Eircom ‘could net €130m a year from broadband plans’

EIRCOM’S €500 million capital investment in broadband over the next five years could deliver revenues of €130m a year if the company reaches its target of 85% coverage by 2005.

Davy Stockbrokers, in a 105-page report initiating their coverage of the Irish Stock Exchanges' latest recruit, indicates that Eircom's broadband rollout is a key element for future growth.

The report by analyst Jack Gorman estimates that Eircom will invest €1bn over the next five years on capex investment with just half of this going to broadband. The report also reveals that Eircom estimates that 28% of its telephone lines are substandard. Mr Gorman believes the fixed-line market can generate modest, low-single-digit growth, but said this will be heavily influenced by the success of the broadband rollout.

"Taken in isolation, a five-year model constructed by Ovum consultants indicated that a broadband rollout (boxes and wires) that achieves 85% availability and 60% penetration could cost up to €2bn in incremental capex (for a 2Mbit/s network)," he says.

Eircom is committed to extending broadband to 70%80% line coverage by March, 2005.

"We believe Eircom could generate up to €130m in annual broadband revenues within five years, with demand underpinned by the strong economy and young population," he said. Mr Gorman said that Eircom capex spending has been tracking in line with its European peers. Eircom is set to spend €200m a year over the next five years "We forecast flat spending in the next two years and gradual increases thereafter to approach operating depreciation levels. Like most incumbent operators across Europe, Eircom has invested significantly in upgrading its network in recent years.

"Since 1998 €2.4bn has been spent, predominantly on upgrading the core network. Latterly, the emphasis has switched to upgrading the access network. More than half of projected annual capex (€200m-plus) will be used exclusively to improve the access network in the next five years," he predicted. Mr Gorman said Eircom's lower capex trend of recent years is in line with other European telcos, which are still managing the implications of substantial over-investment in the late 1990s on their fixed-line and mobile businesses.

Mr Gorman also points out that Eircom has also indicated that it will consider re-entering the mobile market at some point.

"Though a small market, it is very appealing, given growing penetration rates, high ARPU (average revenue per user) levels, and the prospect of a more positive regulatory environment. Options open to eircom include acquiring an existing operator (eg Meteor) or launching as a MVNO (virtual network)."