'3G mobiles will be like colour TV versus black and white'

It plans to be a market leader in the new technology. But just now, mmO2's boss has phone trouble...

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Ericsson's £1.5bn lifeline for mmO₂

Fumbling in the top pocket of his jacket, Peter Erskine pulls out a sleek, silver electronic gadget.

The chief executive of mobile operator mmO₂ slides open the cover and the device emits a strange set of sounds; not the usual electro bleep-bleep, more like chords played on a glockenspiel.

"I know it's a bit childish," he says with a grin. The screen of this new age mobile phone then lights up in full colour and he proceeds to scroll through a plethora of menus.

"Ah, 'business news'," he says, and hits the "yes" button. It's Wednesday, and mmO₂ 's first annual results have just been announced. The company has posted a disappointing 2 per cent rise in UK revenues, sending the shares to a new low, 54 per cent below their flotation price. "The news will probably be all about our stock," he says with an air of expectation. But his internet-enabled mobile, with every whistle and bell going, isn't behaving.

"Oh dear, I seem to have a server error. I must have pressed the wrong button," he says hopefully.

Welcome to the future according to Erskine.

MmO₂ is something of an oddity among its mobile peers. A FTSE 100 company it may be, but it is dwarfed by Vodafone, which even in its current sorry state is worth 18 times more than mmO₂'s £3.7bn. Its other two main rivals, T-Mobile and Orange, are backed by giant parent companies, Deutsche Telekom and France Telecom respectively, leading some people to ask, what's the point of mmO₂?

Formerly Cellnet, it was spun out of BT last year and operates in the UK, Germany, the Netherlands and Ireland. Today, however, it is neither big enough to be number one in a major market nor small enough to be a niche player.

Erskine, who sports a Nigel Mansell style moustache, maintains that mmO₂ has a long future, and this is where his malfunctioning mobile comes in. "We intend to become the leaders in mobile data," he proclaims.

He believes that, soon, versions (hopefully functioning) of his phone – with access to reams of services online – will become common, re-creating the excitement that surrounded the first mobile launch.

MmO₂ is already pushing devices such as the "Blackberry", which allows fast mobile access to email. By Christmas, Erskine says customers will be offered phones that can take digital photographs, which can then be sent to other phones or emailed to the PC. After that, mmO₂, along with most of its peers, plans to launch its high-speed mobile internet services, known as 3G, probably by the middle of next year.

"Suddenly it will be like colour television versus black-and-white," Erskine claims. "By 2005, 3G will be mass market."

Before we get there mmO₂ has got to pepper the country with thousands of masts and base stations to support the services. For a company trying to keep a tight rein on its expenditure, this will be the tricky bit. As part of its strategy, mmO₂ has teamed up with Deutsche Telekom for a venture codenamed "Project Chelsea". The joint effort is designed to save £3bn in construction costs and reduce the number of masts that would otherwise have to be built by 10,000.

To date, mmO₂ has bought most of the sites needed for the 3G masts. "We have all the designs ready. But we won't be spending the capital on 3G networks for another six months," says Erskine.

The company's five-year business plan estimates that it will spend £3.5bn on 3G roll-out. It is now exploring new ways of reducing this figure through various outsourcing deals, including one with Ericsson in the Netherlands.

MmO₂ has also lobbied the UK Government for a two-year extension to its 3G licence. "Without being too unreasonable, given that the technology is a couple of years late, I wouldn't mind an extension," says Erskine.

In Germany mmO₂ has asked the government to relax a requirement that by the end of next year there should be 3G coverage across 25 per cent of the population. But some analysts feel mmO₂ shouldn't be in Germany – or, come to that, in any other part of continental Europe. Stockbroker Collins Stewart and investment bank SchroderSalomonSmithBarney have argued that mmO₂'s value would be higher without its German arm, which lost £166m last year.

Erskine says: "My goal is simple: each day we make those businesses worth more and improve them." Would he entertain an offer? "I close my eyes to nothing. Things could develop in the next six to nine months. I run an executive team and board that doesn't have any great ego or legacy that says we must stay in these businesses. But nobody has rung me with an offer. Plenty of bankers have been speculating, but no one in the real world."

The O₂ brand was launched last month into a market already getting to grips with the Germanic T-Mobile, formerly One2One. Erskine won't say how much he's spending on advertising, but claims: "It'll be no more than our normal marketing spend."

If this is the case then the budget must be fairly hefty as mmO₂ has already signed a sponsorship deal with Arsenal (despite Erskine being a Tottenham Hotspur fan) and the company's new name has been heavily promoted on television, in newspapers and magazines, and on posters.

Erskine says a visit to his doctor convinced him the new O₂ name worked. Reclining in the chair for his annual check-up, only a few days after the launch, the doctor asked Erskine what he did for a living.

"Chief executive of O₂," he replied, expecting a blank look.

"To my surprise," he continues, "the doctor said to me, 'Oh, yes, I know O₂, it's in all the shops.'"

Convincing his GP is the easy part. The sceptical City audience will be much harder to win over.