‘Overall the market continues to be tough and customers are being squeezed, so they are focusing in on price and value,’ says O2 UK CEO Ronan Dunne, speaking to Mobile on the day its Q3 2011 results were unveiled (11 November).
‘There is great value to be found out there at the moment, so customers are doing really well out of it,’ he says. ‘But we have to balance price with end-to-end value, so that we can invest in our network and in innovations, such as Priority Moments.
‘For example, our latest Christmas offers provide real value on top of price. The average family can save up to £75 through Priority Moments. A £10 per week saving is a huge amount for consumers having to spend more on petrol and energy costs. So, we are trying to stay relevant to our customer, but still create new opportunities for them.’
O2’s mobile service revenue of £1,326m for the quarter was an improvement on Q2, but was 5% down on Q3 2010. Revenues were hit by the continuing decline in voice traffic, which is affecting the whole industry, and the impact of cuts in mobile termination rates in April.
But Dunne points to other factors as well, acknowledging that O2 miscalculated some of its tariffs in the earlier part of the year, which made its rivals’ offers more competitive for customers
‘We under-traded at the back end of 2010 and early 2011. We were trying to find the balance between value and volume and didn’t get it quite right,’ he admits. ‘The second factor is to do with the structure of the market. We have the biggest installed smarphone base, so when the iPhone 4 and now 4S come out, we are upgraded existing customers who are already on a high end tariff.’
In short, with so many existing customers on high tariffs, there is little opportunity to boost revenues by moving lower value customers onto higher margin tariffs.
‘The other operators have a much smaller smartphone base, as they got the iPhone two years after us,’ points out Dunne. ‘So, they have been upgrading customers from feature phones to smartphones. They are charging a higher tariff to customers moving up to their first expensive smartphone. They are now getting the advantage of that uplift that we got three or four years ago and that is helping their ARPU, as they are moving more customers onto higher margin tariffs. They are still on their first cycle of iPhone upgrades,’ he explains.
‘We still have the benefit of those contract customers,’ Dunne continues, ‘and our contract churn is still record for the industry, so they are staying. But the market is more price competitive now than two years ago, so they are renewing their contracts in a more price competitive environment.’ The effect of this impacts on O2’s revenues and average revenue per user (ARPU). Contract ARPU for Q3 2011 was approximately £31, down from £36 a year ago.
O2’s customer base also went back into the positive after net losses of 140,000 in Q2 (less than Vodafone’s 139,000 and Everything Everywhere’s 188,000). O2’s net additions stood at 71,000 with 91,000 new contract customers and the loss of 20,000 prepay subscribers.
Both Vodafone and Everything Everywhere outperformed O2 in terms of new contract subscribers, as they signed up 182,000 and 185,000 respectively. However, their prepay losses were much higher than O2’s at 101,000 for Vodafone and 227,000 for Everything Everywhere.
Dunne attributes the lower contract additions partly to the fact that O2 has a high contract base anyway, who he says are staying with the company, and partly due to the operator’s treatment of prepay.
‘We don’t proactively migrate customers from prepay to postpay,’ he explains, ‘as we like to give customers the choice. The other operators like to control prepay and they are seeing big prepay losses, although a lot of them are being migrated to postpay deals. This will help their ARPU progression. They may not make any more money out of them, but they are charging them more to cover hardware costs.’
Dunn also points out that the other factor to watch with O2 is that it operates the Tesco Mobile MVNO joint venture. Tesco has had 101,000 net customer additions so far this year - a higher net addition than Vodafone, according to Dunne.
‘We have a multi-brand strategy,’ he says. ‘We have a value brand with Tesco and an enhanced value brand with O2 with all the additions that comes with such as Priority Moments, gurus in store and so on.’
Business focus for 2012
Dunne says that O2 has three real focuses going into 2012: unified communications; M2M (machine to machine) services; and financial and media services.
Speaking of unified communications, he says: ‘The business arena has moved from being just mobile to a joined up communications business, including mobile, fixed line and data. Our O2 Unified brand has shown very strong growth and a lot of companies big and small are not looking for a mobile deal on its own now. They want a unified communications service. Look at the Sky TV deal we won off Vodafone. We are also supplying managed services and dedicated data connections, as well as telephone services.’
Dunne says O2’s M2M business is also taking off and will be a very strong part of the operator’s business. ‘The opportunity over the coming years is for hundreds of millions of new Sims in devices – cars, white goods, industrial installations, smart meters and the like. We have deals with car insurers. With G4S, we have put Sims in the vehicles they operate, which has led to a 10% cost reduction thanks to better monitoring of how they drive, more efficient routing and so on,’ he says.
On the consumer side, he says O2 will continue to concentrate innovation around promoting customer loyalty with O2 Priority and Priority Moments. ‘We have refreshed the offers and the capability of the Priority app,’ he points out.
O2’s other key area is financial services and media. ‘I see these as two parts of the same coin,’ says Dunne. ‘We are closing the loop here. More and more of people’s activities are going mobile. Now, even a local café owner who wants to compete with Starbucks can send location-based adverts to potential customers. They could never do that before.
‘We are launching our mobile wallet next month. Customers can get a voucher or coupon on their phone and use it to pay for goods in Argos or a coffee shop. We have developed location based prompts, such as for a special offer in Argos. We are putting O2 Wi-Fi in stores to ensure coverage and capacity, where customers can redeem the coupons on their phones, either by NFC or by making online payments via their handsets,’ he says.
Dunne is also keen to extend the O2 WiFi proposition to make it a business critical tool for retailers and other enterprises. The Wi-Fi network has within it the capability to analyse store data on customer behaviour throughout the day and indentify hotspots in terms of products and services that most interested the majority customers, for example.
The store marketing team can then analyse what products or services most interested customers in real time and then devise carefully tailored offers for them very quickly. ‘This kind of service is right in the sweet spot of what we want O2 WiFi to be,’ says Dunne.
‘The opportunity for a business like ours is to be the trusted provider,’ he continues. ‘Customers will opt in to mobile offers and advertising through us. We will use their data for their benefit to provide insight that is actionable, but personal to the individual customer, so they don’t feel they are getting spammed.’
It is a critical point. Offers must be carefully tailored to the users known likes and those they have told the operator they are interested in receiving. Dunne tells a story about what happens when you don’t know the customer well enough.
‘Google has an idea about you through your browsing history, but they don’t really know you,’ he argues. ‘An example of that is a person who told his parents he was staying in a zimmer (German for room). Google then sent him adverts in German – it showed that they were watching him, but knew nothing about him.’
In contrast, Dunne says: ‘We do know about our customers because we can see their choices through Priority Moments,’ he says. ‘If we know they like red wine, we can work with a retailer to alert them to the fact that there is an offer out there that they might like.’
Dunne is quick to point out the other benefit of O2 Wi-Fi is that the service is open to all Wi-Fi enabled mobile phones users. You can still register to use it even though you are on another network. It might seem a generous offer, but the logic is clear. ‘A retailer wants to talk to everybody, not just O2 customers, so that’s why it is open,’ explains Dunne, although he adds: ‘Sure, we may give an enhanced offering to O2 customers, but the access is open to all.’
Faster services with 4G
Dunne is also looking ahead to the arrival of 4G services, which will provide more capacity for data transmitted at faster speeds. O2 announced it was beginning 4G trials in London this week (14 November 201).
‘We will start to prepare for even faster services with 4G, which will lead to the creation of new business models. What 4G brings is high speed lowband with low latency,’ says Dunne. ‘You will no longer be replicating what you used to do on your PC. It will be all about real time opportunities: medical health alerts, traffic management, personal video calling - at the moment there is latency, a pause in the conversation – on 4G with low latency you can have the normal conversation. Or you can do online gaming without delays via tablets or laptops. All this starts to change the experience and that will lead to the creation of new business models,’ he says.