O2, the UK mobile phone operator owned by Telefonica of Spain, is set to enter the fiercely competitive broadband market and offer high-speed internet access to its customers before the end of the year.

Peter Erskine, chairman and chief executive of O2, yesterday signalled it could offer “bundled” services made up of broadband and mobile phone calls.

O2’s likely move into broadband, or digital subscriber line, would pit it against BT, its former owner.

“It is pretty certain we will go down the DSL route,” said Mr Erskine. “If we do DSL alongside mobile we then have just about everything the customer wants.”

Mr Erskine said O2’s UK business could learn from the experience of its sister operations in Europe. O2’s business in the Czech Republic provides bundled services of mobile phone calls and broadband.

O2’s German business will offer similar bundled services this autumn. Its customers can pay less for mobile phone calls made inside the home compared with outside.

Mr Erskine also highlighted how Telefonica, which bought O2 in February for €26bn ($33.5bn), provides television using internet protocol standards. However, he played down the prospect of O2 providing similar services in the UK in the short term.

The development of the UK broadband market is focused on “local loop unbundling”, a process that enables BT’s competitors to take control of the landlines that run from phone exchanges to people’s homes.

O2’s UK business is considering a number of options to enable it to move into broadband.

They include O2 doing local loop unbundling or buying an internet service provider. Alternatively, it could lease broadband capacity.

O2 has no plans to offer phone calls over landlines to its UK customers, and will focus its broadband services on data. However, people using broadband can make voice-over-internet-protocol calls.

Meanwhile, O2 reported its UK business had 16.3m customers after adding 359,000 during the first three months of 2006. Average spending by customers was £2 ($3.8) higher at the end of the quarter compared with a year ago.

Telefonica, among the world’s largest telecoms operators, said yesterday that consolidated group revenues climbed 45 per cent, to €12.04bn.

European acquisitions and customer growth in Latin America had helped Telefonica to post a 40 per cent year-on-year increase in first-quarter net profits, to €1.27bn.

The company said that on a strictly comparable basis, sales growth was 8.9 per cent and operating income ahead 6.2 per cent.

Operating margins suffered a deterioration of 2.3 points, to 38.9 per cent.

Telefonica Moviles, meanwhile, reported a 17.7 per cent rise, to €4.3bn, in first- quarter revenues, thanks to new customers and favourable currency movements in Latin America.

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