Events & presentations

19/02/2003

3GSM World Congress 03

"Competition, Collaboration, and Consolidation in the Global Business: Sustaining growth, innovation and investment"

In 19th century America, the railways offered a new and tremendously exciting opportunity. The United States was a big country, and there was practically no regulation over land use, so anyone with the capital could build a railway and claim a bit of the action. This led to intense speculation, explosive growth, and a struggle for control.

What happened to the railway system in later years is well known. Because railway infrastructure was capital intensive, and because it required fixed rail standards for interoperability and economies of scale, the regulators thought they were dealing with a so-called natural monopoly. And monopolies, of course, need regulating.

So they did - zealously. Over time, the railway industry was nearly destroyed by over-regulation.

What the regulators failed to see were the competitive pressures from alternate forms of transportation - from the trucking industry and from the private automobile, both spurred by the development of the interstate road system. The regulators could control the price of rail freight, but they could not control the increasingly cost-attractive alternatives to rail. And those alternatives won out.

What the regulators also failed to see was the need to nurture the capital investment that had been made in the railways. Capital-intensive industries are, by definition, resource hungry. They need early and repeated infusions of cash, but that investment is made with the expectation that it will sustain the industry over the long term. To cripple the industry with regulation is to waste that investment resource.

The railway regulators made a huge mistake - a mistake of strategy and perception. I call this Small Picture thinking. They failed to consider the shifting pattern of transportation as it evolved around them. They failed to nurture an industry that had enormous, long-term growth potential. They failed to see the Big Picture.

Today, I want to talk about some of the fundamental changes taking place in the communications arena, and why Big Picture thinking is so vital to the future of our industry.

But first, a few words about mmO2, our corporate entity, and the mobile phone company we call O2.

mmO2 demerged from British Telecom as a wireless division, including the former BT Cellnet, but we began life as a totally new brand. Today, we are a leading provider of mobile communications across Europe, with approaching 20 million customers, in the UK, the Netherlands, Germany, and Ireland.

Our re-branding to O2 across all territories on the same day has been a tremendous success with unprompted brand awareness statistics now higher for O2 than our legacy brands and we are less than 18 months old.

In that brief period, we have seen remarkable changes in the mobile arena. The technology is awe-inspiring. The competition is ferocious. As we have grown, we have experienced one of the central paradoxes of the technological revolution. The marketplace demands that we compete rigorously, even as it demands that we collaborate to reap the benefits of shared costs and expertise.

The author Mason Cooley captured the essence of this paradox when he noted that "antagonistic cooperation is the principle of all markets - and many marriages."

There is some truth to this. My first two points today - having to do with competition and collaboration - reflect Mr Cooley's premise about work and love.

Competition and collaboration are the twin forces propelling the wireless mobile sector forward. As mobile telephony moves from the world of 2G to 3G - from the relative simplicity of voice transmission to the complexities of data transmission - the opportunities to benefit from these opposed but mutually dependent forces are tremendous.

Competition in a shifting marketplace

This brings me to my first "C" - which stands for competition.

Competition - sometimes even a healthy antagonistic cooperation, as Mr Cooley put it - is what fuels us and forces us to deliver. Competition is what draws the best and the brightest minds to the industry and inspires fresh ways of thinking. Competition is what attracts financial investment, which in turn fuels new invention, and of course, new services.

The biggest threat to competitive growth and investment is the tendency to impose control over the marketplace through regulation. I am not anti-regulation, by any means. Ideally, regulation is a tool that can protect the market from monopoly practices. But in a diversified, swiftly-developing environment that is already - in my view - sufficiently competitive, regulation stifles creativity, imposes needless burdens, and deters badly-needed investment.

Let me explain the situation my company finds itself in. Over the past two years, O2 has been facing regulatory pressures in the UK, the Netherlands, and probably soon in Ireland. Regulators are trying to micro-regulate some of our mobile pricing points because they believe we're charging too much in the in-coming call market. At the European level, we're currently undergoing a regulatory examination of our roaming tariffs, which are imposed wherever our customers leave their domestic networks and go roaming abroad.

These investigations and examinations have placed us in an uncertain and, some would say, precarious situation. In most capital-intensive technological industries, a long-term view of the marketplace is critical to decision making. That view depends on the ability to make well-informed projections about market dynamics. Regulatory uncertainty and instability subverts the planning process.

As you might imagine, we are fighting these efforts vigorously. But we find ourselves trapped in a contentious and unfortunate cycle. And we are not alone - it is an industry-wide predicament. The regulators believe there is not enough competition, so they put pressure on the industry. Then industry pushes back. The regulators push harder. Industry pushes back. And the cycle continues.

What is the solution to this situation? How can we allow each market player the freedom to invest fully in its infrastructure while fostering a thriving, open, and competitive marketplace?

The solution, I believe, can be found in a new type of partnership between our industry and regulators, one that is based on both competition and collaboration.

This would require a mutually agreed vision of market requirements - one that looks beyond the short-term - and a commitment to sustainable investment. It would require communication rather than confrontation, Big Picture thinking rather than Small Picture thinking, and a clear understanding of capital investment dynamics.

Last summer, in an address before the US Federal Communications Bar Association, FCC Commissioner Kathleen Abernathy addressed this issue when she laid out her vision of what she calls a "nascent services doctrine of communications regulation."

Abernathy's view is that that robust competition delivers tangible benefits to consumers far more effectively than prescriptive, micro-level regulation. Regulators should exercise restraint when faced with new technologies and services. I share this view.

In recent years, it has become commonplace to say that the mobile sector is in its infancy. I agree - it is absolutely true - we are a very young industry. The wireless communications sector in Europe only got off the ground in the mid-1980s, when a number of nations set aside their protectionist mindsets and made a commitment to common wireless specifications, the GSM standard.

The comparison with infancy was useful, for a while. Infants are fragile, they need nurturing, their growth rates are phenomenal, and their futures are marked by limitless possibility. But in some ways, I believe, the comparison has outlived its usefulness and created false expectations.

By the time O2 entered the market, the mobile sector was already leaving its infancy behind and entering a more mature phase. The competition was already fierce then, and over the past 18 months, it has become even more so.

In most countries today, there are three, four, sometimes even six mobile network operators. Often, only one or two have the lion's share of the market, but the pressure from the rest is relentless. For the most part, consumers have been extremely well served, and prices have come down considerably. In the UK, for example, competition has driven down the price of mobile phone calls by 60-70 percent over the past four years.

In addition to the multitude of choices available within the communications market, there is increasing choice across technology platforms.

In the early mobile wireless years, European network operators were largely competing against one another, each trying to grab as many customers as possible and gain a bigger share of the market. But in the last few years, the cellular market has become extremely crowded, and the competitive framework has changed.

Historically, financial analysts have looked at our industry as if customer numbers told the whole story - a tale of revenues and profits. But we can no longer assume there's a direct relationship between customer numbers and the bottom line.

We're no longer talking about mobile networks competing only against other mobile networks. Now we're competing against the entire spectrum of communications services. When it comes to voice, SMS, and data transmission, customers have a dizzying array of choices.

In some countries, such as the UK, Spain and Ireland, it is now possible to send text messages from a landline to a mobile phone. Plans are already underway for sending MMS messages directly from the web, in other words from a desktop or laptop computer to a mobile phone.

I was just looking at the brochure for this conference, and I noticed that wireless LANs - as either a complement or a competitor to cellular service - are on the agenda. This technology could develop into a new form of competition for us. On the not-too-distant horizon, we foresee entirely new players using other innovative technologies to enter the Communications market with Internet protocol-based solutions such as short-range radio, ultra wide band, and mesh radio. The innovation will continue.

What has happened to our industry, you could say, is that the great "land grab" has ended. Mobile customer penetration levels are higher than ever. Communications choices have multiplied. Customers are substituting one technology for another. For the first time, we are facing market saturation and slowing subscriber growth. This is no longer infancy. This is adolescence.

Make no mistake about it - we welcome the competition, and we welcome the challenge. In many ways, the challenges we face are a legacy of own innovation and success. We have every reason to expect that, as wireless applications continue to multiply, our daily lives will be transformed in the most remarkable and surprising ways.

At O2, we are using GPRS technology on our new xda mobile phones to monitor the lung capacity of asthma patients. Our customers are using SMS texting to extend the democratising benefits of voting - whether it be for the winners or losers of a television game show, or to elect their local representatives. In Dublin, Ireland, parkers in the congested centre of the city no longer have to worry about coming up with the correct change for the parking meter - they simply key in an SMS code that charges the cost to their mobile phone or credit card bill. Congestion charging in London can be paid for by text!

All these developments - unimaginable only a few years ago.

Yet the intensifying competition does mean that we will have to change tactics. Going forward, our greatest hurdles will have to do with marketing, with developing new services, with interoperability, and collaboration.

Collaboration

My second "C" this afternoon stands for collaboration. This is the flip side of competition. In a sense, they go hand in hand.

Collaborative efforts are taking place throughout the mobile wireless arena - at the infrastructure level, at the manufacturing level, and among content developers and service providers - in fact, on just about every level except pricing.

I agree that the partnering that's going on in our industry is less visible than the competition, because competition is what everybody hears about. It's what makes headlines. But the truth is that the mobile industry, as we know it, exists because of partnerships and collaboration. The system we have in place today would be unimaginable without a network of intense, interactive, and fruitful partnerships.

Why? Because the capital investment requirements are so high, and the opportunities for cost reduction are significant. Because the customer base is diverse, and maturing. Because customers are demanding ever-increasing diversity of products and services. And because the marketplace is moving so quickly.

No single network operator can do it all.

As we navigate the shift from voice to data, our need for a wide array of additional skills expands, particularly those relating to Internet Protocol and the applications and channels that go with it. Collaboration offers the opportunity to take advantage of the best skills in the marketplace and even, at times, bring on board talent in areas where we feel we are lacking. As we continue to develop our mobile data markets, collaboration will become even more essential.

The roots of international collaboration in our sector can be traced back to the mid-1980s, when certain European operators came to a sobering realisation. What they foresaw was that, with so many manufacturers creating so many diverse products in so many different countries, the mobile sector would be drastically, even fatally stymied without an extraordinary effort to establish common technical specifications.

For mobile phones all over Europe to communicate with one another, the networks and handsets would have to use the same wireless platform. Without it, each market in Europe would be speaking its own language. There would be no mutual comprehension.

Out of that realisation came the GSM Memorandum of Understanding, signed in 1987. Originally, there were 13 digital GSM carriers across Europe that came together and agreed to move the mobile communications market forward within the same time frame, according to the same specifications. It was their vision of a pan-European network - and the intense collaboration that underpinned it - that laid the groundwork for our current system.

At O2, we are mindful of this visionary approach and the benefits it has brought to millions of users - the benefits of roaming, the reduction of costs through economies of scale, the advantages of shared research and development.

In the same spirit, we have nurtured an extensive range of partnerships and cooperative agreements - all of which are pushing the industry forward. These include content relationships, strategic suppliers, applications partnerships, and distribution channels.

In September 2002 our Games Arcade was launched in the UK with Java based games content partnerships. There have already been over 110,000 users across all four O2 countries. More user activity will flow as awareness grows and handset devices develop.

Our handset partnerships are extensive, for both the consumer and corporate segments. For example, we have learnt in the corporate segment a lot from our experience with the XDA and RIM Blackberry.

We also support work on improving usability between phones, function and content ... a key area for better collaboration.

At the infrastructure level, O2 pioneered Europe's first 3G network sharing agreement with Deutsche Telekom's subsidiary, T-Mobile, to roll out 3G services in Germany and the UK. We have similar partnership agreements in the Netherlands covering network outsourcing and in the UK for national roaming, with Hutchison 3G. We estimate that over the coming decade, we will save around £1.2 billion through various partnership agreements.

The benefits of collaboration are spread throughout the development process, and sometimes they are not quantifiable. When we team up with other network providers, we gain immediate access to a larger market. We gain enhanced flexibility on timing and rollout. Because we are building less infrastructure - and in particular, fewer masts - we are kinder to the environment. There is no way to put a price tag on these benefits.

By the way, I see no reason why broadcasters can share networks and at the same time compete on services, whilst some people still debate whether this should be allowed in the mobile arena.

Consolidation in the wireless mobile sector

This brings me to perhaps my most controversial "C" this afternoon - consolidation.

I'm aware there's a widely held view that financial pressures will force consolidation throughout the European mobile sector. I have given this considerable thought, as has my management team, and to be candid, my belief is that we will see some reduction in the number of network operators. Not everyone who holds a 3G license in Europe will be viable for the long-term.

It's not a question of whether consolidation in our sector is going to happen. It's happening. Consolidation is already taking place vertically, among various Internet and mobile communications distribution channels. In recent months, manufacturers such as Hewlett Packard and Compaq, Logica and CMG have merged. License-holders in 3G have withdrawn in Norway, Sweden and Germany. There is more to come.

I do not need to point out that the economic environment is challenging. The combination of reduced demand and diminishing margins has led to rationalisation across the value chain. As I mentioned earlier, the investment requirements - including 3G, are significant. Investment financing in this depressed economic climate is tight.

There is absolutely no doubt in my mind that 3G has the potential to offer significantly more capacity and capability to our customers in the coming years. The enhanced spectrum and associated technology is too extraordinary, the technical opportunities too life enhancing, for this technology not to succeed.

Our long-term commitment to 3G has never been in doubt. We launched the very first 3G service in Europe in 2002, on the Isle of Man, and we started in 1997 the Research and Development that led to the first 3G trials.

Despite the advantages that 3G offers, we have seen in recent months that some operators are delaying their timetables for 3G investment in order to improve their liquidity. This puts pressure on infrastructure suppliers all down the delivery chain. Unfortunately, I believe that pressure will increase. The entire industry will be squeezed.

At O2, we are committed to rolling out data services in line with the demands of the marketplace and the availability of handsets. There are no prizes for building out networks that sit idle. The technology and handover between 2 and 3G needs to work, customer demand is fundamental and we must meet the various licence conditions imposed by different in-country regulators.

So how many networks do we really need? I can't answer that question. The technical and market variables are too numerous. But I can say that, going forward, the issue will not be how many network operators can manage to hang on and survive. Instead, the question will be - how many operators do we need to meet market demand?

In Germany, there are currently four to six network operators. In the Netherlands, there are five. In Ireland, three. And in Britain, five. With vigorous competition for services, do all the operators really need to own and run all their own networks? Frankly no.

Clearly there will be certain advantages for the largest in-country and pan-regional operators. Economies of scale will play a major role in determining who survives and flourishes. Not all the current carriers will adapt to this reality.

Until recently, the tradition in our industry has been "if-you-build-it-they-will-come". We build the network, and the customers come and buy the products and services. Looking back, I think that a certain amount of technological hubris informed that mentality. But now, our attitude has been tempered by a more pragmatic approach. We have moved to a stage in which market demand will determine who plays, where, and how much. We are being held to a more mature standard.

It's worth noting that successful mergers won't be easy to pull off. They will have into account many complex factors, including footprints, licence requirements, business prospects, and the regulatory environment. Also, it is difficult to tell which companies are in the position or mood to buy, right now.

Nevertheless, in the future, I'm anticipating even greater needs for capital investment, even more collaboration - and fewer networks.

At O2, we're keeping an open mind about consolidation. To be honest, it has not been our priority up until this point, and it will not be going forward. We're focussed on maximising stakeholder value - for our shareholders, our lenders, our customers, and our employees. We're focussed on our investment plans, our profits, and our growth potential. We're focussed on keeping costs down and meeting customer needs. These are our most important goals.

In closing, I want to point out that even though we have moved beyond the initial growth phase - our infancy, if you like - we embrace the next stage with genuine passion. The prospects for wireless communications continue to astonish and amaze us.

It's important to remember that we still operate in a growth industry. We're no longer experiencing 80 to 100 percent growth per year, but mobile telephony remains a healthy industry, with a bright outlook.

The latest industry forecasts say that in 2003, the number of mobile phone subscribers around the world will exceed the number of fixed phone lines - 1.4 billion compared to 1.1 billion. China now has more than 145 million customers, more than the USA and Canada combined.

Day by day, mobile services are growing in geographical reach, commercial application, and creative potential. This will accelerate as we continue the shift from a 2.5G to a 3G world - to a market in which Broadband Mobility provides us with many new opportunities.

But innovation and investment will only be successful if we take advantage of the market and form effective partnerships. Productive collaboration is essential for interoperable services and the development of mobile data. Collaboration is key.

We must manage our regulatory relationships with foresight. We must ensure a new kind of regulatory pact, predicated on the dual forces of competition and collaboration.

And we must ensure that, unlike the railway industry, the capital investments that have established the foundations of the wireless mobile sector are not short-circuited by short-term thinking. That capital investment continues to sustain the industry for generations to come. This is what I call Big Picture thinking.

At O2, we are prepared to face the challenges ahead in an era of change and growth. We will continue to seek new forms of collaboration - to engage in clear, open discussion that leads to a creative way forward.

The "3 C's" of competition, collaboration and consolidation will all be necessary to transform 3G into a market reality.

Thank you for your time.

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