Since taking the helm at MmO2 - which demerged from BT in 2001 -its chief executive has steered a prudent course, writes Jamie Smyth,Technology Reporter
Mr Peter Erskine is no stranger to the Republic but his pinstripe suit and grey hair does make him stand out from the crowd at Dublin's latest exclusive entertainment venue, the O2 Point Club.
Unlike the flamboyant former heads of Europe's mobile giants, such as Vodafone's Chris Gent or Orange's Hans Snook, MmO2's 51-year-old chief executive prefers a night in with his family to hanging out with the VIP set.
Such conservative characteristics would have been scoffed at a few years ago when twentysomethings ruled the world, but, with the madness of the dotcom era dissipating, Mr Erskine's traditional approach is suddenly finding favour with the City.
Mr Erskine took over the reigns at MmO2 in August 2001 after 11 years with British Telecom. It was his first post as head of a public company and initially he was supported by a full-time chairman. Mr Erskine has now assumed all responsibility following a decision by chairman Mr David Varney to go part-time.
"People thought MmO2's debt would be over £1 billion (€1.4 billion) following the demerger with BT but we are not heavily indebted, only about £600 million," says Mr Erskine, who believes MmO2 is now undervalued at £5 billion.
Since taking the helm at MmO2 - which demerged from BT in 2001 - Mr Erskine has steered a prudent course, stressing efficiency, cutting about 2,000 jobs and disposing of the group's loss- making Dutch operation. The group's Irish unit, O2 Ireland, has gone from strength to strength in the past few years, contributing €90 million in pre-tax profits in the year to the end of March 2003. There has been dramatic improvement at MmO2's larger British and loss-making German operations over the past year.
O2 UK will boost earnings margins to almost 30 per cent this year from below 20 per cent in 2001 while its German operation is now a viable mobile operator valued at about €1.5 billion.
"Only a few years ago analysts were advising MmO2 to shut its German unit completely but it is now generating real value and is a good performer," says Mr Erskine. Yet despite the improved performance of MmO2, which also operates in the Isle of Man - questions about its future simply will not go away.
MmO2's relatively small scale - it has just 19 million subscribers compared with Vodafone's 100 million - has led analysts to speculate that either Telefónica or the Dutch operator KPN will make a bid for the group. But Mr Erskine insists nothing is imminent and consolidation is far from a given.
"Obviously everyone talks about it [KPN deal] because we both have operations in Germany," he says. "I think we can make it alone but I remain open-minded on consolidation."
MmO2 is clearly aware of its limited scale in the European market and last week took the first step towards addressing the weakness by signing an alliance deal with six operators. MmO2's three operators will team up with Amena (Spain), One (Austria), Pannon GSM (Hungary), Sunrise (Switzerland), Telenor Mobil (Norway) and Wind (Italy).
"We saw that Vodafone would one day begin to leverage its scale in Europe and so have made partnerships with lean and mean mobile operators on the Continent," says Mr Erskine, who formally signed the alliance in Munich last week.
"We are already working on packages of common services and roaming tariffs for our customers and we expected to see these in place before next summer," he says. "Roaming charges are one of the big issues and obviously the alliance will bring benefits to customers."
The alliance will also seek to harness the purchasing power of each firm to enable them to cut their costs when ordering handsets in bulk and other network technologies, says Mr Erskine.
However, he admits the cost savings will initially be limited due to the different network technologies used by each operator.
An immediate benefit provided by the new mobile alliance is that it has enabled Mr Erskine to meet international chief executives and see how their markets are developing and pick up ideas.
He says MmO2's management will take another look at i-mode, an internet access platform for mobiles which has proved popular in Japan, and is being introduced by the Italian firm Wind.
There may be i-mode services that we could learn from, says Mr Erskine, who believes the alliance will prevent MmO2 from becoming insular. It could also lead to further consolidation. "We want to expand it into other states in Europe, Asia and the United States... the obvious hole within the alliance is France."
Ironically, MmO2's current difficulties lie in the British market where the firm faces stiff competition from new entrant '3', which is owned by the wealthy Hong-Kong-based conglomerate, Hutchison Whampoa. Originally focused on offering consumers the latest third generation mobile technology, which delivers video and multimedia to handsets, the firm has now changed its strategy by slashing call costs for users.
"The case is unproven for '3'," says Mr Erskine. "They haven't won many customers, perhaps 200,000, and I guess that many of these still carry their old handsets around with them."
But Mr Erskine is clearly concerned about BT's decision to re-enter the mobile market through an alliance with MmO2's rival T-Mobile. The former parent dropped its own consumer deal with MmO2 and is now likely to compete strongly in the family mobile phone market.
To counteract the threat posed by BT's re-entry to the market, Mr Erskine recently signed a 50/50 joint venture deal with the retailer, Tesco. This virtual operator deal will enable MmO2 to sell minutes to Tesco, which will in turn market its own offering to its customer base.
This week the firm will begin offering its mobile services in all 650 stores in Britain - though not the company's Irish stores - and there should be big opportunity for it in the family market, says Mr Erskine.
A similar type of virtual operator deal may be possible in the Irish market, he says, but stresses that MmO2 looks at each market in its own right. He also denies recent claims at an Oireachtas committee meeting that mobile phone firms in the Republic are ripping off users.
"This is disingenuous. There are three players in a small market and the statistics show that Irish people use their mobiles 70 per cent more than British users but only pay 40 per cent more per month. That is good value and the regulator should not intervene," he says.
On top of the competitive pressures in the British market, the regulator Oftel is forcing all mobile firms to reduce termination rates by 15 per cent this year. Consequently, MmO2 decided to slow down the roll-out of its third generation network in Britain
In the Republic and Germany, Mr Erskine says the firm will meet its regulatory commitments to build a third generation network by certain deadlines. Yet it probably won't launch a consumer third generation service until late 2004 and perhaps later, he says. "3G will possibly be ready for the Christmas market in 2004 but we can do a lot with 2.5G technology such as video streaming and music downloads.
"We had to pull back from third generation technology [in Britain\] and we think we have the bet right because of the lack of adequate third generation handsets," says Mr Erskine, who is now targeting an autumn 2004 launch.
The limited range of third generation services currently available from '3' doesn't justify launching a service yet, he says.
Delaying the roll-out of its own expensive third generation network in Britain will help MmO2 cut its expected capital expenditure by 5-10 per cent this year to around £1.17 billion.
Earlier this week, MmO2 confirmed that it will shortly launch a music download service for mobile devices. It also began offering British subscribers video clips using the interim 2.5G technology. But this is only the beginning, says Mr Erskine, who lists several innovative uses for MmO2's mobile technology including current trials by police forces and health professionals.
Behind the dark suit is a man with an eye on the future. And in the competitive world of mobile telephony, MmO2 will probably need this to continue a recovery.
