Matthew Key: first key principle of network sharing
is protect the customer experience

Telefónica is to rationalise its brands across the world, according to a decision announced at a meeting of 1,200 senior managers in Madrid.
The company will use Movistar as its brand in Spain and Latin America — except for Brazil, where its joint venture with Portugal Telecom will remain as Vivo — and it will promote O2 as its brand in Europe outside Spain.
The name Telefónica will be dropped except as the name of the parent company — reflecting a similar decision by France Telecom, which has decided to rebrand everything as Orange over the next three years.
Telefónica, which is the incumbent operator in Spain, bought UK-based mobile operator O2 in October 2005 for £17 billion, including operations in Germany and Ireland. Since then the company has expanded the O2 brand to include its incumbent and mobile operations in the Czech Republic and its operations in Slovakia.
The Spanish newspaper El Pais quoted CEO Cesar Alierta as saying the branding move would help to make Telefónica "a world leader in the digital environment".
Telefónica, whose 260 million customers make it one of the largest mobile operators in the world outside China, is now the controlling shareholder in Telecom Italia but that operation and brand remains separate.
It's been a busy time for Matthew Key, the CEO of Telefónica's European operations outside Spain — essentially the O2 businesses, but including a number of business and broadband operations in addition.

Network sharing

The company has just announced a huge deal with Vodafone to share mobile networks in Spain, Germany, Ireland and the UK, and possibly the Czech Republic, with claimed savings of hundreds of millions of euro.
So it's a perfect time to put some questions to Key, a chartered accountant who became CFO of the UK operation in 2002 — after being finance director of Vodafone UK. He became CEO of the UK operation of O2 in 2005, a year before the Telefónica takeover, and took over from Peter Erskine as chairman and CEO of Telefónica Europe, the holding company for Telefónica's European interests outside its Spanish homeland.
In a way, it's a curious title, because Telefónica as a name has a low European profile outside Spain, and O2 is far better known. Erskine was particularly proud of taking what had been BT's wireless division which was split off from the old parent in 2001, and rebranding the old Cellnet as O2.
Many people were sceptical at the time, but the new brand has been a success and, though Telefónica has resisted any temptation to import it into Spain, it has used O2 for its acquisition of the old Cesky Telecom in the Czech Republic and the creation of a new mobile operator in Slovakia.
But O2 is increasingly admitting to its ownership by Telefónica. The head office in Slough, just west of London's Heathrow airport, brands it clearly as "a Telefónica company", though a sign behind the reception desk admits to continuing ownership of vestigial O2 businesses including a company still called BT Cellnet.
Telefónica "is comparatively low profile considering its size and scale", admits Key. "Telefónica is one of the 30 highest market cap businesses in the world across all industries." After China Mobile, Vodafone claims 289 million proportionate customers, so Telefónica is not far off with 260 million.
"The group is run from three regions: Latin America, Spain and the rest of Europe. As far as revenue is concerned, Latin America has just become the biggest. As far as cash flow and Oipda — operating income before depreciation and amortisation — Spain is the biggest."
A Spanish executive runs Latin America; an Argentinian runs Spain; and Key runs the rest of Europe. "We all report into Julio Linares, who is called COO but is effectively day to day CEO, and he reports into Cesar Alierta."

First commercial 3G network

Apart from the big operations in his patch, he also runs Manx Telecom, on the Isle of Man in the middle of the Irish Sea. A former BT operation which came over with the demerger in 2001, it had the world's first commercial 3G network.
The UK is his biggest business, "but the Czech Republic is not far behind as far as cash flow generation is concerned, but Germany is the biggest market with the biggest potential".
The businesses are more than mobile. There's an active DSL and wholesale business in Germany, that Telefónica had before it bought O2 but has now brought into the same unit; and in the UK the company acquired a broadband startup, Be.
"In the Czech Republic we're the ex fixed incumbent and also the ex mobile leader, formerly Eurotel — so we have mobile, fixed voice, DSL and IPTV."
Since Telefónica bought O2 only Slovakia is new. Are there going to be any new operations in Key's territory — whether through bids for new licences or otherwise.
In essence, no: "Our view is that organic is the way to grow. We've clearly got significant upside to go for in Germany. The UK continues to go from strength to strength, as far as taking market share is concerned."
If an opportunity arose, he'd look at it. "Are there any plans? Absolutely not," says Key. "Do I foresee anything on the horizon? No. Our opportunity is in the markets we are in."
But there was a rumour in the German press, a few days before our meeting in Slough, that Telefónica was looking at Hansenet, a broadband operator which is owned by Telecom Italia though was once a sister company of Fastweb, the Italian broadband player.

Right asset at the right price

Key doesn't deny the reports. "We've always said in Germany that if the right asset came up at the right price we would look at it. For Telefónica Deutschland — now O2 Deutschland — in terms of its wholesale and retail arm, Hansenet is one of its major customers."
And he has taken a look at Tiscali's operation in the UK, about a year ago. "The combination of the asset quality and the price and the technology they were operating on didn't work for us. That was 15 months ago."
Others were looking at Tiscali at the same time: Vodafone at about the same time as O2, and BSkyB more recently — until those talks came to an abrupt end, leading Tiscali to make some searching questions over its future.
"It has to be the right asset at the right price," says Key. "That hasn't arrived yet."
Does he have a list of assets that, if the right phone call came, he would be interested in? He doesn't answer the question directly, but offers another one: "Does it take up a lot of my time? No."
And 90-95% of his time is taken up with improving existing operations, he says. So what opportunities are there, in markets which are pretty much saturated?
There is still scope for improving share and profit "if you get the proposition right in the current market environment", he says. "We've coined this phrase internally: 'Why waste a good crisis?' We fundamentally believe that if you do the right thing by the customer — and the customer is becoming far more discerning — and deliver, you can still prosper in the environment. And, by the way, you come out a lot stronger than you went in."
Customers want three things, he says: control, value and trust. For example, customers can get text alerts when they reach a set spending limit each month. "We ask: 'Do you want to keep using your phone?' when they get to that limit. That's control."
SIM-only options have been a big thing for O2 in the past year or so. "Many customers have two or three phones in their drawer." The SIM option allows them to keep using them — and saves O2 the cost of subsidising new phones.

The iPhone as a destination product

The market is polarising between "destination products", such as the iPhone, which O2 sells exclusively in the UK and Ireland, and lower value products, he says, which O2 sells under the Simplicity brand. "If a customer wants a new phone, great. If they don't, give it to them in their tariff."
There is an increasing level of cooperation between Telefónica in Spain and the O2 operations that Key runs, he says. O2's roots are in mobile, so when it started to expand its DSL activities, Telefónica people were on hand to give their advice and guidance. "We've taken an awful lot of learning from them, and we've used their guys — when we bought Be, for example."
Germany's a challenge, clearly. "2008 was a year of building foundations," says Key, a curious remark for the head of a company whose German operations date back to 1995. He admits that E-Plus, the KPN subsidiary, has been stronger in the market than O2 expected with a range of MVNOs. Now, O2 has its own MVNOs, and there are other products due for launch.
"We've appointed Huawei to roll out 3G network," following earlier contracts with Nokia Siemens Networks. "It's a dual vendor strategy."
O2 still has a roaming contract with T-Mobile in Germany to fill in network gaps, but that deal will cease by the end of 2009. "We'll have weaned ourselves off that. It's a capex for opex swap." And the network quality will rise, with the end of hand-offs between different operators.
And that takes us naturally to network sharing. The interview took place a few days before the announcement by Telefónica and Vodafone, though there had been plenty of well informed rumours that something was happening.
But Key was happy to talk about his requirements for a network sharing deal. Given his remarks about the challenges of hand-off between O2 and T-Mobile's German networks, what criteria will Telefónica set for a deal?

Protect customer experience

"A couple of key principles. The first is that we will protect customer experience. We've always said that. Get the product right for the customer. If a network sharing deal was detrimental to customer experience, then we'd think very carefully about whether we should do it. That's the first thing?"
Is it possible to tell in advance whether a deal is going to be detrimental or otherwise? "You've got to look at the structure. There are many different flavours of network sharing."
The second point: "Don't make it too complex. If you're getting into JVs and sharing assets, our perspective is it's probably too complicated," says Key.
Thirdly, if you can't differentiate from the customer's point of view — in other words, if the customer doesn't even notice — then "think very carefully about how you're delivering the product and reinvest where the customer does notice".
A few days before the official announcement, Key was understandably cautious and wouldn't give details. When the announcement did come out, it mainly concerned "joint building of new sites and/or consolidation of existing 2G and 3G mast sites, with one site housing the equipment of both companies where previously two would have been used".
So the networks themselves will remain separate, fulfilling Key's requirement that the customer experience should not be detrimental. "Telefónica and Vodafone will continue to compete strongly against each other in local markets, while giving our customers enhanced mobile coverage in more places, using fewer mast sites," said Key in the official statement.

Reducing costs

However, he added: "We are actively exploring additional areas for cooperation and, by reducing our costs in areas of the business that customers don't see, we can ensure that we invest in areas they truly value."
The project "is expected to lead to a significant reduction in the total number of masts in operation and reduced environmental impact, compared to both companies expanding their networks separately".
So it's not a full network sharing deal, either in the radio access network or in the backhaul network. For the time being, just the masts are to be shared, though the precise details vary in Germany, Ireland, Spain and the UK.
Back at the interview, Key appeared a little more cautious: network elements do affect ability to compete "and we like competing for customers", he says. "It is possible to do a degree of network sharing, but network sharing is one element of the equation. If the customer notices, and it's a differentiation point, I want to keep control of that, to manage that."
But compromises have to be made, and companies have to be careful where they spend the money. "We intend to do it from a position of strength, not a position of weakness," says Key. "We want to be taking the decisions proactively ourselves rather than reacting to events. Yes, you want to be driving down your costs, but you also want to be growing your top line."
The deal with Vodafone is new, and no doubt the details — and how each company works with the relationship — will develop over the coming months.
Meanwhile Key has a new responsibility within the global Telefónica empire. It's always been rather short on multinational customers compared with many equivalent operators worldwide.
The company has set up a global unit to develop business with multinationals, says Key. "It reports to me, though customers will be run out of their home territory," he adds — though that decision will be taken country by country. For example, a deal to provide service to DHL across 28 countries in Europe will be run from Prague.
DHL is owned by Deutsche Post, the Germany post office, so that is excluded: Deutsche Telekom has that deal.
"We'll have a special unit, which will pull all the resources together," says Key, who is clearly looking forward to his expanded role in the Telefónica group. GTB