Putting brand before booty

O2’s move to axe the 100-strong innovation unit it created only a year ago (MW last week) raises questions about the forward strategy of the UK’s number one mobile operator.

Disbanding the division has triggered a wide-ranging restructure across O2’s marketing function, and redundancies are on the cards. Some see it as a cost-cutting move, though O2 denies this. Others believe parent company Telefonica is centralising its long-term innovation strategy across the 23 countries where it operates, obviating the need for a separate operation in the UK.

Russ Shaw, who has overseen the unit as capability and innovation director since its creation in May last year (MW May 25, 2006), is taking a new post as global director of innovation for Telefonica. An indication towards a new strategy for O2 that sees it launch whizzy new services such as mobile Internet and mobile TV.

Since O2 demerged from BT in 2001, it has concentrated on building brand loyalty rather than launching the latest 3G and 4G services. Rivals such as Orange and 3G upstart 3 have streaked ahead in introducing new technology. Meanwhile, O2 has achieved leadership using loyalty deals for existing customers, alluring advertising by Vallance Carruthers Coleman Priest and heavyweight sponsorship deals, putting its name to Arsenal shirts (until last year) and The O2 leisure complex. The operator has lagged behind rivals in rolling out the new services, but this is a wise strategy, the company argues, because consumers still find them slow, clunky and hard to use.

Its own launch of mobile Internet, using NTT DoCoMo’s i-mode system, has attracted just half a million users, despite being a hit in Japan, where 46 million people have taken it up. Advertising and marketing for the service have all but disappeared, prompting speculation that it could be axed or left to wither.

Risky business
The danger for O2 arises when rivals’ state-of-the-art services become a basic requirement for all operators, not just an irritating and costly add-on. O2 has scored successes until now, as its rivals have soaked up the disadvantages of being first to market with new services, while O2 has stuck to good old-fashioned marketing.

It claims to have built the largest active customer base in the UK with 17.8 million customers and a turnover of £4bn. The company has added some 5 million customers in the last five years.

But what today looks like a brilliantly executed consumer-led strategy could prove to be quaintly outdated in five years time if the market moves onto a more advanced stage of development and O2 is left behind.

This week’s opening of The O2 – a US-style mega-leisure complex on the site of the old Millennium Dome – shows how far the operator will go to exert influence over its customers. O2 will offer them priority in buying tickets for major acts performing at The O2, such as Bon Jovi, Prince and the Rolling Stones (with 10% of tickets reserved for them). There will be an exclusive bar only open to O2 customers and a large wall where customers can project pictures of themselves. The company dislikes the term sponsorship, talking instead about “interactive partnerships”.

Developing such innovations has made up much of the work undertaken by Shaw’s unit over the past year. Other tasks have included creating the BlueBook social networking service that launches this autumn. The division has also been in charge of acquiring the Be fixed-line broadband brand, which also launches this autumn and will be offered at a discount – though not free – to O2 customers.

Jumping the curve
Given these achievements, it is unclear why the unit has been scrapped. For last May’s launch, nearly 100 marketers and other staff were plucked from across O2 to staff the unit, which was portrayed as a brave new strategy for the future. Shaw told Marketing Week at the time, “We will be looking at how we get ahead of the curve in this new, converged world. We have got to do more in the future if we are [to be] successful.”

Far from getting ahead of the curve, the unit is finished and a massive restructure is taking place, with marketing staff shifted back into product groups. The company says it has yet to decide on redundancies. Shaw’s role is being split between marketing director Sally Cowdry and device and solutions director Ian Clarke.

Cowdry explains that re-integrating marketers back into frontline product groups is now seen as superior to having them hived off in a separate division. “Our customer strategy is to put experience at the heart of everything we do,” she says. “The changes are about putting greater focus on that strategy.” This will help the brand get closer to customers, she adds, and will enable O2 to integrate synergies from Telefonica.

She declines to elaborate on why the unit was axed so quickly, but claims it is because the industry has changed greatly from a year ago: “A year in telecoms is a long time. As we move forward, things change. We are a learning organisation. We believe that [the unit] was the right way to do it for last year.”

A source says the unit had been planned before the Telefonica takeover. The parent company saw it as an unnecessary expense given that it could develop new technologies centrally for its European operations. The division was supposed to get O2 ready for an unpredictable future. Undaunted, the company now boasts that it is exactly the opposite strategy which makes it ideally placed to face the battles ahead. Such fluidity is needed in the fast-changing world of telecoms, says the company.

Under pressure
In any event, pressure is on O2 to prepare for the new generation of converged services on mobile phones that many believe is inevitable as technology improves. Strategy Analytics analyst Phil Kendall says: “The mobile market is a brand battle at the moment, but it is moving towards a content and application play where innovation is going to be more important. The way consumers use mobile phones is changing. Operators have won because the mobile phone is so personal. Now the internet is getting in on the act, so allegiance will be to MySpace or eBay, rather than to the mobile operators, who have got to get into content and partner Internet brands.”

Innovation is O2’s key challenge. This recent escapade reveals a rapidly evolving picture at the company about how best to structure itself for the future. This needs sorting out. There is only so much loyalty to be earned from herding customers around an entertainment complex. At some point, O2 will have to play catch up and get down to the task of launching some workable, popular new communications services.