Will Ionica’s launch leave BT dangling?

The name Ionica should have been ringing in our ears by now if all had gone according to plan. But last week the fledgling telephone company was forced to postpone its attack on the 7bn local phone market.

For now, consumers could be forgiven for thinking Ionica is a new make of Japanese car, or a camera perhaps. Only if its promised heavyweight branding campaign succeeds will we all know it stands for an innovative telephone service, using digital radio rather than expensive underground cabling or overhead wires.

The company is secretive about its decision to delay the launch but insists it is an administrative hiccup and promises a start date in a matter of weeks.

“Having spent three years getting ready for this, it would be stupid to launch two weeks too early,” says founder and chief executive Nigel Playford. “There are no technical hitches. We have everything ready in principle but not in detail.”

Why do we need Ionica? The cable companies already offer savings of between ten and 20 per cent on average bills, while BT is being forced to make substantial reductions in its phone charges by official industry regulator Oftel.

Playford says: “Our way of doing things is entirely novel. We can offer a better service and better value. People have had to take their phone line at home from BT since the year dot. More than 80 per cent still have to take it from BT, but of the 20 per cent who have the choice, up to five per cent have opted for cable.

“We don’t have to dig up the streets like the cable companies. They have had difficulty persuading people to watch 30 to 40 TV channels, but they have been highly successful in persuading people to leave BT. We are entirely focused on telephony but our economies are 100 times better than the cable companies.”

Some analysts believe Ionica could undercut BT by up to 40 per cent.

The beauty of its system is that radio is used for the link from the local telephone exchange to the user, avoiding the need to use BT’s network of copper wires under licence, or to lay a whole new cable network.

Calls are carried by high frequency radio signals, with a flat octagonal plate fixed to the customer’s property to provide the link with a base station. Long distance calls can then be forwarded from there, thanks to agreements with other networks (mainly with BT).

Radio’s key advantage is that most of the capital investment is confined to the equipment that goes into the customer’s premises. Contrast this with cable, where a much greater capital injection is needed to lay the cables under the pavements, before even offering the service to potential customers.

Ionica’s shareholders include some big players, including Morgan Stanley, Yorkshire Electricity, 3i and Robert Fleming. Playford says the shareholders are “extremely happy” with the way things are going, despite the delay to its launch.

Kleinwort Benson analyst John Karidis suggests a simple explanation. “It has to make sure there is someone to pick up the telephone when it generates demand. It had better be ready for an avalanche of calls and enquiries.”

Karidis says confidence in Ionica’s launch is high but that the longer it drags on, the more competitive the market becomes. While Ionica delays, BT sharpens up its act.

Ionica has to persuade people to install its system when they already have one that works perfectly well. The company promises digital technology, a feature-rich service that includes call diversion, call waiting and conference calls and, of course, substantial savings.

In the meantime, BT has been installing more digital exchanges, effectively undercutting elements of the Ionica service package. And last week, BT customers learned their phone bills will fall from an average of 50 a quarter to about 30 over the next five years under new price-cap proposals published by Oftel.

Competition in the UK is likely to hot up even further with the possible 33bn merger of BT and Cable & Wireless. The mega deal would mean the sale of Mercury Communications, C&W’s UK arm, to avoid monopoly problems. Possible buyers would probably include US telephone giant AT&T, whose presence would spice up competition in the UK.

“The goalposts keep moving for Ionica,” says an industry insider. “In the past 18 months there has been a huge change in BT’s attitude and performance as it tries to make itself more consumer-friendly. But it has gigantic overheads. A telecoms system using wires and poles is pretty primitive in this day and age.

“BT will not be out to strangle Ionica at birth. It might allow it two to three per cent of the market to get into Oftel’s good books and be seen to be encouraging competition.”

BT will also make money out of Ionica from leasing its lines, so the two have both a symbiotic and competitive relationship.

Playford denies Ionica’s launch delay was sparked by Oftel’s call for substantial tariff reductions. He insists: “Everyone in the industry knew this was going to happen. Our business plans projected this, so it comes as no surprise to any of our shareholders.”

Ionica’s network is being rolled out in stages, starting with the East of England. The service should be offered nationally in two years. The company’s stated aim is to win five per cent market share in five years, or a million customers.

Ionica is not as dependent on grabbing market share as the cable companies are. Some observers say it will only target premium customers, with relatively high bills. Otherwise, margins will be so low it will not be worth it for Ionica to install the equipment.

In fact, Ionica is expected to make its real money from partnerships abroad. In other words, the UK will act as a guinea pig before the system is exported. Ionica is already being tested in ten countries, although the company refuses to say which.

Last October, ScottishPower paid 16m in return for the right to use Ionica’s telephony equipment in Scotland. In 1993, Telecom Finland agreed to adopt the Ionica technology in its bid to break into the local service market.

Once the system is running in a couple of UK regions, Ionica’s management may even opt to run the service on a franchised basis.

But first things first. The UK launch will begin with advertising through Rainey Kelly Campbell Roalfe, after a last-minute switch out of BST-BDDP. Because Ionica is a remote operator, its focus must be on customer service, so powerful advertising is crucial. Behind the sudden ad review seems to have been a change of emphasis away from classic direct response ads. Playford and his team – which includes ex-Direct Line marketing boss Steve Ashman – are expected to begin with brand-building advertising and leave aggressive, competitive marketing until later in the campaign.

One insider sums up Ionica’s future: “The UK is a bit of a test market for Ionica. If it can succeed against BT, imagine how successful it could be in countries without an existing telephone network. Why put wires and poles up when you can use radio? It can go to its financial backers and say, ‘give us some money – and we will conquer the world’.”