Texters hold O2 's future in their hands as fingers do the talking

Chief executive Mr Peter Erskine believes data services will provide 25 per cent of the company's revenue by next year, writes Karlin Lillington

Mobile operator O2 "remains resolute" that data services are its future and predicts that 25 per cent of revenue will be generated by data rather than voice calls by next year - up from 17.3 per cent today.

"This isn't about dry ice, this isn't about hand-waving strategy. This is about hard numbers," said Mr Peter Erskine, O2 chief executive, speaking at an O2 data strategy meeting in London.

According to Mr Erskine, data revenue in the year totalled £766 million sterling, (€1.1 billion) with Irish data users bringing in the highest revenue per user per month at £4.37.

The average across the group was £3.51.

However, no comparison of charges in national markets was offered, making it difficult to understand if the high Irish figure related to higher tariffs or greater usage.

Data usage had already risen to 19.4 per cent in the quarter to the end of June, according to company figures.

Mr Erskine said that in the June quarter data growth was up 40 per cent on last year and running ahead of overall market growth, at 34 per cent.

He said O2 had doubled the number of active MMS users to 180,000 by the end of March. MMS, or multimedia messages, are mobile messages that include images, music or video.

Usage, at one to five MMSs per user per month, was "in line with expectations".

GPRS (2.5G) mobile users jumped to 643,000 from 120,000 between March 2003 and the present.

Mr Erskine attributes much of the growth to increased use of the company's mobile email service that uses the Blackberry handheld device, with 27,000 units sold to date, and to growth in sales of its high-end XDA, a combination PocketPC and phone with internet capabilities, with 64,000 sold to date.

The company also saw a significant jump in the numbers of customers downloading games based on the Java programming language, from 278,000 at the end of March, to more than half a million downloads three months later.

Some 580,000 O2 customers now have handsets that enable them to download games, ringtones, music and video, according to company figures.

However, much of the growth in data usage continues to be in low-end SMS or text messages, which make up 95 per cent of the data revenue total.

O2 customers sent and received 8.5 billion text messages this year, an average of 63 messages per month, up on 51 per month in 2001-02.

Irish customers are the most active texters, with 72 per cent of customers using the service, an average of 107 messages per month per user, as opposed to 54 per cent in Britain.

Curiously, though the penetration of SMS in the Netherlands has increased to 47 per cent, from only 32 per cent in the previous year, the number of texts sent has actually decreased, to 25 per user per month from 35.

The Netherlands is the only country with a decline in numbers of SMSs sent.

Despite the much-publicised tribulations associated with its roll-out, O2 executives said they remained committed to and enthusiastic about 3G - the next generation mobile networks that will deliver data and internet services at high speeds.

"We are very confident that it's a key part of our future," said Mr Erskine.

The Republic has one of O2's already-launched 3G networks, and the company said it would achieve 33 per cent coverage by the end of this year.

In Britain, O2 will launch a network shared with German operator T-Mobile in late-2004. The German network, also shared with T-Mobile, will achieve 25 per cent coverage by year's end, he said.

Mr Erskine attributed delays to operator financial issues, the poor economy, and particularly a lack of 3G-enabled handsets. "Why was 2.5 G two years late? Handsets. Why will 3G be two to 2½ years late? Handsets," he said.

O2's 3G network had an asset value of £4 billion after write-downs, he added.

The company believes consumers and businesses will be ready to migrate gradually to the new networks.

GPRS demand is approaching critical mass, according to Mr Kent Thexton, chief marketing and data officer for O2.

The company believes the market reached this crucial point on the adoption curve in March through April, when 12 per cent of O2 customers had GPRS-enabled handsets.

The company is looking at patterns being set by more sophisticated data devices such as its XDA and Blackberry.

XDA owners use more than three times as much data as owners of other devices that are data-enabled, and the XDA is now the leading product in the western European market for combination voice and PDA (personal digital assistant) devices, according to analysts Context.

The XDA has 36 per cent market share in Europe, 59 per cent market share in Britain, and 80 per cent market share in the Republic, where there are few other options.

O2 said it would release the XDA II, an upgraded version with Bluetooth, inbuilt camera, and a removable battery, before December of this year.

Two other developments represent a testing of marketing waters for O2. The company has cut a deal with AOL to offer instant messaging (IM) on its mobiles across Europe.

The phones can use ICQ or AOL Instant Messenger (AIM) to carry on a live text conversation with an IM user on a PC or another mobile.

IM is the most popular application on the internet after email, with 220 million users across the globe.

The company has also been testing a music service that lets users download songs onto a special Siemens music player, using a mobile. Some 300 youths in Germany and Britain have been using the service, which has priced songs at £1-£2 per download (O2 has let users believe they were being charged so that it could test price points).

Users downloaded on average five songs a week, with 4,000 downloads to date.

Songs use an alternative to the MP3 compression technology and digital rights management is built into the song.

The company said it believed music over mobile had enormous potential to generate future revenue.

Music companies that participated in the trial, which ends this month, include big names such as Sony, Universal and BMG.

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