February 4, 2013
Last month, Geeksphone (a Spanish smartphone manufacturer), Telefonica and Mozilla introduced to developers two Firefox OS-based smartphones, Keon and Peak. What attracted less attention in the otherwise typical announcement was the presence of Telefonica, a global giant with revenue of US$84bn, operations in 25 countries around the globe, and 314 million subscribers, in this partnership of relative rookies.
This move presents yet another example of the Spanish company’s aggressive efforts to redefine its position in a mobile value chain increasingly challenged by OS players, device manufacturers and Internet companies.
Telefonica has come a long way. Faced with the weaker performance of its European operations, increased competition, the prospect of slowing growth in its Latin American stronghold and tighter margins, the company has gone on the offensive in a hardcore search-and-destroy mission, taking the following key steps:
- It restructured its European operations, particularly building on its successful operations in Germany and the UK. The hope is that this restructuring may ultimately decrease the dependence of its “aging European parents” on their “Latin American children.”
- It cut smartphone subsidies in a number of countries, a move which, while causing short-term losses (e.g., between December 2011 and September 2012, Telefonica lost 1.2 million postpaid mobile customers in Spain), has revitalized the operator’s European margins.
- To mitigate the impact of the subsidy cut, it introduced a handset financing scheme and a quadruple-play service offering in Spain.
- It created a global resourcing unit to increase its leverage in negotiations with device vendors, and Telefonica Digital to drive innovation in the digital arena.
- In response to the rising threat of OTT providers, Telefonica launched its own messaging and voice OTT service, TU ME, a service good enough to more than hold its own in a competitive OTT space.
Telefonica’s partnership with Mozilla and Geeksphone follows the same pattern. Rather than merely complain about the outsized power of Android and iOS, the company is leveraging its scale to do something about it by injecting additional competition into the OS market.
At the end of 2011, Telefonica went to war against its declining margins, the underperforming economy in Europe, competition from OTT service providers, overdependence on certain OEMs and saturating markets. Initial results have been promising: Telefonica Spain’s OIBDA margin has increased by 5 percentage points between Q1 2012 and Q3 2012, exceeding 47% at the end of the period (see Exhibit). Perhaps more importantly, the operator is demonstrating to its peers that mobile operator disintermediation need not be a foregone conclusion.
Exhibit: Telefonica’s OIBDA Margin in Spain, Q1-Q3 2012
Sources: Telefonica, Pyramid Research
— Stela Bokun, Senior Analyst
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