Cutting Room: Strategy stops O2’s bubble bursting


O2 is on the up having added 223,000 contract customers in Q1. Paul Withers argues that the operator’s innovative services are leading it to think outside the box, keeping it ahead of its rivals

Nine months ago, O2 UK CEO Ronan Dunne told Mobile News  he felt consumer confidence was at an all-time low, given the state of the economy.

In the second quarter of last year, O2’s profits took a battering, declining 4.3 per cent to around £1.3 billion, and customer numbers plummeted by approximately 140,000.

Perhaps more alarmingly, contract connections during that period dropped from 150,000 to just 25,000, leaving many thinking O2’s bubble might just have burst.

Dunne pointed to a lack of excitement within the industry, blaming the absence of innovation and new headline handsets in the market during the first half of the year.

And he had a point. The market typically hots up in the second half of the year, with the majority of key devices announced at Mobile World Congress in February, the first of these hitting shelves in April and May.

Dunne said at the time the operator needed to focus on more than just handsets to retain and grab the attention of new customers.

Fast-forward nine months, and this strategy seems to have worked. The operator added 223,000 new contract customers in Q1 2012 – its biggest gain since Q3 2010, best Q1 performance for contract for three years and a 48 per cent increase from Q4 2011.

Of course, it wasn’t all good news. O2 lost around 65,000 prepay customers, but that’s not all that bad when you consider it lost almost 221,000 prepay customers during the previous quarter.

The prepay market has long been in decline as all networks would agree. Many of these customers migrate to contract anyway.

Road to profitability
O2’s operating income also slumped 33.2 per cent year on year during the period to €334 million. The company obviously felt it had to spend big to take the fight back to the market.

And while this dip in operating income would normally be alarming, the spend should actually set O2 on the road to respectable profitability this year.

A defiant Dunne said: “These results show that we have taken the fight back to the market and regained commercial momentum.”

It’s hard to argue with that. Despite Everything Everywhere owning a commanding market share by customer numbers, O2 continues to act as the market leader.

Rather than merely reducing tariff costs and increasing its minutes, data and text allowances, the operator continues to launch new and innovative services.

It has made vast attempts to reduce its need to rely on others to boost its coffers – not becoming obsessed or concerned by what Apple or Samsung will release next. It wants loyalty to its brand, not to the manufacturer – although launching handsets the market demands is clearly essential.

Priority Moments is a master stroke that enables customers to save money in more than 300 popular restaurants and retailers on the high street.

O2 said this month the service had already saved customers more than £7.5 million.

Fresh offerings
The service effectively offers those customers feeling the effects of the recession a helping hand, without O2 needing to reduce its margins. Dunne says “millions” have now signed up and are using it on a regular basis.

Other services such as O2 More, which provides customers with bespoke advertising, continue to perform. More than 10 million customers have signed up to O2 More in the 18 months since it was launched.

The results suggest O2’s strategy is working – with churn now down to less than one per cent. O2 has found a niche service here and is taking full advantage of it – and so are consumers, it seems.

In addition, the operator’s O2 Wallet service also went live at the end of last month, signalling the company’s debut in the mobile money sector. This will be a key part of the industry in the run up to the Olympic Games and beyond, and with NFC slowly but surely gaining traction this could prove to be a key differentiator when competing against rivals.

No one is suggesting the likes of Vodafone, Everything Everywhere and Three are sitting back – Three in particular continues to show improvements.

But customers increasingly demand more from their operator than just a good tariff and signal.

Of course, this is nothing new. Orange Wednesdays has been around for years and is without question a great perk for moviegoers. Vodafone’s VIP is great if you want to buy tickets early for a festival, or you want to try to win something related to F1. But these are quite specific niches.

O2 has gone with the broader approach, offering deals and discounts on everyday items and encounters rather than something restricted to time as well as hope.

The momentum appears to be with O2 and its continued ability to think outside the box. The same cannot be said of its rivals at present.