Telefonica UK Floats Tentative Prospect of an O2 Mobile Sale

The owner of mobile operator O2 (Telefonica), which last year sold their home broadband and phone customers to BSkyB (Sky Broadband) after failing to make a success of the business (here), has warned that if more of the United Kingdom’s telecoms market moved towards bundled services then it may have to consider putting up the FOR SALE sign.

Historically mobile operators haven’t had much luck in the consumer fixed line market. For example, EE’s home broadband only recently returned to growth after struggling for years under Orange UK, while Vodafone gave it a go until selling customers off to PlusNet in 2011 (here) and of course O2 itself failed to make it work and last year sold out to Sky. Meanwhile Three UK has kept to a purely mobile focus.

In nearly all of these cases some of the root causes of failure can be traced back to a combination of factors, such as a lack of advertising or an inability to understand what their customers wanted and to keep their products up-to-date with what others in the market were offering (e.g. O2 dragged their feet for years over FTTC, despite clear demand among their customers).

Funnily enough O2’s fixed line service was actually quite good (thanks to the BE Broadband LLU network), yet they slowly made their packages more restrictive and expensive, which they also did at a time when rivals were doing the opposite. Meanwhile Vodafone’s recent decision to move back into the consumer fixed line broadband market (here), which is itself a response to BT’s move into the mobile sector, appears to be making O2 nervous.

Jose Maria Alvarez-Pallete, Telefonica’s COO, said (Reuters):

“If the market goes convergent then we will need to evaluate our options … In the landscape as it stands today we are in good shape, but the position taken by BT when and if it launches in mobile will be a key event. Virgin and others already have converged offers, but we don’t see a major appetite from consumers. So we’ll see how that evolves.”

In fairness bundles are nothing new and their prevalence has been slowly growing over the past few years. Today EE, Virgin Media and TalkTalk are already quad-play (broadband, tv, mobile and phone) providers. Next year BT and Vodafone will join that pack and Sky Broadband are widely expected to do the same by adding a mobile solution of their own, most likely through a deal with existing partner Vodafone.

As a result of all this O2 and Three UK will be left as the only two mobile-dedicated operators in the market, although it remains to be seen how successful Vodafone and BT’s respective offers will be. We strongly suspect that BT’s market reach, hybrid 4G/WiFi technology approach and advertising prowess will enable them to break through. By comparison Vodafone’s history in the home broadband sector makes us sceptical.

Lest we not forget that O2 recently signed a deal to become TalkTalk’s new MVNO partner, replacing Vodafone. Sometimes not having a quad-play solution can have its own advantages. But O2 are still right to be worried about the future and they’re unlikely to adapt by taking a second stab at the home broadband market so soon after leaving it.

Much will probably depend upon just how much of a success BT and Vodafone’s rival services actually become and we suspect that it may take a while for both to build themselves up. So for now it looks as if O2 will simply watch and wait to see what happens, much like the rest of us.