Paignton and Ionica

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Summary

This is a short history of Ionica with a view of its aspirations and downfall.

Ionica

Ionica was incorporated in 1990 with the aim of competing with BT in the UK residential telephony market – using a novel wireless access technology – bypassing BT’s local wired infrastructure. It had set itself ambitious targets to both develop the technology and to roll out a network of base stations, as well as installing and operating a national network. This would need substantial development resources and financial backing, both of which were insufficient for the task.

It was a critical time in the evolution of telecommunications;

  • BT was fully privatised in 1994 and remained in a dominant position in the UK market, having, what the regulator Oftel – later Ofcom after telecom, TV and wireless regulator agencies were merged – called “significant market power”.
  • Mercury Communications, a subsidiary of Cable & Wireless, was issued with an operator’s licence in 1982 and was deploying a national backbone network. After 8 years of operation, in 1993 it had 174,000 direct business and 511,000 indirect residential lines in service – accessed by dialling a 3-digit code.
  • Competition between mobile operators was increasing with 4 licence holders – Cellnet, Vodafone, Orange and One2One using the GSM standard, with 34m users by the end of 1998 and with 3G services in preparation.
  • The internet, which was accessed using a dial-up modem, was expanding quickly and needed higher data speeds and an “always-on” connection. Broadband  access – see pages 214 for discussion about infrastructure competition – was to become an essential consumer service which later included TV and internet services over the same network connection.
  • Privatisation and consolidation of cable TV companies, which entered the telecom market – initially by offering telephony services. Broadband access was also being offered using high-speed cable modems over coaxial or fibre-optic cables.
  • The investment community was encouraging startup companies to take advantage of liberalisation by offering seemingly unlimited amounts of capital. This led to what became known as the “dotcom” boom, followed by a spectacular bust.

Ionica could have used any access technology – cable, wired, wireless – or a combination. It decided that the only way to bypass BT’s network quickly and cost-effectively was to use wireless, and developed a proprietary system operating in the 3.4GHz frequency band – used by the Ministry of Defence but which was licensed to Ionica – to provide network access.  This meant the network could be rolled out by locating base stations in areas where there was most demand. Each subscriber has a fixed terminal in their home or office to which they can connect phones, fax machines and modems. Crucially, at this time, the system they had defined was narrowband, so could not provide broadband access to the emerging internet.

Atlantic Telecom, backed by Marconi, was another alternative operator based in Scotland, using a similar business model, with the use of wired as well as wireless network access. That company went into liquidation in 2001.

Nortel Networks

Nortel entered the UK market – following market liberalisation – primarily by buying the UK company STC Plc in 1991.  At one of STC’s sites in Paignton, Devon there was a large opto-electronics factory making components for, amongst other applications, STC’s fibre optic cable business.  It also housed a much smaller wireless activity which developed antennas for BSB – the “squarial” – and a satellite simulation product, now owned by Spirent.  It was this department that offered to manufacture radios for Ionica’s fixed wireless access system.

In the early 1990s a decision was made by Nortel to become a leading developer and supplier of fixed wireless access products.  The company already had another product group using the North American CDMA standard for wireless access and decided that – for some territories – the Ionica-derived product would be preferred.

A new building to house manufacturing and product design for the UK and overseas markets was completed in 1997.  This was accompanied by a recruitment campaign for hardware and software engineers, and support staff, which filled the building, just 18 months before Ionica was placed into administration.

Ionica’s Business Plan

To show how ambitious Ionica’s business plan is it is worth comparing it with the progress made by Mercury Communications, which had started offering services in 1986, some 10 years before Ionica.  This is shown in the chart below.

Business customers were provided with a direct connection to Mercury’s network while residential customers had indirect access, by dialling a 3-digit prefix (131 or 132). Mercury had only to advertise its service tariffs and sign up a customer, there being no additional equipment needed for residential users.  

Ionica, on the other hand, had to deploy a base station to provide network access, link it to their switching and network management system, and perform radio propagation measurements, and then install an antenna on the customer’s premises and provide cabling to their equipment.

So Ionica had a much more expensive and time-consuming process for residential customers and, at the same time, was still developing their site survey and installation process while working with Nortel and others on product development.

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Looking at Ionica’s financial performance reveals a dramatic profile for a company that has just raised money from investors. The cash in the company disappears between the time it was floated on the stock market in July 1997- raising £156m – and the time it went into administration just over 15 months later in late 1998.

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The impact on the profit & loss account indicates a cost per subscriber of £6,600 in the year to March 1998!

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There are two contributing factors;

  • Network rollout was slower than it might have been because of base station capacity limitations and a complex and expensive subscriber survey and installation process.
  • Ionica Group’s realisation that revenue growth was never going to match the company’s plan, and seeing that it was now impossible to raise further finance using its Senior Credit Facility, cut its losses and placed the company into administration.

At the time the administrators were informed the company had book value of £305m with a prospective realisation value of £8m and with a cash balance of £11m. In 2007 the administrators completed the process with a cash balance of £65m to be returned to stakeholders.

Ionica Group plc

From the American Bankruptcy Institute;

“In 1997, Ionica Group plc was formed at the request of Ionica’s lenders to facilitate additional financing for Ionica’s startup business. Ionica became a wholly owned subsidiary of Group, and Group consummated an initial public offering, the proceeds of which allegedly were to be used to fund Ionica’s expansion and development. According to Ionica, Group was to act as a conduit, with the IPO proceeds to be funded by Group to Ionica as needed. Initially, this took place, but as Ionica’s business and financial situation soured, Group allegedly balked at advancing additional funds, acted to protect its position and eventually agreed to advance funds to Ionica only on a secured basis.”

A holding company corporate structure protects investors from Ionica going bankrupt, as any shareholder’s assets held by Group are protected from claims made by bondholders in the Ionica operating subsidiary.  

Total funds raised by Ionica were;

  • Private equity between 1992-1997: £206m
  • US bonds 1996 13 1/2%, due 2006; $150m
  • US bonds 1997 15%, due 2007; $350m
  • Public share flotation 1997; £156m

Potential funds from a consortium of banks;

  • Senior Credit Facility; Up to £300m subject to network rollout and subscriber revenues.

The reason for the company going into administration was the failure to meet the target for 1998. It was an unrealistic target even if there had not been issues with base station capacity and the subscriber installation process.

The actual compound annual growth rate (CAGR) in subscribers achieved in 1998 was 117%.  The target agreed with  the banks was 572%. Even more demanding was the revenue growth required.  Ionica achieved a CAGR of 119%, but the target was 797%. Even with a faultless product development and subscriber installation process this was unrealistic.

Product Development

The hardware and software for the fixed wireless access product was developed in stages called “releases”.  Each release introduced new features and cost reductions – in the case of hardware – to meet agreed specifications.

Initial product development was done by Ionica’s in-house engineering group, assisted by contracts with Symbionics and Scientific Generics. By 1995 a demonstration system was available, called release AR1.

The first system release that was capable of handling live traffic – called AR3 – included a low capacity base station with 3 radio bearers. A bearer is capable of supporting 10 radio channels, each one of which can carry a telephone call. To provide the required in-service capacity Ionica had to deploy two base stations at each site.  

Nortel developed this release for Telstra and Lanka Bell, as well as Ionica. It was shipped  to Ionica in May 1996 and to the other operators in Q4 1996.

The next release – AR4 – doubled base station capacity to 6 bearers and 600 subscribers with development beginning in December 1996. The target date for this release was December 1997 and was based on the time it would take for Nortel to complete the software and new hardware, and Ionica to complete integration and testing of its switch with fixed wireless base stations. Ionica completed its testing in early 1998 and began deploying in April 1998.  By June around half the base stations in the network had been upgraded, in line with expectations.

Testing of the latest release in Lanka Bell’s network was also completed by the middle of 1998.

The next system release – increasing base station capacity to its design limit of 18 bearers and 2,500 subscribers – was tested by Nortel by November 1998, just as Ionica was placed in administration. Coincidentally BT was conducting trials of broadband DSL technology in its local network at this time.

During the period March 1996 to March 1998 Ionica had purchased £227m of network equipment,  mainly from Nortel, but also from GPT and other smaller suppliers.

Nortel subsequently developed further releases, including an “always-on” internet access option with a packet data rate of up to 163 kbps. This was available in 2001.

By this time, however, BT and others, were planning broadband internet access using DSL while cable network operators were providing cable modems for broadband. Interestingly BT was constrained in deploying DSL because it had debts of £28 billion – in the financial year 2000-2001 – which led to it selling its mobile business.

Conclusions

Ionica failed for several reasons, the two main ones being;

  • Ambition – and an over-ambitious network rollout, using proprietary processes and technology that were still being developed.
  • Technology – defining a proprietary technology for an analogue telephone network that was on the way to being transformed into a broadband digital one.

The casualties included all the stakeholders – investors and employees – who lost most of their investments or jobs. However, this was tiny compared with the fate of 60,000 Nortel employees who lost their jobs in 2001 and another 35,000 subsequently. Nortel was declared bankrupt in 2009. Another victim of ambition and technology.

Postscript

Linkem SpA (annual company reports are available from www.registroimprese.it was incorporated in Italy in 2001, initially to provide WiFi hotspots in public places and latterly as a broadband access service provider. Today it has more than 1200 base stations serving 40%-60% of the country – 35 million people – using WiMax fixed wireless access at 3.4GHz. This was deployed between 2008 and 2014 with equipment supplied by Alvarion.

Linkem provides broadband access to around 350,000 residential customers in parts of Rome, Palermo, Turin and Naples, adding around  5,000 customers monthly.

In 2015 the company began deploying LTE technology from ZTE to replace its WiMax network. The LTE specification provides downlink peak rates of 300 Mbps, uplink peak rates of 75 Mbps and a latency of less than 5 ms in the radio access network.

Additional finance of €100m was raised by the company in 2017 to fund the network upgrade, bringing total investment to over €500m.

The major difference between Ionica and Linkem is clear – it chose internationally standardised technologies, one that is also used by mobile operators, and will have the advantage of competitive supply and continuous product development.