Online Extra: O2 Hits Home with Genion

Rudolf Gröger, the German mobile carrier's CEO, on how its home zone calling service, is fueling growth

Someday, presumably, everyone will carry one phone

everywhere that will work as well -- and as cheaply -- on the road as it does at home. A beta version of that telecom dream is already available in Germany from mobile carrier O2, a unit of Britain's mmO2 (OOM ). The company's Genion service lets customers call from within a 500-meter wide "home zone" for as little as 3 cents a minute, almost as cheap as traditional land-line service. Outside the homezone, customers pay competitive mobile rates.

At the moment, only O2 is in a position to offer that service because it's the sole German carrier with a dense-enough network of base stations to triangulate a customer's whereabouts. That's essential for knowing when customers are inside their homezones and entitled to the lower rate. Rudolf Gröger, CEO of O2 Germany, talked recently with BusinessWeek Frankfurt Bureau Chief Jack Ewing about Genion's importance to O2's business and the future of wireless communication. Edited excerpts of their conversation follow:

Q: What is Genion contributing to O2's business in Germany?


Viag Interkom [O2's predecessor] was the last entrant in the German mobile market. If we'd had a me-too product, we would not have been in a good situation. Now about 70% to 75% of our postpaid [clients who pay for services after they use them] growth is from Genion home. In addition, the Genion subscriber spends more per month, 43 euros [$50], because they have a good feeling that the service is fairly priced. That's the highest ARPU [average revenue per user] in the market. This contributes a lot to the success O2 has had in the last 15 months. O2 has had at least double the growth rate of the German mobile market.

Q: How profitable is O2?


In EBITDA-terms [earnings before interest, taxes, depreciation, and amortization] we've turned around the business in the last fiscal year. This happened one year ahead of our plans. Now we promised the market that for the fiscal year ended March, 2004, we would deliver a double-digit EBIDTA margin. We're pretty confident we will meet this earlier. We're well on track.

Q: How long before competitors start to offer a similar product?


No advantage is forever. But we're somewhat safe because we have designed our network from the beginning with this type of functionality. I would think in the German second-generation mobile market, we never will have competition. Our system is up and running. The handsets are there. Everything is really mass-market. We have five years' experience. For us it's a standard product. If there's competition, it will be in 3G [third-generation wireless networks].

As we migrate to third-generation mobile, will competitors follow? I don't know. The incumbents are relatively slow in reacting. To some extent they would be cannibalizing their fixed-line business. We will see what they do, but for the time being there are no indications others are following us.

Q: Is your goal to replace land lines or just steal some of the voice traffic?


There are about 3 million Genion subscribers. At the same time there's no German house or flat where there's no land line. Deutsche Telekom (DT ) doesn't like too much competition, but honestly we're not a real problem for them. We steal traffic, but we're positioned as a product for singles, for students, as a second fixed line for families, and as a better mobile contract. I don't think we're much in the focus of Deutsche Telekom.

Q: What will the shift to third-generation technology mean for O2?


O2 Germany's data traffic is about 20% of usage, the highest rate in the German market. There's a group of consumers that's interested in a certain technology -- the user group of Genion. The Genion concept will continue. The big question for us is if we need to complete our [product range] by offering a kind of wireless DSL [broadband] for the home by partnering with someone else.

There are companies that have wireless DSL. Their problem is they have technology but no market access. A mobile company like us has a couple of million subscribers. We would bundle all these things together for the customer. This could be the next step.

Q: When is 3G going to really become a mass-market product?


We're switching on the network Nov. 17 and doing tests with about 1,000 "friendly" users. Commercial launch depends on handset availability. The issue is seamless roaming between the existing 2G network and 3G. The technology is perfect. The issue is that when you start a heavy commercial launch, your customers will move around the country and won't have 3G all over the place. The middle of 2004 looks realistic for a full commercial launch.

Q: There has been talk of a merger between O2 and KPN's (KPN ) E-Plus, the No. 3 mobile carrier in Germany. What's going on?


It's speculation. There are no talks.

Q: In general, will we see a revival of merger and acquisition activity among telcos?


With the exception of mmO2, the telecom industry in Europe is still very much loaded with debt. A couple of companies still have to do their homework. Midterm, there will be some logic for consolidation, without any doubt. You're already seeing some activity in places like Poland. But I don't expect big mergers for three or four years until debt is taken care of.

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