MMO2 plc - UK Mobile Phone Service - Category Directory

Wellington Street
Slough
Berkshire
SL1 1YP
England

www.mmo2.com

Sales

$10.4 billion

Business Description
COn 10 May 2001, BT announced its intention to demerge our businesses. This was effected by a reorganisation, a scheme of arrangement and, on 19 November 2001, the demerger transaction. As a consequence, our operations have been conducted as an independent entity, mmO2, with key subsidiaries in the United Kingdom, Germany, the Netherlands, Ireland and the Isle of Man. In September 2001, we announced a new brand, O2, for the Group. This was introduced in May 2002 and, in support of that introduction, each of the principal country company operating names, except for Manx Telecom Limited in the Isle of Man, were changed to include the brand in their names. Accordingly, references throughout this annual report to the country operations, where appropriate, refer to the new operating company names.

The following is a brief summary of the development of our key businesses:

O2 UK

O2 UK is our main UK business and presently our most significant business in terms of its contribution to our revenues and profitability.

O2 UK was formed as a joint venture between BT and Securicor Group plc in January 1984, with BT owning 51 per cent, and, prior to May 2002, was called BT Cellnet. In April 1986, BT increased its stake to 60 per cent. In November 1999, BT acquired Securicor’s remaining stake in the business for £3,173 million including expenses. The business was managed separately from the businesses of either of its former shareholders.

O2 UK provided analogue mobile telephone services from January 1985 until October 2000 and has provided GSM services since July 1994. In April 2000, O2 Third Generation Limited, one of our subsidiaries, was awarded one of the five UMTS licences in the United Kingdom for £4.03 billion, which was paid in May 2000. On 17 July 2003, the UMTS licence was transferred from O2 Third Generation Limited to O2 UK. In June 2000, O2 UK launched GPRS services to the UK market.

Our mobile internet portal, O2 Online, was originally developed in 1997 as part of O2 UK in the United Kingdom, and prior to 2002 was called Genie. O2 UK continues to provide online distribution of its devices and services through this channel.

During the second half of the year, the Group transferred the O2 Online, Products O2 and certain other central functions to the operating businesses, to simplify lines of management, reduce costs, and improve speed of execution. This restructuring, which reduced headcount by 200, led to an exceptional operating charge of £75 million being incurred in the second half of the year, and is expected to generate annual cost savings of £40-45 million. As a consequence of this streamlining, as from 1 April 2004, O2 Online and Products O2 will no longer be operated as separate businesses.

O2 Germany

Our German business, O2 Germany, was launched in May 1995 as a joint venture between BT and Viag AG, with BT holding a 50 per cent stake, and prior to 2002 was called Viag Interkom. Following and pursuant to agreements made in August 2000 and January 2001, BT acquired a controlling stake in O2 Germany. In February 2001, BT acquired the remaining share capital of the business from E.ON AG (formerly known as Viag AG) for £4,562 million.

Initially, the business provided fixed line services only, but in May 1997 O2 Germany was awarded the fourth German GSM licence and launched GSM mobile services in October 1998. In August 2000, O2 Germany was awarded a UMTS licence in Germany. The cost of the licence was £5.16 billion, which was paid in September 2000. In January 2001, O2 Germany launched its GPRS service.

O2 Ireland

Our Irish business, O2 Ireland, was formed in June 1995. In April 2001, BT acquired the entire share capital of O2 Ireland.

O2 Ireland launched its commercial GSM services in March 1997 and its GPRS service in January 2002. On 2 October 2002, O2 Ireland was awarded one of four UMTS licences offered by the Irish government.

O2 Airwave

In November 2001 BT transferred the Airwave business to us. O2 Airwave provides TETRA network services to certain Public Safety Users in England, Scotland and Wales. Prior to that, BT already had transferred to us its contracts to provide network services to a number of police authorities within the United Kingdom.

Manx Telecom

In 1987, our business in the Isle of Man, Manx Telecom, was awarded a 20-year licence to operate the Isle of Man telecommunications network. The licence originally covered fixed line telephony, but was expanded in 1994 to include GSM mobile services and in 1999 to include UMTS services. Manx Telecom launched Europe’s first UMTS network in December 2001. On 1 January 2004, Manx Telecom was awarded a licence extension for 15 years.

O2 Netherlands

O2 Netherlands was founded in September 1996 as a joint venture between BT and Nederlandse Spoorwegen N.V., the Dutch railway company, with BT holding a 50 per cent stake, and prior to 2002 was called Telfort Mobiel. In July 2000, BT completed the acquisition of the remaining 50 per cent interest in the business for £1,207 million. On 14 April 2003 we announced that we had agreed the sale of O2 Netherlands to Greenfield Capital Partners, an independent private equity and finance group with interests in the telecoms sector, for €25 million in cash which was paid on completion of the transaction on 3 June 2003.
 
Business Overview

Our Group

We are a leading provider of mobile communications services in Europe, with wholly owned businesses in the United Kingdom, Germany, Ireland and the Isle of Man.

Together these target a total population of 148 million people. For the first time our total subscriber base broke through 20 million during the year and we now provide international mobile roaming to 150 countries worldwide.

The businesses in the UK and Ireland are both established and profitable, with a track record of revenue and customer growth and a strong presence in high-value markets, such as business and mobile data services.

O2 Germany is now the fastest growing operator in Germany. Its 6 million customers account for the highest ARPU ratio of any German operator.

O2 Airwave, which is supplying a network of secure communications to the police forces and other Public Safety Users in England, Scotland and Wales, has continued to develop rapidly.

Manx Telecom is unique within the Group, providing mobile, fixed line and internet services in the Isle of Man. It was also the pioneer of UMTS networks, the platform on which we, in measured stages, will supply services Europe-wide.

Our products and services

In line with our strategy, our internet portal is designed to attract high-value customers, reduce churn and generate revenues by providing high-quality content and closer relationships with customers. We are pleased with the success of this service, which has recorded a 27 per cent increase in online subscribers in the financial year to 31 March 2004, of which around half were post-pay customers.

We are committed to increasing the value of our offering to business. Our corporate handheld e-mail device, BlackBerry™, is central to this. Since launch, more than 55,000 devices have been sold to over 2,000 organisations.

Following the success of our Xda device, this year’s launch of our own-brand X1 picture phone and Xda II second-generation pocket PC highlighted our ability to offer innovative products to our customers.

Designed to make the mobile phone more intuitive and easier to use, O2 Active, which is discussed in greater detail later in this review, has been an instant success. An award-winning, data services menu, it quickly became the UK’s most widely used mobile portal.

Mobile alliance

In October 2003, our German, UK and Irish operations became founder members of the Starmap Mobile Alliance, a group of independent mobile phone operators who are joining forces in readiness for the international roll-out of UMTS services. Starmap aims to provide a “home-away- from-home” experience by introducing seamless roaming and multimedia connectivity to more than 46 million customers in 10 European countries. The “home-away-from-home” concept aims to provide customers with a service while travelling that is as close as possible to that they receive at home. It will enable members to be quick to market across borders with new products and services, and will increase their inbound roaming revenues.