Connected Research

Union policy research in the 21st century

BT in O2 managed services deal

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BT’s Wholesale business has announced a five-year managed services agreement with Telefonica O2 UK under which it will consolidate O2’s fixed and mobile networks in the UK into a single network. In a nod to the problems that smartphones have caused the O2 network, via rapidly rising volumes of data traffic, the intention behind the deal is to provide O2 with access to reliable capacity while also allowing it to focus on customer services rather than network investment.

[Edit 5 February: O2 said also this week that it had over 2m iPhone customers [registration required; limited viewing time] by the end of 2009, when its two-year exclusivity period ended. That means that about one in ten O2 customers have an iPhone. No wonder the network’s creaking! The exclusivity period ended on 10 November, when Orange started selling it, with Tesco (which uses O2’s network) added on December 15 and Vodafone (which turned down the opportunity of an exclusivity deal on the iPhone in 2007) on 14 January. We know that Vodafone sold 100,000 iPhones in the first week [registration required; limited viewing time] (half of which were pre-orders) and that the iPhone constitutes 25% of its new sales and that the company is expecting that to rise to 30-40% in the next 12-18 months [registration required; limited viewing time]. Vodafone has a larger amount of higher frequency spectrum than O2, so its network may be less troubled by such volumes, but these sorts of deals may well become more common in the future. Overall, there must now be something like 2.5m iPhones in the UK, currently less than 4% of subscriber numbers, but the one-way direction of this trend is clear.]

Three things are obviously worthy of comment here:

1. BT used to own O2 until the debt taken on as a result of auctions for 3G spectrum (largely, here and in Germany) forced a re-think of company strategy and the flotation of O2 in appeasement of the City for being asked to contribute to BT’s resultant rights issue. Speculation about whether this deal would have needed to occur had all that not happened is not likely to be all that productive – and this post is not about to start heralding the likely merger between the two companies – but the simple commoditisation of the relationship is interesting.

2. The deal illustrates the networks/services conundrum, with the communications world increasingly divided into providers of networks/network services and providers of communications services (to customers). Allowing one company to do the first allows another to concentrate on the second. To some extent, this has already affected BT internally, with the separation of the core of the company into network (Openreach) and services (Retail and Global Services) arms (Wholesale sits somewhat across both), although how far such a strategy is followed, either in terms of the regulatory approach or else in terms of BT’s own strategy, is a moot point (as well as one being subject to frequent rumour).

3. The fusion of fixed and mobile networks into a single platform – albeit via a third party – illustrates another aspect of the convergence of communications services. The converging of communications markets – a process which has been going on for some time – merited its own section in the most recent Communications Market report by Ofcom (chapter 5) although the convergence between fixed and mobile did not feature (although such a process is quite clearly on Ofcom’s radar – see para. 2.34)). At the same time, the increasing use of Internet Protocol technology within the networks world clearly endows such agreements with a deal of rationality.

Given the typically lower levels of consumer satisfaction with mobile than with fixed networks, the deal may well bring its own problems to BT, although this may well only be around the margins and could well be lost in any further move towards ‘nixing the nines’: BT’s most recent Annual Report already refers to faults on the telephone line being experienced now on average every 13 years (p. 4) – a level which is likely to be more or less unnoticeable to most people.

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Written by Calvin

02/02/2010 at 2:25 pm

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