Peter Erskine, CEO of European mobile operator O2, talks to Ian Channing, editor of TelecomsEurope, about the impact of the company's recent acquisition by Spanish carrier Telefonica and how he sees developments such as fixed-mobile convergence and triple-play impacting on the European mobile market in the future
TelecomsEurope: Has O2's acquisition by Telefonica changed the way in which the company operates or what its strategic goals are‾
Erskine: Our strategic goals remain the same, only that they have been bolstered by being part of an enlarged company. We are aiming for revenue and cash-flow growth above other European communications services businesses and look to create a strong, coherent European footprint. True to its word, Telefonica has left in place all the ingredients that attracted it to us in the first place. The acquisition has re-shaped O2 - we have expanded and now have responsibility for the Czech Republic and Telefî£„ica Deutschland, which increases our size and our profit.
In addition to encouraging customer additions, particularly in the UK and Germany, Telefonica's supportive approach has helped O2 score a number of noticeable operational successes in the first few months of this year. We also continue to maintain a strong and distinctive O2 brand endorsed by our recent Â£10 million advertising campaign and a number of new interactive partnerships.
Increasingly, we will examine ways to move beyond mobile into fixed broadband and converged services. O2 is also benefiting enormously from being part of the wider Telefonica group in terms of procurement synergies and revenue benefits from faster time to market. We are sharing best practice in a number of important areas of differentiation, including DSL and converged products as well as marketing, customer loyalty programmes, like O2 Treats in the UK and Genion in Germany. Our people have already spoken with device and hardware manufacturers with Telefonica Moviles about better prices and more exclusive handset ranges.
What is your view on the EU's proposals to dramatically reduce roaming charges‾
At the beginning of the year when we became part of the Telefonica Group, we said that one of the first tangible benefits of the deal for our customers will be improvements in roaming services due to us being part of a wider, global company in order to leverage scale.
Even before the dust settled on the Telefonica deal and at my very first board meeting back in February, we were putting our roaming plans into practice and in May announced My Europe. In addition to introducing low-cost roaming price plans - including, for example, a 35p per minute pan-EU flat rate for UK customers - we believe we are the one of the first, if not the first, to scrap charges for receiving calls abroad for customers who select one of two services under My Europe. We believe from our customer research that there is not a one-size-fits-all answer at the retail level, and therefore have announced two service offerings under My Europe.
Work began on scoping out roaming propositions before the EU made its announcements and is due to our ability now to leverage scale as part of the Telefî£„ica Group. It is competition that is driving down charges not regulatory intervention - this is particularly true now that we have seen market consolidation in Europe and the US and the need for companies to differentiate on customer service and international reach.
Does O2 have broadband DSL ambitions in the UK market‾
With regards specifically to our options in the UK, we are examining the broadband market and have ruled nothing in or out. Following the acquisition, O2 now has a combination of mobile and fixed businesses.
In recent weeks we announced the integration of Cesky Telecom and Eurotel to form a single, unified business and Telefî£„ica O2 Czech Republic, to provide both fixed and mobile products and services. Telefonica Deutschland is being integrated within O2 Germany and, at CeBIT in March, O2 Germany announced a range of integrated fixed/mobile offerings utilizing the company's new broadband capability. Our Manx Telecom business also offers a complete suite of fixed and mobile services.
So clearly as a group we are already focusing on broadband and mobile solutions.
Is this a different deal than triple/quadruple play‾
I believe that the industry's desire to label an offering either as a double, triple or quadruple play could have a tendency to confuse the customer. We are concentrating our efforts around providing services based on the convenience of mobile coupled with the speeds of fixed broadband, and over the next couple of years HSDPA - or what we are calling turbo-charged mobile. Attached with simple price plans, these services may include mobile voice calls at local rates when used within the home or office, a plethora of messaging services presented within one user interface, the ability to download music and games, as well as to view TV on the move or to the desk top.
Generally speaking, mobile operators have a major advantage over fixed-line providers. Millions of people now see their mobiles as almost an extension of themselves and by combining broadband and mobile technology, content can be tailored to individuals and is easily accessible on demand. In addition, O2 has a major advantage over mobile only operators in that it can draw on the vast experience and resource of Telefonica.
Does O2 have plans to move down the fixed mobile convergence route in the UK‾
Convergence has been talked about since about 1990, but over the next two to three years my sense is it will start to happen. We were looking at the DSL market in Germany and possibly doing something with Telefî£„ica Deutschland even before the Telefî£„ica offer. We will launch DSL in Germany later this year, and with Genion this will be a pretty compelling product for a customer's complete communication needs. In the Czech Republic, we are putting together a fixed and mobile business and expect there will be some real customer benefits there as well as revenue synergies. Indeed, around two-thirds of the total synergies of $625 million to $700 million already announced will be from revenues, not cost reductions.
We will look and learn from our experience in these markets, and this will help inform our thinking on the UK market. We are looking to offer DSL in the UK market, but have made no final decision yet on the exact delivery mechanism.
What is your take on fixed mobile substitution‾
There is a huge opportunity here for O2, especially when one considers that today around 70% of all voice calls made still originate from a fixed-line telephone.
Do you think 3G is fulfilling expectations or will it require the introduction of HDSPA to really deliver on its promise of high-speed data‾
As we have always anticipated, the take-up of 3G is still relatively modest. With an increase in attractive handsets, we are starting to see the numbers grow and we expect that to increase further later this year. O2 became the first operator in Europe to launch a commercial HSDPA service on the Isle of Man in last November, and the Czech Republic is now also offering the service. We have HSDPA capability built into the network to provide improved performance over today's 3G networks and plan to introduce commercial HSDPA services in the UK and Germany later this year.
However, we have always said that customers are interested in services, not technology. Overall, mobile data continues to deliver for us and we have recorded consistent growth in data revenues, supported by increased usage of data services. We now have 11 million active mobile data customers across the group - up from seven million a year ago - and that figure does not include text users. SMS volumes are continuing to climb and across O2, we saw more than a 30% year-on-year increase in volume.
Is your i-mode service a success with subscribers‾
i-mode is performing in line with our expectations and we have around a quarter of a million customers in the UK and Ireland. Going forward, we will continue to deliver more content and devices - to date we have close to 150 i-mode sites in the UK, including eBay, ITN News, the AA and lastminute.com.
Average data usage of i-mode customers exceeds that of WAP users, which is very encouraging and in line with the experience of other i-mode operators. One of our key objectives was to provide our customers with a great customer experience. Although our research is still ongoing, initial results show that 96% of customers that used i-mode claimed it to be very or fairly easy to use and 87% of stated that their handset worked immediately without any issues.
Do you see mobile WiMAX/IEEE 802.16e as being of interest to O2 down the road‾
Potentially, it may be of interest, but today few devices support the service and, in any case, existing Wi-Fi services offer more than enough bandwidth. Customers will still want to roam far afield in the future - so as we've always said, we believe that offering a mix of local and wide broadband services is the way forward.
Do you think it at all possible that in the future the Telefî£„ica group could encounter competition in some of its actual or potential markets from Chinese or Indian operators‾
To date, the major operators in these markets have been slightly wary to move into markets overseas. However, recently the Chinese have moved further to secure a presence in emerging Asian countries. The competitive landscape is changing all the time.
Do you think the global mobile industry is set for more consolidation‾
Yes, it would appear to be the case if one listens to some of the future intentions of other operators. But I don't expect to see a rash of deals - more likely a small number of considered approaches. Clearly with market penetration reaching saturation point in many European countries, there will be fewer 'new to mobile' customers, which only intensifies competition. I envisage seeing the more mature markets in the UK and Germany dividing into two distinct camps - winners and losers. It is one thing to announce hefty investment programs and new pricing plans and another to deliver real value from them.
What are the key mobile trends that you seen developing over the next five years‾
None of us really know what the new converged media world will be like. We are all still testing out the water - broadcasters with podcasts; the BBC with MyBBCPlayer, which will allow viewers legally to download seven days of programs; Google with its VoIP offering; and us at O2 with DVB-H mobile TV and super-fast 3G - otherwise known as HSDPA.
Customers can pick and choose what they want to watch and listen to and when. And with DVB-H, they can now choose where to watch as well. Across the communications sector, customers' consumption patterns are changing. There are more sources of content to choose from. And there are more ways that customers can access, consume and pay for this content. With greater choice, customers will also become more demanding. Brands will have to work harder to engage and keep their customers. Customers will expect us to get it right first time, every time. They will decide what they want and it will be up to us to provide the technology to make it possible.
So, for instance, customers will expect to be able to transfer content across different devices and platforms. This applies not just to the technology in customers' hands, but also the technology under the ground and in the air. Between us, we will construct a patchwork of technology across our territories, of GSM, GPRS, DVB-H, HSDPA, DSL, DAB and so on. This mesh of technology will be opaque to the customer, but will offer them the kind of flexibility and inter-operability they seek.
I have been surprised about how up until now a lot of the convergence debate has focused on Internet versus broadcast. But if the customer is becoming more powerful and you look at what he or she wants, it is flexibility and mobility. They want all the content and entertainment the digital world offers - but they want it at home, on the bus, in the street or at work. In short, they want mobility.