Telefonica Predicts Cut in Phone Range Will Bolster Earnings

Telefonica SA (TEF) said a planned cut in the number of mobile devices it offers will boost earnings following a reorganization of Europe’s second-largest telephone company.

Telefonica, which formed a new digital unit in September to manage partnerships with U.S. technology companies including Apple Inc. (AAPL) and Google Inc. (GOOG), aims to cut the range of handsets on offer to less than 100 from about 240 currently, said Matthew Key, who runs the division. The move will have a positive impact on earnings, Jose Maria Alvarez-Pallete, head of the operator’s European operations, said today in Madrid.

The company will purchase devices centrally based on Key’s recommendations, following Newbury, England-based Vodafone Group Plc (VOD), the world’s biggest mobile-phone carrier, which already buys most handsets at group level. Madrid-based Telefonica, which owns the O2 brand, has revamped regional businesses and shuffled managers to focus on Latin American growth amid falling revenue and profit in Spain.

When managers discussed forming the Internet unit, “there was a dawning reality that this was a necessity,” Key said at a event in London this week. The company’s decision to narrow its range of handsets contrasts with the proliferation of devices in the fast-expanding smartphone and tablet market. Apple sold more than 4 million iPhone 4S devices in its first three days while Samsung Electronics Co. became the largest smartphone vendor in the last quarter with its focus on Google’s Android software. Nokia Oyj (NOK1V) last month introduced devices running Microsoft Corp.’s Windows Phone in what may be its last chance to regain market share.

Smartphone Boom

Telefonica doesn’t know yet how much it will save through the reduced phone range, Alvarez-Pallete said, adding that some savings will be invested to improve customer service.

Telefonica has a total of just 12 handsets that are common to all markets. Apple, Nokia and Samsung are the company’s three largest suppliers, according to data compiled by Bloomberg.

“The whole concept of the phones you stock as an operator is that it’s largely consumer driven,” said Kevin Yates, a London-based equity analyst at Royal Bank of Scotland. “If they were to get it wrong and only stock the phones that people didn’t want, they are going to be in trouble, that’s the risk.”

Telefonica rose 1.3 to 15.13 euros in Madrid trading today, giving the company a market value of 69 billion euros ($95 billion). The stock declined 11 percent this year.

‘Positive Surprise’

Key, based in London, formerly ran the company’s European operations and will oversee Telefonica’s diverse portfolio across territories. Telefonica has holdings in Spanish social- networking site Tuenti; Jajah, a California-based Internet-phone company; and Terra, an Internet portal based in Sao Paulo.

Revenue and profit from digital operations, including Tuenti and Jajah, will be a “positive surprise” in the coming months, Alvarez-Pallete, head of the operator’s European operations, said in September.

Telefonica’s business in Spain remains “complicated,” Alvarez-Pallete said today. The company isn’t considering selling, merging or buying any assets in Europe as it’s focused on boosting its current business activities, he said.

The digital unit, which also includes venture capital funds, will work on which units to focus on in the next two to three months, while also managing partnerships with the U.S. technology and content companies, Key said. “We cannot create it all ourselves and cannot create a walled garden.”

European network operators have warned against the dominance of the U.S. media companies that threaten to overrun their networks with new content and data services.

As part of the reorganization, Telefonica moved former Latin America chief Alvarez-Pallete to oversee the enlarged European unit including Spain.

“The whole future of the company is going to be based on the digital space,” Alvarez-Pallete said.

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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