated quarterly. Our analysis of this information may differ from the analysis provided by ComReg to this committee as it may have chosen a different basis for comparison. We believe the only valid comparison for Vodafone Ireland is with the other leading operators across Europe, in other words, those operators which a majority of European customers have chosen for the complete range of value and service they offer.

When the cost of a bundle of Vodafone Ireland services for a low user on a pre-paid service is prepared with the cost of the same bundle of services for other leading operators across Europe, we can see that, Luxembourg apart, the Irish pre-pay customer gets the best deal in Europe, in other words, the 70% of Vodafone Ireland pre-pay customers can avail of the best deal in Europe.

If we then consider how the OECD comparison looks for customers with medium or heavy usage on contract services, we see that compared to the cost of these packages of services from other leading mobile operators in Europe, Vodafone Ireland customers pay about the average of Europe in many cases. However, Vodafone Ireland's business customers can avail of share bundles of minutes which offer better value but these bundles are not compared by Teligen.

If we then look at the comparison of standard text messaging rates for leading operators across Europe, we can see that Vodafone Ireland text rates are well below the average. In many cases Vodafone Ireland customers can enjoy even lower text rates on particular tariffs that are focused on high texting users. This is one of the reasons Irish customers are among the highest texters in the world.

If we look at the cost Vodafone charges other operators to send and terminate calls on the Vodafone Ireland network, we find that these charges are again among the lowest in Europe. These charges have been arrived at through commercial negotiation and represent a reduction of approximately 30% on the retail price index over the past two years. This has been done without any regulatory intervention. These low charges for other operators mean that the cost for a fixed line caller calling a mobile phone in Ireland is among the cheapest in Europe.

All our analysis points to the fact that mobile costs in Ireland are far from being the highest in Europe or indeed the world. In fact, Vodafone Ireland contract charges are about average for Europe and the majority of our pre-pay customers can enjoy practically the lowest charges for Europe.

Mr. Donovan

As we have outlined, the mobile costs between leading operators across Europe shows that we are below average or, at worst, average.

To complement the Teligen data just presented, we would like to show the committee members data which we believe will be of interest to them. This table shows the average minutes per user, or AMPU, using published data from the websites of those European operators who have published this particular metric. It also shows the same metric for Vodafone Ireland. This is the first time Vodafone has disclosed this number in Ireland. Along with many other operators, it is not the policy of the Vodafone group to do so and it is a mark of the seriousness with which we take this meeting that we have obtained the permission of our disclosure committee in order to be able to do so today.

Chairman

If this information was available in the public domain, we might not be having this meeting.

Mr. Donovan

That might be the case, Chairman. This shows that, on average, usage is some 183 minutes, which is about six minutes per customer per day. Second in the table we can see Telenor from Norway, the other market with high purchasing power and high spend. The numbers for O2 Ireland, as recently presented, are not dissimilar. These numbers confirm that, on average, Irish usage on mobile is about 65% higher than we would see in other southern European markets such as Spain, where we have data from Telefónica, and 56% above the average from all those other networks we see here with published data. I emphasise, however, that this does not mean, per se, that Irish people talk more than others. That would be a simplistic analysis. What it indicates is that Irish people are choosing to give a greater proportion of their total telecommunications spend to mobile.

If we go one stage further and take the data on AMPU, minutes of usage, which is represented by the diamond on the line on this particular chart, and compare it with theaverage declared spend by operator on a monthly basis, represented by the bars, we can see clearly that there is a very close relationship between minutes of use and the amount people spend on their mobile phone. The conclusion, as far as we are concerned, is clear. High spend is driven by high usage, not by high prices.

In terms of the outlook for the mobile market in Ireland, the industry will be characterised by significant amounts of competition as new operators enter the market, and we are poised for the entry of some serious competition, but customers will choose to continue to spend more money on their mobile phone. Research among teenage girls has shown that mobile top-ups replace the spend of teenagers on tobacco, for example;they are diverting spend from one category to another.

Chairman

The Minister for Health and Children will be delighted to hear that.

Deputy Eamon Ryan

The company is saving all those girls.

Mr. Donovan

We are doing what we can for the health of the nation. Mobile Internet access will increasingly replace fixed Internet access. Picture messaging, which is the next big development, will replace the amount people would spend on photo developing. Some of those present may have parked nearby today. One can pay for parking with one's mobile phone instead of by cash in Merrion Square and St. Stephen's Green. New businesses are going mobile.

The availability of 3G broadband services will increase. We are at an advanced stage in terms of the build out of our 3G network, which will allow high quality, fast Internet access on the move. This will become a mass market proposition, although probably not until late 2004. The reason being is that experience around the world has shown that handsets of sufficient technological reliability, the reliability of networks and the cost factor involved, are such that such a service will not be available until that time. There is still much mileage to derive benefits for both businesses and customers from 2.5G, our GPRS network, which is rolled out on a national basis.

Ireland is one of the most mobile markets in the world. With high mobile penetration relative to fixed, 85% of the population have a mobile phone versus 40% who have a fixed line. The population is demonstrating a clear preference for mobile communication. It is personal, ubiquitous and, importantly, it represents value for money. Customers make very informed choices between pre-pay and contract and the churn numbers that have been talked about demonstrate that customers are seeking best value at all times. The costs per minute for Irish customers are falling, on average, by 10% per annum and, I believe, they will continue to do so. We believe that mobile costs here are average or well below average in all categories. Irish customers are among the most communicative in Europe. They spend 183 minutes on the Vodafone Ireland network per month, 65% more than the customers of Telefonica in Spain. Our mobile infrastructure is among the best in the world and benchmarks in the top quartile of the world's leading mobile communications company.

We will deliver mobile broadband services to the mass market by late 2004, which is a real commitment against what is an uncertain business model. I took the extra month necessary to consider whether I was prepared to commit not only to the €140 million licence fee but also to the €1 billion in Cavex that would be necessary to roll out to ubiquitous 3G coverage during the next seven or eight years. We believe that we are committed to the future development of telecoms in Ireland as an investor in our own business, as a significant employer, as a facilitator of group inward investment in Ireland and as a company which focuses on satisfying its customers and giving them value for money.

Chairman

Deputy Coveney

I will be brief as I am aware we have a good deal of work to get through. The representatives are welcome to the committee. The statement that the company is predicting that Irish customers will benefit from a fall of an average of 10% in prices this year and that is likely to continue into the future is extraordinary. We have a relatively mature mobile infrastructure, which the representatives have pointed out. How can Mr. Donovan say that prices will fall by 10% this year and probably by 10% next year and at the same time not suggest that customers are currently being overcharged? If he can say that the company will reduce its prices by 10% this year and 10% next year, those are significant drops. Why are those reductions not being fast-tracked if companies like Vodafone and O2, which suggested something similar, are indicating that they expect a 10% price reduction this year, next year and probably the year after? If they can do that, surely that suggests customers are currently being over-charged when almost every other aspect of the cost of living is increasing with inflation or above the rate of inflation?

There is no mention of roaming charges in the presentation. Vodafone is in a unique position in relation to roaming charges because it has such a large network across the globe. What is it doing about trying to reduce roaming charges for customers? For example, if an Irish person was to go on holidays to Spain, he or she could stay on the same Vodafone network, access messages in the same way as if he or she were accessing them at home, yet he or she would be charged differently. What is the company doing to inform customers of the cost of roaming charges and the cost of using one's mobile phone while on holiday abroad? As a customer, I have not received information as to the cost of using my mobile phone abroad.

I wish to ask the representatives similar questions to those I asked the representatives of O2 concerning the cost of handsets. Do the representatives maintain, as the representatives of O2 do, that it is a pure coincidence that a Sony Erricson phone of a certain type costs the exact same whether one goes on the Vodafone network or the O2 network? Is it the case with Vodafone, as we heard it is with O2, that the cost for post paid customers of purchasing a phone and getting on the network is significantly cheaper in the UK than it is here? If so, why is that the case? The same principle applies for the cost of upgrading, which is extremely high in Ireland compared to the UK, our closest neighbour, where Vodafone is also very influential in the marketplace.

In relation to the pre-paid and postpaid comparisons, it is hard to know which set of figures is correct, ComReg's figures or Vodafone's. Mr. Fahy said it was a matter of interpretation. Everybody agrees that we are reasonably competitive in the pre-paid sector but, according to the figures ComReg gave us, we are not competitive in the post-paid sector. I do not understand what Mr. Fahy meant when he said it is a matter of interpretation and usage. The figure we have is for the high user post-paid basket and the national figure for it is given. That is either factually correct or it is not. I am sure the representatives have the figures we got from ComReg and they will have done their homework before coming to this meeting. The representatives might explain, in a more scientific way, where they see the differential in figures between the ones we were given two weeks ago and the ones the representatives gave us today.

My next question is similar to a question I asked the representatives of O2, has our market bottomed out? Clearly it has not given that Mr. Donovan said that charges are like to come down by 10% this year, 10% next year and indefinitely into the future. How many players in the marketplace do the representatives envisage in two or three years' time and how many do they consider are required to provide real competition, as currently we effectively have only three?

Mr. Donovan

I will take the Deputy's first question and Mr. Fahy will take his question concerning roaming. As to how can we predict that prices will come down, not all costs in our business come down. As I am sure all the members will be aware, we have increases in labour costs and increasing costs of raw materials and electricity, which, like any other business, we must absorb. I am not sure that the question of our infrastructure being mature is necessarily right because we are at the cusp of one technology going into another. One of the reasons we have made an investment in 3G is that 3G makes much more effective use of radio spectrum. As we roll it out over time, it will enable us to have much lower costs of delivering our service. It is with some certainty we can expect costs will fall over time.

As regards the financial structure of the telecommunications industry as a whole, the committee is quite right in its analysis that in the late 1990s and early 2000s, which was a period of dramatic expansion, many telecommunications companies significantly over-stretched their finances and today they are materially burdened by a requirement to repay debt. Vodafone, however, is not one of those companies. Our debt to market capitalisation ratio is between 11% and 13%, which is extremely healthy compared to many of the global operators in both fixed and mobile communications. This has meant that Vodafone has been free to reinvest significantly in its businesses around the world. Some €200 million of investment last year in our infrastructure in Ireland, the purchase of our 3G licence and the commitment to ongoing spend to build a world class telecommunications infrastructure, characterises an industry which believes in its future.

There are many other areas of Irish telecommunications life which are characterised by low levels of capital investment. Indeed, I know that the Government has considered very seriously the possibility of setting up a parallel broadband infrastructure because it cannot find significant private companies willing to invest in a broadband future. We are not one of those companies and we will continue to invest significantly in our businesses across the world.

Was the EU correct to launch a dawn raid on the basis of alleged collusion for roaming charges? This took place almost three years ago. It is perhaps timely for me to answer a question that was put to the chief executive of O2, which was whether Vodafone and O2 are operating in collusion or operating some kind of cartel in Ireland. I completely refute any such allegation or implication. Indeed, it would be a criminal offence and entirely contrary to the code of business ethics that operates through our own group business.

Any concrete findings concerning roaming charges, arising out of the EU's dawn raid, would have resulted in fines for operators, but there were no such findings. I have the greatest respect for the comments Ms Étain Doyle of ComReg made to the committee last week on the subject of roaming charges. She said that neither she nor the operators in Ireland can fix this issue. It is a European-wide issue that needs to be addressed by all operators and regulators. I am pretty confident that we will see roaming prices come down significantly and a much greater degree of co-ordination and co-operation with the EU on what is a very material issue. Those are my comments concerning the dawn raid.

Senator Kenneally

I am delighted to hear that roaming charges will come down. Many people who get caught by roaming charges go abroad perhaps once or twice a year and are not totally au fait with how the charges operate until they are faced with a big bill on their return. They only discover later in the small print that they could have contacted a mobile operator before going away, in order to have the roaming facility turned off. Why is it not done the other way around, for example, by not having a roaming facility included in the package? If that were the case, customers would not be subjected to this system when they travel abroad. If, on the other hand, customers wanted the facility they could request the mobile operator to switch it on. It seems to me, however, that is not being done because of the huge revenues mobile phone operators are earning through roaming charges. If operators were fair to their customers they would not operate the system in that way but would only switch it on by request.

The Vodafone presentation referred to contracts for light and moderate pre-paid users. In the case of moderate users, unused free minutes can be carried forward to the next month but the unused account balance for light users can be carried forward indefinitely. Why should unused free minutes for moderate users not be carried forward indefinitely also?

Mr. Donovan

All right. We have around 50 retail stores which we believe is the right number for a market this size. We have two distributors of mobile phones who compete aggressively between each other for the business of independent agents. Where agents are larger, they often choose to have a direct relationship with us to enable them to carry out marketing and other activities. We provide substantial marketing support for them in terms of being able to help them generate a professional environment in which to carry out their business.

Manufacturers provide discounts on bulk purchases. A number of those discounts operate on a global basis. What generally happens is that those discounts get passed back into the customer offer. For example, the €110 phone on sale in the high street, about which we talked earlier, will have €60 call credit as well. That call credit plus the cost of commission to the agent, the cost of packaging for the phone, the cost of inclusion of customer leaflets, the cost of customer communications and, for the latest phones, the cost for configuring those phones to deliver the latest services to customers, which is a prerequisite for them enjoying those services, goes into the mix. That results in very competitive high street pricing.

Senator Finucane

If the independent retail store wishes to purchase separately, can it do so?

Mr. Donovan

That happens all the time.

Senator O’Toole

I would like Mr. Donovan or Mr. Fahy to confirm to the committee that if the wholesale price of a mobile phone is between €100 and €200, there must be an exorbitant profit. The phone I use retails at over €700. If they are saying there is a 300% mark up on that, I want to know why. It is the only phone which is GPRS enabled and it cost that amount.

I refer to competitiveness, people changing from one network to another and the advice given to people roaming. As I said earlier, when I arrive in another country in which Vodafone offers a service, it welcomes me there and tells me I can call 171, 1907, 1905, etc. Why does it not also tell me the roaming charges and that every time I receive a call, it will cost me 70 cent per minute which most people do not understand?

Another issue, which is far more important and goes back to the question Senator Kenneally raised, concerns people roaming for a period of time. I know for a fact, because I have had this argument with Vodafone, that it does not advise people going abroad that their monthly minutes rental is of absolutely no value to them when they go abroad. Most people around this table pay a basic €100 or €150 per month before they even get beyond their term of minutes, but they get nothing back for that except, in some cases, a carry over. Some people, including myself, are not able to carry over the amount of minutes and, therefore, they lose them. I would say to Mr. Fahy that it does not happen on the odd occasion, it is programmed into the system.

I listened carefully to two phrases Mr. Donovan used. He talked about phones being enabled automatically and he told us Vodafone was the world's leading mobile communicator. I was actually on to his company this afternoon in regard to a simple issue and perhaps he will explain it. I found I was wrongly advised by his company in relation to going abroad. I asked it a simple question some months ago about the cheapest way to roam. The cheapest way to roam is not to do so, but to buy a phone in the country to which one goes. It is by far the cheapest option, but people do not tell us that. I am going abroad next weekend and I thought I would do that, so I bought a SFR phone - SFR is a partner of Vodafone - and I tried to put it into a Nokia phone. I telephoned Vodafone to say I had a separate phone on which nothing was owed, but that it was locked. I asked your company to unlock the phone but it said it had to communicate with Nokia which was not too bad; the world's largest mobile communicator had to communicate with the world's largest mobile phone manufacturer. I asked if it could be done this afternoon but was told it would take four days. Why does it take four days to automatically enable a phone? I could not understand the answer I was given, which was, that Vodafone had to communicate with Nokia by snail mail. Vodafone must write to Nokia which must write back and it takes a minimum of four days for this to be done. If that is not an anti-competitive practice, I do not know what is. It is, at the very least, collusion and, at the very most, some type of cartel arrangement to stop people from moving from your system. It is not good enough.

I notice from your presentation that you promise us broadband in 2004. Let me remind you that you promised us GPRS last year. You promised people who opted into to GPRS data communication that they would be able to communicate at 100 Kbps within GPRS. How much faster than high speed is GPRS? How many places within your system in Ireland get 100 Kbps communications? Is GPRS, for which we are paying more, operating to the levels you indicated in your advertising last year? Do you advise your customers that using GPRS for browsing the Internet is far more expensive than doing it at high speed or at ordinary speed? Is that made clear? What is the average speed of GPRS in Ireland?

Is it correct that when people receive a roaming call but do not answer it, they are still charged for that call? That is a crucial issue. Many people might be aware of roaming costs but they are not aware that even if they do not answer a call and if it does not go to divert, there is still a charge in some cases. Will you confirm whether that is or is not the case? Are your roaming charges for data not an awful lot more expensive? You said your costs are average or below average. My investigation, or research, has shown that GPRS costs for UK customers are significantly cheaper than for Irish Vodafone customers.

I would like a response to those questions, particularly why you cannot communicate the unlocking of a Nokia phone to Nokia through data, e-mail or telephone. I should say that your staff are very good. When I was becoming irritated about that issue, I asked if I could be put through to a supervisor. Both staff members were good at what they did, so I asked the supervisor to think of the most obnoxious member of senior management and to put me through to that person but they refused to do so. I was fuming when I put down the phone but then I saw you on the monitor and said to myself that there is a God somewhere, so I thought I would come to talk to you.

Chairman

I did not realise that when I allowed you to ask so many questions.

Senator O’Toole

They are all very relevant.

Chairman

We did not notify Mr. Donovan of those questions and a number of others which have been asked. If he is not in a position to answer some of them, he can send the information to us or the Senator.

Mr. Donovan

In regard to Senator O'Toole's particular issue, without having a full understanding of the facts, including from where the phone was brought, etc., it is impossible for me to comment.

Senator O’Toole

It was an unlocked phone.

Mr. Donovan

I will give a commitment that we will resolve this issue to the Senator's satisfaction once we understand the facts. One does not get charged when one is roaming, when one does not answer the phone and when it is switched off and diverted to voicemail. We would be very surprised if there were any instances where that occurred.

In terms of GPRS, 100 kilobits per second is a performance that we would be very happy to get out of 3G but it is actually beyond the technical capabilities of GPRS. GPRS performance varies depending on the loading of the network but it is in that 27 kilobits per second plus category depending on the device and where one happens to be located. GPRS is a complete overlay for the voice network. Where we have circuit switched voice, we also have GPRS.

On the question of whether it is best to buy a SIM when one roams, for some people the answer to that question may be yes. Every mobile operator sells SIM only packs. We sell quite a lot and do so at the airport for people who want to come in and who want to move on to a fundamentally different service without being able to be contacted on the number they have given everybody, which is, their regular mobile phone number. There are ways to do that.

The comment about advising customers about roaming costs when they arrive at their location is one we have to take on board. I will discuss that with my colleagues in the Vodafone group. If providing that additional transparency to customers is something they want, then there is no reason we should not proceed to do something like that, although it will be fraught with some technical issues which, I am sure, we would need to overcome. However, that was an excellent point.

Senator Dooley

I did not hear all the presentation, although I watched much of it on the monitor. I wish to ask a question which may have been addressed already and which relates to work you are doing on your retail network. I understand a number of retailers offering the Vodafone product and service have been removed from its retail network in the last number of months. In some rural areas, that is creating great difficulties for consumers who would have used the services of local retail outlets for upgrades.

Chairman

That has been covered fairly extensively and O2 answered a number of questions put by Senator Finucane.

Senator Dooley

I will check the record.

Deputy M. Brady

Do you have a register of who purchases ready to go phones? The reason I ask is that from time to time people complain that they get nuisance and abusive calls and text messages. I believe these phones are used to make calls in relation to criminal activities. What is the procedure? Are these calls traceable?

Mr. Fahy

We seek to collect information about who purchases all our products which means we can do better marketing to our customer base. There is no requirement when one purchases a pre-paid phone to give any information about who one is. One is invited to register one's details on Vodafone's website and one will get an additional €10, or sometimes more euros, of credit in return for doing so. We have no way of confirming the details of the registration other communicating with the person at that address. That is how they get the information about their extra credit. It is in the customer's interest to communicate the correct address information but there is no guarantee or certainty. Unfortunately, Mickey Mouse is our most common customer data base name. We rely on people's own initiative and we try as best we can to collect details.

In relation to tracing nuisance calls or, of much more concern, nuisance text messages, all traffic on our network can be traced from and to the phone on which it originates and terminates. If we do not have any details about the owner of the pre-paid phone, all we can do is identify the information that nuisance texts are coming from a particular phone. If there is a criminal investigation or a Garda complaint, we provide that information accordingly to the appropriate authorities which may then be able to identify that the phone is in the possession of a particular individual.

Chairman

I thank Mr. Donovan and Mr. Fahy for appearing before the committee and for their indication that mobile telephone prices will fall in the next 12 months. I thank them for their comments on roaming charges within the island of Ireland and for agreeing to send us the number of tariffs you operate and the contract prices which will be treated sensitively by the committee.

Sitting suspended at 6.07 p.m. and resumed at 6.11 p.m.

Chairman

I welcome Mr. Andrew Kelly, Director of Regulatory and Corporate Affairs at Meteor. I first acknowledge the letter we received from Mr. Stewart Sherriff, your chief executive officer. I understand he was in hospital yesterday or the day before and that he is recovering from an operation. We wish him a speedy recovery and send him our best wishes.

We thank you for your patience and for appearing before the joint committee. Before I ask you to introduce your colleagues, I draw everybody's attention to the fact that members of the joint committee have absolute privilege but the same privilege does not apply to witness appearing before it. It is generally accepted that witnesses have a qualified privileged, but the joint committee cannot guarantee any level of privilege to witnesses appearing before it. Members are reminded of the long standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.

Mr. Kelly, I should mention that a number of members have to attend the House to debate a Bill that is of concern to the joint committee. That will not detract from your presentation because we are well able to listen and ask questions. Everything will be recorded by the parliamentary reporters and you will be able to get a copy of the proceedings of this meeting once the report is released.

Mr. Andrew Kelly

As you mentioned, Chairman, our chief executive officer, Stewart Sherriff, had a relatively minor but critical medical procedure. It occurred yesterday in the United States, so unfortunately he could not be here today. We are grateful for your comments and will take them to him.

We have brought along the senior management team of the company. On my left is Cliodhne Whelan, chief financial officer, Liam Hamilton, technical director, and Jan Remmelg, commercial director. We hope to be able to answer any questions. We are delighted to be here.

We will run through a presentation which will give you a little information on our company background. We will not take too long on that. We will look at issues such as our impact on the market, delivery and competition. Our presentation may be different to the two that have gone previously. My interpretation of them was that two operators spoke about themselves and not about competition or prices. We will be talking about them as well as ourselves, and about competition and prices, because we understood this is what the work of the joint committee is about. We will also look at some other issues, including coverage and national roaming and at the end we may have a request for the joint committee to consider.

In February 2001, Meteor launched the third GSM operator, that is, 2 and 2.5 GPRS. As everybody is well aware, there was a two year court delay so we entered the market when there was high market penetration. Two years on, we have invested well over €200 million in the network infrastructure and we have over 85% population coverage with no capacity constraint. Previous presentation referred to taxis and cars. Our network is state of the art. The equivalent is like driving on a Friday on the M50 between the5 a.m. and 7 a.m. on the one hand, and 5 p.m. and 7 p.m. on the other hand. The experience is entirely different with regard to how fast one gets to somewhere.

We have 12 owned retail stores, 300 store outlets, that is other retailers who sell our products, and 7,000 top-up locations nationwide. We have 320 staff in Dublin, Limerick and Galway and our majority shareholder is Western Wireless of the United States. It is an 80% majority shareholder.

I understand the joint committee has been told by the Consumers Association of Ireland that we have a 3% market share. That is an old figure. The last reported figure from ComReg for the first half of the year was over 4%. We predict we will have 6% or more by the end of this year and 10% by the end of next year. The competitive element we are bringing to the market is working

As far as are concerned, competition exists in the Irish market and Irish mobile phone users have a genuine choice. From our point of view that choice is coming from us. We are offering better value, lower prices and better services. Competition exists, but not between Vodafone and O2. They comprise a duopoly while we are trying to bring competition to this market. They both focus their attention on us as the smallest operator and we believe that in their marketing and approach to the market they are projectionist rather than competitive. However, we have succeeded in bringing competition to the market and we have forced prices down.

Some 70% of the overall market is pre-paid while 97% of our subscriber base is pre-paid, so for the most part we will talk about the pre-paid market. We are not, at this stage, very active in the post-paid market. We have simple tariffs and we offer lower prices. We have driven huge SMS growth in this country. We have low tariffs which have stimulated the market and we have forced Vodafone and O2 to compete. On average, Meteor customers pay one third less. That is substantiated. We had to substantiate it in order, for example, to carry the advertisements on RTE.

The ComReg presentation, which has been referred to several times, and the slides they used acknowledged Meteor's competitive impact on the market. Our pre-paid tariffs in this country are the third lowest in Europe and below the EU average. We have taken this slide from ComReg's own website, which they presented to you last week. It shows Ireland being the third highest with the post-paid basket and the third lowest for the pre-paid basket. ComReg's bullet point on that slide was very interesting to us. It states: "Meteor is more active in the pre-paid market." It was an acknowledgement, which we have verified with ComReg, that where the third operator is active in the market there is competition and prices are lower. This is the impact that Meteor has had on the market, not the impact of the big two.

In a competitive comparison, where prices are lower, usage is stimulated. High usage of voice and SMS on the Meteor network does not lead to higher ARPU. Meteor SMS usage per subscriber is more than double the industry average. The industry average is 78 SMS, or text messages sent per month; Meteor customers average 179. Some 25% above the average of those SMSs are paid for SMSs. They are not free, they are paid for. The lower tariff is effectively stimulating growth and use. High usage, we think, reflects the customer response to low prices. Our price is the lowest in the market, at 9 cent anytime to all other Irish networks. There are no restrictions and Meteor to Meteor is free.

Average revenue per user has been mentioned. The figures may vary slightly in terms of interpretations of international or published figures, but they are pretty close to what the committee has been talking about, which is a Vodafone ARPU of €46 per month, an O2 ARPU of €45 per month, while our ARPU is €27.50 per month. The same comments cannot be levelled at us regarding high ARPU usage.

The Chairman referred earlier to the Yankee report. The next slide shows ComReg's ARPU reporting with Ireland shown as third highest in Europe. Superimposing our ARPU over that graph shows that the Meteor ARPU is about the fourth or fifth lowest in Europe. At €27.50, it is €2.50 below the €30 EU average on the ComReg and Yankee graphs.

Much interest has been shown by the committee in tariffs and the publication of same. What committee members see in front of them are our tariffs. We have only two pay as you go tariffs: Meteor "leisure time" and Meteor "any time". They are exactly what they set out to be by way of title. "Leisure time" is a tariff for social users who use their phones in the evening and at weekends whereas "any time" is a tariff used mainly by higher use customers who use their phones during the day. Our subscriber base is 97% pre-paid. We have post-paid tariffs and will make them available to the committee. They would take up just one other page; we do not have reams of them. We have always stated since our launch that we would bring a simple approach to the markets in order that all customers would understand exactly what they receive and for what they pay and are charged.

The following few slides are some comparisons to indicate to the committee where a third operator, in this case Meteor, brings competition into the marketplace. I will not go through them line by line given the amount of time we have, but they are available to the committee members to study at their leisure. We show in these that, in terms of choosing an off-peak or peak tariff, Meteor is significantly cheaper. Depending on usage, it can be between 29% and 86% cheaper. As we said earlier, on average our customers pay one third less.

With regard to top-up, we reward loyalty. Every time a customer tops-up on our network, he or she receives a Meteor reward bonus. On average, customers receive an additional 10.5% free call value as a bonus for topping up.

We believe we are the texters' network of choice. We drove SMS growth in this country by first introducing a 7p text which translated into a 9c text. Now Meteor to Meteor text messaging is free. One thousand texts with Meteor can be cheaper than one text with our competitors because one cannot get much cheaper than free.

We also offer the cheapest international and roaming text rates. When people go abroad, they like to use their mobile phones for texting because they believe it to be cheaper. The rates show that both international texts from Ireland and from abroad are cheaper on the Meteor network by a substantial difference than the other two operators.

We may be a newish operator in this country. However, we have 180 roaming partners in 90 countries. Our customers can use their phones globally. Prices are significantly cheaper where Meteor has control. We have no control in some areas but we remain highly competitive there and negotiate the best prices for our customers. Often these prices are the cheapest available.

On the issue of control, effectively Meteor controls the cost of a call received while abroad if the call comes from its network. The cost of making a call when a customer is abroad is controlled by the host operator in the country in question. Where the control lies with the host operator, we add a 15% margin which covers our costs in terms of routing that call, customer care and all the other costs associated with it. When all these costs are removed, the margin to Meteor on that rate is 2% which we do not regard as excessive. Where we have no control, we negotiate the best prices we can on behalf of our customers.

In countries where Meteor has control - where we send a call abroad - prices are lower for a Meteor customer to receive a call on the O2 or Vodafone network in some countries than it is for Vodafone's and O2's customers. That may sound a little unbelievable but it is true. We have some indications which will be seen on the next page of our presentation. In the United Kingdom, France, Germany, Italy and Spain it is cheaper for a Meteor customer to receive a call while roaming on the Vodafone network than it is for a Vodafone customer. It is cheaper in the UK, Germany and the Netherlands for a Meteor customer to receive a call while roaming on the O2 network than it is for an O2 customer. The same applies to SMS. In the five countries I listed where Vodafone has operations, the text rate is 30c for Meteor and 49c for Vodafone. It is 30c for Meteor in Germany, the UK and the Netherlands and 44c for O2.

Meteor is consistently cheaper than Vodafone and in many cases cheaper than O2 when roaming on networks not owned by either. This underlines how well we have negotiated lower roaming tariffs. This means we offer our customers a wider range of networks when they travel abroad. Networks in all countries, as in this country, are different. They differ in terms of service levels and coverage in different parts of each country visited. We do not believe it is right to limit a customer travelling abroad to roaming on a single network. It could be argued that Vodafone is forcing its customers to choose its network while abroad to obtain the commercial value from that because it charges significantly higher rates to use another network. In theory, it should be as capable as we are of negotiating rates on other networks.

I will not go through the slide dealing with international outgoing calls but the committee members may wish to examine it. It shows some examples where, even though we do not have control and are not a global network, we negotiate the best possible and often much cheaper prices for our customers. I have highlighted one in bold at the end because the poor Irish soccer supporters in Switzerland last week could have phoned home on Meteor for 96c or €1.59 on Vodafone. They were sad enough without having to pay €1.59 for a call.

We do not believe O2 passes on to its Irish customers the savings of having its own networks abroad. The all-Ireland rate is an add-on service. It costs €7.50 per month to have access to that service. O2 charges the same rate of €1.20 no matter what network is used. Although at €1.19 it is only 1c of a difference, it is still cheaper for a Meteor customer to make a call on O2 Germany than it is for an O2 Ireland customer to make the same call. It is O2's network; why are wecheaper?

At its launch, Meteor announced flat rate tariffs for the first time for Ireland and the UK. We still offer the same rates for calls to mobiles and land lines in the Republic of Ireland, Northern Ireland, England, Scotland and Wales. We offer cheaper international rates than Eircom to many locations, including central Europe, Africa, Australia and New Zealand. We offer the cheapest international text and voice rates in ten out of 13 international areas, including the UK land lines and mobiles, even though Vodafone and O2 are UK companies. Meteor is also cheaper than Vodafone and O2 for international calls to EU countries, central Europe, the USA, Canada, Australia and New Zealand, the latter of which are English speaking areas. The graph I am showing highlights ten of the 13 international areas to which I referred where Meteor offers the cheapest service.

Mobile number portability has been introduced in this country. It is a strong competitive tool and was resisted strongly by Vodafone and, in our view, possibly still is, but was championed by Meteor. Difficulties since launch have been mainly due to system problems with Vodafone and O2 which we believe demonstrate a lack of commitment to competition.

Chairman

Perhaps Mr. Kelly would explain that. We had complaints from some who had changed to the 085 system and found it took days to be connected. Is that what you mean?

Mr. Kelly

That is exactly what I mean. People who tried to change were not able to do so and the fault lay with the systems in Vodafone and not with those in Meteor. Only this morning, once again Vodafone was not "clear to port", as it is called. It had system problems again this morning. We have complained regularly to ComReg and we hope it moves to resolve these system issues as quickly as possible.

From our point of view, even though these problems have existed since the beginning, we believe it is important for this market that number portability be pushed and promoted by ComReg and all the operators. I am delighted to say that, despite these problems, Meteor is the only network to date to have a net gain of customers. In terms of all the customers who have moved between networks, only Meteor has had a net gain. The other two have had net losses. For every one customer we have lost to Vodafone and O2, we have gained on average 3.5.

On national roaming, we believe we have brought significant competition to the pre-paid market and that we can continue to do so and move across and be very effective in the post-paid market. To do that, we must rid ourselves of a perception among the public that we have no or bad coverage. I say "perception" because we have a state of the art high quality network that covers 85% of the population. For the most part, west Cork and Donegal are the areas where we do not as yet have coverage. It takes time to build a network. It took Eircell-Vodafone many years to do so and took O2-Digifone a long time to do so. We are two years in existence and have 85% coverage.

There is a way we can bring competition to the marketplace much more quickly and that is through national roaming. This is a system which allows a new entrant or operator to have its customers roam on the network of an existing operator in areas where the infrastructure is still not built with no price penalty to the customer. This would mean, for example, that a Meteor customer moving from Cork city to west Cork would automatically switch to the O2 or Vodafone network without a price penalty. This would give full coverage in Ireland to Meteor while we continue to build our network. It would remove this barrier to competition, namely, the public perception that they should not move, even for the good prices, because the coverage does not exist.

We know ComReg thinks national roaming is a good idea because it included it in the 3G licences. When Hutchinson launches in this country and has built out 20% of its network, it will be entitled to national roaming. We believe this should be available on a non-discriminatory basis to Meteor as the third entrant to the marketplace. We request the committee to ask ComReg the reason it has not moved on this competitive issue.

We are not in the same position as the other two networks in this country in that we do not have our own network in Northern Ireland. Vodafone and O2 have their own networks there. As I said to the committee earlier, O2 has introduced a flat rate roaming charge for Northern Ireland but it costs €7.50 a month to buy into that plan before one makes a call. We do not have the same latitude to introduce an all-Ireland rate as quickly, but there are other operators in Northern Ireland and the United Kingdom besides Vodafone and O2 to whom we are talking and with whom we are forming our own alliances. We will, as soon as we can, introduce the best possible cross-Border rates.

Chairman

Did I see an advertisement recently which stated that Meteor does not have roaming charges?

Mr. Kelly

No, what the Chairman may have seen is that we were quoted somewhere as saying that it was not an issue for our subscribers at present because most of the areas of the country in which we are still building the network are around the Border.

Senator MacSharry

Given that Meteor's prices are extremely low, the breakdown of which surprises me, it is unfortunate that its representatives were not the first to make a presentation because it would have given us greater food for thought in our questioning of the other operators.

To what extent are the higher prices of the other operators determined by the level of investment they have had to make consistent with their coverage? Will Meteor have to raise its prices to become profitable given the level of investment it must make in erecting masts and putting antennae in place to improve coverage?

Do the representatives present concur with my observation that the other two operators who have made presentations are, as the Consumers Association said, ripping off customers?

Chairman

I will call Deputy Coveney as well. Perhaps Mr. Kelly might bank the questions.

Deputy Coveney

I apologise for my intermittent attendance at the meeting but it is due to the unfortunate fact that a Bill is also being discussed in the Dáil.

Will the representatives of Meteor indicate what market share the company has of all customers with mobile phones in Ireland? It would give us an idea of what we are talking about.

Chairman

The figures the Deputy requires are contained in the presentation.

Deputy Coveney

A comparison is made in the presentation between Meteor and Vodafone and O2 on the basis of average revenue per user. The last two are similar at €46 and €45 per month, respectively, while the Meteor customer pays €27.50 per month. Perhaps part of the reason for that is the type of customer who subscribes to Meteor. The majority of mobile phone customers are either Vodafone or O2. Anyone who chooses Meteor does so solely for price reasons because of the perception that the coverage is not as good and it is a new company that does not offer the same amount of services that O2 and Vodafone have built up over a longer period.

If one seeks to attract customers looking for the cheaper option - the "low fares" option as Mr. Kelly described it - it should not be surprising if such customers use their mobile phones less because they are more cost aware. The figure appears very impressive but what I have just outlined is the reason I asked for Meteor's market share. While the company's figures are impressive, it is important to examine the reasons behind them as well.

The presentation states that Meteor has coverage for 85% of the population. I presume that does not equate to 85% of the geographical area of the country.

I understand the motivation of the Meteor representatives on the issue of national roaming coverage. It is a sensible suggestion but I can understand the reason Meteor's competitors would want to prevent it.

The representatives have given much information on pre-paid market comparisons, an area in which Meteor appears very competitive. There is not a great deal of detail on the post-paid or contract market. There is one page which focuses on the amount of free calls per month. Perhaps the representatives could provide the committee with some more detail on how Meteor's post-paid contract customers compare with Vodafone and O2. I get the impression that Meteor is highly competitive in the pre-paid market and on roaming, the figures for which surprised me, but there does not appear to be emphasis on the other area. I am curious how Meteor compares outside the pre-paid market and roaming charges.

Mr. Kelly

In terms of coverage and investment, as I stated previously, our shareholders have invested €200 million to €220 million in this country and that will continue. The investment is planned over a number of years which will bring the company into profitability. Our intention is to become more competitive and drive prices down rather than up. I do not mean just on our network. When we are competitive, it reduces prices on all networks. Where we continue to build out coverage, that will not have an impact on prices except where we become more competitive and deal with the coverage issue. That will have the effect of bringing prices down.

On market share, the ComReg figures for the first half of this year were 4%. We do not have official figures beyond that. Our estimates point towards us reaching 6% by the end of this year and 10% by the end of next year.

Regarding whether customers come to us for cheaper prices, we certainly hope they do because that is one of the propositions we make to them. Our propositions are much better value and a much better service. I do not accept that we do not have or offer the same services the other networks have built up over the years. We are the only network to offer free customer care to all our pre-paid customers. Our handset prices are on average approximately €20 cheaper in the marketplace. We offer a full range of mobile phone services and we are about to launch our GPRS and LMS services onto the marketplace. As I said earlier, our network is state of the art. Mr. Hamilton will be happy to deal with quality details.

No coverage is a perception issue. It is correct to say that we do not have 85% geographic coverage; it is approximately 61%. The areas of the country where we do not have coverage are low population areas. It is very difficult to explain to us how it makes economic sense for a second operator to build a network in some of these rural areas, not to mention a third or a fourth. These are low population areas where the traffic does not justify building three or four networks. Therefore, from the point of view of a competitor allowing us to have national roaming, whichever one of them does will have nothing to fear because it gains revenue from a network in an area of the country which is largely dark at the moment. They do not carry huge amounts of traffic on their networks in these parts of the country and they will gain revenue from that. The national roaming issue is very important for competition in this country. It has worked successfully in other countries. If there are regions of the country where it does not make sense to build three or four infrastructures, should the new entrant not be roaming on the infrastructure of the existing entrant in order to get rid of this coverage perception and bring competition to the entire marketplace? The last census of population indicates that approximately two million people live in the greater Dublin and Leinster area. Our coverage geographically and by population in this region is as high as Vodafone and O2 . We are whittling away each day at the coverage issue and as a result we are gaining more and more customers.

On post-paid tariffs, the reason we did not dwell too much on these tariffs today is that 97% of our subscriber base is pre-paid, with just 3% post-paid. We believe that just 3% is post-paid because we have this coverage perception. A post-paid customer, a business customer, SMEs and SOHOs are all more inclined to want the coverage issue dealt with before joining a network. Our post-paid tariffs are available. They are, like the pre-paid tariffs, 30% to 35% on average cheaper than Vodafone and O2. We will send the figures to members after this meeting.

Deputy Coveney

If 90% of Meteor's customers are pre-paid - I accept it is highly competitive in the pre-paid marketplace - is it not somewhat inaccurate to make average revenue per user comparisons with O2 and Vodafone who clearly have a much higher percentage post-paid customers than Meteor? By their very nature, post-paid customers spend more per month on their phone. This is one of the most impressive pages, but it is a bit misleading. If you compare pre-paid Vodafone customers and what they spend per month and O2 pre-paid customers and what they spend per month with Meteor customers, then it is a fair comparison. Is it correct that pre-paid customers do not spend as much on average as post-paid customers per month? I assume a post-paid business person is likely to use the phone a lot more than a mother buying a phone for a son or daughter. Pre-paid customers must try to keep some kind of reins on their spending.

What is being suggested is that Meteor customers are paying €27.50 a month and O2 and Vodafone are paying €45 and €46. This would mean that Meteor customers are paying just over half of what others are paying.

Chairman

Are you saying there is almost 70% of pre-paid customers with the other two operators?

Mr. Kelly

Some 70% of the overall market is pre-paid. Today Vodafone and O2 said their figures are 70%, which is 70:30 as opposed to 97:3. Our post-paid customers use their phones a lot more than our pre-paid customers. I do not agree with the assumption that because one is a pre-paid user, and they move to the Meteor network for cheaper prices, they will not use their phone as much as perhaps a Vodafone customer on a pre-paid tariff plan.

What we said in the presentation with regard to our voice calls, and SMS in particular, is that higher usage is driven by lower prices. We find that the people who come to us are driving up usage because they feel they are getting better value for money. I do not agree with the Deputy's assumption.

Deputy Coveney

I am not being critical; I am just trying to get the facts. Does the fact that just 3% of your customer base is post-paid back up the view I suggested earlier that perhaps the post-paid tariff with Meteor is not quite as competitive relative to the other two operators as the pre-paid tariff?

Mr. Kelly

The Deputy is incorrect. Our post-paid tariffs are 30% or 35% cheaper on average. It is very difficult to look a particular tariff because of the number the other two operators have, including the number of baskets, choices and so on. We offer very simple tariff plans. What we can substantiate is that our post-paid tariffs are 30% to 35% cheaper. With due respect, I will offer our service to the Deputy. We will analyse a phone bill for anyone who wishes and tell them exactly how much the bill would have cost on the Meteor network.

Deputy Coveney

I look forward to that.

Chairman

Mr. Kelly made an excellent presentation and I am very impressed with Meteor. Competition is necessary and, when one refers to competition, one means real competition, not just a competition facade. Different people have different ideas as to how things should be done, but I agree with almost everything Mr. Kelly said. I have been a supporter and an advocate of pre-paid mobile phones. Having a family I am speaking from experience. Mobility in the modern world is the only way to go for students, young people and even older people like myself. It gives people great flexibility and adjustment. It involves no financial problems, no long-term investment for customers and it is definitely in the best interest of customers to have pre-paid phones available. I am pleased that this service is being advocated. The advantages of a pre-paid phone service is endless from the customer's point of view.

On the national roaming issue, I agree with freedom of choice. There were complaints that people who wished to change from one network to another find it difficult. It appears to take a lot of time and things do not seem to run very smoothly. I recommend that the regulator should move as quickly as possible to make sure that if people want to change from one network to another it should be as speedy, efficient and as pleasant as possible. I would be curious to find out the timeframe envisaged for full coverage.

Let us be realistic - times have changed in Ireland. Times are now more difficult in relation to planning applications throughout the country. There are now endless objections, regardless of what type of planning permission is being sought. Some of these objections may be justified but others are not. It is difficult to continue to add more networks when there are already sufficient networks in the country to cater for the service required.

Given that Meteor is that competitive and its service is so good, has it received much Government business? Perhaps it could get more Government business. Mr. Kelly answered the query on tariffs and prices. He appears to be in tune with what people are saying out there because he came prepared to answer the questions put to him. This is a much better way to proceed than having to drag out the answers.

In my opinion the committee should put the people of Ireland, that is, the customers, first. The customers in this case are the people who use mobile phones. If customers are given priority, we will get a better service at the cheapest price. The committee and the Chairman are doing a good job. The Chairman is always conscious of prices and the customers and he has always been pushing for lower prices and better services. If the committee can achieve this today and in the future it will be doing a good job. I believe that Meteor is providing the competition needed in this market to shake it up and get a better service at a better price. Ireland should be the country in the world to give the best mobile phone service at the cheapest prices.

Mr. Kelly

I will try to take as many questions as I have written down. I thank the Deputy for his comments. I am not aware that we have any Government business. We would, of course, be delighted to receive business from the Government should it wish to talk to us. We would offer it the same great rates we are offering the rest of the country.

(Interruptions).

Mr. Hamilton

The last tender was 18 months ago, which was a little too early for us.

Chairman

I am advised that the Government applied for approximately 2,000 telephones, a significant number of which are from Meteor's network.

Mr. Kelly

We were not aware of that fact. On the other comments, yes, we might be regarded as a minnow. We are certainly a very hungry minnow. We have been in business for two years, which is very much the early stages of network development and network roll-out. On the question of whether we can sustain this service and bring these competitive prices to the market while still making money, the short answer is yes. Our chief financial officer will deal with that issue in more detail in a moment.

In regard to holding up national roaming, we have asked Vodafone and O2 to give us national roaming on a reasonable commercial basis. These negotiations have got absolutely nowhere. We have asked for ComReg's intervention and we have given them legal opinion. That legal opinion suggests that ComReg has not just the right but potentially an obligation under the new European framework to mandate national roaming. From our point of view, national roaming is being held up unnecessarily and it should be mandated immediately in this market. If it is, we will then have much greater levels of competition to the marketplace because we will remove this perception of coverage. Perception is the problem we have, not the actual coverage.

Chairman

We will clarify that issue with ComReg.

Mr. Kelly

I have stated that it does not make sense to build four networks in some areas. To date we have found it impossible to get a national roaming agreement with another operator. A national roaming agreement is unsustainable. In the future we would compete equally with all operators in the marketplace. This would be more difficult to do while roaming on someone else's network which is just an interim fix. We will continue to invest and build our network. It should be completed in the next two years. In the meantime, the competition we brought to the marketplace could be more vigorous and successful if national roaming were put in place.

Chairman

I thank Mr. Kelly and his colleagues for coming here. As I said to the other operators, we may not conclude our business this evening. We may want additional information from the organisation. This committee will decide what steps to take regarding mobile telephone charges.

Sitting suspended at 7.28 p.m. and resumed at 7.33 p.m.

Chairman

This meeting commenced at 3 p.m. and it is now 7.30 p.m. I realise that members have other business today and I appreciate their patience. I did not expect this meeting to last so long.

I welcome Mr. Ciaran O'Donnell, Hutchinson 3G Ireland. Members of this committee have absolute privilege but it does not apply to witnesses appearing before the committee. It is generally accepted that witnesses have qualified privilege but the committee cannot guarantee any level of privilege to witnesses appearing before it. Further, members are reminded of the long standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or an official by name or in such a way as to make him or her identifiable.

Mr. Ciaran O’Donnell

I represent Hutchinson 3G Ireland which operates under the brand 3. My company was awarded a 3G licence in the middle of last year. Since then we have commenced the roll-out and launch of our 3G business.

The agenda I have set out is probably different to what members have seen today. I shall give some background information about the company and 3G. I have prepared an attractive demonstration but given the time constraints I am happy to leave it out. I will outline how the Irish mobile market will develop. Afterwards I shall be happy to answer any questions members may have.

Last year my company was awarded a 3G mobile licence in Ireland. The Irish company is owned by Hutchinson Whampoa, which is a multinational conglomerate based in Hong Kong. Hutchinson Whampoa operates five core divisions which include telecoms, ports, retail, property, energy and infrastructure. In telecoms it is quite well regarded for founding Orange in the 1990s and VoiceStream which it built into the biggest global mobile system or GSM operator in the US. Since the disposal of Orange and VoiceStream, mainly 2G investments, the group is now reinvesting in new 3G operations. In addition to Ireland, Hutchinson is investing in Australia, Austria, Denmark, Hong Kong, Israel, Italy, Norway, Sweden and the UK. All of these global operations are branded as 3.

In Ireland we have outsourced the build and operation of our 3G network to Esat BT in a deal worth approximately €150 million. We launched our network in Dublin and we are now offering 3G services to key corporate partners. In the next year we expect to make 3G services available to the wider public as our network continues to be rolled out and we agree national roaming terms with one of the incumbents.

Third general or mobile broadband is the latest global standard for mobile telecommunications. It is different to GSM because it allows very high wireless data speeds and access to a vast array of video content, including news, sport, weather and games. It can also host e-mail and support multimedia and video messaging. It can enable video calling and allow a person to see and hear the other person. It also gives increased security for mobile commerce where personal data is either stored on a SIM card or a handset.

We plan to cover over 50% of the Irish population with our 3G network by early 2005. Outside of our 3G coverage areas customers will be able to access existing voice and data services and GSM services via a national roaming arrangement with either Vodafone or O2. Our 3G network will continue to be rolled out and will eventually cover more than 80% of the Irish population. We expect that our additional competition in the market will drive down prices. We shall increase competition with a wide range of services offered at competitive and simple prices with the cost of national roaming an important consideration.

Deputy Coveney

Third generation technology is impressive. It offers possibilities for communications that no one thought we would have so soon. Is there a benchmark for the price of this service? Has 3G been rolled out in France, Germany and the UK? How does Ireland compare with regard to roll-out and timing? Are we competitive? Do Irish businesses have an advantage or is everyone rolling out the technology at the same time? I presume this technology can be used for video conferencing. What is happening in the Irish market? The 3G network has already been rolled out in Dublin. Are Dublin businesses now in a more advantageous position than businesses in Cork, Limerick or Galway? How much does 3G cost? If someone wants this service how much will a mobile phone handset cost? How much would it cost per month? What type of pricing structure is available? Is there only a commercial price available at the moment? Answering some basic questions about the service would be helpful.

Deputy Broughan

On the same point, how do the costs even remotely compare with those of operators like GSM? It seems to me that 3G will be revolutionary, an incredible step forward. When mobiles first appeared in the Dáil perhaps ten or 11 years ago, that was revolutionary. The video call idea seems incredible and will change things. I presume one will have to hold it differently in order to look at it.

O2 and Vodafone are also your competitors. Last week I asked the regulator when these two giants were going to roll out their 3G network. They seem to be shy of setting early targets. Does Mr. O'Donnell expect that Hutchinson Whampoa early in 2005 will have the field entirely to itself? Will that be good for competition? I wonder if the witness has any fears about the market, perhaps because of the cost structure, whatever it now is, in the sense that a licence is sitting there for anybody, I presume. Eircom was talking about going back into the mobile market. Does Hutchinson Whampoa have any concerns? It is a very striking international organisation with branches in Australia, Scandinavia and the UK and its headquarters in Hong Kong. It will be interesting to get comparisons from other markets. I thank the witnesses for the presentation and regret it has been such a long day.

Mr. O’Donnell

Regarding 3G across Europe, there was obviously a delay in the issue by the regulator of licences in Ireland. Through auctions we picked up licences in Italy and the UK at the top of the market, paying large amounts of money in 2000. The fact that the licensing process was delayed by three years has not helped to speed up the roll-out of 3G in Ireland. However, the Hutchinson group has been developing the technology with the network suppliers, procuring handsets on a global basis. In that way Ireland is part of a very aggressive group with an aggressive 3G roll-out. Ireland is behind but not that far behind. We have launched in the UK and Italy, Austria, Hong Kong and in Australia six months ago. We have launched across Europe.

Our commercial launch has taken place in Ireland, albeit with limited coverage. We expect the Irish market to be more adoptive of new technologies. It is an exciting market to be in, though small compared with 60 million customers in the UK and the same number in Italy. There is nevertheless an appetite for the Hutchinson Whampoa group for investment in technology in an adoptive market. We recognise it is currently quite a high value market but we believe that through 3G technology and the services it can offer we will grow the value not by high prices but by high usage.

With regard to the Irish roll-out, it is clear we will roll out in urban areas first. We can reach 50% of the population by covering the five major cities. We have obligations to roll out beyond those cities which will include major routes and major towns along those routes, and beyond that we will extend into rural Ireland. Our broadband roll-out is not directed against the mobile operators. There is also a nationwide incentive to roll out broadband on a fixed line basis into rural areas. We foresee ourselves being in a rural area, not heavily populated but still an area offering opportunities for 3G services.

As for the cost compared to GSM, we have reckoned that it is four times cheaper for us to send voice through our network than the existing operators can send voice through their networks. By way of a simple analogy, when one looks at the M50 at peak times, one could class that as a GSM network, while a 3G network would be a 40 lane motorway without toll gates. When one tries to compare what broadband can offer against a GSM network, the bandwidth enables voice calls data to be shipped a lot more cheaply than by the GSM operators.

On the national roaming and pricing issue, our prices will be largely influenced by the national roaming agreement that we can execute with either O2 or Vodaphone. As an SMP they have an obligation to offer national roaming to us. That means that when our customers are outside our network coverage area they can roam onto our partners' network. We as operators have to pay Vodaphone or O2 per minute for each call that our customers make. That price will very much determine at what price we are ultimately able to offer our services, voice and SMS, to our customers. While both operators are obliged to offer us a price, if we are unable to reach a commercial price with either, we will have to refer it to the regulator for intervention. We are confident that we will be able to reach a national roaming agreement with one of the two operators in the next few months.

With regard to fears in the market, our general approach to the Irish market is that it is an attractive market in which to build a business. Further to all that has been heard here this afternoon, there is a lot of discrimination in the market with regard to north-south calls, north-south roaming, roaming internationally and also between post and pre-paid. As a business, that is the opportunity for us. We believe we will penetrate the market only if we think laterally and target markets which have not been targeted. For example, in principle Vodaphone and O2 said that they offer a north-south one-island tariff. In principle we agree but on price we aim to compete.

With regard to the prices we plan to offer the Irish market, it is currently very difficult to propose a price without having any 3G handsets from manufacturers. As a group we are trying to procure 3G handsets from manufacturers and we are applying a lot of pressure in the other countries where we are established for those handset manufacturers to deliver the volumes for which we have built the demand. The closest notion of price that I can give is in the UK, close to home. Our cheapest post-paid tariff is for our VideoTalk 500, which gives 500 minutes of voice to any network at any time for £25 per month. That equates to five pence per minute, using any network at any time. It does not discriminate between those whom one wants to call. Some of the higher bundled packages take the same adoptive approach.

I am not saying that pricing depends on the availability of handsets and the price at which we can secure them, but we will probably adopt a very similar and aggressive approach to the one we take in the UK where we offer three times as many minutes as offered by the other mobile operators. We feel sure there is much ground for competition in the Irish market.

Deputy Broughan

Roughly how much do handsets cost in the UK?

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JOINT COMMITTEE ON COMMUNICATIONS, MARINE AND NATURAL RESOURCES debate -
Tuesday, 14 Oct 2003