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How Ionica Got Its Circuits Jammed (Int'l Edition)


International -- European Business: TELECOM

HOW IONICA GOT ITS CIRCUITS JAMMED (int'l edition)

This wireless network filtered out basic economics--and the power of British Telecom

A year ago, when the astounding runup in European technology stocks was just a whisper in the summer breeze, Ionica Group PLC, a British telecom company in Cambridge, stormed onto the scene.

The newcomer had plenty to excite investors: roots in Britain's answer to Silicon Valley, a new wireless technology, and a license to challenge British Telecommunications PLC (BT). It was a tech-driven deregulation play, and it even offered fast access to the Internet. When Ionica went public in July, 1997, investors promptly bid up its market capitalization to $1 billion.

The debutant celebrated its success with champagne--and has been walking wobbly ever since. Over the past 12 months, the company, whose representatives declined to comment for this story, has wrestled with its new technology while taking an old-fashioned licking in the marketplace at the hands of BT, which controls 90% of Britain's residential business. The company reported operating losses of $184 million on sales of $13.4 million for the nine months ended last Dec. 31.

A change in management in January did little to solve the problems. Things looked dire in April, when debt-ridden Ionica announced that it was looking for a deep-pocketed rescuer, and worse in August, when it admitted it couldn't find one. That bad news drove the company's once high-flying shares down to $1.25, less than one-tenth their original price (chart).

Ionica's tumble is a cautionary tale for investors in promising European technology stocks, from biotech to Web design. It shows how euphoria surrounding a new technology can drive up expectations while blinding investors to glaring shortcomings, such as a company's lack of business knowhow. All too often, this sets the stage for a crash, and that was the case at Ionica. As a result, the company is unlikely to survive as a stand-alone phone company--even though its core business may be sound.

Ionica's idea, hatched early this decade under the leadership of an electrical engineer named Nigel J. Playford, was a common one: The key to riches in telephony was to control the so-called last mile, the link between the big wires and consumers' houses and businesses. This is where operators could charge the highest retail prices. Plenty of companies were already developing radio technology to leapfrog this final mile. In essence, they would link thousands of rooftop antennas through a cellular-type connection to the big phone networks. Most of these operators, though, had their eyes on remote unwired markets from Africa to the far reaches of Russia. Playford's Ionica was focused on Britain, one of the most wired markets in the world.

In 1993, after Britain's government decided to open up the local phone market, Ionica was the first to land a public operator's license. Avoiding the cost of wiring, Playford, then 36, hoped to swoop in with cheap radio technology and undercut the wired competitors. With installation and maintenance costs projected at half of BT's, Ionica would be able to offer users inexpensive multiple lines for faxes and modem connections, while keeping rates 15% below BT's.MISREAD COSTS. Eventually, Playford hoped to land 10% of Britain's $42.6 billion telecom market. His pitch found followers. Investors from Yorkshire Electricity Group PLC to Telecom Finland Ltd. poured in some $246 million in development funds, and Ionica worked with Canadian equipment manufacturer Northern Telecom Ltd. to come up with the radio hookups. By the time of the 1997 initial public offering, Playford's Ionica was well known to investors. Now, it just had to make money.

That proved difficult. At the heart of the trouble seemed to be a misreading of costs. While it was true that Ionica's radio technology was cheaper than wiring, Ionica's competitors--BT and a handful of cable operators--had long ago paid for their wires and were more than ready to battle the newcomer on price. "It was a basic misunderstanding of economics," says Bill Matthews, CEO at venture capitalist Cambridge Quantum Fund Ltd. As Ionica deployed its machinery and geared up a local marketing campaign, declaring "The Revolution is here, in East Anglia," the company ran right into a price war. BT's aggressive tactics forced Ionica to slash rates five times in its first six months, eventually offering long-distance calls at less than a nickel per minute--all to stay some 15% below BT's rates. "They're in one of the most competitive markets in the world," says Chris Hart, Nortel's marketing vice-president for fixed wireless systems.

The price war was painful enough. Logistical snafus made things far worse. The company's marketing proved overly effective, and Ionica quickly overloaded its base stations with too many callers, leading inevitably to breakdowns. Software upgrades promised relief but took months to implement. Cash poor and besieged in its startup markets, the company postponed planned expansions across Britain.

In January, with the stock swooning, the board hired a new CEO, Mike Biden, a longtime executive at the Mars Group, relegating Playford to vice-chairman. Since then, Biden has been applying first aid to the troubled company, trying to straighten out the logistical mess while searching for a rich investor, most likely a foreign phone company, to bail out Ionica. But investors are staying clear until Biden can renegotiate the company's $350 million debt.MODEM ENVY. Oddly enough, despite the jammed circuits, software delays, and miserable publicity, Ionica continues to expand its customer base. In the quarter ended in June, that base rose 18%, to 50,790 households. And even while pulling back on television advertising, it keeps adding several thousand households each month. At Ionica's cut rates, the impact on earnings is small, analysts claim, but access to a larger customer base will heighten its value for potential investors.

Ionica faces another new problem, however. Even as it struggles to build up a national telephone service, investors and customers are boosting their expectations for phone companies. Looking ahead to multimedia, they want companies to provide broadband access into houses so that customers can download movies and games off the Internet or install video phones. Responding to this demand, even cellular-phone operators are now promising dizzying data speeds, fast enough for live video, within three years in both Europe and Japan.

By comparison, Ionica, with its every-day modem speed for Internet access, looks pokey. "It was set up to compete against a more prosaic telephone service," says Michael Jeremy, telecom analyst at ING Baring Ltd. After such a wild and woolly ride in its first year, Ionica seems likely to end up in the slow lane on Europe's Information Highway.By Stephen Baker in Paris, with Kerry Capell in LondonReturn to top


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