Omnitel: gaining recognition as leading wireless player

Published on:

Omnitel Pronto Italia is the second biggest cellular operator in Italy, one of Europe's most dynamic wireless markets. The operator already has over eight million subscribers. It recently launched an innovative Internet-related product, Omnitel 2000 for the fledgling data market . Newly-appointed CEO Vittorio Colao comments on developments in Italy.

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 products?"

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 services.

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?

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?

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?

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?

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.

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 networks?

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 future handsets?

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 users?

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?

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?

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 to.

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?

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 this?

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 market development.

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?

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?

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 alternatives.

How much does it cost to acquire a new customer? Which benchmarking tools do you use to measure Omnitel's operating efficiency?

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 operators.

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?

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?

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 EBITDA margin?

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?

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 available?

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?

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 population.

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 bill?

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?

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?

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?

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?

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.