O2’s Evans ready for the major challenges ahead

UK CEO discusses how it can overcome barriers in the operator segment and what the future holds

O2 UK CEO Mark Evans has been in the top job for just six months after taking over in August from Ronan Dunne, who departed the operator after 15 years, nine of which he spent leading the company.

Dunne’s time at O2 was regarded as highly successful, with the operator continuing to add hundreds of thousands of new customers each quarter, achieving record low contract churn of any European mobile provider, and introducing a number of firsts to the UK market.

However, Evans has taken over at a time which is arguably the most challenging of the brand’s 15 years in the UK, parallel to the fact that this market is considered to be one of the most competitive in the world.

O2 was left reeling after the European Commission last year blocked its proposed £10.25 billion sale to CK Hutchison,  a move also heavily backed by regulator Ofcom, leaving the BT/EE joint venture as a clear front-runner in the market.

Spectrum imbalance has also become an extremely hot topic at the operator over recent months, with itself and Three holding significantly less than BT/EE and Vodafone.

Both have campaigned to Ofcom for a cap to be put in place over how much spectrum its rivals can hold following the completion of the next auction, expected to take place later this year, in order to create an equally competitive market that will drive more investment.

In his first in-depth interview since taking over as CEO, Evans sat down with Mobile News to discuss all of these factors, as well as the legacy created by Dunne, the job ahead of him and his plans for O2 UK over the coming months.

How is business at O2, both from the past few months and currently?

As you can see from our most recent financial results, everything is going reasonably well. The key is what our customers believe and think. They are continuing to use our services, show the loyalty and satisfaction in everything that we do for them. We’re not at all complacent in any way but generally, it is all moving in the right direction.

How have you settled into the role of CEO since taking over six months ago?

I have been with O2 for more than five years, so it is somewhat different to joining a brand new organisation. I’ve moved from chief financial officer to CEO in a business and culture that I know extremely well, and in a market that I’ve had a lot of experience in. What I’m pleased with is from a historical basis, I was fairly instrumental on the strategy, so there is no re-work of that.

Our business model is focused on great mobile connectivity and a relentless focus on the customer, so that will remain. It is also highly beneficial to have the same members around the board table.

Ronan did a great job leading the business for nine years and took us to a whole different level but there is an awful lot of continuity in not just myself but the other members of the leadership team that remain
now.

What kinds of qualities can you add to the business as CEO?

The brand is synonymous with creativity and boldness. A great example of that is 10 years ago we partnered with AEG to transform the Millennium Dome into The O2. That has become the world’s leading entertainment venue and we have given millions of tickets to our customers. We’re at our best when we are customer-led and do things that are bold and creative.

What you will see from us over the coming years is that we will continue to go in that direction, making sure that everything we do has customer-centricity at its heart. If you look back every year, we have brought something that is new and fresh.

We were the first business to introduce SIM-only, reward prepay customers with treats, a digital loyalty club – last year there were 15 million transactions on Priority, which is exceptional. We were also the first to launch a flexible contract. We will continue that same strategy.

What kind of legacy did Ronan Dunne leave behind? Are they big shoes to fill?

Every employee at O2 UK has a huge affinity with Ronan.  The way in which he led the business – he described himself as “chief cheerleader”.  He is a big loss but he now has other challenges.

O2 isn’t just about the person at the top of the organisation – every employee contributes to making us the business we are. During his time as CEO we have achieved Europe’s leading loyalty from customers of any service provider – our postpay churn is at historically low levels.

The UK market is arguably one of the most competitive in the world.  Are you taking over at one of the most challenging times possible?

You’re absolutely right – the UK mobile market is indeed one of the most competitive in the world. Every year that doesn’t ease up and only gets tougher. It’s incumbent on businesses like ourselves to not become complacent over what is working and what we’re doing, and to carry on redefining a whole new level of experience, offering value so customers continue to join and stay with us.

Have you made any noticeable changes to the business as CEO over the past few months or is it just business as usual?

The strategy is the same but there have been a couple of changes. Internally, we have simplified the organisation of the business and that has brought the decision making and customer-facing part of the business much closer (see page two of this issue), which we believe will help us accelerate our agility and do the right things.

We have also committed to another major agreement. Since I became CEO, we have re-signed and committed with the RFU until September 2021. We have one or two new developments too.

What are your thoughts on O2 UK’s sale to CK Hutchison being blocked?

What the EC decided was that the UK would be better off in a highly-competitive, four-player market. What is important now is Ofcom ensures they are consistent in the decision making that supports that structure.

One of our concerns is that the UK has one of the most asymetric spectrum holdings in the world – there is no other four-player market where an operator accounts for more than 35 per cent. BT has 45 per cent and aren’t using it. That is neither in the interests of economic growth, as we are wasting scarce resources, and it’s not good for competition because hiving spectrum is highly uncompetitive.

It’s also not great for customers, because we are being prevented from making the investments in the interests of them. Now is the perfect opportunity for Ofcom to step in and be consistent with their own view of how the UK market should play out, which is a highly-competitive, four-player market, and the best way of achieving that is to place a 35 per cent cap.

Even BT would not have to divest itself of anything it holds today – remember it has spectrum it isn’t even using. They can also buy more than a quarter of the future 5G frequencies, so there really is no rational reason why a 35 per cent cap isn’t appropriate. In fact what they could do is divest themselves of the spectrum they aren’t using today and then, ironically, they could buy more than half of the 5G frequency. We looked at this consultation and have tried to structure it in a way that is in the interests of all parties.

Does this spectrum imbalance therefore contradict Ofcom’s vision for the UK market?

The consultation is still ongoing so we haven’t seen the final judgement. Rather than be pessimistic, I’m going to be optimistic. If the regulator is going to be consistent with its judgement in helping a four-player market play out, then intervention is required.

Does the dominant spectrum holding that BT/EE possess put operators like yourselves at a distinct disadvantage?

More customers are joining and staying with us, and we have Europe’s leading level of loyalty. We have the highest customer satisfaction levels and in fact, Ofcom has awarded O2 as the best service provider for each of the past seven years. Today it certainly isn’t impacting the customer experience.

It is entirely appropriate that Ofcom structures the auction in a way which is conducive to a four player market that helps us all invest, innovate and compete. The last thing the mobile industry needs is for scarce resources like spectrum to be used ineffectively or have a dominant provider, because that inhibits competition.

Where does the responsibility lie to address this problem? Is it with the regulator or the UK Government?

It’s absolutely squarely on the regulator.  They have two statutory duties: to ensure the efficient use of spectrum (and we are falling short in that regard); and to act in the interest of driving competition in the interest of customers. It’s important they are consistent in their decision making in a four player market that can compete on both coverage and quality.

Ronan Dunne was strongly opposed to O2 employing a quad-play strategy because of the limited growth it has historically offered. Do you agree?

The mobile market is the one that customers are showing an insatiable appetite for. This isn’t the case for the fixed line market for example.

Usage there has been in decline for a number of years, so the future is undoubtedly in mobile. That’s why fixed-based businesses are showing a real interest in mobility. We have seen Sky enter the mobile market with the launch of their recent MVNO, while BT and TalkTalk have also made similar moves.

More of our lives are being run through this route. I have two twin boys that are 22-years-old and they have never used a fixed line and have no desire to do so. Customers really want great mobile connectivity.

There is no doubt that some customers will be interested in convergence but I am absolutely confident it will not be the majority of the market. For that reason, O2 will focus on the growth sector, which is mobility, and we’ll continue to excel at what we do.

Following the failure of your sale to CK Hutchison, there has been a lot of speculation that parent company Telefónica will now float the company on the UK stock market. What is the latest on this?

Telefónica Group has listed its main mobile operator businesses in Spain, Germany and Brazil. In fact, the anomaly in their portfolio is the UK.

They have made it publicly known that one of the opportunities is to list the UK business.

The brief from Telefónica to myself and the rest of the UK team is to prepare and be ready for an Initial Public Offering (IPO). This would involve building a prospectus, provide the financial statements and be prepared to enter a listing process if the time is right.

That’s exactly what we are doing. This is not a UK decision, but a group shareholder decision, and clearly they will decide if we proceed in that manner.

What exactly can you do to prepare for a potential stock market flotation, should it occur?

Apart from building a prospectus and the previously mentioned elements, you then need to be able to produce three years of audited accounts for a company that will come to market; demonstrate to the board, that is if it going to adhere to UK Authority Listing Code, and it has to have a majority of independent non-executive directors (excluding the chairman).

There are a number of different things that we need to prepare. Another example is a working capital statement, which demonstrates that there is the sufficient cash that is required to run the business into the foreseeable future, often a minimum of 24 months.

There is an awful lot of preparatory work that we need to undertake for this to happen, and that is exactly what we are currently doing.

Why would Telefónica take the decision to list the UK business on the Stock Exchange over the coming months?

Telefónica has demonstrated that they want to keep an investment in the UK. I’m not surprised by that – the UK is the largest mobile market in Europe and most advanced.

They are retaining an interest in the UK market. Strategically they believe it is in their interests to list a minority shareholding, so that means they have a majority interest in those operators but it is their way of managing debt levels whilst still ensuring they are the majority shareholder in a market. It is one option for the UK but not the only option.

Telefónica’s brief to me and the rest of the team is to be prepared and be ready and whilst they evaluate whether this is the right course to take, our job is to ensure that if they do decide to go ahead, we can do so quickly.

Is Telefónica still looking for a buyer for the O2 UK business, or with the level of consolidation we have seen recently, are those options limited?

They have publicly stated they want to retain an interest in the UK market. You can never say never, but they have made that clear and have put that on record. Who is to say what will happen in 10, 20 or 30 years time, but in the near future the strategy has been made very clear.

Sky is entering the UK market by using the O2 network. Why did they choose you? Was it due to your strong track record in MVNOs?

We have partnered really well with other businesses, and Tesco is one example. The partnership with AEG and creation of The O2 is another great example.

We also famously partnered with Apple to exclusively sell the iPhone in the UK, so we do have a history of partnering really well with other organisations to help them succeed as much as ourselves.

You’re also chairman at Tesco Mobile. How is that business progressing?

Tesco is the largest retailer in the UK and, under Dave Lewis’ leadership, is a business that is really going from strength-to-strength.

We’re fortunate to be able to work with a business of that magnitude with huge footfall that goes through their stores and online channels.

The two brands put together – O2 and Tesco – have created the leading MVNO in the UK. They are continuing to grow year after year, despite the intense competition. Those customers choose the proposition because of its simplicity and value.

What are your thoughts on the progression of 5G and a planned full rollout of the technology throughout the UK in 2020?

The future is mobile and 5G will be another massive evolution in that. What nobody knows is the final standards for 5G yet, and we will need to bed those down before we can really articulate the full potential of what 5G will provide.

The principles are that it will provide much more ubiquitous coverage at high speed capabilities and that opens up a whole world of opportunity. However, let’s bring this back to something important.

There is a spectrum auction that will take place this year and that will include some frequencies that Ofcom would like to reserve for 5G services. It is incumbent on them to make the right intervention now to enable good competition to thrive for 5G.

If there are four players that are able to invest in 5G, that will accelerate investment and innovation, and drive the right customer outcomes. I’m excited by 5G and what it may provide in years to come, but in 2017 there is a pivotal decision to set ourselves up for success.

How do you set yourself up for success?

We don’t want mobile to go the same route as fixed has. If you look at BT Openreach for example, we have seen some of the slowest levels of investment in fibre-to-the-home that exists across Europe.

Fibre-to-the-home has a penetration rate of no higher than three per cent, which is incredibly low. If you compare that to Spain, which is a country that has been through some very challenging economic times, they’re almost at 70 per cent penetration with fibre-to-the-home. Why is that? Telefónica has opened up its network to others so they too can invest and compete.

Therefore competition drives an acceleration of investment and innovation, which is a great thing for customers. We’re at a pivotal moment in mobility where we have been hugely competitive until now. Ofcom has a clear role to ensure competition can still prevail into the future.

What happens to the mobile industry if these spectrum issues aren’t addressed?

I won’t speculate on a very disappointing outcome but what I am very confident about is that the regulator will see the proposals that we have put forward that enable all UK mobile operators to participate and invest, which has definitely got to be the right thing for the customers and the country as a whole.

High street retail appears to become less important as more customers prepare to browse and shop online. Will there be any major changes to this strategy?

Retail throughout the UK in multiple sectors is experiencing a difficult time because more customers are choosing to do their shopping online. In the mobile channel, we see it as an instrumental part of an omnichannel experience for customers.

They like to search online but also like to visit stores so they can get a feel for the product and have a conversation.

In retail at O2 we have the Guru proposition, so people can discuss complex problems and receive advice free of charge.

Despite footfall on the high street perhaps easing year-over-year, we believe that retail has a prominent part to play in our overall omnichannel strategy.

What is the plan and strategy for O2 this year?

We need to make sure that the spectrum auction due to take place later this year is structured in the right way and concludes as soon as possible.

If that happens, then we can all accelerate our investments. O2 is investing more than we ever have in mobile connectivity. We want to continue that.

That is our number one priority, not just for ourselves, but for the UK economy and customers.

Secondly, we’re going to continue to be extremely bold and courageous, two elements that we have excelled in over the years, redefining some of these propositions and expanding on the experiences customers receive as part of being an O2 subscriber.