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O2 converges with Telefónica

01 March 2006

Weeks after mobile operator O2 is integrated into Telefónica, CEO Peter Erskine explains how his expanded business now has the infrastructure to be able to add fixed DSL services to its offering, while he relishes the chance to do new deals on handsets and equipment for O2's networks. He doesn't want to repeat the mistakes other operators have made, he tells Alan Burkitt-Gray

Peter Erskine picture
Peter Erskine:
Keep hitting
the numbers

So, Peter Erskine's back in an incumbent. Five years ago he was running BT Wireless, the mobile arm — then better known as Cellnet — of the UK giant. It was demerged on November 19 2001 into a wholly separate listed company, O2, and Erskine remained CEO of the company with the funny name for the whole period of its independent existence.

And then at the very end of October 2005, just as O2 was coming up for its fifth birthday, the Spanish incumbent, Telefónica, moved in with a £17.7 billion takeover deal. Many were surprised that O2 had survived so long: few operators had so many rumours about imminent takeovers, though most of them were wrong, Erskine says now.

Not only are Erskine and his team now owned by one incumbent, but he is now in charge of another, Cesky Telecom, with fixed and mobile services in the Czech Republic. It is also part of the Telefónica group, but Erskine is in charge.

With that, and Telefónica's decision to put its German broadband operation into the O2 group, Erskine is now planning some intriguing trials of fixed-mobile convergence in Germany and the Czech Republic.

Since its separation from BT in 2001 O2 — like Vodafone — has been virtually a pure-play mobile operator. It is clear from this interview that O2 is now actively looking at alternatives.

Actually, O2 has never been quite pure-play mobile. BT gave it Manx Telecom, which runs the fixed network in the Isle of Man, an almost autonomous community of 75,000 halfway between Britain and Ireland. That was because back then it was a testbed for 3G mobile services too. Today it offers HSDPA, the technology which boosts data downlink speeds for 3G services.

But it's small, and in fact the subject of Manx Telecom just didn't come up in the interview.

International prominence

Telefónica's bid for O2 in 2005 was a move that has helped to push the company to long-deserved international prominence as one of the leading operators. It is now clearly among the leading operators in the world.

Yes, it is the incumbent in Spain. It has long had interests in South America: by early 2004 it had 21 million fixed lines and 41 million mobile customers. That year it bought for $5.8 billion BellSouth's mobile interests in Argentina, Chile, Peru, Venezuela, Colombia, Ecuador, Uruguay, Guatemala, Nicaragua and Panama, giving it another 10 million or so connections.

But in Europe Telefónica has been quiet and shy. A year of two ago it bought and then sold a relatively small UK business operation, and has kept a larger German broadband business going. Its first big European purchase was 51% of Cesky Telecom from the Czech government in April 2005 for €2.7 billion.

And then came O2, a deal completed in just a few months. By January 2006, only three months after it was announced, it was through the regulatory hurdles, including the European Commission. The following month Erskine and his colleagues were holding court in a Barcelona hotel by the port, a decent taxi ride away from the hubbub of the vast 3GSM mobile phone exhibition, as a wholly owned subsidiary of the local operator.

The trees outside the hotel were decorated with the blue LEDs that have been adopted by O2 for its shops in the UK, Germany and Ireland. Meanwhile, purely by chance, there was an old Telefónica payphone by the kerb — entirely undecorated, apart from with the usual seedy stickers that are attached to any payphone in a big city.

So now, less than five years after escaping BT, Erskine is back in an incumbent. "I think it's very different, though. I think we go back in with pride and confidence, and that's quite a bit different," he says. "What's very obvious is that Telefónica is aware that they've paid good value but for a winning team — and they're treating us like that. It's very good."

And Erskine and his team have been recognised by Telefónica: he has joined the board of the main company in Spain, as an executive director, while the ex-chairman of O2, David Arculus, is on both O2 and Telefónica boards as a non-executive director. Erskine is, he says, taking Spanish language lessons.

Meanwhile Rudi Gröger, the head of O2 Germany, is now a non-executive director of Telefónica Moviles, the mobile unit within the Spanish home market, and is responsible for Telefónica's fixed operation in Germany, while Erskine is in charge of Cesky Telecom, both fixed and mobile operations.

"The deep, deep worries we had were not so much the BT analogy, but the way France Télécom and Orange happened. I think the Spanish are as eager as we that it doesn't go like that," says Erskine.

Hey, what's that about France Télécom and Orange? As a brief background, the French incumbent took control of the UK-based operator Orange in August 2000 after a complex series of financial transactions. In its first six years before that Orange had established a reputation for its quirky, off-the-wall marketing which pushed it from the fourth entrant in the UK business to the biggest share.

After the takeover Orange became a big international brand, but the culture was very, very different.

"Let's just look at facts rather than judgments," says Erskine. "Orange is an awesome brand, performing fantastically in the UK. We were kind of lucky because it seemed to go off the boil round about 2000 when they were bought by France Télécom. With all the bureaucracy that came in, and everything agreed in France, they just lost the edge."

Erskine is learning from that. "Obviously we've got to get synergies from Telefónica. We've sat down and said how do we make sure we don't kill ourselves and in a year's time say, there goes the second Orange. How do we make sure we get the good things from a big company but not all the bureaucracy that could come."

Welcome from Telefónica

He's clearly delighted at the way Telefónica's top management have treated him and his colleagues since the deal was announced — and not just by giving him a board position. "We've been really welcomed," he says.

Alierta with Erskine
Telefónica CEO César Alierta
with Erskine: they "really
want this to work"
A few days afterwards "my executive team were together for their Monday meeting" at the company's head office just west of London. Telefónica CEO César Alierta came to meet the group "on the day, on his own, into our little room at Slough and talked to our top 10 people", says Erskine with obvious pleasure. "He didn't have a brief, he didn't have a minder. He chatted. They really want this to work and they're making every effort."

He's comforted that Telefónica has created a separate board for O2, "which I think is really quite important". Erskine chairs it, but senior figures from Telefónica are represented, including Alierta. "That will meet six times a year."

As well as Arculus, other directors from O2's independent days on the new board include the American Andrew Sukawaty — now CEO of Inmarsat, former CEO of Sprint, and former COO of One 2 One, which later became T-Mobile UK. The three Spanish on the board are Alierta, plus Antonio Viana-Baptista, who runs Telefónica Moviles, and Julio Linares "who is responsible for our integration — our COOs, effectively", says Erskine.

"I think that's important, because that ensures if we need a quick decision we can move quickly and lightly. And the other important thing is that my relationship with César so far feels good."

What does he mean by that? "We've gone through the honeymoon. If we'd been bought by a German or American company by now the owner would be saying: 'Look, I bought you. Do this.' I'm not getting that. I'm getting sensible discussion. I think I'm being grown up. I know he is. It feels very good."

Germans or Americans? The main rumours about O2 involved KPN, the Dutch incumbent. Were there other options? "The only option that was on the table was to carry on as we were."

But weren't other companies coming to O2 to talk about a deal? "No," says Erskine firmly. "The press have written about us for four and a half years about being on the block. The truth is — and I can go to my cross on this one — is that in February of 2004, and this is in the public domain, KPN talked to us and had an aborted bid, and then Telefónica came when they did. Other than that, we just got on with growing the company. We weren't planning to sell it."

Indeed, he says, "we were getting ready to announce at the half year, as we'd promised, an improved dividend policy and then out of the blue they phoned us up".

There were no other options, he repeats, "but a good one was to carry on as we are ... er, were. Actually it was an offer we didn't think our shareholders could refuse."

And he is happy with it? Obviously, as he's still there? "I think if you look at it, it sounds trite but it's true, it's great for shareholders: a cash offer of £2 a share. They've seen the volatility of the market since we did the deal. That's got to be good. Not long afterwards, France Télécom had their profit warning, Voda's had a number of issues, and the market's gone down."

And it's good for customers, he adds. "O2 is as it was, but now we can get them better international rates in time, better handsets, and so on. And it's very good for our people — there's no overlap, there are no redundancies." Well, one or two in head office, "but all the businesses they stay as they are, and there are greater career opportunities". He adds: "I've managed to retain my management team" through the takeover.

Integration into Telefónica

So what's the strategy over time? Will O2 become part of Telefónica, or that Telefónica will become O2? Is there a sort of coming together that is being planned in Spain as well as elsewhere?

"Well, in terms of organisation, César is very aware that if there is too big an operation under a CEO you get the kind of challenges you get with Vodafone. How do you focus when you're running a global operation, when there's always something going wrong — whether it's Japan or the US or whatever. With us, what we've tried to do, is that I've got the rest of Europe. He's got a guy running Spain and he's got a guy running Latin America."

Telefónica is the incumbent in Spain, so a different structure is likely to remain in place. "It needs to keep close to the fixed business, albeit in a separate company." However, a few weeks after our conversation, Telefónica announced that it was wanting to acquire the tiny minority of shares in Telefónica Moviles it does not already own.

The incumbent owns 92.4% of its Spanish mobile business, and has offered an all-share deal — four of its own shares for five in Moviles — to take the other 7.6%.

So Telefónica in Spain is moving towards an integrated fixed-mobile operation. As the incumbent it is likely that management will be kept separate from O2.

But how about the Czech Republic, where Erskine and O2 is now the incumbent? "We are the incumbent, yes," he says with some surprise. "The government only sold it last June."

The mobile market is "pretty competitive", with Eurotel — O2/Telefónica's brand — with "a bit over 40%", he says. T-Mobile "is close, but not quite as good, not much off, and Voda bought the third player and is waking that up".

So there are three players and good competition. "I think the regulator will leave that alone. I'm sure as the incumbent fixed operator we will have to talk to the regulator a lot. I certainly am leaving that to the CEO and his management."

Branding is another issue in the Czech Republic. "We're working that through," he says. The company is now called Telefónica O2 Czech Republic, which Erskine himself admits is an awkward name. "A bit of everything."

Cesky's mobile brand, Eurotel, is being dropped. "They wrote Eurotel off in value recently and they've decided not to progress that." O2? "We haven't done the work but almost certainly O2 will be in there somewhere," he says.

"We've just got to work through little things like the fact that they have got phone boxes and do we want those called O2, and I don't know. A month ago I couldn't spell Cesky Telecom and it's just come under me."

He's not planning to learn Czech, though. "That's a bridge too far. Spanish is a challenge."

When BT dropped the Cellnet brand — which had survived in the UK since the earliest days of analogue cellular services in the early 1980s — in favour of O2, in preparation for the 2001 split, some people laughed, but most now recognise that the brand has been a great success. "They all took the mickey, but we had some super people on the marketing side and it's worked," says Erskine. "It's a very valuable asset."

In theory it translates well. The "2" can be said in any language, just as Hutchison Whampoa's 3 is said as "Tre", "Drei" or "Tre" again, depending on whether one is talking about the Italian, Austrian or Swedish companies, or as "Three" in Australia, Hong Kong, Ireland and the UK.

But, says Erskine, the Germans actually call it "O-two", in English, not "O-zwei", and use the slogan, also in English: "O2 can do."

Alierta "saw us as the vehicle for expanding in Europe and he gave us his Cesky business". That is a big business, "a couple of billion euros of revenue in fixed and mobile", he says.

Will there be more deals? Alierta said at the results conference in early March that this is a year for "delivering organically than doing a lot more deals", but, says Erskine, "they've got the cash and the wherewithal to keep expanding and the O2 teams generally feel pretty motivated".

So why did Alierta put Telefónica Deutschland, a DSL company, into O2's management? Interestingly, reveals Erskine , before Telefónica came on the scene, O2 "had been starting to think there might be a strong customer offering if we could put mobile together with DSL".

And now, bingo, "the DSL business in Germany gives us a chance to test that". And "Cesky is doing the same." They have merged their fixed and mobile business. "It's a good opportunity to test our hunch that DSL and mobile is a strong offering."

Cesky Telecom had already been looking at a combined mobile/fixed plan before O2 came along, he says. "Their plan was Czech. It was going to be their role model. That was their plan. Our plan was not so sophisticated. It was more just DSL and mobile, so it was lucky we've inherited the German DSL business. O2 is running that. We've integrated that in just a few weeks."

Fixed and mobile services

Something of the kind was, it seems, being looked at within O2 before Telefónica arrived. "We were starting to form the view that — frankly put rather too simply — if you could give people one device for their home and for when they're on the move, it's very doable. When it's in the home it can give them very high speed data by DSL and obviously voice calls, and then when they're on the move the same sort of high speed data, probably not quite as fast, but via 3G with HSDPA, then there's not much else they need."

It's a step forward from the current view of fixed-mobile convergence? "I think it is," says Erskine. "I think it's quite a lot simpler as well. It doesn't mean yet —obviously we've got to learn what the customer wants — that therefore you just bang fixed and mobile businesses together."

O2 is doing that in the Czech Republic for very specific reasons, he admits: "Frankly the reason is, fixed is very unpenetrated. There is less than a third of the people who have a fixed line." So it's more efficient to have the same sales team selling both fixed and mobile connections.

"The idea is that you can say to a customer: 'I will take your fixed minutes and your mobile minutes,' which is great because in none of our markets has mobile got more than a third of the minutes, so there's plenty of opportunity."

It's also a recognition "that 3G's very exciting, but it's not going to be as fast as DSL".

So you say to a customer that you will provide all the fixed minutes at home, and mobile minutes when they're travelling, "and it saves the customer money because they're not going to have to pay for this fixed line. We will see. The market will tell us. The customer will tell us."

So O2 will see the fruits of the German and Czech projects "and form views" which will aid it to plan its strategy for its other operations.

It has Telefónica Deutschland in Germany as a DESL operator. It has mobile and fixed — including DSL — in the Czech Republic? So, it's early, but how does he think O2 will get into DSL in the UK?

"We're looking at partnerships, we're looking at all models. I wouldn't want to say more. Frankly what we going to do for the next little while is learn from Germany. Probably we will cut a wholesale deal very soon in the UK. If it works we'll form views as to the right model."

It was a coincidence that O2 should have the material for a ready-made prototype landed in its operation. "We were thinking — I guess this is last summer — could we be tempted to make a bid for Telefónica Deutschland? Well, then all this happened and we didn't need to, so we've got a nice train set."

So he and his colleagues in O2 had already identified Telefónica Deutschland as a suitable candidate for this trial? "Yes," he confirms. "It's got about half a million DSL lines out there but they intend to expand on that. I'm sure with our 10 million or soon 10 million mobile customers we can leverage that."

Would this be like the BT idea, originally called Bluephone and now being marketed as BT Fusion, of having a multimode handset, switching from GSM to Bluetooth or wifi?

"No," says Erskine. "Bluntly, Fusion I still don't think is right for customers. The market will tell, but they're not running away with customer demand." BT is doing a lot of advertising for the service, though. "You can advertise anything if you've got a big budget."

One of the golden rules is that "handsets are so important" and if you don't get a lot of handset manufacturers making a new technology "you know it won't take off".

O2, though, "can deliver the combined service now and we can bill it", says Erskine. "And then the interesting thing, which is blindingly obvious, is that what we've been finding over the last year or two, is when you deliver content, customers want to be able to download it for all their applications."

He gives an example: "Music downloads. They don't just want — and we fortunately guessed this one — to download music to the mobile. They want in a very friendly format at the same time to download it to their computer, and store it."

When you supply content, people should be able to "bring it to all that they want".

What does that mean in practical terms? "We're just making sure, as we develop the applications, that they are user-friendly so they are easy to download to whatever you've got, rather than that it will just go on the mobile."

Mobile television trial

What other applications will be big? "We did a TV trial in Oxford. That was over a different technology but it was to tell us if people like it. Early signs — it was only a small sample — are they liked it a lot. They were using three and a half hours a week. Surprisingly 60-70% of that was at home. But they did say they were willing to pay a tenner a month."

That's not the same, in a free trial, of them actually paying £10 a month, "but our German business is going into the mobisoap thing just to test it out", with four-minute soaps.

"All the time we're saying mobile data — if you park text, and we're getting something like 27% of our revenues from text and doing well — mobile data is interesting." It provided £250 million revenue last year for O2. "It's growing but it still is only 3-4% of the revenue. What is going to make it really grow?"

He has some key points: ease of delivery. Certainly 2.5G is faster than 2G, but "3G will be faster, it will be better".

Erskine says that "O2 has been sensible and cautious in its 3G rollout". The company didn't push it early, unlike Orange and Vodafone. "They've invested a lot of capital. They've got greater coverage in some countries that us. It's paying them not a penny of benefit, because the customer won't be pushed," he says.

"Now if 3G does take off, and we think it takes off at the end of 06 as you start to get the right handsets out there, we will continue to expand our 3G."

Why later this year? The terminals "are becoming as good as 2G", he says. "Even this Christmas people said the very sexy RAZR mobile from Motorola would come out in 3G form. Well, it didn't, it was fatter." And 3G phones still have lower battery life.

"But we start to see product, and certainly before 06 is dead handsets from 3G are as good as 2G and the market will start to take off."

That will give good mobile data speeds, better with HSDPA, "but at home broadband will probably still be better", and hence O2 wants to offer that to its customers too.

Live auctions on i-mode

But "it's also what do people want to use?" he asks. "We went with i-mode last autumn — so we've just launched. One big breakthrough with i-mode, and the reason we went for it, is that it is very simple to use. In the last couple of weeks we've launched eBay on i-mode." So people can monitor their auctions all day.

"Without wasting and spending a lot of money and without pushing a lot of technology at the customer — as I would argue one or two of our competitors have — we're just saying that this mobile data space will have applications. And how do you win? One, by making it easy to do, and that's where I come back to my DSL and mobile. Two, whatever you enable the customer to access, make it easy to access so they can download it to all of their vehicles." By vehicles he means terminals, phones, PCs, players.

"And then try and find if there are new areas that they are interested in." It's not so much a matter of finding killer applications for mobile, but mobilising what are already killer applications, enabling email, TV, eBay, music and other services on the move.

Erskine admits that he's not the age to be a typical user, "but my car has got a little TV at the front", that for legal and safety reasons he can watch only when it's parked. "It's sad and amazing how often when I'm waiting for someone — my kids — you pop that on. You wouldn't think you would, but I've found myself thinking, what's on the box?"

Telefónica's own empire is bringing useful contacts and information to Erskine and his colleagues in O2. It owns about 78% of Endemol, the Dutch-based television company famous for Big Brother and other productions designed to entertain and delight us.

"Being sisters, or brothers or cousins, they're being very helpful. What we're able to do is learn about programming, and what media might work. That's helping us down that space."

Telefónica Moviles has operating i-mode services in Spain under licence from the system's inventor, the Japanese mobile network NTT DoCoMo. In the few months since the takeover was completed have he and his colleagues been able to share experiences? "They've got good ARPU uplift," he says. "I think that is one of the reasons we went into it."

And it was the connection with Telefónica Moviles through the community of i-mode users that helped attract O2 to the Spanish incumbent when that phone call was made last year. "We knew that Telefónica people were good people to work with. We got to know their culture by working together on i-mode."

What has O2 learned about i-mode? "First of all, undoubtedly getting the right handsets is important. We're halfway there. We've got some. The thrilling bit is that Samsung has come out with a fabulous product, but we need to get more."

O2 also learned from Telefónica Moviles "that the great thing with i-mode is that because NTT DoCoMo has built these platforms for a number of operators around the world they really do work. The stuff is delivered."

That is one of the important features that helped swung O2 towards going i-mode — and in the process towards Telefónica as an owner.

Friendly to use

"I tried to put the mantra through my business that we couldn't launch services unless they were really friendly to use. We all as an industry launched picture messaging and it didn't work for a long while. It's still not brilliant. And yet we're amazed volumes didn't take off."

The great feature about i-mode is that it is operating in a number of countries around the world "and it works. That is good. Simple to use."

Since launching i-mode in Spain "the ARPU has gone up quite nicely". Telefónica is learning which services work and which don't, but "the handset is the absolute key, getting a better range of handsets".

Erskine and his colleagues also value highly the chance i-mode gives of working with DoCoMo people "and you do get an eye on other markets around the world". The Japanese market "is different but very hot", he says: "You learn a lot there as well."

Is there scope for working together more closely with Telefónica on i-mode? After all, for many British, Spain is their favourite summer holiday destination. Will they be able to access O2's i-mode services from the bars, clubs and beaches?

"I think for this summer we've got to work on that, and it's unlikely. The main goal for this summer, as you would expect, is that we will be launching much better roaming tariffs." When the British — or the Germans, as Spain is the number one holiday destination for them too — are there this year, they can expect "much better rates", he says. "We want to show customers tangible benefits."

But, yes, to make i-mode seamless "is a distinct possibility", he adds. "We will be going down that route."

O2 has the right to use the i-mode trademark in the UK and Ireland, as does Telefónica is Spain, but in Germany, O2's second biggest market, KPN was there first, with its E-Plus German network. O2 plans to launch i-mode services in Germany "probably towards the end of this year", says Erskine. "We were less excited in Germany because KPN had it already."

And E-Plus hasn't exactly had a great launch for i-mode. "No, they haven't," says Erskine. "They went early with it and they didn't do a wonderful job. We're kind of hoping that by the end of the year — I'm not certain we'll have it ourselves, but they haven't made a great cut through with it so that when we launch we can more or less make it our own."

Will O2 be able to call the service i-mode in Germany? Doesn't KPN have the rights to the name there? "We hope to," says Erskine. "We're not certain of that because at the moment the lawyers are saying KPN have the brand, but KPN are publicly saying it's not working, so whether the Japanese can persuade them to, er, give up, we'll see. We'll see."

Growing numbers

O2 "is encouraged by — I nearly said proud of — is the rate we're growing", says Erskine. "The numbers are more challenging these days but our UK business announced at the end of December that it had grown its revenues 12%. That's voice and data. In that same context Voda UK has grown 3%. T-Mobile and Orange have actually gone backward."

Germany? "Our German business at the end of last year announced it had grown just under 20%. Voda in the same year hadn't grown."

So what has O2 done that is right, compared with the others? "We've won customers. The UK until about 18 months ago still had a bit of a churn problem. Churn now has come way down. It was in the mid 30s and it's now in the mid 20s."

The difference is due to "lots of strong customer offers to keep them, lots of focus on loyalty", he says. "And therefore as we win new ones each month we aren't losing old ones out of the bottom of the bucket so much. So our UK business has now got 16 million customers."

Add the MVNO with the Tesco supermarket chain, which is a joint venture with O2, and "there's another million", he adds. "We're getting scale."

In Germany, ARPU shows "a little bit of growth, but mainly we're winning customers, and of course the big opportunity in Germany is that although we're doing well we still only got about 12-13% of the market, so can we keep taking it away from the big guys?"

T-Mobile, owned by incumbent Deutsche Telekom, and Vodafone "have both got about a 40% share", he notes. ""Voda hasn't grown its revenues. E-Plus is smaller, it's about the same size as us, it grew 4% in the last year, and we grew just under 20%. So we're not wasting money on growth but if we can keep growing and improving the margin I think Telefónica will continue to be pleased with us."

O2 has introduced loyalty campaigns — designed to undermine the irritation shown by many long-term customers at seeing attractive offers made to newcomers from other networks. "We'll actually give you as good if not a better deal. Others followed but we trailblazed on that."

Network quality

The company has also invested heavily in its UK network, not necessarily to roll out 3G fast but to improve 2G and 2.5G networks. "Our UK network four years ago was third and very close to bottom in quality" when the regulator, Ofcom, judged it, says Erskine.

Why was that? Had BT — when it was owner — taken its eye off the ball? "I don't think so," says Erskine. "It's funny, one thing again you learn, don't you: we put in charge of our network in the UK a non-techie. Very commercial guy. Hard-nosed chap as well, but a very commercial guy. And what he said was: stop just throwing new cellsites at it. Stop just throwing money at it. Tune what you've got."

So they went back to the cellsites "and they found things like the aerial wasn't as high as it should be, or the relationship between cellsite A and cellsite B wasn't what it should be, and now Ofcom has judged we're the best."

Who was this person? "He's our COO in the UK, a guy called Vivek Dev. And they love him, because now the engineers talk about minutes per drop — and they're all the time driving it up. They've got it up to well over 200 minutes per drop. That is more than double where it was when we were in the pits."

It sounds sensible that if calls are dropped, people don't call back and so companies lose revenue. If someone is out of range, no one can call, so there's no incoming revenue.

Sharing experiences of 3G

We've talked about experiences O2 can absorb from what Telefónica is doing in Spain, but what are the differences in the strategies — and are the two companies starting to share experiences?

"We're starting to," says Erskine. "The differences are still emerging. We're probably a bit more focussed on data than they are. We're sharing thinking about 3G and the right way to use 3G."

Where is Telefónica in the 3G saga? "They're behind Vodafone, so I'm not being clever but they've got that right. They're probably about 60% of the country, but I don't think they're going to rush to build a lot more. They'll build a little bit more in the odd cities." That compares with O2's "about 50% in Germany and the UK". The company "will be rolling out this year but I'm very pleased we're not at more than 50%".

The first thing O2 and Telefónica Moviles sat down and discussed "was how we can improve roaming rates". Not only how can O2 point its customers in Spain to the Telefónica network while Telefónica points its users to O2 in Germany, the UK and Ireland, "but how do we use their big block of Latin American traffic to get better deals around the world for our customers".

Handsets can be reprogrammed over the air to select preferentially one carrier rather than another to keep as much traffic as possible in the company.

And then the combined company can go to operators in other companies to negotiate better deals, in places such as "France, Italy or the United States", he say, "and get a better rate for our customers".

The second area "is the whole handset bit", says Erskine. "Between us we buy loads of handsets, so can we buy them better? Can we rationalise the range?"

They are different ranges, though. In the top 10 handsets in O2 and the Spanish operation "there are very few overlaps", he says. "Is that the market? If it is the market then I want it to stay that way." On the other hand there might be other factors — and by addressing them O2 and its sister company in Spain might be able to get better deals from vendors.

O2 has put a lot of effort into its XDA range of PDAs, and such products are absent from Telefónica's range. "We're asking if they're interested and we're working through. We've sourced a lot of that kind of product in Asia and they're working out if they're interested."

He's very happy that "we're not finding from my people or theirs any 'not invented here'", he says.

O2 has a more business feel to its shops? "Yes, we do," he agrees. "That's interesting, because they are weighing up the right way to run their shops, and should they have more."

Cross-fertilisation with Latin America is slower to achieve, though. "There are a lot more similarities with the Spanish business. Given they only took majority share of most of their Latin American businesses about a year ago they're still learning what they've got. So it is harder for us to get in to find out if we could share ideas with the Latin Americans. Spain is the first port of call but it won't be long before we get into Latin America."

Equipment and systems

Let's turn to the network side, equipment and systems such as billing. Any chance for commonality there? "On billing there isn't." O2 has an IBM billing system "that's gone into all the businesses", he says, "and that's also given us good segmentation tools".

On the network side O2 uses Nortel and Nokia. "We may, through the Telefónica link, decide to bring in another vendor." Telefónica is "largely Ericsson and Nokia and slightly in favour of Ericsson", he says. "It feels as though Ericsson must be giving them very good deals. They like Ericsson a lot. That's good. If we can leverage a good deal we will visit it."

That's particularly the case as Spain and O2 are in "a similar roll-out" position for 3G, he adds. Latin America isn't really moving much towards 3G yet.

So he's happy with the way things have turned out so far? "So we feel remarkably happy," he agrees. "Of course, there'll be the odd bad day. Bad days always happen — middle management in Telefónica wanting to integrate us a bit more than we want to be integrated."

But the O2 board and "strong support from the top", mean "there'll be plenty of good days, I think."

There's always one proviso: "Keep hitting the numbers. The day you miss your numbers for too long everybody likes to interfere then, don't they?" So, "keep growing it, keep it simple, keep the brand as it is, refresh it if you should".

And with that he was off — to a meeting in Madrid of the top 160 people from the whole Telefónica empire, as one of the leaders of a significant new acquisition by one of the world's leading operators. That clearly delights him. GTB

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