Angel Dobardziev
Cesky Telecom and Eurotel merge to become Telefonica O2
Yesterday, Cesky Telecom announced plans to merge its fixed operations with its mobile subsidiary Eurotel, and to change its name to Telefonica O2 Czech Republic. The new entity will have integrated network and IT operations, as well as distribution channels. The sales teams will also be integrated, but they will be structured along customer lines, with Consumer and Retail commercial operations. Through this structure, Telefonica O2 will aim to defend and grow its revenues through bundled and fixed-mobile convergence (FMC) services, as well as preserve margins through removing duplication and increasing efficiency. The integration is subject to shareholder approval, and is set for completion by the end of 2006. Telefonica owns 69% of Cesky Telecom. Comment: This move is not dissimilar to that of Magyar Telecom, Deutsche Telekom's (DT's) Hungarian incumbent. In essence, both players acknowledge that they can maximise value by bringing together fixed and mobile silos under one roof to provide bundles and FMC services, increase efficiency and reduce costs. We agree, and for a long time we've been advocating that this is the right way forward for incumbents. What's interesting is that both DT and Telefonica are pressing ahead with this strategy in their overseas operations, before they have done this in their home markets. In this light, it is easy to draw the conclusion that both DT and Telefonica are using their Eastern European operations as the test beds to experiment for what is to come at home later. While this may be partly true, the reality is that the need for these moves is much more pressing in Eastern Europe.Cesky Telecom saw a 7% year-on-year decline in its fixed lines in 2005, while Magyar Telecom's churn stood at 5%. Both players have seen their fixed divisions decimated by a combination of fixed-to-mobile substitution, and altnet market share erosion. The evidence so far is that bundles and convergent services can work to reduce churn, and this is what Telefonica and DT will hope to achieve, while in the process reducing costs. Yet, with many Eastern Europeans never experiencing a fixed line and most falling in love with their mobile lifestyle, it remains to be seen whether these strategies will deliver results.One final point to note is the issue of brands. While the Telefonica O2 name may well be used for its various country operations, there is not yet a decision on the commercial brands that are to be used to sell services. And that is the tricky bit: when you sell FMC services, you will probably need a single brand, but which one is going to be? France Telecom settled on Orange, but Telefonica and DT are yet to decide: is it going to be O2 or Telefonica (or Eurotel); T-Com or T-Mobile? No doubt, we'll soon find out.
