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O2 focuses on MVNOs - Tesco's iPhone and GiffGaff

By CAROLINE GABRIEL

Published: 26 November, 2009

READ MORE: UK | O2 | Tesco Mobile | MVNO | iPhone

What a role reversal for O2 - having extended its UK market lead this year largely thanks to its iPhone exclusive, the carrier has lost its sole rights to the Apple phone and is increasingly turning its attentions to the indirect revenue boost it can get from MVNO deals. The iPhone itself features in one of these, with supermarket chain Tesco adding the handset to its virtual mobile service - which runs on the O2 network - sparking the long expected price war. And a more innovative MVNO, GiffGaff, which is actually an O2 sub-brand, goes live this week.

Apple is abandoning its premium, exclusive strategy for the iPhone in earnest in the UK, where even the low cost MVNO run by supermarket giant Tesco is to offer the iconic handset. Tesco will join former exclusive carrier O2, Orange, and - from the first quarter - Vodafone in offering the iPhone, and hopes to do so before Christmas. Tesco uses the O2 network and offers contract and prepaid tariffs via its stores and online.

So far, the price war that many imagined would be signalled once Orange launched its iPhone this month has not really materialized, with the cellcos beating one another up on buying incentives - from free movie tickets to free home broadband lines - but not actually doing much to change the upfront charges and/or monthly commitments needed to get hold of a 3GS.

Tesco, which targets the budget market and is strongest in prepaid services, is likely to change all that. Although it has not yet announced pricing or a launch date, a spokesperson for the UK's largest retailer said: "We would love to get it in our stores before Christmas and would love to bring a bit of Tesco value to the iPhone and offer something very different to what is out there."

Tesco Mobile is the UK's fastest growing cellco, and is 50% owned by O2. Such deals indicate the strategic importance of MVNO customers to the network owners - using up excess capacity and targeting new user profiles, all with no customer acquisition costs. Increasingly, the major carriers take stakes in their virtual partners rather than just leasing them airwave space, and some are even setting up inhouse MVNOs, segregated from their main brands as a way to experiment with a different customer base or business model.

Orange has done this by taking over ad-supported MVNO Blyk, and O2 has followed suit with GiffGaff, a pioneer in 'crowd sourcing', where members can get free services in return for participating in the community by answering support queries or submitting marketing ideas. Such contributions, all designed to reduce the costs to O2 of running the operation, earn points, which can then be exchanged for cash, mobile credit or charity donations twice a year. For example, if you get a friend to join GiffGaff by giving them a SIM card as a gift, you get earn 50 points or £5.

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