With such a fast-moving and volatile industry it's probably reasonable for the investor to expect the unexpected in 2006, writes Barry O'Halloran

Ireland's telecoms market may be developing but Eircom continued to be the company dominating newsflow in 2005.

In November, the company that effectively controls the State's fixed-line telecoms infrastructure looked certain to fall into the hands of Swiss state player Swisscom.

Swisscom's overtures began last spring, but the courtship began in earnest in the last quarter of the year.

It made its approach and began due diligence with a view to offering €2.40 a share for Eircom, a price that valued it at €2.57 billion. At the same time, the Irish company's board granted it exclusivity, clearly signalling that this was a deal it wanted to do.

But in the final week of November, the Swiss government stepped in and broke up the party, saying it did not want its state telecoms company making foreign acquisitions.

At the time, Swisscom was also eyeing Danish operator, TDC, which sold that week for €10 billion. It had earlier been in the running for Czech and Austrian companies, though it had been successful in its pursuit of neither.

The Swiss government's opposition to Swisscom's attempts to expand were supposedly rooted in state airline, Swissair's disastrous investment in Belgian carrier, Sabena, which left the country without a national airline in 2001. But senior figures in the Swiss administration made it clear that they were particularly concerned about the company's intention to buy Eircom.

Interior minister Paschal Couchepin told local newspapers that the Government's decision to block Swisscom from making foreign acquisitions was designed specifically to prevent it taking over Eircom, which it believed had weak growth prospects.

He pointed out that as soon as news of his government's decision emerged, Eircom's price plunged to €1.94 from €2.30, a fall of 17 per cent. "Swisscom was about to acquire a company at an overvalued price," he said.

Despite some rumours the following week that a deal could be done, the process was never revived. It looks as if, for the moment anyway, Eircom will have to go it alone.

The Swisscom approach appeared to have come at just the right time. Eircom had just received Competition Authority approval for its €420 million take over of Meteor, the smallest of the three established players in the Republic's lucrative mobile market.

That news followed quickly on the heels of an Eircom rights issue that successfully raised the cash needed to fund the deal, agreed in principle with Meteor's owner, Western Wireless, in late summer.

Earlier in the year, Eircom also won a High Court battle with communications regulator, ComReg.

The regulator had directed Eircom to open up the connections between its exchanges and customers (known as the local loop) to its competitors. At the same time, ComReg refused Eircom the right to appeal the decision to the new Electronic Communications Appeals Panel .

The High Court ruled that the regulator was wrong to do this, and the decision was rescinded.

To the frustration of Eircom's competitors, particularly BT Ireland and Smart Telecom, the outcome meant a delay in opening up the local loop to them. Eircom put forward its own proposals for doing this in October but these were dismissed as not going far enough.

Companies like BT and Smart want access to the local loop so that they can sell their own products and services to consumers and businesses. It's particularly relevant to the development of broadband, which will open up a new range of services, including cheap phone calls over the internet, to customers.

Minister for Communications Noel Dempsey subsequently signalled that the Government would bring before the Oireachtas legislation aimed at forcing Eircom to give this access to its competitors.

Newly-appointed BT Ireland boss Danny McLaughlin, welcomed that news. The company is champing hard at the broadband bit because it plans to launch a new series of products and services, 21C, in this country. But it will need local loop access to do this.

BT recently took over IT services and products supplier, Cara group (once part of Aer Lingus) for €15 million. Mr McLaughlin intends chasing further acquisitions next year.

Part of BT's 21C offering will include internet-based phone calls. Known in industry jargon as voice over internet protocol (VoIP), this will allow people to make international calls for the cost of a local connection.

This technology threw up one of the most significant developments on the global front during the year. Online auctioneer, eBay, paid €3 billion for Skype, a company that uses VoIP to give people cheap calls across the internet.

The move made the industry sit up and take notice, as Skype, founded in Scandinavia and based in the Netherlands, was regarded as something of an upstart. Search engine operator, Google, launched a similar service, and it is likely that many others will follow in 2006.

Internet phone calls require broadband, something for which a lot of Irish people are still waiting. The Republic has one of the lowest rates of broadband penetration in the developed world, a shortfall that threatens our ability to compete for the kind of high-level of investment that we are trying to attract.

While Eircom says otherwise, opening up the local loop is seen as vital to solving this problem.

However, the State is making progress with the next generation of mobile technology. This year, ComReg awarded a third generation (3G) mobile network licence to Hutchison Whampoa subsidiary, 3. This company became the State's fourth mobile operator when it launched its service in the summer.

Last month, ComReg awarded the final 3G licence to Smart Telecom. In the final week of the year, Smart announced that it had raised €57 million for the development of its network, which it expects to be up and running by July.

A surprise participant in this fund-raising was a subsidiary of businessman Seán Quinn's Quinn Group, more associated with traditional industries like cement, manufacturing and financial services. Quinn will contribute half the €57 million by way of a loan that is convertible to Smart Telecom stock.

Expect similar surprises in the fast-moving telecoms industry in 2006.