O2 targets UK broadband operators

O2, the mobile phone operator now owned by Spain's Telefonica, is considering a move for a UK internet service provider and is understood to have Cable & Wireless's Bulldog division and Tiscali's UK broadband business in its sights.

Although the company has yet to make an approach, the fact that it is considering an acquisition shows that O2 is responding to the threat posed by rivals which can bundle mobile, fixed-line and broadband products or deliver services using both fixed and mobile networks.

An O2 spokesman said: "We're looking at options to either buy an ISP or go down the wholesale route or, alternatively, we may do nothing. However, no approaches have been made and no decision has yet been taken." One source said that O2's examination of potential UK targets was at a preliminary stage.

C&W is thought to prefer an alliance with a mobile operator but has not ruled out a sale of Bulldog if the price was acceptable.

O2's Spanish owner operates ISP Terra Networks, which serves more than 2 million internet customers, predominantly in Spain, Brazil and Chile with broadband, dial-up services and internet content. Across Telefonica's European network, it is only in the UK and Ireland that it does not offer a broadband service.

O2 already offers combined fixed and mobile products in Germany and also in the Czech Republic after Telefonica bought Cesky Telecom last year. Internet access via mobile phones is yet to take off in Europe and fixed line offers much faster and more reliable broadband access and is growing at a rapid rate.

O2's rival Vodafone has also been linked with an acquisition of a UK ISP, although it has declined to comment on its plans. Vodafone will explain its strategy on 30 May when it reports full-year results. It recently established a division devoted to exploring new growth opportunities, including converged and Voice over Internet Protocol (VoIP) services.

O2 may also target smaller players in the UK market such as Pipex and Plusnet. Tiscali's UK unit is a key part of the Italian company's business while Cable & Wireless, which has struggled with customer service and technical issues at Bulldog, may prefer to sell broadband to mobile phone companies on a wholesale basis. C&W is focused on large, profitable corporate customers and can use Bulldog to serve those clients. Yet it has no consumer-facing business apart from Bulldog and has no retail presence, while mobile phone companies have customer service expertise and operate large high-street retail chains.

O2 and Vodafone could decide to enter the broadband market as a virtual operator, offering branded internet services to customers by striking wholesale deals with Bulldog, Tiscali or even BT. This would be a reversal of strategy for mobile operators, which often provide mobile network capacity to companies such as Tesco, Disney and BT.

France Telecom's decision to rebrand its Wanadoo internet division under the Orange banner has increased the pressure on mobile rivals. Orange could potentially take market share from mobile-only players by luring rival customers with bundled services and, perhaps, free residential broadband.

O2's former parent BT is offering consumers mobile phones which route calls via fixed-line networks when inside their house. It is also gearing up for the launch of internet television services later this year.

Carphone Warehouse is offering UK consumers free broadband if the user subscribes to its fixed-line phone call service. NTL is looking to offer television, fixed-line, broadband internet and mobile telecoms services as one package, while the satellite television provider British Sky Broadcasting is also targeting the broadband internet market after purchasing easynet last year.