Italy boasts one of the highest cellular penetration levels in
Europe, exceeding the 40% barrier. Omnitel has obtained about
33% market share and is now entrenched as the second wireless
operator behind Telecom Italia Mobile in Italy. By the end of
1999, it expects to have ten million subscribers. John Jensen,
a telecoms equity analyst at Salomon Smith Barney, comments:
"So far they have been a fantastic company. They started one
year later than Orange, for example. They have three times the
subscriber base of Orange in a market with the same kind of
population. They have twice the EBITDA mark of Orange. They
have just done fantastically really. The question is: can they
keep that track record with increased penetration and
competition? So far they have proved that they can."
In July Omnitel announced that its profits had risen 182.5%,
with revenues up 83.7% on the same time last year. Jensen
explains how the company took a long-term view in the beginning
and is now reaping the benefits: "Omnitel exploited the best of
the Italian market, meaning when they entered the market, it
was totally dominated by Telecom Italia Mobile (TIM). TIM had
not introduced handset subsidies in the market, and Omnitel did
not fall into the trap of obtaining high EC high subscriber
growth by subsidizing handset costs. Instead they added a
little bit more to the conducive environment of the Italian
market, by emphasizing service and network quality and also
transparency in pricing. TIM is a very, very good operator, I
think. Omnitel would be kind of lost if they had entered into a
price war, because TIM was just so big at the very beginning.
So they took the best of the market and simply improved on it.
I think that they did not simply go for the quick fix, which is
very good. This company is not only one of the largest
operators in Europe. It is also one of the most profitable. It
has one of the highest EBITDA margins."
Earlier this year, the operator launched Omnitel 2000, which
offers customers access to a host of services through voice,
WAP (Wireless Application Protocol) and the Internet. This new
Internet portal provides access to an offer of over 150
different services. It will allow users to have access to all
the latest value-added services through their cellular phone.
It is one of the most innovative product offerings on the
market. Jensen notes: "Innovative services have definitely been
a key. It takes some key issues to be a player in the mobile
data market. Firstly, you have to have a strong brand name. You
also need strong distribution. Early mover advantage is very
important, and certainly they are an early mover."
The Italian wireless market has attracted interest from some
of the world's top operators. British Telecom has a stake in
Blutel, which was recently awarded a licence. Meanwhile France
Telecom and Deutsche Telekom are shareholders in WIND. Omnitel
has clearly benefited from the backing of such respected
players as Mannesmann, Vodafone AirTouch and Bell Atlantic.
Jensen talks about the company's prospects: "They are facing a
situation now where they are seen as an incumbent, competing
against WIND and Blutel. So the question is: are they going to
change a lot owing to that new type of competition? Do they
anticipate a fundamental change in the market because of the
new entrants? What do they expect from Omnitel's 2000
In an exclusive interview with Global Telecoms Business, the
recently-appointed CEO of Omnitel Vittorio Colao answers these
questions and describes the operator's plans in the Italian
cellular market, including the potential for wireless data
Italy has one of the highest rates of cellular
penetration in mainland Europe. Why has the Italian population
embraced mobile services to such a high extent? In your
opinion, what is the ceiling for cellular penetration? How many
subscribers do you have?
Colao: I believe that cellular penetration levels
have risen so rapidly in Italy, because the market
incentivization plans of the operators have successfully
reduced the ownership costs for cellular subscribers. Through
segmentation, continuous innovation and pricing, we have been
able to address each segment very rapidly. In my view, there is
no real ceiling for penetration levels. We can say 80%. We can
say 90%, but basically the whole population represents the real
ceiling. The last official number of subscribers that we
announced was eight million. Of course, we have exceeded that
figure significantly. We will release official numbers at the
end of the quarter. We expect to have 10 million subscribers by
the end of this year or early next year.
What is the current ARPU (average revenue/subscriber)?
How will you improve this figure? Do you plan to launch any new
products this year? Which markets are you targeting?
Colao: The last officially released number was about
Eu30 or L70,000 ($38.7), more or less. We perceive an upward
trend in terms of usage. People use their mobiles more each
year. We plan to stimulate usage through new services. We also
think that the services will progress and contribute more and
more to the average ARPU. It is already very evident with SMS
services, which have been extremely popular in Italy. We are
going to see more with GPRS and WAP next year.
In terms of segments, we are already in the third handsets in
the family segment. We are not talking about the second any
more, rather than the third or the fourth. We are also
targeting the lower mobility professional segments. Lower
mobility implies people that might need the phone, not
necessarily to be used on the move, but to be used when they
are at their work. So we are really targeting basically
everybody at this point.
What do you believe to be your competitive advantages
over Telecom Italia Mobile and WIND? The ministry of
communications recently awarded a licence to Blutel. How do you
think that they will fare in one of the world's most
competitive cellular markets? Do you anticipate a change in
market dynamics owing to the new entrants?
Colao: Obviously, quality of service is a competitive
advantage. This means better network quality, better customer
operations and assistance quality. That is number one. We are
continually awarded European and Italian prizes for
high-quality and better service. The other competitive
advantage is our leadership in innovation. We keep launching
new products. We have announced 30 new innovations over two
years. These are technical, service, platform and pricing
innovations. So innovation is a very strong element of our
branding and positioning strategy.
I don't think that market dynamics will change. Italian market
dynamics have been characterized by fairly low prices and
stable acquisition costs. I don't think that any substantial
change can really occur at this stage of development, when the
market has a penetration of over 40%. I think that Blutel will
probably do well. It will take time, but I think that there is
room for a fourth operator in Italy.
How do you benefit from the presence of Mannemann as a
shareholder? How do you see the relationship between Infostrada
and Omnitel developing? How do you benefit from the presence of
Vodafone AirTouch and Bell Atlantic as shareholders?
Colao: I perceive the relationship with Mannesmann in
the same way as I perceive contacts with Vodafone AirTouch and
Bell Atlantic. They are productive relationships about the
exchange of ideas, operational experience and continuous
stimulus to innovation and new ways of approaching the same
business in different countries. So it is a two-way
relationship based on different contributions.
In the case of Infostrada, like any other large fixed-line
company, the relationship will be a mixture of competition,
co-operation, purchasing and selling services.
Do you believe that there is a large market for
wireless data services? Fixed-line data services have yet to
take off in Italy. Internet penetration is low compared to
other major European countries.
Colao: I think that wireless data will take off. I
think that we should probably not consider it large, using your
words, but significant. It will take off, if we are able to
stimulate wireless data services through offerings such as
Omnitel 2000 and new technologies, such as GPRS which is coming
next year. There is a market, which will be significant. There
will be a significant new range of services for our customers.
Omnitel is very committed to producing applications and
providing new services.
How do you view the potential for wireless offices in
Italy? How do you view the concept of wireless virtual private
Colao: We already have wireless VPNs in our offering.
This has been basically Omnitel's big success in the corporate
market. We are leading the market in that segment with a
product called "RAM", which means mobile corporate network. All
the competitors are trying to imitate us: I think that this is
a very positive development. Wireless offices will be an
extension of that service. I think that they will be IP-based:
this will be an interesting extension of the same service. So I
would consider wireless offices as a sub-segment of the wider
wireless VPN segment.
What wireless data services do you currently offer? In
your opinion, which services will prove most popular with
customers? What services are you trialling? Do you believe that
wireless Internet access will become a key feature of your
Colao: We have data offerings in three areas now.
Firstly the traditional SMS service, which is of course
person-to-person, but also retrievable information from
databases. Then we have the Omnitel 2000 WAP offering which is
being advertised. I think that this is a very innovative
data/information retrieval system linking voice with data
through the unique access of the Omnitel 2000 number. We also
have wireless Internet access which goes under the number 2800.
This is very low price: free of charge, free monthly. It is
basically a free net service on mobile.
The first service will probably be replaced by WAP, when that
is a common standard on all handsets. I think that the concept
of retrieval and information service provision will be very
important. We will also see an increase in usage of mobile
Internet. I think that the big impulse to the market will come
from two things: GPRS which equals higher speed and secondly,
better integration of mobile applications.
Wireless Internet access will become a standard feature of
future handsets. As I said, all phones will have WAP. All
phones will have Internet access. All handsets will have to
provide some integration of E-mail, Internet browsing, and
telephone functions. This is what we are working on. The
necessary platform to support all this is faster radio access
platform, which we believe is going to be GPRS.
Can you provide more information about Omnitel2000?
How does this Internet portal work? How can it be accessed?
What kind of information will Omnitel2000 provide for
Colao: Omnitel2000 can be accessed through three
different technologies: WAP - in other words mobile data; the
vocal system based on a voice recognition platform, so regular
voice and thirdly of course, Internet through the Web. So far
we offer a wide array of information which is valuable for an
individual's everyday usage and also for entertainment.
Basically this comprises financial, sports, traffic and
political information. These are traditional services for the
individual. We also have some services for business, such as a
variety of financial and market information.
We will expand it in a couple of directions. One relates to
the transaction environment and therefore E-commerce
applications running over the phone. I mentioned the other
area: services that integrate the personal phone with other
personal ways of communicating, such as E-mail, fax, and what
is termed universal messaging applications. With Internet, we
have hundreds of thousands of potential users, as it is an open
platform for everybody. WAP customers will depend greatly on
the speed of all phones in the market with WAP software. It is
difficult to provide a figure for voice services at this point,
but we are talking again about hundreds of thousands.
The government is planning to launch a tender for a
fifth UMTS licence later this year. Do you believe that there
is room in the market for five cellular operators? Do you think
that Omnitel is adopting more of an incumbent mentality, now
that it is one of the more established players?
Colao: The government plans to launch a tender for
five licences. I believe there are four already. I believe
there is room. The fifth operator will be different in terms of
its market: perhaps it will offer local service. So we will
have four-five operators. But as long as we can develop deep,
intensive services, and possibly get closer to entertainment
and video, I believe that there is room for five operators.
I don't think that we have changed our mentality. We have
simply changed the size of our profit and loss. But, in terms
of mentality we want to be close to the customer and innovation
rich. That does not depend on the size of your profit and loss.
It should not.
What was the significance of your recent agreement
with Nokia which sees them supplying Omnitel with an
unspecified number of MSC switching centres? Who are your main
handset suppliers? How long do Omnitel subscribers keep a
handset before switching to new smaller models?
Colao: We have different fixed technology suppliers.
We have Nokia. We have Lucent. So our network plans are not
bound to any specific supplier, but are instead driven by needs
and the different types of switching in the case that you refer
We do not have preferred handset suppliers, but we have
changed suppliers every year for the past three years. The
number one supplier has been different, based on the appeal of
the different models and the technology that they support. For
example, the ability to run SMS. So we don't really have a
policy. We simply keep renovating our choices based on the
factors that I mentioned. On average subscribers keep a handset
two years before changing.
Have you suffered network congestion problems? If
there is an increase in demand for wireless data applications,
for example, will your network be able to handle increased
usage? How will you improve network capacity?
Colao: We have not had any real congestion problems
in 1999. This year has been much better than 1998, thanks to
the increased number of BTS (Base Transmission Stations) that
we have in the country and transmitters. I do not think that
wireless data will be a problem, as I believe that the big
increase in wireless data will depend on GPRS. As you know,
GPRS is a channel-efficient way for increasing the speed.
So we don't see many problems for the year 2000 and possibly
for 2001. We are basically thinking now about 2002, although
there is time. We are constantly improving our network
capacity, as we have witnessed such growth in the customer
base. So our network needs to be technically larger than in the
previous year. But I don't think that data will be the main
factor behind congestion. I don't think that we would tolerate
congestion in any case.
In a recent interview with Global Telecoms Business,
the CEO of NTT DoCoMo Keiji Tachikawa said: "The existence of
multiple technologies that compete with each other might be
beneficial in terms of joint technical development rather than
having one single standard." What are your opinions on
Colao: I think that the CEO of NTT DoCoMo is right
when he says that competition, even on technological standards,
pushes creativity and the brilliance of solutions. I also
believe on the other hand that GSM has demonstrated that once
you can reach agreement on the standard, market penetration
happens much more rapidly and services to customers are
developed in a better and more opportune way. So I think - as
is the case with almost everything in life - that it is good to
have competition when you are in the creative and thinking
phase. At the same time standards have also contributed to
Do you plan to form relationships with companies such
as Microsoft to develop wireless applications? What percentage
of your overall revenues would you expect data services to
account for in two years?
Colao: Obviously we plan to form relationships with
companies in general to develop wireless applications and
especially wireless data applications, where we really expect
demand when WAP and GPRS are on the market. It is not
necessarily Microsoft: we will form relationships with whoever
is able and committed in any vertical or horizontal segment to
develop relevant resources. So we think basically that vertical
applications for a specific corporate market, as well as
horizontal applications integrating the IP platforms, are
clearly a priority.
I cannot disclose the percentage figure for data. I think that
the number will be small compared to the whole size of the
company, but much bigger than today.
What levels of churn have you experienced? Do you
think that you will be able to increase market share or will
you concentrate on boosting ARPU?
Colao: We have a level of churn in the low teens. So
historically it has been very low in this market. Last year the
final number ranged between 13-14%. This year is going as well
if not slightly better than last year. I don't think that
market share and ARPU are real alternatives. Our mission is to
develop the best and most innovative services with the best
customer orientation. In this way we will boost ARPU, lower
churn and obtain market share. So I don't see them as
How much does it cost to acquire a new customer? Which
benchmarking tools do you use to measure Omnitel's operating
Colao: Our variable acquisition costs amount to 25
Euros. We keep measuring Omnitel's operating efficiency
internally. We have basically regionalized the company. We keep
benchmarking different units against each other. Of course we
also look a lot at developments in other international
operators that are of a similar size. So we look at operators,
such as AirTel and Orange, as well as the other large European
How are you targeting the 15-19 year old market? Do
you believe that this is a major untapped market for Omnitel?
Which packages are you devising to attract younger cellular
users? How important is the pre-paid market for Omnitel?
Colao: That market is already very tapped. Pre-paid
has been very crucial to reach that segment. Our pre-paid
packages will always constitute a bundle of attractive tariffs,
such as the "You and Me" pricing scheme, which has been
extremely successful over the past two years or the summer card
that we launched last summer, where calls were charged for a
certain period at a very low price. In addition to the price
scheme, we offer very attractive handsets, which are in touch
with young people's tastes in terms of look, feel and features.
As there are so many operators in the Italian cellular
market, will you have to drastically reduce tariffs? AT&T
has achieved a great deal of success with the One Rate plan in
the US. Would you adopt a similar pricing package?
Colao: The prices have already dropped very much. If
you compare prices in the Italian cellular market to what they
used to be and what they are abroad, you will notice that there
has already been quite a decrease historically. So I don't that
it is a case of drastically reducing prices. I think that there
will be price adjustments. AT&T has achieved significant
success in the US with the One Rate plan, because they had a
big roaming problem between different markets in the US, but
AT&T was the only company that was able to offer a very
easy to understand nation-wide tariff. In Italy we think that
we are more in the segmentation targeting concept scheme which
has proved so successful. So for the time being, we don't think
that the US example really applies to Europe, at least to a
single country in Europe.
In July, you announced that revenues had increased by
83.7%. Net profits increased by 182.5%. Will you be able to
continue to grow revenues to such an extent? What is your
Colao: Our first quarter EBITDA margin in 1999
reached almost 45%. We believe that it will improve. I don't
think that we can keep growing percentage-wise in the same way,
simply owing to the sheer mathematics of percentage growth. But
in absolute terms we can perceive a lot of growth ahead, both
in terms of new subscribers and new data traffic, as well as
revenues from new applications.
Can you describe the benefits of WAP technology? Will
Nokia provide the WAP-capable phones? How do you view GPRS?
When do you think that demand for 3G data-rich applications
will appear in Italy?
Colao: I think that there are three factors. There
will be three technologies that will together contribute a lot
to the diffusion of data traffic. The first one is WAP. WAP is
a user interface which allows for some kind of micro-browsing
over the phone, which users will find easy to scroll and
adjust. The second one is a system that allows predictive text
input: the most well-known version is T9, which allows the user
to enter words in the phone keyboard by tapping a very limited
number of keys. The third one is GPRS, which allows basically
higher speed. Now the combination of the three, an easy
interface, an easy input system and higher bandwidth, will in
my view allow any holder of a phone to use the phone, not just
as a voice device, but also as a two-way wider communications
device. Two way is very important. Everybody will do
WAP-capable phones: Alcatel, Ericsson, Nokia and Motorola.
Demand for data-rich applications will emerge once the
handsets are available, as the operators are working very hard
to put content on databases, in order to have data-rich
applications available. But then of course we need the
handsets: otherwise we will not the feel the need or will not
be able to experience the service. So the handsets are crucial.
When do you think that the handsets will be
Colao: The transition between two to 2.5 and third
generation will occur between now and 2002. We are filing a lot
of requests with the manufacturers, so that we can provide 2.5
and third generation handsets as soon as possible.
How will you charge for some of the premium services
offered through your web site? Can you explain Omnitel's
version of cyber-cash? How will a pre-paid subscriber be able
to use this service?
Colao: Omnitel has two main ways of charging the
customer. One is through the SIM. In particular we can link a
bank account to a SIM and enable a money bank transfer, based
on instructions sent from the phone. For example, this already
works, when re-charging our pre-paid customers. By dialling a
PIN code, a subscriber can receive a recharge. The amount is
then debited from his/her bank account. We also have another
mechanism for pre-paid customers that we are working on. The
customer can buy scratch cards and accumulate credits in some
account and then use that account to buy goods or pay for
services over the Web in the same way that they pay today for
their phone calls. So we believe that these two mechanisms
provide us with very strong payment systems that we can make
available for everybody, to make E-commerce and cyber
transactions easier, safer and more widespread throughout the
How will the convergence of mobile and Internet
services affect your billing platform? Which billing supplier
are you using? Will you be able to offer an integrated
Colao: Of course billing is crucial. We are working
on it. You have touched upon a very important issue. We are
rethinking our billing strategy in terms of billing the amount
of data that you transfer or billing an event such as a
concert. We are working on this with our main suppliers, which
are Oracle and other billing experts.
What opportunities does fixed-line tariff rebalancing
in Europe offer wireless operators such as Omnitel?
Colao: It offers substitution. It enables us to push
through the substitution of fixed-line to mobile traffic, as we
are progressively more competitive, also in terms of pricing,
not just in terms of convenience and ease of use.
How do you view the importance of number portability?
How has this issue been tackled in Italy?
Colao: Number portability will be introduced in Italy
at some point next year. From what we see in other countries,
it would seem that number portability has not really been
demanded by the customers. We will provide number portability.
We will adjust to any requirement that is imposed. But we
believe that the real way to preserve a customer is to provide
quality of service and ensure intrinsic loyalty. So this is
what we are really working on for the future.
What are your opinions on the merger between Telecom
Italia and Olivetti? How will this merger change the nature of
the Italian market? Do you think that this will lead to changes
in your competitor TIM's strategy?
Colao: Personally, I think that the acquisition of
Telecom Italia by Olivetti was a very bold financial move. As
to my opinion on the merger or assumptions about its impact on
the market structure, like everybody else I will wait and see.
I have no comment to make. I think that the number of large
players that exist in the Italian market constitutes a fair
number to provide competition, innovation and price reductions.
Any other consideration is left to each individual operator.
Finally, what are your hopes and ambitions for the
company over the next two-three years? What trends do you see
emerging in cellular?
Colao: If I have to sum up my ambition in one short
sentence, I would like Omnitel to be recognized in three years
as Europe's leading wireless innovator. Not necessarily
wireless communications, but wireless in general.
The following are the main trends: integration of the Internet
and wireless will play a very significant role. I believe that
wireless operators will make a significant contribution in
Europe to the development of E-commerce owing to the number of
customers that we have, the technology and innovative attitude
that Omnitel, as well as many other European companies, are
demonstrating in their home markets.