O2: Enjoying its bite of the 3G apple

Ronan Dunne, O2 UK's chief executive, is a softly spoken Irishman who heads up the operator's UK operations from a glass-walled office above an open-plan atrium where staff sit and sup bottles of O2-branded water in the company's Slough HQ.

Promoted from his role as chief financial officer, Dunne was appointed chief executive of the UK operator on 1 February this year, taking over from Matthew Key, now chief executive of Telefónica O2 Europe (Telefónica acquired the UK operator back in 2006). His office is airy and uncluttered, though he manages to find room for a coffee-table-sized table football.

It's not all about perks though, as Dunne only received his iPhone 3G on the day of this interview. "One of the things that was a challenge for us in the early days was just getting enough iPhones," he explains. "So nobody inside the business was allowed to switch until this week because we now have free supply."

He adds: "It was a very important point for us that, where there was a shortage, customers absolutely came first. And so you'll see nobody round the business with a 3G device."

Despite clearly enjoying the fruits of winning the iPhone contract, Dunne is also keen to stress O2 is not an "Apple house"; nor is Apple's touchscreen phone a BlackBerry killer in his view, though he believes it has certainly shaken the industry up. From an operator point of view he says it would be "fantastic" if all the other handset manufacturers delivered hardware as sexy as Apple's, too.

The chief executive of the UK's number-one network operator is clearly not a man to court controversy. "Broadly I'm ambivalent as to whether a customer takes a BlackBerry or whether they take an iPhone. I just want to make sure they have a great experience with us," he says diplomatically.

Natasha Lomas of ZDNet.co.uk's sister site, silicon.com, recently sat down with Dunne to discuss his thoughts on winning the iPhone contract, working with Apple, bugs and more.

Q: Was it open warfare among the operators when it came to fighting to get the iPhone contract?
A: It may well have been the case that some operators were not in the race but we weren't the only ones in the race. What we understand is that after a period of time of talking to a number of people it wasn't clear to [Apple] that they had exactly the right partner in the UK so then we took the initiative and in a very short space of time — say over a period of eight or nine days — we went from no contract to signing a contract. And actually the contract was signed on this table in this office on a Saturday morning over sandwiches from M&S.

It wasn't Steve [Jobs, Apple chief executive] himself [signing the contract] but we do deal with Steve and also Tim Cook, who's Steve's number two, the chief operating officer, but Steve was intimately involved in the details.

Matthew Key who is our European chairman, and César Alierta, who's the chairman of Telefónica, flew out to Cupertino to Apple to sit down with Steve and really set up the initial dialogue. And then we put a team from the UK with a team from Apple to really drive through the detail.

What we found was we had a lot more in common with Apple than perhaps they'd seen with other operators and we were able to move quickly to getting a deal done, which was great.

How long is the contract with Apple? Is it true that it's moved from a revenue-sharing model to a non-revenue sharing model?
We have a multi-year contract with Apple which has an exclusivity within it. We don't comment on the length of the term. Generally details of the contract are commercially sensitive and confidential but it's fair to say that the initial launch was a revenue-share model and in discussions with Apple after we reviewed the initial launch we looked at an opportunity to grow the market and particularly to be able to offer the product across a wider segment base — so right across business, corporate, consumer, pre-pay and post-pay.

To do that, we thought we should evolve the model [from the initial revenue-sharing one] so we went for a more traditional model with a handset manufacturer, where we pay for the device and then sell it. […]

Without going into too much detail, we have said in public that [the iPhone] has significantly higher average ARPU [average revenue per user] than other equivalent devices, so that'll give you a clue that it's a profitable business and an attractive business.

What's it like working with Apple?
To be very honest, any chief executive of any mobile-phone company anywhere in the world would bite my hand off to have a contract with Apple, particularly an exclusive contract, so for us it's great. Also I think what's important is it's brilliant for the industry so every operator…

…in the market will benefit from Apple's arrival into the mobile market because they've just upped the game, they've moved the goalposts and everybody's running to catch up and from a customer point of view that's fantastic.

The whole mobile data space — the mobile internet — has just been transformed. And what we proved together — Apple and ourselves — is if you put the right device with the right customer experience with the right tariff proposition together and if you get the package right there is no limit to people's appetite for data.

Has the iPhone delivered what you expected?
With the initial launch what we found was a huge affinity with existing Apple customers.

What I think has happened over the nine months or so since then the story of the iPhone has just started to influence the whole mobile device space. So the people who queued outside our stores back when we first launched, if you'd done a survey… probably eight out of 10 of those customers were existing Apple customers, probably Mac customers who absolutely knew and loved Apple so they were very much the early adopters.

What we've moved through to now is… as people have got to play with it and got to see the experience, it's moved from being an Apple aficionado product to a hugely broad demand product because it's a fantastic user experience. And that is the key and that's Apple's great strength.

Have you been disappointed by the number of bugs in the iPhone?
You go through the blogs and I'm not being complacent about it but the vast majority of the network problems were actually with AT&T in the States not in the UK. There are always gremlins on devices but actually I think the iPhone has had remarkably few issues with it. One of its great strengths is the fact you can update the software regularly… the [iPhone] user can upgrade the software whenever they want. You can just keep evolving the customer experience on the platform.

What could the iPhone do better?
One thing on the first device, which they've now solved, was… the ability to send texts to more than one person… So multiple texts was a frustration but they fixed that with a software update months ago.

Some people have said 'wouldn't it be nice to have two-way cameras for doing video calling?'. And you know what, that might be something [Apple] do in future — I don't know. But the actual market for video calling is not a huge market to be honest with you. So I could tell you lots of things I've seen on blogs that people would like: what I haven't seen is anything on those blogs where they say that's a huge market-demand item and they've missed it.

I have seen some niche things which could be there but also if you're trying to package the right experience at a sensible price you can't put everything on the one device.

Another example is the [iPhone's two-megapixel] camera… Some of the handset manufacturers are just about to launch the first eight-megapixel cameraphone into the market and you do then have to question whether that's a camera or a phone and what the benefit is relative to the additional cost…

There will be a market for megapixel [cameraphones] I'm sure, but it won't be the huge breadth of the market and Apple's approach is they want this to be a broad product that's available to the broadest range of people and provides the broadest experience. They're not looking at a niche product. They've been very public in setting themselves a target of tens of millions of devices to sell around the world.

The iPhone doesn't support MMS but it has a great camera and it has email functionality and therefore actually the ability to take a picture and share it is there, it's just using a slightly different format of technology.

How has the business world responded to the device?
In the business and corporate [world] the appetite has been very big and we've seen a significant appetite from what I would have described as traditional BlackBerry users, so I think what we're seeing is the market for that type of integrated device is growing and what the iPhone is doing is broadening the category. For some people it may be a choice between BlackBerry and the iPhone or a Nokia and the iPhone but what it's also doing is getting more people to think about a more integrated device where they can do their data and their voice on one device.

Is growth in data the answer to getting a return on investment for 3G?
3G return on our investment is not only about data — it's about voice and data.

Two things about 3G. It's a much better data carrier than 2G — both in the context of speed and the cost to carry — but it's also a very effective voice carrier as well, and a cost-effective voice carrier as well. So over time as we've seen…

…an explosion in usage, we've seen as big an explosion in the usage of voice as we have in the usage of data. Our voice traffic grows something like 20 percent per annum compound, year after year after year.

Now data is in an explosion at the moment where we doubled the amount of data in our network in the last six months, but it's a hell of a lot of catching up to do with the sort of growth that we've seen in voice. And a huge proportion of all of the operators' revenue still comes from voice and will continue to.

People ask this year: what's the killer app on 3G? You know what the killer app is? It's voice. Not great for writing headlines but it is. Voice usage is just growing exponentially. It's fantastic.

How will a mobile Oyster wallet phone get off the ground?
We're putting a forum together because for adoption we would want as many handset manufacturers as possible to participate and we would want as many providers of services to participate — this is not about having a niche and saying we've got one handset manufacturer and one network operator and one service provider… and we're going to close ranks and close this in.

This is something that's a bit like cross-network texting. When we first launched texting you could only send texts to people on the same network and people debated about should we do interoperability. As soon as we did, the volume of activity just went through the roof and all of the operators benefited. […]

This is an area where the technology is absolutely mature and ready to go… It's robust, it's deliverable today. It's now about working with the widest possible group in the NFC forum to get people to start to deliver the capability to leverage that technology — whether it be point of sale, whatever the case may be.

And when?
We're dependent on all of the other providers, so it would be a decision by Transport for London about what they want to do with the Oyster card, and that may be delayed by some local difficulties they're having in that space at the moment…We've not set down any specific milestones that we expect to pass at this stage. What we want to do is get the forum together first and define what the art of the possible is. […]

What are the biggest barriers to implementation?
Er, I would say priorities. If I look at the current environment over the next two years if I'm a financial institution, what are my priorities on product innovation against the backdrop of credit crunch and so I would say that in a lot of cases, [the biggest barrier to rolling out the tech is] what I might describe as access to the roadmap. Is this a big enough opportunity early enough for it to knock some other things off the list?

When people are cutting back on investment, we as a business — and generally as an industry — are very much in a growth and investment mode, and we continue to do very well despite the fact that the economy has slowed down, but different sectors will be impacted more than we will, and that might slow down timing in some of those areas.

We — separately from but complementary to NFC — are working with the financial services sector on that whole area of payments and managing your money and electronic wallet and stuff like that, so we have lots of work that we're doing across that area and it's an area generally that we're very excited about. Some of those initiatives are not as dependent [as the mobile Oyster wallet] on as many other parties in the chain coming on board, so I think there's exciting opportunities in that area.

Is mobile TV effectively dead in the water? There have been several UK trials but commercial launches have been very thin on the ground...
I think our strategic position on this is very much watch and learn. So we're keeping an active eye, we're keeping involved in all the technical forums and other things as the technology evolves.

I think there's probably a place for a type of mobile TV — exactly which format and the model I think is as yet unclear. But five years ago, four years ago, if you were asking the same question about mobile internet, we weren't quite clear. Then we got the device right, we got the interface right and we got the tariffing proposition right and literally it was like setting light to straw, it went up in flames. It was just [an] incredible response.

O2 has been accused of being slow to market — for home broadband and mobile broadband, for instance. What's the company's investment strategy?
Where there's customer insight that says there's an opportunity and an appetite we've always been there. That's why we're the number one in the market by a distance. What we don't do always is back multiple horses at races in regional race meetings in the west of England on a wet Tuesday afternoon. We have to focus, we have through Telefónica the ability to make lots of small bets around the world. And we do that.

We are doing lots of things, but what you'll tend to find is that we are balancing that raw innovation, which is way before customer demand can ever be evidenced, with a sensible approach to the market.

You were also slow to fulfil your 3G licence commitments…
We got slightly admonished in the press and slightly admonished by our regulator for being slow in our compliance with our licence. And that was a very easy decision for me to make.

I could have done things that would have delivered coverage to meet the regulator's requirements a few months earlier because we were only three-and-a-half months behind our timeline… The answer was we built good-quality coverage that customers can use, not coverage that ticked a box and actually give bad customer experience.

Now you can criticise me for being three-and-a-half months late in delivering that but the bigger point is we deliver usage coverage, usable capacity and consistent customer experience and we'll not compromise on that. So if things aren't…

…quite ready sometimes, people will say: 'Oh, you're a bit slow coming to market', but if I was asking some of the other network CEOs about what their customer experience has been like on the early adopters on dongles, I'd be interested to know what they said.

The market has very, very high return rates on dongles, which means the industry — and I'm not criticising my competitors — but the industry isn't getting it right.

Does O2 have any plans for a fibre rollout?
We'll keep a watching brief on fibre… There's no doubt that there will be increasing demand for higher speeds from certain segments and we will observe how BT goes about deploying fibre into the UK market and that will be done on a basis that will allow wholesale access to others. The details of exactly how that will be done are a matter of consultation at the moment.

We absolutely have a watching brief on fibre but there also is the potential that existing capability like ADSL2+ can be further enhanced to go even faster than it does today. That's effectively what Virgin is doing at the moment — enhancing the software that means that its existing infrastructure can deliver faster speeds, and I think there's opportunity on ADSL2+ to do that as well. […]

Almost certainly [deploying fibre] will be done in conjunction with key providers in each market so only one or two people at most in any market are likely to deploy fibre. And then almost certainly to make their business model work will provide wholesale access to others.

What's O2's LTE/4G roadmap? What kind of investment do you envisage?
We are, as an organisation in Telefónica, supporters of LTE and we're part of the industry technical streams on that. I think the timing of LTE is outside our current business-plan horizons so I couldn't give you size and scale of the investment numbers just at this moment because, in what I would describe as general commercial deployment, we are still four, five years away.

Going forward, do you see femtocells playing a big role in mobile networks?
We very much see the role of mobile moving into being an integral part of the home — in the whole digital age and the digital home we see the potential for your mobile phone to actually be the remote control of your digital life. The reality may not be quite there yet but it is in part.

When I walk in the door with my iPhone it goes straight onto my Wi-Fi connection at home. If I want to stream my multimedia system that I have at home I can get my iPod music to play out on the speakers that are in the roof in my living room. We're getting very close to a point where the mobile phone and its functionality can be much more a central point to managing the whole digital space and, in that context, I think femtocells potentially have an interesting role to play.

Do you support EC telecoms commissioner Viviane Reding's moves to bring down mobile-roaming costs for European consumers via industry regulation?
I absolutely support increases in [data] usage and I think allowing highly competitive organisations to compete is invariably the best way. All of the evidence of the UK market is that there's loads of competition and that competition has been really good for consumers.

Capacity is there and demand is there and we're seeing huge increases of usage across the whole range of our services, so I think if you leave the market to compete you will find that the market will deliver. I think intervening at either the retail rates — which Viviane Reding does — is almost certainly going to create an artificial position.

The other things I would say in a nascent market like data — and I'm genuinely not having a pop at Viviane Reding because I struggle sometimes with it myself — but understanding the cost dynamics of data is a very complex issue.

A lot of data is being sold in domestic markets at possibly lower than cost and that's not a basis for regulating if, at the end of the day, you want people to continue to invest. We need to invest in LTE and other things and if we've got prices regulated down, the danger is there isn't enough return there for investment.

The other things I would say is much better [is] that we're allowed to be flexible across our portfolio of services, because customers don't just buy one product, they buy a suite of products, and if you take certain products out of the mix and regulate them, then the ability for consumers to benefit from bundling is actually reduced. And [this] won't always benefit the people who are maybe the least financially able in the market — it tends to disadvantage the people who are lower spenders, not higher spenders.