O2’s parent company, Telefónica, is hunting for new revenue. The company’s CEO and chairman, Cesar Alierta, unveils his strategy for growth and what it means for the UK during Mobile’s visit to the operator giant’s Madrid headquarters.
Alierta reveals that mobile advertising and mobile internet are at the forefront of the company’s strategy for UK growth. The Telefónica boss hopes that mobile advertising will prove to be the goldmine that analysts predict. Informa Telecoms and Media, for example, estimates that it will generate £3bn of revenue by 2011.
O2 has already been involved in mobile advertising with banner ads on its Active portal, as well as promoting brands within mobile games.
As a first step in his plan to extracting incremental revenue from mobile advertising, Alierta signed a global deal with mobile advertising enabler, Amobee. The deal aims to create a single point of contact for advertising agencies and brands that want to reach consumers through mobile phones.
Matthew Key, CEO for Telefónica Europe, says: ‘This will be a hugely significant new revenue stream. Mobile is now seen as the next mass medium battleground for advertising, delivering reach and relevancy that blows away traditional media formats.’
The agreement covers all types of mobile advertising, including ads on the O2 Active portal, inside games, in messages, videos and music applications.
Patrick Parodi, chief marketing officer at Amobee, says: ‘There will be a lot of interest from agencies and brands to participate in the evolution of mobile media. Mobile advertising is much bigger than just the mobile internet. There has been an initial focus on mobile internet advertising, but this announcement shows that we will see inventory beyond that.’
O2 recently completed a mobile advertising trial involving half a million of its subscribers. The testing revealed that customers did not mind receiving advertising on their phones. Furthermore, it proved that mobile advertising could be appealing for brands, with a 6% click through rate compared with an average rate of 0.18% online.
The 3G iPhone will also help O2 in its search for revenue beyond voice and text. The original iPhone allowed the operator to increase its data ARPU, and with the 3G version, internet usage on the device is likely to be even higher.
O2 has been slightly behind its competitors in launching mobile broadband and only recently joined the dongle race. The operator’s strategy was initially to offer the USB modem just to its existing customers, but it now allows anyone to buy a dongle.
The operator is also looking to increase 3G penetration in all its markets. Currently, Telefónica’s global broadband penetration is around 4%, but Alierta says he expects this to increase to 35% over the next two years. The UK is well above the company average, with around 14% of its subscribers already on 3G.
As 3G penetration grows, Alierta also plans to increase the bandwidth of the network, allowing for faster mobile broadband speeds for 3G users. He expects speeds to go from 1.4Mbps in 2006 to 14Mbps in 2010.
The second strand in Telefónica’s plans for growth is increasing efficiency in the global operational running of the company, as well as on the retail side of the business.
In October last year, Telefónica presented a cost saving target of £6bn for the period between 2007 and 2010. The majority of the company’s efficiency initiatives are global and aim to extract all possible advantage it has in terms of scale, in areas such as purchasing, handsets, network, technology and IT; however, there are also some local integration and regional initiatives.
Telefónica is also looking to cut costs in the operations side of the business, which includes centralising its IT strategy. The company revealed its plans to make 100 job cuts in the IT and network divisions already at the beginning of the year. At the time the restructure was priced at £15.6m.
Sim-only deals are another example of increasing efficiency, Alierta says. In the UK, O2 has been at the forefront of the boom in Sim-only deals, which have exploded in popularity during the past six months. According to market research company GfK, Sim-only deals in the UK are reaching 20,000 per week.
The margins that the operators make from Sim-only deals are much higher than regular contracts, because there is no need to contribute a handset subsidy. Consumers, meanwhile, are attracted to the lower monthly fees in the current climate of economic slowdown.
Staff is also one of Telefónica’s key focuses for growth. Alierta says the company is looking to invest in staff with training programmes, talent development and retention initiatives.
The company runs some employee-focused programs; for example, the International Employee Volunteering Program, which has been running in Latin America for three years and was opened to O2 employees this year. The company’s employees get the opportunity to spend time in Latin America, working alongside Telefónica’s social program. The project, called Proniño, aims to eradicate the worst forms of child labour in Latin America.
Telefónica is also planning exchange programs across the operator group to broaden the skills of its workforce. The company runs exchanges between its European and Latin American operations. Staff from Europe get the chance to work in Latin America for short and long periods of time.
The company is also giving its staff the opportunity to learn Spanish and take business courses at a bespoke Telefónica University in Barcelona.
One of Telefónica’s main ambitions is to become an integrated operator. In addition to mobile, the company offers services in broadband, fixed-line and cable TV. So far the only Telefónica operator to offer the full suite of four products is in the Czech Republic. In the UK, the operator is looking into ways to integrate all the services further.
O2 has been pushing fixed-line broadband heavily alongside mobile services. The operator launched a nationwide billboard and TV advertising campaign for its broadband proposition in May.
Telefónica’s chief operating officer, Julio Linares, told the EU to back off after EU commissioner Viviane Reding revealed plans to reduce mobile termination rates. ‘Regulation should decrease and should stimulate investment. There should be harmonisation of regulation worldwide,’ he said on the day the commissioner announced a cut of up to 70% in termination rates.
As a large operator and a net receiver of calls, Telefónica stands to lose significant revenue from the EU intervention. Keys said: ‘Reding gave the industry a bit of a wake-up call.
‘There needs to be more certainty. I see a danger in Brussels picking product by product and I don’t think it