26 May 2012
Matthew Key, former head of O2 in the UK, is gambling that he can make new digital and online ventures pay off for the Spanish telecoms firm
Matthew Key, head of Telefonica’s new digital division. Photograph: Sean Smith for the Guardian
Matthew Key’s career has been marked by three big bets. As head of the O2 mobile network in the UK, he decided to back the 2007 reopening of the Millennium Dome, pitching the idea to his board three times before getting the nod. With the rebranded O2 successfully brought back to life, he signed an onerous but exclusive two-year deal with Apple to bring the iPhone to Britain. It was a gamble that paid off in spectacular fashion, as 3 million high-spending customers flocked to the network.
For his third spin of the wheel, Key is leading the most explicit effort yet by a mobile phone company to participate in the digital goldrush. In September last year he left his role overseeing 30,000 staff as European chief executive of Telefónica, O2′s parent group, to run a newly created division designed to house just 6,000, working in a rather random assortment of internet and television businesses collected by the sprawling Spanish telecoms firm.
“The chances of success are not 100%,” says Key, in his first interview since taking the job. “I’m going to give it my best shot and I think we’ve been set up to succeed.” He will present his plans for Telefónica Digital to the City on 5 July. Key is on a mission to make a “material” difference to the mothership’s bottom line, and will operate a “shadow” balance sheet, declaring profit and loss probably every half year.
Telefónica’s revenues from non-traditional business lines could be around €5bn (£4bn) by 2013, according to management consultant Arthur D Little. Not insignificant, even for a company bringing in €62bn a year.
There will be new products and services in seven areas: financial services, healthcare, advertising, media, security, cloud computing, and mobile internet connections in cars and utility meters (also known as machine-to-machine connections).
There are half a dozen existing companies under his stewardship, including Latin American internet TV company Terra, which will be broadcasting dozens of Olympic channels this summer; a satellite broadcaster headquartered in Peru but operating across the region; Spanish social network Tuenti; and the UK discount mobile brand giffgaff, whose online helpdesk is run by its own customers.
And then there is the search for the next Instagram – the photo-sharing service launched 15 months ago which has just been bought for $1bn by Facebook. Telefónica’s technology incubator, Wayra, is a year old but already has bases around the world, including London, where up to 20 startups will be given office space and access to Telefónica’s technology – and, ultimately, its 300 million customers worldwide.
Wayra was created by José María Álvarez-Pallete, who previously ran Latin America for Telefónica and replaced Key as head of an enlarged European unit that included Spain for the first time. In Álvarez-Pallete’s view, using mobile networks to create digital businesses is crucial if Europe is to climb out of recession.
He said recently: “We have an entrepreneurial deficit in the EU. If we do nothing, all the talented people will emigrate to the US and innovation is not going to happen in Europe. If you look at the biggest listed technology companies in the world, none of them are based in Europe.”
In Key’s mind, digital represents one of the best chances of a return to growth. In western markets, mobile networks are waking up to the fact that their best years may already be behind them. Once rated as growth companies, they are now more likely to be viewed as utilities. Across the industry, revenues are flat. The recession is forcing prices down in Europe. Emerging markets in Latin America and Africa are making up for the shortfall, but only just.
Telefónica’s revenues in Spain were down 16% in the first quarter of this year. With net debt of €56bn to service, Telefónica cut its dividend last year and analysts believe it may soon be forced to do so again.
Meanwhile, Apple and Google have found ways of exploiting mobile phone networks to amass cash piles that run into billions. Hard times have increased resentment of Silicon Valley’s success among many in telecoms. But Key embraces the Californian philosophy of “co-opetition”, which allows competitors to form partnerships where their interests are aligned.
“We have to get into the mindset of exploiting the future rather than just protecting the past,” Key says. This means being prepared to work with other mobile networks as well as internet companies.
The most high-profile alliance is Project Oscar, a joint venture with Orange, T-Mobile and Vodafone to create a mobile wallet. With Google Wallet yet to expand outside the US, where it has been blocked by a number of networks, mobile payments could be an opportunity for Telefónica. Unfortunately, the UK’s smallest operator, 3, was excluded from the joint venture, prompting European regulators to begin an inquiry that could delay its launch for months.
More promisingly, Telefónica recently signed its largest deal with a car company, with General Motors. Its network will connect vehicles to the internet so that they can be located by the emergency services and have their components remotely monitored. The concept will be extended to motor insurance this autumn, with a product that tailors premiums according to where, when and how fast a vehicle is driven.
Also coming in September is a personal alarm currently being used by the NHS to monitor patients with Alzheimers or dementia. When the wearer strays outside a set area, an alarm is sounded with their carer.
One of the bigger opportunities is mobile advertising, particularly through promotions and coupons. In the UK, almost half of O2′s 22 million customers have agreed to share their information for some form of marketing. Brands are expected to spend around £300m on mobile marketing this year, and O2 will take a significant chunk of that.
Mobile networks have repeatedly tried and failed to make money from the internet. Telefónica’s purchase of Big Brother production company Endemol during the dotcom boom was seen as a strategic blunder. The company was sold after seven years, for €3bn less than its purchase price.
Key says he has been given the autonomy to succeed and that his work is essential to the company’s future growth: “We will not be successful without Telefónica, and Telefónica will not be successful without us.”
His division will have swanky new offices just off Regent Street, but its creation does not require a big outlay. If Key fails to move the dial, the damage will be reputational rather than financial. If he finds the next Instagram, the rewards will – for a change – be counted in billions of euros rather than dollars.