An immediate priority is reclaiming residential and business customers for its landline business, writes Jamie Smyth

Eircom may become a "virtual mobile operator" as part of a new strategy to compete more aggressively with mobile phone companies for customers.

It is also researching wireless "hot spot" technology, capable of delivering high-speed internet at locations such as railway stations and supermarkets, says Mr Cathal Magee, managing director of Eircom Retail.

But a more immediate focus for the State's dominant telecommunications provider is its campaign to reclaim residential and business customers for its landline business through the launch of a new digital cordless handset, the Eircom 4012, and the roll out of its digital subscriber line service, i-stream.

"We see mobile as the same market as fixed line and the people we need to compete with," says Mr Magee. "There are 2.9 million mobile phones out in the market and only 1.8 million fixed lines; this gives us just a 37 per cent market share.

"Our main competitors are Vodafone and O2 and we need to offer our customers both value and convenience. The new handset is a way to modernise the landline business... It's also about innovation in landline."

The launch of the digital phone is themed around the concept of customer flexibility. The handset looks exactly like a mobile phone and offers features such as caller identification, call waiting and the ability to transfer telephone calls.

But it is also cheaper to make calls on Eircom's fixed network compared to the other major Irish mobile networks, says Mr Magee.

The launch of the new handset is an attempt by Eircom to try to claw back some of the gains made by mobile firms over the past three years, which have reduced Eircom's share of the voice market to just 37 per cent, down from 65-70 per cent.

Despite an increase in data and internet traffic carried on the Eircom network over this period, the fall in voice traffic has caused the firm's revenue generation to remain flat, says Mr Magee.

"The total value of the telecoms market is €3.2 billion. But our retail and wholesale revenues are about €1.7 billion. This amounts to just 56 per cent of the market in terms of revenue," he says.

Eircom will use Mr Magee's analysis of the market for voice services to lobby to overturn a recent notice by the telecoms regulator, who said she was "minded" to retain a price cap on Eircom.

The price cap mandates Eircom to reduce its telecoms charges by a factor of the consumer price index minus eight annually. It was imposed because of Eircom's dominance in the fixed-line sector, where it still maintains more than 80 per cent market share.

But Eircom chief executive Mr Philip Nolan has placed the issue at the top of his regulatory agenda, and Mr Magee will set out to change the regulator's mind before she makes a final direction this year.

"We would question the industry rationale for a price cap on retail telecoms services," says Mr Magee. "We think it is a very competitive market here for voice services. Customers have choice, whether business or residential. They can choose any service provider they wish."

But the rapid success of mobile operators here has not been matched by Eircom's landline competitors, most of which are still losing money. Since carrier pre-select was introduced - a technology that enables competitors to offer services over Eircom's local network - 320,000 phone lines have been transferred to competitors. But most competitors here have failed to hold onto these customers and, since January 2001, Eircom has won back 150,000 of these lines.

Critics believe removing the price cap would lead to higher telephony prices for consumers, and enable Eircom to behave in an anti-competitive fashion towards its competitors.

However, Mr Magee believes a decision to retain the price cap may actually harm the cause of competition.

"Other licensed operators are struggling with the level of price competition in the market. In fact, the reason Eircom has been so successful is that we are under a very tough price cap and have had to become efficient.

"A further price cap would result in more price competition and new competitors would find it more difficult to enter the market. This would also prevent extra investment in the market here."

A decision to remove the price cap would also reflect the new era in telecoms where profit is crucial, argues Mr Magee.

"A few years ago a company was valued by the number of subscribers it had, but now it's got to be profitable. Profit depends on margin and margin depends on tariffs," he said.

"The industry is at a new phase, a shake-out is taking place and the business models that applied a couple of years ago are now the subject of some ridicule."

This has persuaded Eircom management to hold to its controversial decision not to introduce a dial-up "flat-rate" internet product similar to that seen in many European countries, despite lobbying from consumers and politicians.

"A flat-rate product is already on the market through our DSL service. This meets all the requirements of flat-rate internet," says Mr Magee. DSL enables telecoms firms to offer "always on" high-speed internet services over ordinary telephone wires to consumers and businesses at speeds much faster than dial-up internet connections.

But the high cost of Eircom's new DSL product, i-stream, has been criticised by consumers and is a factor in the slow role-out of this broadband technology. The company has installed just 800 DSL connections since the product was introduced in May.

"It's very early days," says Mr Magee. "We'll not make any early judgments on the market for at least three to six months."

Consumers who want to purchase cheaper DSL services - similar to ones available in Britain at about £30 sterling - will have to wait until at least next year, according to Mr Magee, who would like to see greater Government support for DSL services.

"Tax incentives do have a role to play in stimulating demand - just look at the 21 per cent VAT levied on the DSL services... The Government could also support PC penetration," he says.

However, after a 12-month period of retrenchment, which saw hundreds of high-tech workers at Eircom subsidiaries lose their jobs, the firm is beginning to research innovative technologies and strategies.

Despite a non-compete clause signed with Vodafone following the sale of Eircell last year, Eircom is looking at the possibility of offering mobile services to customers in the future.

"It's a logical development for Eircom to be a supplier of fixed and mobile services. We will look at becoming a mobile virtual network operator and see if it presents an opportunity," says Mr Magee.

The entry of Hutchison Whampoa into the mobile sector here may enable Eircom to gain a foothold back in this market. Under the terms of Hutchison's licence, which was awarded last month, the firm must allow "virtual operators" - companies that do not own their own network - to piggyback on their mobile network.

But most observers believe the non-compete clause with Vodafone will rule out Eircom's re-entry to the mobile market until mid-2004. Until then, Eircom will look to sweat its existing assets and try to make its fixed-line business more attractive to consumers.