We’re not convinced by the convergence hype – O2 CEO

Despite almost everyone in the industry clamouring to climb the convergence mountain, O2 still remains unconvinced by the rewards, choosing instead to double-down on the mobile connectivity mission.

Jamie Davies

July 26, 2018

5 Min Read
We’re not convinced by the convergence hype – O2 CEO

Despite almost everyone in the industry clamouring to climb the convergence mountain, O2 still remains unconvinced by the rewards, choosing instead to double-down on the mobile connectivity mission.

Speaking during a briefing ahead of its first half results, Telefonica UK CEO Mark Evans set out the mission very clearly; O2 is the leader in the UK mobile market, and it doesn’t plan to waver from than commitment any time soon. The customer is expecting greater reliability and performance, distractions is not what the business needs.

“Customers will curate content which is relevant to them,” said Evans.

Like Orange in France and T-Mobile US on the other side of the pond, the team’s number one objective to provide a connectivity experience which meets the expectations of the consumer. This does not mean its subscribers will struggle to access content, just that O2 is allowing those with expertise to focus on those areas. O2 will aim to reduce the price of tariffs (its Family Plan is a good example), improve 4G coverage across the country (the recent spectrum auction demonstrates this) and forge partnerships to offer the consumer choice (Netflix is a major win, and available for free to subscribers on certain tariffs).

The message seems to be empower the user through connectivity, creating room to allow for the difference in taste.

Another aspect of this strategy is the Priority pillar. Again, the team are offering value to the customer through partnerships, not getting involved in the messy business of owning diversification. 3.1 million Priority offers were accepted, while more than 18 million entries were made into the prize draw over the first six months of 2018. Again, it is a simple idea; offer value to the customer through breadth, while allowing the team to focus on the core business of connectivity.

It’s a refreshing approach to business, and perhaps explains why O2 is claiming the top-spot in the market share rankings. Including MVNO agreements, 32.1 million customers are now making use of the Telefonica UK network, while O2 currently claims 34% of the UK mobile market, according to the Ovum WCIS.

Looking at the financials for the first half, total revenues hit £2.836 billion, a year-on-year increase of 4.2%, while Operating income before depreciation and amortization (OIBDA), up 7.2% in comparison to the same period of 2017. Evans boasted of eight consecutive quarters of growth, while churn was down to 1%; the numbers are certainly heading in the right direction. CAPEX stood at £351 million, or 12.3% of total revenues, which is a bit down on the industry’s big spenders, but not the end of the world.

The issue here remains growth. As the leader in the market, substantial increases in subscriber numbers would not be a reasonable target. For Evans, the focus is about keeping current subscribers happy, while targeting marginal gains each quarter in market share. Growth will come in the enterprise business unit, where Telefonica is a challenger as it stands, and 5G will play a major role.

“5G is the most powerful opportunity to strengthen the economy, enrich lives and outperform the global economy,” said COO Derek McManus. “5G will have a bigger impact than any other technology introduced since electricity.”

Of course, 4G will not be forgotten, the team wrote a cheque for more than £523 million to bolster its 4G coverage, though the acquired spectrum will forge the foundations of the 5G push. While a minor player, developments for in the much-hyped 5G world will be the opportunity for O2 to push its case in the enterprise market. An agreement announcement back in April with Arqiva to deploy 300 5G-ready small cell sites across London will certainly help. These sites will be up and running in the second half of 2019.

As part of this drive, McManus said the team has written to every CEO of the FTSE 100 to invite the businesses to participate in O2’s 5G Testbed trials. The aim here is to create an understanding of the sheer breadth of use cases in across the UK, but also the 130-odd countries which the FTSE 100 has a presence in. 2020 has been targeted as the launch date for 5G services, with O2 aiming to focus on how the standard can improve efficiencies in supply chains and production processes.

No-one really knows how 5G will work just yet, but the testbeds will offer insight. McManus, who has been with Telefonica through the introduction of 3G and 4G, noted that each evolution brought about new operating models and opportunities; learning without doing is impossible, and much will be learnt over the years following deployment of 5G.

O2 is the current leader in the UK mobile market, and with a sustained focus on its core business, waving away diversification distractions, it certainly looks in a promising position heading into the 5G era.

UPDATE: 26/07/2018: 14:30

After reading the story, tech and telco analyst Paolo Pescatore decides he want to weigh in on the convergence debate

“No doubt O2 has been hugely successful. However, with the latest developments and the competitive landscape it needs a plan b beyond mobile only.

“We’ve seen it take a huge leap of faith with the Netflix deal. And there’s so much more it can do by working closely with the OTT providers. There is no reason why they shouldn’t partner with each other. A great match both for traditional providers and OTT. This way they do not need to be embroiled in battles for costly rights.

“And given its huge mobile base, it should think about offering a fibre broadband service as an add on. There is a fibre frenzy for customers in the UK. Everyone is piling in except for a few like O2.”

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