Unconventional services drive O2's fightback

The past few months have been challenging for Telefonica's UK arm, O2 - it has lost its market lead following the merger of T-Mobile and Orange in the country, and also lost the iPhone exclusive that drove much of its growth during the downturn. But the cellco is not sitting still, and is becoming more innovative in the face of pressure, with new devices and services.

It will introduce a range of new smartphones, at last addressing criticisms that it was offering very little to non-iPhone lovers as it put all its high end resources into the Apple device. Among these will be the Dell Android smartphone, which has been adopted by the Telefonica group as well as AT&T, China Mobile and Brazil's Claro.

But O2's new directions go beyond handsets. It is creating and aggressively promoting left-of-field services that have traditionally come from disruptive players rather than established cellcos. Among these are its community oriented MVNO Giffgaff, which has just announced its pricing model, and a Skype-like low cost voice offering for international calls.

Giffgaff was announced last year, and aims to differentiate itself by offering customers a high degree of involvement in shaping its services (to the extent of customer support being mainly run on a community basis rather than by professional staff). Now the MVNO has unveiled pricing bundles - true to its ethos, created in consultation with users. The company said that feedback from its community clearly indicated that subscribers wanted "clear and fair pricing without hidden costs and restricting small print". That translates into bundles called 'goodybags', such as a £5 offer covering unlimited UK texts for a month, and a £35 option for unlimited UK calls, texts and data.

Mike Fairman, CEO of Giffgaff, told UK magazine New Media Age: "Increasing numbers of consumers demand to be more involved, engaged and interactive with brands and we've been built to respond to this. Our members said don't call it unlimited if it has limits, so we've deliberately made the offering very simple to fit with our no-nonsense philosophy."

This indicates one of the more intangible benefits of initiatives like Giffgaff, giving O2 a closer connection with user behavior and demands than conventional market research allows. However, analysts remain skeptical that the MVNO will generate significant additional revenue for its owner, although its low cost base and friendly public image make the risk low.

On the voice side, O2 is to compete directly with Skype, rather than embracing it as rivals like 3 UK have done. It will offer a new service that allows unlimited international calls for a fixed fee, starting from £5 a month. In beta test now, the offering will allow a customer to call one number, fixed or mobile, in one selected country at any time, for the fixed rate, and to change that number twice a month. For £10 users get three numbers, while five will cost £15. The terms and conditions state a fair usage policy of 5,000 minutes per month, though O2 will automatically terminate a call after one hour rather than charging the premium.

So far, the service covers 60 countries, and will be extended once the service goes fully commercial. It will remain in beta at least until July.