O2 confirms 2019 5G launch

Telefonica’s UK business O2 has confirmed it will launch 5G in 2019, though there will be much more of a business twist to the new connected euphoria.

Mixed in with the management team reporting financial results for the last twelve months, the team announced the network upgrade, which will be fuelled by a £1 billion CAPEX investment over 2019. What is worth noting is the O2 management is pitching 5G with more of a business facade than competitors are offering.

Although specific dates have not been revealed, the network will first launch in Belfast, Cardiff, Edinburgh and London, while the rollout will continue throughout the rest of the UK through 2020, as compatible smartphones become more readily available.

“Mobile is one of the most powerful opportunities for growth in the economy and 5G is just the next step,” said COO Derek McManus. “We’re building a 5G economy is coalition with British business.”

What is not entirely clear is how much of this £1 billion investment will be directed towards 5G and what will be left over for the 4G network. O2 has been investing healthily in its network over the last couple of months, CAPEX investments in 2018 accounted for 12.9% of total revenues, and CEO Mark Evans expects this to continue.

According to Evans, 5G will not be forced on consumers once launched, but there will naturally be early adopters queuing up. Selling 5G to the consumer is going to be a tricky task for many telcos, 4G is arguably fast enough for all available applications and services, and to ensure O2 is generating ROI, the enterprise world is going to be a focus for the team.

This is not necessarily out of character for the telco either. Over the last couple of months, O2 has been targeting enterprise for growth, perhaps realising fortunes are not going to be realised in the consumer segment. As the market leader, O2 now has 32.6 million connections on its network (including MVNOs) and the expense of artificially attempting to force future growth might exceed the benefit. Growing in the enterprise market, while maintaining a leadership position in the consumer world, is certainly a sensible strategy.

“The company is taking a cautious wait and see approach to 5G,” said independent analyst Paolo Pescatore. “However, it can’t afford to be left behind. It is apparent that initial consumer appetite for 5G will be limited. A greater focus on enterprises is a sensible approach.”

Over the last couple of months, O2 has been running its FTSE 100 5G testbed to identify the usecases which mean the most to British business. Although McManus was not forthcoming on specific partners and customers, he did suggest there was strong progress being made in the agriculture, retail, transport and industrial segments. O2 will certainly not turn away any consumers who want to upgrade to 5G, but there does seem to be much more of a business twist to the super-charged network plans than we’re seeing at other UK telcos.

That said, while there is certainly a stronger focus on business, fixed wireless access seemingly has not been ruled out as a 5G usecase, potentially opening the door for a convergence offering. Evans pointed out that there would certainly be customers who would use the 5G connectivity for FWA but stopped short of completely ruling out this type of service from O2.

According to both Evans and McManus, FWA can make sense in some circumstances, take rural locations as an example, but long-term there are better options. With the country being fibred up, FWA as 5G validation is weak.

Moving over to the financial results, there are certainly some healthy numbers here. Total revenues for the last twelve months went just past £6 billion, a 5.4% year-on-year increase, while operating income was £1.6 billion, a 11.8% boost in comparison to 2017. O2’s subscription base grew to 25 million, with the total of 32.6 million including MVNOs such as Tesco Mobile, Sky Mobile and Lycamobile, as well as its own sub-brand Giffgaff.

CFO Patricia Cobian pointed towards increased data consumption and the introduction of three new offers as fuel for the positive results. In Q1, O2 updated its roaming plans to include the US and Australia (amongst other countries), while in Q2 the team launched a family plan and in Q3 Custom Plan debuted, allowing customers to decide how they pay for subsidized devices. With net additions standing at 282,000 across 2018 and churn below 1%, the offers certainly seem to be having a positive impact.

The Priority initiative has once again proved successful for the business. Some might feel this is a card which is underplayed by the O2 team, but customers certainly enjoy it. Over 8 million Priority offers accepted across the year, 42 million entries made to prize draws and £26.7 million saved in offers and freebies.

In terms of value adds, O2 is doing a great job in rewarding customers but limiting its own exposure. For example, the Telefonica parent group has relationships in place all around the world to fuel the roaming offer, the custom plans make few changes to revenues and the Priority initiative is more about connecting two parties, rather than a big financial outlay. BT has tried to add value by spending billions on TV content, but O2 is using current assets in an intelligent way to create value for customers and partners.

O2 isn’t changing the world with these results, but the UK is a relatively sedate telco market. That said, the telco is in a very healthy position moving forward. With a sensible touch crafting a business visage to 5G, a loyal customer base and big investment plans, O2 will not be easily giving up its leadership position.

We’re not convinced by the convergence hype – O2 CEO

Despite almost everyone in the industry clamouring to climb the convergence mountain, O2 still remains unconvinced by the rewards, choosing instead to double-down on the mobile connectivity mission.

Speaking during a briefing ahead of its first half results, Telefonica UK CEO Mark Evans set out the mission very clearly; O2 is the leader in the UK mobile market, and it doesn’t plan to waver from than commitment any time soon. The customer is expecting greater reliability and performance, distractions is not what the business needs.

“Customers will curate content which is relevant to them,” said Evans.

Like Orange in France and T-Mobile US on the other side of the pond, the team’s number one objective to provide a connectivity experience which meets the expectations of the consumer. This does not mean its subscribers will struggle to access content, just that O2 is allowing those with expertise to focus on those areas. O2 will aim to reduce the price of tariffs (its Family Plan is a good example), improve 4G coverage across the country (the recent spectrum auction demonstrates this) and forge partnerships to offer the consumer choice (Netflix is a major win, and available for free to subscribers on certain tariffs).

The message seems to be empower the user through connectivity, creating room to allow for the difference in taste.

Another aspect of this strategy is the Priority pillar. Again, the team are offering value to the customer through partnerships, not getting involved in the messy business of owning diversification. 3.1 million Priority offers were accepted, while more than 18 million entries were made into the prize draw over the first six months of 2018. Again, it is a simple idea; offer value to the customer through breadth, while allowing the team to focus on the core business of connectivity.

It’s a refreshing approach to business, and perhaps explains why O2 is claiming the top-spot in the market share rankings. Including MVNO agreements, 32.1 million customers are now making use of the Telefonica UK network, while O2 currently claims 34% of the UK mobile market, according to the Ovum WCIS.

Looking at the financials for the first half, total revenues hit £2.836 billion, a year-on-year increase of 4.2%, while Operating income before depreciation and amortization (OIBDA), up 7.2% in comparison to the same period of 2017. Evans boasted of eight consecutive quarters of growth, while churn was down to 1%; the numbers are certainly heading in the right direction. CAPEX stood at £351 million, or 12.3% of total revenues, which is a bit down on the industry’s big spenders, but not the end of the world.

The issue here remains growth. As the leader in the market, substantial increases in subscriber numbers would not be a reasonable target. For Evans, the focus is about keeping current subscribers happy, while targeting marginal gains each quarter in market share. Growth will come in the enterprise business unit, where Telefonica is a challenger as it stands, and 5G will play a major role.

“5G is the most powerful opportunity to strengthen the economy, enrich lives and outperform the global economy,” said COO Derek McManus. “5G will have a bigger impact than any other technology introduced since electricity.”

Of course, 4G will not be forgotten, the team wrote a cheque for more than £523 million to bolster its 4G coverage, though the acquired spectrum will forge the foundations of the 5G push. While a minor player, developments for in the much-hyped 5G world will be the opportunity for O2 to push its case in the enterprise market. An agreement announcement back in April with Arqiva to deploy 300 5G-ready small cell sites across London will certainly help. These sites will be up and running in the second half of 2019.

As part of this drive, McManus said the team has written to every CEO of the FTSE 100 to invite the businesses to participate in O2’s 5G Testbed trials. The aim here is to create an understanding of the sheer breadth of use cases in across the UK, but also the 130-odd countries which the FTSE 100 has a presence in. 2020 has been targeted as the launch date for 5G services, with O2 aiming to focus on how the standard can improve efficiencies in supply chains and production processes.

No-one really knows how 5G will work just yet, but the testbeds will offer insight. McManus, who has been with Telefonica through the introduction of 3G and 4G, noted that each evolution brought about new operating models and opportunities; learning without doing is impossible, and much will be learnt over the years following deployment of 5G.

O2 is the current leader in the UK mobile market, and with a sustained focus on its core business, waving away diversification distractions, it certainly looks in a promising position heading into the 5G era.