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Will Telefonica really want to buy MMO2 if it goes i-mode for mobile data?

Some time this year, UK wireless network MMO2 will go Japanese. That is, it will launch an i-mode mobile data service. Why? Easy: Peter Erskine wants to be taken over by Telefonica. Or at least, so say sources in the City of London's financial sector.

The City folk also think Erskine doesn't really stand a chance. He has the Spanish Government on his side, but even if he slims O2 down, Telefonica is conducting another love affair with South America, and won't get involved in the UK.

This time last year, of course, the rumours were saying that O2 would be taken over by Dutch group KPN. That fell through; but the brave words about how "we're doing better than KPN" aren't fooling anybody in the City. They, after all, can all remember the deals behind that deal, and why it fell through; and they know why Erskine wants to sell.

Jackpot bonanza for Erskine?

So, will i-mode make O2 look gorgeous enough to attract the Spanish-based giant?

"No chance," is the general response from those in the know.

The good thing about i-mode is that the losses are smaller. MMO2 has a rival product to Vodafone Live! - it's called O2 Active. It attracts new users who want to download clips, tunes, and so on; and so it depends on o2's ability to sign up Hollywood deals on new material.

Exactly how much this costs, is one of the industry's better kept secrets. But the number of users you have is what you divide the cost by. So if you have 150 million odd users around the world, you can divide the 20m cost of signing Spielberg's latest movie by 150m and so that makes it a tenth of the cost per user of what you have to pay if you're struggling along with 15 million.

Erskine introduced his i-mode plans last week - along with good financial results for the quarter - with the news that "we're part of a bigger family now." As part of the i-mode empire, with a deal signed with DoCoMo, the ALPU - O2's download load (average loss per user) - goes down to around ten pence per download, instead of around a pound - or at least, that would be my own, non-expert estimate of the order of magnitudes were talking about.

And that, say insiders, will make Erskine feel that his dropped handkerchief will smell sweeter, and more attractive to Telefonica. Hence his many flattering references to Telefonica as the ideal example of how run an i-mode network, during his presentation last week.

All is not hopeless

Well, it may well work up to a point. The deal isn't hopeless, say my sources. There are powerful forces working on his side. The Spanish Government, eager to increase the country's influence commercially in the EC, thinks Peter Erskine's plan is excellent.

And of course, MMO2 shareholders like the idea. They think that the company is probably worth a lot more on paper than an insider might judge, perhaps. The trouble is, Telefonica directors think the same. They think that the company would be worth taking over, but not for what they'd have to pay today.

Officially, O2 Active will run in parallel with i-mode as an O2 product. It's hard to see how this can be done, harder to see why it might be done. Anything Active can do, i-mode can do for a tenth of the price.

Erskine's theory, last week, was that the trick to i-mode is to change nothing; take it as it comes from DoCoMo, as Telefonica has done. Last year's potential partner, KPN, didn't do that, he says, and KPN's i-mode service has not been a success. Telefonica did, and has succeeded.

But behind that, there is more. The theory that O2 can survive and prosper as a purely UK firm with some European footholds in Germany, assumes that the company can invest properly to keep up. Well, if Erskine really thinks that, then one would expect him to be investing.

But where does the money go?

The thing is, all the announcements made last week point to economising. The high-speed 3G network, HSDPA, is a big step forward, but its real attraction is that it requires no big investment. O2's leading technical advisers are telling Erskine that they can't afford to look at rival technologies.

HSDPA gives, roughly, three times the data download speed of standard WCDMA, and covers more users. Exact figures aren't available, and until O2's 3G coverage can actually reach inside a majority of households, even in the London area, exact figures won't be available. But is three times enough, even if it's covering more users?

The comparison that Erskine's board is anxious to avoid making, is with the capabilities of truly high speed wireless data. Not WiFi - O2 is actually doing as much as can be expected with hotspots (well, apart from a few silly bugs in Connection Manager, which can't see WiFi nodes if the SSID isn't broadcast, for instance!) and certainly as much as any rival is doing. No, the threat to WCDMA 3G isn't from WiFi. It's from two rival pioneers: IP Wireless and Flarion.

It's the latency, stupid!

The point of their threat isn't that they are three times faster than HSDPA or cover four times as many users per cell. It's the latency. Flarion's Flash-OFDM technology in particular, is proving to overcome several of the nasty latency issues that plague 3G providers.

In the Netherlands,  T-Mobile is already trialling a Flarion system, and it is proving to be very effective in providing true broadband experiences for wireless users on the move. Is there a demand for this? Hard to say.

The point is, however, that if there is, then money has to be spent. MMO2 already has investment in place to run HSDPA; it would have to upgrade all its 3G masts to run Flarion technology. Maybe it would be worth it. Maybe it would be good money poured after bad; the point is that for Peter Erskine and his board, the gamble can't be played.

Well, not until after the sale to Telefonica, anyway. Play it now, and the bottom line looks rotten. Play it after the takeover, and it's just one of the costs of acquisition, a drop in the ocean of the giant Telefonica. And indeed, it's true, it would be a drop.

Trouble is, as my sources see it, it's not the only drop, and Telefonica knows it. It is trying to become the biggest mobile network in South America, buying up everything in sight. There are issues, costs, and fights. One more complication, including a battle in one of the most competitive markets in the world, with eight networks operating - the UK - isn't really what the Madrid office is looking for.

Don't expect Erskine to confirm any of this. His team is under orders to suppress any and all rumours of the Telefonica flirtation. Flirtation? What flirtation..?