April 3, 2012

Re Eircom Examinership this week, thoughts from 2000 on similarity between Railway Mania and Eircom

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“Nothing so undermines your judgement as the sight of your neighbour getting rich,” wrote JP Morgan in 1905. As I write, a telecom company is digging up the street outside the window, laying cables, promising me the world from my living room in a matter of months. The gouging out of Ireland’s road network is happening in every town and has been for the past six months at least.

It is contended that this new information superhighway will change our lives for good. That may well prove to be the case but my question is far grubbier and much less profound: will these telecom pioneers – whether they be fixed-line or mobile merchants – ever offer a decent return for their investors? Now that the vast majority of Irish shareholders own Vodafone as well as Eircom, the issue is whether a global bet on telecoms is better than a local one.

Innovation, according to Joseph Schumpeter, is the one outstanding fact of the economic history of capitalism and, where there is innovation, there is always speculation. The speculators are at the vanguard of the process and once the innovation has settled down, is proven to work and can guarantee decent but not dramatic returns, the speculator disappears and the investor takes over. The investor is a much more stable person, mainly interested in the way the company is managed today rather than the promise of vast riches tomorrow.

The other question for Eircom shareholders is whether companies such as Vodafone and the international telecoms market in general are still in the expensive innovation phase or have reached maturity? If we are still in the innovation phase, Eircom’s shareholders are speculators rather than investors.

In 1845, England was in the grip of a boom in railways. They offered the real prospect of linking the whole of England together efficiently for the first time. The general public was mesmerised by the prospect. Both Dickens and Wordsworth complained about the railway obsession while new expressions, such as “you’d better get up to steam”, entered the English language.

However, with the innovation came the speculation. The world wanted a slice of the action and, initially at least, investments in railway stock returned up to 50 per cent per annum. Given these returns, the number of railway projects exploded.

Most were financed on a `call’ basis, where 5 to 10 per cent of the money was put down in advance and the remainder would be ‘called’ when the project needed cash. All that was needed for a new line between two destinations was an act of Parliament. By late 1846, 1,200 projects were planned, all financed by punters on a `call’ basis. At the height of the boom, the paper value of certain projects had increased by 500 per cent.

By 1847 (in a way which showed just how removed Victorian England was from famine Ireland), 100 Irish railways were planned. They were to be financed by English investors, apparently oblivious to the suffering of the people.

During the boom, many speculators became fabulously wealthy. These included Charlotte Bronte who proved to be one of the master speculators of the day. The new wealth also changed the delicate social balance of Victorian England with new money usurping the power and prestige of the landed gentry. But storm clouds were brewing. In 1848, revolution abroad jolted confidence, prompting the Bank of England to raise interest rates. Faced with collapse in the feel-good factor associated with the easy money of previous years, many speculators found themselves caught between the falling value of their railway stock and the increased demand for cash in order to complete projects.

Thousands went bust overnight, as did many small banks that had underwritten such projects. Fortunes were wiped out and by 1850 railway shares had declined from their peak by 85 per cent. The total value of the shares amounted to only half the total cash invested in them. Average dividends amounted to a paltry 2 per cent and up to 25 per cent of projects never paid any dividends at all.

With that in mind, let’s look at telecom mania 1999/2000. Like the railways, telecoms promise huge returns for the ultimate winner, but with so much cash sloshing around, prices earlier this year became ridiculous. In April, hysteria kicked in with the next big thing: auctions in Europe. Five groups paid �37 billion or �630 per customer for five British 3G (third generation) licences.

In Germany, where �50 billion was invested, each customer was valued at �615. However, this month, similar Swiss licences went for a mere �20 per customer – a 96 per cent fall in value.

To finance the German and British ventures, Europe’s big telecoms companies went on an unprecedented borrowing binge. France Telecom is now carrying �65 billion in debt, up from �13 billion two years ago; Deutsche Telekom is �60 billion in debt, up from �30 billion; BT is �50 billion in debt, up from �3 billion.

Coinciding with this borrowing binge has been a sharp fall in their share prices and a disastrous launch of the Wap phone, which has been a conspicuous failure almost everywhere with the possible exception of Japan.

Maybe these are only teething problems, but when market leader Vodafone does not estimate a return from 3G until 2005-2007, deep root canal surgery rather than the cutting of milk teeth springs to mind.

On the fixed-line side of the business, competition has been so strong due to the new long-haul fibre-optic networks that the old indebted companies are losing market share by the hour and prices are plummeting.

The basic problem in global telecoms is far too much debt and a market that isn’t growing as quickly as most expected. Shareholders have been badly burnt and raising more cash is becoming increasingly expensive.

Two weeks ago the Bank of England warned investment banks against arranging new loans for telecom companies. Once the banks begin to get nervous we know we’re in trouble.

For Eircom investors, direct exposure to the international market via Vodafone might well be a godsend, but the climate suggests otherwise. It is difficult to see the telecoms fad generating serious returns for shareholders against a backdrop of diminishing global spending power and a requirement that bondholders be paid first.

For everyone else, the telecoms mania will leave some positive results. The railway mania in England left it with 8,000 miles of track by 1855. Likewise, the telecom mania will leave most of us with better communications, cheaper bills and a faster service.

But who pays for it? At the moment and into the near future, it seems that telecom shareholders have subsidised a better telecom service for the rest of the country. I suppose that is how democracy works but back in July 1999 it was all supposed to be so different.


  1. brianh

    “The gouging out of Ireland’s road network is happening in every town and has been for the past six months at least.”

    What/Who/Where? Ohh you are talking about Eircom laying down fiber where there is already another provider..
    Here is a bright idea. Put them down somewhere else where there are NO decent broadband provider.
    But hey guess that would make too much sense.

    I hope they crash and burn hard.

    • lff12

      ESB Telecomes have already laid Metropolitan area networks in about 30 towns. The towns that EirCon left behind because it didn’t want to risk losing money on them. And there are parts of Dublin which still cannot get broadband, just 9 miles from the city centre. EirCon have kept us in the technology dark ages. No wonder we are one of the fastest abandoners of landlines.

  2. Tony Brogan

    Faites vos Jeux

    Sounds like capitalism at work here.Winners and losers.
    What is it to do with democracy?

  3. lff12

    David, I think you are 100% correct on the analysis of telecoms and comms in general, but eirCon was very different, because eirCon did not spend on infrastructure and forced cutting egde users to pay the full cost of the new technology – which of course meant that high cost prevented the development of essential services, and slowed down their rollout. EirCon also continued to charge at multiples of the rates elsewhere right up until the present day – companies with an office in both Dublin and Belfast, for example, pay 10 times the cost for the same network link. For a corporate link, you could be paying 100k for the same thing in Belfast and 1,000,000 euro in Dublin. Think about it. Thats the price of 20 well paid jobs. Or 50 entry level posts.

    And then there’s the laugh that is EirCon advertising. They have repeatedly shamefacedly advertused themselves as a bargain when they have almost always been by far the most expensive provider on the market. And up until a couple of years ago, it was extremely difficult to extricate yourself from their stalker sales teams. I recall telling one telephone harasser who had phoned about 4 or 5 times never to call again – and somebody arrived on my doorstep the next day. He asked me did I want to save money on my calls? I told him I already did so by not doing business with him. Please don’t come here again. Thank you.

    The only thing is I do feel for staff hired in the last 10-15 years who’ve been squeezed on all sides, from what I hear.

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