You can look at O2’s prospects in two ways: the best and most consistently performing operator, with the strongest brand in the market and the biggest subscriber base, underlined this week by another solid set of results. Or the network that has made the wrong call on 3G and has its glory days behind it?
Sipping an O2-branded bottle of water on the table in his office, UK CEO Ronan Dunne’s assessment clearly appears to be half full, rather than half empty.
He talks of a new plan for O2 that he claims will go further than any of his rivals in embracing data: an all-encompassing HSDPA, Wi-Fi and fixed-line broadband strategy.
It is 100 days since Dunne was promoted to CEO of O2 UK from his previous role as finance chief. He replaced Matthew Key who was promoted to the CEO role for O2 Telefonica’s western Europe territories just before Christmas.
Exiting along with Key were his two principal lieutenants, and arguably the two individuals who shaped O2’s success from the wreckage of BT Cellnet six years ago: sales director Mark Stansfeld, and customer director Cath Keers.
Dunne is disarmingly charming and has the support of two new sales directors – Stephen Shurrock and Ben Dowd, as well as marketing heads Sally Cowdry and Tim Sefton. He also has Ian Clarke leading the device team and Derek McManus heading technology.
The exiting trio’s last days saw the spectacular win of the iPhone contract, as well as the first rumblings of criticism towards O2’s slow 3G strategy. The late rollout of 3G, following the operator’s misadventure with i-mode, started to show cracks in O2’s strength in the market.
On the credit side, Dunne inherits a company with the largest subscriber base in the UK (18.4 million, including seven million on contract). O2 continues to top customer service polls and has a brand that is admired well beyond the mobile industry.
Most recently, O2 used Sim-only deals to fantastic effect to keep contracts ticking over without spending on handset subsidies, and taking prepay customers onto contracts.
The iPhone was the biggest story for O2 last year. In a few weeks, Apple is likely to unveil the 3G iPhone, continuing its exclusivity with O2. Dunne says: ‘We’ve got a multi-year, multi-product deal with Apple. Whatever product development they [Apple] have, it will be on O2.’
The iPhone was heralded as the ultimate music phone, but it has arguably done more as a mobile internet device. ‘It has 20 times the average data use and the ARPU is 35% higher than the average. It has sold well and driven more customers to use data.’
The anticipation for a 3G iPhone has highlighted the potential weakness at O2 for lagging behind rivals on 3G. The rise of the dongle market, exclusion of network sharing deals, and the final embarrassment as Ofcom rapped O2 at the end of February for failing to meeting its 3G coverage target brought the issue to the surface.
‘I don’t think we’ve made any mistakes. It’s the quality of the network that counts, and we are building a high-quality HSDPA network in line with customer demand.’
Last month O2 was the last of the major networks to launch its dongle, which is only available to existing O2 customers – again raising questions about the capacity on its network.
Dunne says: ‘It doesn’t matter that we weren’t first. It is too early to say how big mobile broadband will be but I can make it clear that we won’t be playing as an also-ran.’
Dunne points to the dispute between Vodafone and 3 over speeds, saying: ‘I certainly wouldn’t want to be involved in the spat between 3.6 [Mbps] or 7.2 [Mpbs]. I would ask whether those customers really are getting those speeds. It’s a developing market and I am more focused on our customers and what they want.’
O2 is in the process of building a huge HSDPA network, leap-frogging 3G in many parts of the country.
The operator is believed to be at a disadvantage because it is the only network without a partner to share the cost of building a 3G network.
He refers to 3 decommissioning 60% of its network and adds: ‘We’ve looked at network sharing arrangements closely. While we wouldn’t rule anything out permanently, at the moment we feel that any potential savings are outweighed by the complexity and risk of compromising our customer experience.’
‘There’s no technical limitation to us being added as a network partner [to either the T-Mobile-3 partnership or the one with Vodafone and Orange], but we’re not in any negotiations.’
Dunne warns that it would be wrong to get ‘too hung up’ on HSDPA. ‘Customers want fast data access, so Wi-Fi and EDGE give us additional differentiation.’
O2 has a deal in place with The Cloud and is less resistant to Wi-Fi than rival networks. ‘I would compare some people’s attitude to Wi-Fi to that of the walled garden when using the internet on phones. You can’t restrict people’s experience. There is a big opportunity to use Wi-Fi in areas with large demand for data.’
Dunne also believes it is more cost-effective to offer data services across a range of technologies instead of ‘overloading your mobile network’.
A critical plank of O2’s ‘Beyond Mobile’ strategy is fixed-line broadband. The adverts are everywhere as O2 starts advertising outside its existing mobile customers. Its new £5 ad campaign launched in mid-April aims to refresh the brand.
O2 has set a target of one million customers by 2010 as it enters an already competitive fixed-line market, with the likes of Sky, Virgin, BT, TalkTalk and Orange fighting over market share.
O2 once again beat all the major mobile operators in the JD Power survey last week and is regarded the customer service benchmark in the mobile industry. With that context, O2’s tactic is to build on its record for high-quality customer service. And as broadband is one of the few areas to rival the mobile market for appalling customer service and consumer perception, Dunne says there is a clear opportunity.
Service and speed
Claims that nine out of 10 O2 customers would recommend the service to a friend are routinely made by O2 on the subject of fixed broadband, and eight out of 10 say O2’s service is better than their previous provider. ‘We test the lines as you’re connected to see that the speed you were sold is the speed you are getting. We go back and check it a few months later,’ says Dunne.
As rivals have already found, getting customer experience right in the home broadband market is far trickier than with mobiles. One analyst says: ‘There are infrastructure issues. It’s more complex. You’re relying on BT a lot of the time and there are a lot of the layers between the infrastructure and the customer.’
O2 is in the process of moving its customers to its own infrastructure rather than relying on BT’s and already has 57% of the population unbundled. The operator is looking to increase this to 70% by the summer. What isn’t immediately apparent is why O2 is making this huge investment in fixed-line? What’s the relevance for O2 other than reducing churn?
For rival Orange, the argument was made that its parent company France Telecom already had a UK broadband business and it made sense to combine it with the mobile operation. But even that has proved tough; the project hasn’t been as much of a triumph in the UK as it has been in France. Rather than bring benefits to Ora