17/06/2002
Mandarin Oriental Hotel du Rhône, Geneva
Speakers: Peter Erskine, CEO, mmO2
Thank you and good morning. It's a pleasure to be here.
This is an intensely rewarding time to be in the wireless world. Many people, including myself, believe that the Internet is the most important technological development of our time. It is a privilege and a thrill to be part of the leap into the mobile world.
Yet even as we champion each technological breakthrough, we have to acknowledge a certain amount of scepticism about the financial foundations of the mobile industry. Uncertainty about Third Generation services is abundant. Doubters are everywhere.
Today I want to explain why I believe the doubters have got it wrong. I'll share my views about the future of the industry, including some of the challenges and opportunities ahead. And I'll tell you how this relates to the topic I'm officially supposed to be talking about today - partnerships and alliances.
In only the last couple of years, the push towards partnerships in our industry has dramatically accelerated. New co-operative and joint agreements of all types are being announced on a constant basis. It has made for some fairly surprising bedfellows.
To understand why, we must start with a bit of history. In the old days of the mobile phone business, network operators produced a fairly simple proposition. It was a self-generated product - the human voice. Customers created their own content simply by opening their mouths and speaking.
Then came the data revolution. In the transition from verbal to visual, and musical, a great deal changed. Post-revolution, we find ourselves delivering far more than the human voice. We're dealing with audio, with still and moving pictures, and with digital data in unprecedented quantities, transmitted at previously unheard of speeds. Suddenly, it's about much more than the Internet.
In the old world, mobile operators would form a relationship with a handset supplier and nurture it. In the new world, we have hundreds, even thousands of vendor and developer relationships that support a huge array of services.
Suddenly we're playing a new game, one that requires new strategic and management skills. The business model has changed. We now are in a position of supporting not just the services, but the relationships that support the services.
I firmly believe that the key to success or failure in the mobile sector lies in those relationships. The creative and effective management of partnerships will be crucial - not only to gaining a competitive advantage, but to the success of the entire industry.
Not so long ago, there was a lot of talk in the industry about the mobile value chain. The chain was a metaphor - one that's been used in many sectors - for the way different companies work together to satisfy market demand. The chain is made up of many links, each one leading to the next in an orderly, sequential fashion, each one adding value.
Some models of the mobile value chain had four steps. Others had twelve. What mattered was that the chain advanced in one direction - from setting up a network to transportation, provision of services, and customer care.
Then came the data revolution. Suddenly the technology became a lot more complicated. The old business model didn't work anymore. There was no linear progression.
Instead of a value chain, the new model is something like a wheel, or a web, in which industry players relate in a complex, intra-dependent fashion. Positioned at various points on the web are users, content and application providers, device manufacturers, system operators, portals, retailers, IT service providers. Each is linked to the centre, and to the others.
I prefer to think of it as an ecosystem - a physical environment made up of infrastructure, content and applications - all part of a living, breathing, dynamic community. It changes constantly.
There's a popular view in our industry that customers will flock to those network providers that offer superior mobile data technology. I'm convinced this is a misconception.
I personally do not believe there will ever be a market for mobile data in my lifetime.
How could I say that? Because customers do not buy mobile data. No one goes shopping for data. What people buy are applications that save them money, or help them make it. That remove hassles. That make life more fun. That enrich their daily experiences.
But the mobile sector hasn't got it yet. Instead of asking, "what do people need?" or "how can we make their lives better so they'll want to pay us?" we produce technological constructs and label them with awful-sounding acronyms like WAP, SMS, GPRS, CDMA, and UMTS. Who can relate to an acronym?
Customers want content that improves their lives. That's attractive. That's as easy to use from the seaside as from the office. I emphasise - it has to be easy.
Martin Cooper, the man who invented the portable mobile phone in 1973, when he was Director of Research at Motorola, says he didn't carry a mobile phone until they weighed under four ounces. Before that, it was too heavy. It wasn't easy.
Creating and developing the content that meets this standard - that is our challenge.
Why do we form partnerships? Because we can't do it all. No network operator can generate products and applications that will be popular with everyone, because the customer base is too diverse. The 15 to 24-year-olds want games, music, entertainment, and instant messaging. Above all, it must be package in a fashionable handset.
Corporate executives want access to email, calendars, and other business applications like CRM. They probably want larger screens.
What about a specialised niche like football fans? Arsenal supporters - if they're not physically at the match - will probably want to know when important events are happening on the pitch, when a goal is scored. They'd want to know when players are bought and sold. Maybe they want to buy Arsenal memorabilia.
As a network operator, we have to provide the hardware, software, content and services for a diverse customer base. Choice and diversity are critical.
We segment our customers thoroughly, so we can understand their individual needs. We do focus groups, we test market products, we look at their voice and data needs, and we learn from our customers.
But with a diverse and demanding customer base, we can't do it all ourselves. It's impossible to play solo.
This brings to mind a wise expression: Know what you know. Know what you don't know. Find someone who knows what you don't know. Then you really know something.
At O2, we form partnerships with companies that specialise in areas we don't. If it's a true partnership, then each party brings something to the table that the other cannot. The idea is to complement one another and generate new ideas together.
I want to spend a few minutes using broad-brush strokes to describe the most significant types of partnerships in the marketplace.
The first falls under the category of operator partnerships. Network operators band together for various reasons, among them to share the physical roll-out of the networks.
There's been a lot of talk about "network sharing," but actually it's a catch-all term. In practice, it takes many forms. New technology has made it possible to share more parts of the infrastructure and bring the costs down. Network operators are sharing transmission sites, base station equipment, the radio masts, the antennae.
They're forming national roaming agreements. The idea of some form of spectrum sharing is also gaining favour. The momentum behind all these types of network sharing is growing.
Two examples of how we at O2 are sharing our network is our joint 3G network roll-out with Deutsche Telekom's subsidiary, T-Mobile, in the UK and Germany. And in the Netherlands, we've outsourced our network to be run by Ericsson, as of 1 July. We still own it, but our people will effectively be working for Ericsson. That's a new partnership model.
One tangible benefit of these partnerships is cost savings. It's possible to trim anywhere from 20 to 40 percent off the expense of building out a network through various types of sharing agreements. But saving money is not the only benefit.
Network sharing results in a quicker roll-out of services, and in many cases better coverage. Fewer masts reduce the visual impact. Environmentalists like it. So do the people who live and work near the sites. We do all this while preserving the competitive nature of the market.
At O2, we've come up with a memorable short-hand for the effects of network sharing - "Where have all the towers gone?" With network sharing, the towers are shrinking, and in some cases literally disappearing.
Where have all the towers gone? (Maybe you're humming the song in your heads?) I'm sure this dates me, but I can probably remember the song better than most of you in the audience. Instead of an anti-war anthem, for us it's reminder of the benefits of an important form of co-operation.
Network operators get together for a lot of reasons. Remember, it took a massive collaboration among operators to create a seamless 2G wireless standard across Europe, one that was open, cross-border and non-proprietary. There were many difficult issues to resolve, and many compromises. Compatibility of the radio and air interface was an issue, as was user interface, interaction with the core network, business support, and hardware compatibility.
Today, more than 300 million mobile phone users in Europe are the direct beneficiaries of that collaborative spirit.
We expect to see more of it. One example is the Open Mobile Alliance, a cross-industry forum that promotes open standards and conformance testing.
Another example is the recent announcement that Vodafone and T-Mobile have joined forces to develop a common platform for mobile payments. These and other m-commerce initiatives are intriguing. We certainly respect the collaborative effort that is going into them.
The second broad category is distribution partnerships. This includes a wide range of co-operative arrangements between mobile operators and those partners who have direct access to a pool of potential customers. They include, for example, retailers, specialist mobile dealers, IT outlets, Internet portals, financial institutions, supermarkets and many, many others. It might be a grocery chain, or a bank, or the Automobile Association - anyone with a large, receptive customer base.
The goal of distribution partnerships is to boost the market reach of the services and products of the network provider and the partners, while at the same time giving customers easier access to new applications and services. The variety and range of these types of partnerships will certainly grow.
One type of distribution partnership involves wholesale service providers, such as MVNOs. Most of you are familiar with wholesale service provision and how it works - essentially it allows a company with a strong brand and customer connections to offer mobile services, even though it doesn't own its own mobile network. The network comes from the partner.
The most famous example of an MVNO is Virgin Mobile. Using the MVNO business model, Virgin Mobile signed up 1 million customers in the UK in only 19 months and is currently expanding overseas. Virgin contributes its fabulous worldwide brand, and T-Mobile contributes the network.
Fixed Internet portals are also looking to extend the distribution of their offerings into the mobile space through partnerships. All the major portals - AOL, MSN and Yahoo - have struck partnership deals with mobile players to put their email, messaging services and other content on wireless handheld devices. O2 has agreements with five portals - including Yahoo, AOL and BT Internet.
Microsoft is the most significant player to take this step. Last month, Microsoft and Verizon in the US announced plans to develop wireless services and devices together. All new Verizon customers who subscribe to web access will find MSN as their default service. That gives them access to Microsoft content such as Hotmail and MSN Messenger instant messaging, a chat program, a calendar, news, stock information, sports, and weather.
Without doubt, this is an important partnership for the industry. It confirms what a lot of people have anticipated for some time - that Microsoft recognises the value and importance of the mobile revolution and aspires to be a significant player in the wireless space.
There's one more type of distribution partnership to mention. We use the term "affinity marketing programmes" to describe the partnerships we form with commercial institutions - banks, supermarkets, and many others - that give us direct access to their customers.
For example, in the Netherlands, we partner with the Postbank, where 500,000 account holders received a free prepay mobile telephone. The handset is linked to the users bank accounts and has various m-banking functionalities that allow them to do things like request balance information, perform transactions and top up call credit through a giro account.
The benefits go three ways. O2 attracts more mobile users. Postbank distinguishes itself in the marketplace itself by being able to offer something unique to its customers. And the customers receive mobile services that are specifically tailored to their interests.
Lastly, I want to mention the category of customer solution partnerships, which are formed with players whose products and services in one way or another satisfy customer demands. That includes software and application developers, content providers, and handset and other device manufacturers.
Partnerships with content providers who own the rights to their original material are commonplace - most of you are familiar with them. They make sense if they give access to material that encourages people to sign up to your service. They include news, entertainment and information providers of all types.
Content owners - and this includes content aggregators - want to reach the largest audience possible. They're always looking for opportunities to sell the rights to their material through as many distribution channels as possible, including TV, broadband, and mobile. Some of the more prominent examples of partnerships include Disney's deals with T-Mobile and NTT DoCoMo, and the BBC's link-up with Hutchison 3G.
At O2, in addition to agreements with the larger content providers for news, entertainment and information, we're breaking ground with a number of sponsorship agreements with entertainment providers. One is our sponsorship of the Big Brother 3 TV show in the UK, which got underway last month. Customers seem to love voting on who should be kicked out of the house.
Another is Arsenal Football Club. We pay the club an up-front sponsorship fee, plus a percentage share of the revenue generated from our specially branded products.
We've producing more than 20 personalised video, audio and multimedia services. These include ring-tones, icons and phone messages, manager and player insights, a daily Arsenal trivia game, priority ticket text service, live match commentary, and pre and post match analysis. Arsenal fans will be able to enter competitions to win tickets and vote for their Man of the Match, all through their mobile phones.
As for partnerships with device manufacturers, it's important to note that the device sector has become intensely competitive. Traditionally, the European mobile phone market was dominated by three players - Nokia, Ericsson, and Motorola. But as mobile phones and PDAs come closer to convergence, the Big Three are facing increased competition from manufacturers such as Handspring, Palm, Compaq, HP, Sharp, Samsung, and others.
Device manufacturers are eager to extend their reach into content and service provision to boost customer loyalty and upgrade cycles. This is what Nokia is doing with Club Nokia, the online community that's offering all sorts of fun and games, including Star Wars themed screensavers, graphics, and ring tones.
O2 has partnerships with RIM, the Canadian company, to launch the BlackBerry, a wireless PDA that provides always-on access to corporate email accounts. And we're partnering with the Taiwanese handheld manufacturer, HTC, and Microsoft to produce the O2xda, a pocket PC with an integrated mobile phone and data applications.
Let me read you a brief list what customers will be able to do with the new O2xda: text, chat, conference, message, record, read, watch, browse, listen, phone, play games, and email.
That list in itself answers the question - why partner? No one company has the resources and technical expertise to provide for that many complex interactions.
One more example is our three-way partnership with Microsoft and a variety of IT partners to use MMIS - Microsoft's Mobile Information Server. This is Microsoft software specifically made to work with mobile networks. It allows corporate clients secure access to their corporate intranets. We formalised that agreement last summer, but the relationship goes back two years.
The IT partners including companies like BT Ignite, Compaq, Computacenter, Hewlett Packard, Unisys, and Winlinx. They are the ones that sell the packaged services. They actually pull the whole thing together.
While I am enthusiastic about the advantages arising from these relationships, I must be candid and acknowledge that there are risks. Forming alliances with players who could, in other circumstances, be your competitors is an inherently tricky business. How do you create mutual incentives for partnership? What happens when your partner is also your competitor?
Most importantly, will co-operation hinder competition? The answer to that, we believe, is a firm no.
It bears recalling that co-operative relationships are not new to the mobile sector. The foundations of the industry were built on amicable agreement between players, many of them fierce competitors in the marketplace. For the most part, the negotiations that created the European 2 and 3G standard took place behind-the-scenes.
These days, co-operation has much more to do with delivering solutions to customers, and as a result it's becoming more visible.
At O2, we can cite many examples of working closely with our competitors to achieve mutual benefits. Consider our relationship with Nokia, which provides us with handsets. At the same time, the company competes vigorously with us for the teen market through Club Nokia. We're doing deals together, but at the same time they're trying to steal customers from us. And yet we can still work together.
Here's another example. O2 goes head to head with T-Mobile for customers in the UK and Germany. Yet at the same time, we've established a highly successful 3G network sharing agreement with T-Mobile in those same countries, as well as a 2G in-country roaming pact in Germany.
Evidence shows that even the fiercest of competitors can find common ground. This is the way it has always been in our industry. This is the way it will be, going forward.
At O2, we believe it's possible to minimise conflict between partners by adhering to a simple set of principles. Here are our guidelines:
I find it both daunting and stimulating to recognise that - despite our many accomplishments - the main challenges in our industry lie ahead. The new world of data and other digital mobile services requires a completely different way of thinking, and that may be the hardest part.
In the old days, our propositions were built around the mobile experience - adding gadgets, fiddling with content, enhancing speed and mobility. That was what preoccupied us. The mobile customer, to us, was an individual who held a device and performed different tasks with it. Talked. Played games. Sent messages.
We thought hard about how to make that person's experience more engaging. We put our energy into building propositions around that concept. And it made sense, for a certain period. That period is over.
Now we realise that our thinking was too narrow. Consider, for a moment, the worldview of a fixed portal like AOL. To AOL, the mobile world is just another means of reaching its customers, along with other distribution channels like TV and broadband. The value of the mobile is worth significantly less to someone like AOL or CNN because it's just another conduit for delivery of their products. Just one among many.
I believe that to flourish, the mobile experience must be considered as part of a much larger equation. As an industry, we must look at the world from a broader perspective.
How do we make the applications live? How do we get the content to evolve and customer experiences to grow? How do we develop an ecosystem - something that's physically alive and changing all the time? Unless we do, the industry won't expand and realise its true potential.
Can we adopt a broader worldview? Can we change the way we think about the marketplace? Can we harness the benefits of technology without being burdened by the bottom line?
We don't have the luxury to build everything ourselves, put it out on the market, and hope it takes off. We don't have the resources.
But working together, we can build better, more imaginative and responsive propositions that enhance the lives of our customers. This calls for a higher degree of mutual collaboration. No one can make it happen alone.
Who are the winners in this game? The ones who team up, share the risk, and reap the mutual benefits.
Thank you.
