24/06/2002
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 - consolidation and co-operation.
In only the last couple of years, the momentum behind co-operation in our industry has accelerated. New partnerships, alliances, and joint agreements of all types are being announced on a constant basis.
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. In the new world, we have hundreds, even thousands of relationships that support a huge array of products and services.
Suddenly it's a new game, one that requires new strategic and management skills. 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 and alliances? Because we can't do it all. No network operator can generate products and applications that will be popular with everyone. The customer base is too diverse.
The 15 to 24-year-olds want games, music, entertainment, and instant messaging - all 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 at the match - will 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.
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.
"Network sharing" 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.
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 that's not the only benefit.
Network sharing results in a quicker roll-out of services. 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.
The second broad category is distribution partnerships. This includes a wide range of co-operative arrangements between mobile operators and those partners with direct access to a pool of potential customers. They include retailers, specialist mobile dealers, IT outlets, Internet portals, financial institutions, supermarkets and 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. They allow a company with customer connections to offer mobile services, even though it doesn't own its own network. The most famous example 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. 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 that we call "affinity marketing programmes". These are 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 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.
Content providers are 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 - things like ring-tones, icons and phone messages, manager and player insights, a daily 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, O2 has teamed up 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 co-operate? No one company has the resources and technical expertise to provide for that many complex interactions.
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 co-operation? 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.
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 want spend a few minutes on a topic that has generated a lot of interest lately - the prospect of consolidation in the mobile sector. There's a widely held view that financial pressures will force consolidation among the European players.
I must be frank and say I do expect some reduction in the number of players. Not everyone one who holds a 3G license will continue for the long-term. There's also going to be some rationalisation throughout the value web. It's not a question of if, but when.
To a degree, it will come down to whether the market requires pan-regional players or highly focussed national players, and what scale is required to achieve a critical mass.
Clearly there are scale advantages for the largest in-country and pan-regional operators. On the other hand, there will be some highly focussed operators that play an invaluable role in satisfying diversified customers and delivering products with extremely short lifecycles.
I think it's worth pointing out that successful mergers won't be that easy to pull off. They'll have to take account of many complex factors, including footprints, licence requirements, business prospects, and the regulatory environment.
At O2, we're keeping an open mind about consolidation, but it's not our priority. We're focused on maximising stakeholder value - for our shareholders, our creditors, our employees, and our customers. We're focused on our investment plans, our profits, and our growth potential. These are more important and immediate goals.
I find it both daunting and stimulating to recognise that - despite our many accomplishments - the main challenge lies ahead. The new world of data and other mobile services requires a 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. We thought hard about how to make the mobile customer's experience more engaging.
Now we realise our thinking was too narrow. To flourish, the mobile experience must be considered as part of a much larger equation. 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 realise its true potential.
Can we adopt a broader worldview? 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.
Who are the winners in this game? The ones who team up, share the risk, and reap the mutual benefits.
Thank you.
