Vodafone Profits From Economies of Scale Vendor Analysis Abstract: Vodafone is a multinational mobile operator that uses its size and influence to good effect when buying network infrastructure and creating new products. Our overall rating is positive. By Nick Jones, Stephanie Pittet and Nigel Deighton Strategic Planning Assumptions Vodafone will not establish its brand in the U.S. market through 2006 (0.7 probability). Vodafone will remain the largest non-chinese operator in terms of equity subscribers through 2008 (0.6 probability). Vodafone will expand its presence through operational partnerships, rather than major acquisitions, through 2008 (0.7 probability). Publication Date: 17 September 2003
2 Vodafone Profits From Economies of Scale Introduction Vodafone is the largest mobile operator outside China, with a presence in 28 countries. It grew very fast through acquisitions during the 1990s. Vodafone continues to lead the industry as it shifts from mobile voice to data communications. Corporate Viability Vodafone is big enough to operate in emerging markets, where voice services drive revenue growth, and in mature markets, where competition makes it harder to profit from growth in voice services. It accepts that it must tailor its strategy accordingly. For example, in high-penetration, mature markets like Europe, revenue growth springs from encouraging data use. Vodafone has launched a data-centric service Vodafone live! in these markets. Vodafone wants to expand the service into other mature markets. Since it acquired a controlling interest in Japan Telecom and its subsidiary, J-Phone, Vodafone has operated in one of the world's most sophisticated mobile markets. It has invested in third-generation (3G) licenses and in rolling out the associated infrastructure, spending particularly heavily in the United Kingdom and Germany. Although most GSM operators in Europe needed 3G spectrum to continue to improve voice capacity, the real (but risky) promise of 3G is data revenue growth. Size matters in mobile service provision, and economies of scale are becoming vital to reduce costs and debt in a capital-intensive industry. While far from perfect, Vodafone is the largest multinational mobile operator worldwide. It has the highest revenue and most international connections. China Mobile has more connections, but does not operate internationally. Vodafone is well placed to exploit its size. Strategy Rating: Positive Vodafone's strategy has three key elements: To be, or to own, a dominant operator in each of the regions in which it is present. Vodafone had almost 123 million equity connections worldwide at the end of June 2003. Equity connections are calculated by multiplying the number of connections an operator has by the stake a shareholder holds in the operator. Vodafone has a strong presence in Europe and the United States, and a weaker presence in Japan. To exploit its size and the consequent economies of scale in procuring infrastructure technology and in creating products and services. Most of Vodafone's networks use GSM, except for those in the United States (CDMA) and Japan (a 3G technology compatible with GSM migration to W-CDMA). To expand the mobile data services market. Vodafone recognizes the futility of competing on price to steal voice connections in mature markets opportunities for growth will be based on new mobile technology and services. Vodafone's execution of this strategy is promising, but still has some way to go. Although it has only a small share of the total market, Vodafone is the world's largest multinational mobile operator and is large by comparison with competitors like T-Mobile (62 million connections) and Orange (46 million connections). Vodafone's U.S. presence is incomplete it owns only 44 percent of Verizon, which itself has only 22 percent of a fragmented market. J-Phone is only the No.3 operator in Japan. Vodafone is likely to embark on further acquisitions and partnerships to complete its regional domination, especially in Asia. Vodafone is well-placed to benefit from the consolidation that will occur in more mature markets like Europe. It
3 has already triggered consolidation, for example, by acquiring Mannesmann, and has taken majority or total control of many of its European minority investments since 1998. Vodafone is starting to exploit economies of scale, and has shown that it can incorporate experiences in one country into multinational offerings, and roll out products like Vodafone live! and Mobile Office across several countries. New products are intended to support the company's strategy of encouraging mobile use, not just attract new connections. The future of mobile data is likely to involve content and services from many partners, and potential content partners are likely to focus on the size of market that an operator can provide. Vodafone's size and its goal of being the No.1 or No.2 player in national markets will make it an attractive channel for providers of localized and general content. Financial Rating: Positive Vodafone is a strong performer in an industry facing many challenges. Like many mobile operators, Vodafone has a heavy debt burden. But is in a better position than its key European rivals. Unlike many operators, Vodafone's ability to innovate, combined with solid execution in traditional voice services, mean it will be able to repay its debts. Vodafone has a good credit rating (single A with Standard and Poor) and the financial flexibility to invest in the execution of its strategy and to exploit acquisition opportunities if they arise. Although we rate Vodafone's finances as "positive," there are still many risks associated with the mobile industry. 3G network rollouts and new product developments will continue and will consume cash. Vodafone's ability to generate cash is dependent on consumers and corporations changing the way they spend money and use mobile devices. Vodafone's most recent quarterly report indicates that average revenue per unit has risen slightly in the United Kingdom and Italy and stabilized in Germany. Vodafone's financial situation could alter if it makes more tactical or major acquisitions. Tactical acquisitions are likely, and a major acquisition is also possible, especially in the United States. Vodafone already has nine nonequity partnerships with European operators, and these offer a costeffective and efficient way to enlarge Vodafone's share of the Asian market. Marketing Rating: Caution Corporate users mostly use mobile data for slow, expensive e-mail, which is difficult to cost-justify. Vodafone has established a group marketing function and is progressively re-branding wholly owned subsidiaries, but we are not convinced about the value of a global mobile network brand. A single brand may not resonate strongly across the huge range of ages, demographic characteristics, needs and attitudes of global mobile connections. Vodafone (and other mobile operators) may find that, as markets mature, they need to create new brands (or sub-brands) to attract market segments based on age, mobile device usage patterns, device type, leisure or business activities, location and possibly even the fashion statement that the user wants to make. Vodafone has marketed Vodafone live! effectively and established it as a strong European sub-brand, based on entertainment, fun and fashion, rather than technology features. Vodafone has extended its brand to include some handset models,withcustomizedscreensandahandsetlogo afurthersignofvodafone's global branding campaign.
4 Vodafone Profits From Economies of Scale If Vodafone is to change its customers' attitudes to using mobile devices and drive the transition from voice to data revenue, it needs marketing. Our "caution" rating is based on the many marketing challenges to overcome before this is achieved. The whole industry needs to shift from selling technology to marketing services that customers see as having value. Organization Rating: Caution Vodafone owns or has investments in 28 separate networks the challenges of integrating these organizations and factoring out common functions in a multinational, multicultural environment are huge. Vodafone has made a good start by creating corporate strategy, marketing and technology functions, but integration is proceeding relatively slowly. The evolution from voice to data services and from a national to a global perspective will require big changes to the skills and attitudes of Vodafone staff. One of the keys to a mobile operator's future success will be its ability to establish partnerships with a wide range of organizations, including distribution channels, content and service providers, IT services providers and application service providers. Vodafone live! will probably be forced to evolve from a closed, relatively small ecosystem to incorporate many more partners. Vodafone live! already has more than 100 partners. This suggests that Vodafone will need a much more wideranging and sophisticated partner management organization. Our "caution" rating reflects the significant, complex organizational change we expect to occur. Market Offerings We have opted to consider Vodafone's products and services from a regional perspective because regional technology and market differences make global summaries inappropriate. Products and Services in Europe Consumer Voice Services Rating: Positive Voice and Short Message Service (SMS) services still make up most of a European mobile operator's revenue. Vodafone has around 23 percent of the equity connections in Western Europe. For several years, it has had more equity connections than any other operator in the United Kingdom, Belgium, Switzerland and Ireland, and is not far behind in several other countries. Vodafone is clearly competing successfully in this voice-dominated market. The company will retain its market share in Europe even if revenue from voice services falls as markets become more saturated and competition from 3G networks expands voice capacity. Consumer Data Services Rating: Positive Vodafone is the acknowledged leader in European consumer data services. Vodafone live! is the first credible European mobile data community. It had 1.75 million connections and was available in nine Western European countries by the end of June 2003. The service demonstrates Vodafone's ability to leverage technology and business offerings across multiple countries. It succeeds because it focuses on human value, high usability, a simple "out of the box" experience and a standardized technology platform (see "Vodafone live! Shows It's Mobile Services That Count," TELC-WW-DP-0586). Other operators have copied the formula, but Vodafone should retain its European lead as long as it invests in the service and builds on its success. Vodafone's size and scope will be advantageous when seeking new content partners.
Business Voice and Data Services Rating: Caution Few mobile operators offer strong products and services for business voice and data. Although many offer corporate contracts, these are based on what the operator can offer easily, rather than what a company needs. Vodafone's challenges are similar to many other operators, and include: Applications like Microsoft Exchange that perform poorly over GPRS connections. GPRS pricing models are inconsistent across Europe and often inappropriate. Some are based on the amount of data transmitted, others enforce data quotas too small for corporate purposes. Problems offering pan-european cellular contracts with a single point of contact for multinationals. Vodafone supports pan-european pricing plans for voice and, increasingly, for data. Lack of integrated European Wireless Fidelity "hot spot" packages providing corporate billing and roaming. Considerable scope remains for offering more-innovative and appropriate corporate mobile data services in Europe. A multinational operator like Vodafone should be well-placed to provide these, but the rather weak offerings it has at the moment are reflected in our "caution" rating. Products and Services in North America Vodafone is present in the U.S. market through its 44.3 percent holding in Verizon, the mobile operator with the most subscribers in the United States (see "Vodafone Positions Itself to Conquer North America," TELC-WW-DP-0595). Verizon's roaming agreement with Telus Mobility gives it a presence in Canada on a CDMA network. Verizon holds a minority share in Telus Mobility's parent company. Consumer Voice and Data Services Rating: Positive Verizon, like many of its competitors in the United States, has tended to focus too much on attracting consumer users to its network. In the last 12 months, Verizon has gained more than 3 million new connections, most of them for personal use. But the company still offers users very few handsets. This may be a problem if, as in Europe and parts of Asia/Pacific, fashion becomes important to consumers when choosing handsets and operators. Verizon has managed to get customers to use text messaging for personal use. The company is successfully targeting the American youth market by launching: Consumer services for example, downloadable ring tones and games based on Qualcomm's Binary Runtime Environment for Wireless. A Multimedia Messaging Service for camera phones. It will be 2005 before the spread of compatible phones affect profits. Verizon is targeting the prepaid market more aggressively. About 20 percent of new subscribers in the last two quarters have been prepay customers. Verizon will need to balance the low average revenue per unit from these connections by targeting more high-use, postpaid consumer and corporate customers. Business Voice and Data Services Rating: Promising Mobile operators in the United States face many common issues: poor customer service, complex terms and conditions, complex pricing and too strong a focus on consumer users (see "Magic Quadrant for U.S. Wireless Service Providers 2003," M- 20-5615). But Verizon has started to address these problems. It put considerable effort into rolling out CDMA 20001x infrastructure to 80 percent of its network by 5
6 Vodafone Profits From Economies of Scale Network Technology the end of 2002. The company expects all of its network to use 1x by the end of 2003. Verizon's sales team deals with larger customers directly, but its performance has suffered from fast staff turnover. Verizon wants to attract business users by improving its corporate sales organization and focusing on sales of voice and data services that meet the demand of specific vertical markets. Verizon and Vodafone recently announced the launch of a PC Card that would allow users to roam between Verizon's CDMA network in North America and Vodafone's GSM networks elsewhere. Verizon now supports mobile number portability, which is particularly important for business customers. Products and Services in Japan Vodafone acquired a majority stake in J-Phone, the No.3 Japanese operator, in 2001, and is currently rebranding it as Vodafone. The change should be complete by October 2003 (see "Vodafone in Japan: Still No. 3 Despite Efforts to Dislodge DoCoMo," TELC-WW-DP-0590) Consumer Voice and Data Services Rating: Caution Japan is a sophisticated market, approaching saturation, with strong competitors. The leading operator, NTT DoCoMo, pioneered consumer-oriented data services. Since acquiring J-Phone, Vodafone has reduced costs and introduced several initiatives, including a campaign aimed at low-end, prepaid customers and the introduction of photo messaging and international roaming. Vodafone must be more aggressive and innovative if it is to overtake the No.2 vendor in Japan. Business Voice and Data Services Rating: Caution Vodafone does not offer strong corporate data services in Japan. J-Phone has been slow to exploit opportunities like machine-to-machine telematics outside the consumer space. Japanese mobile operators especially J-Phone have traditionally focused on consumers, rather than corporations. Vodafone could exploit its international strength in the corporate market, but has not yet seized the opportunity. Europe (2G and 2.5G) Rating: Positive Objective, comparable and independent network quality statistics are not available for Europe, but discussions with clients suggest that Vodafone's network quality is comparable to that of its competitors. Europe (3G) Rating: Caution Vodafone owns direct or equity share in 3G licenses in 10 Western European countries. Regulatory coverage targets differ by country. For example, Ireland requires coverage of 33 percent of the population by June 2006, Germany requires 50 percent by the end of 2005 and the United Kingdom wants 80 percent by the end of 2007. In cases like the United Kingdom and Germany, Vodafone has revised its original schedules and delayed 3G rollout. Vodafone's European 3G offerings will roll out slowly, and inconsistently. Because Vodafone has only a few 3G licenses, it may be unable to offer flexible, pan-european corporate 3G offerings. New offerings like Vodafone live! can operate successfully on 2.5G, so Vodafone does not need to rush into 3G deployments. But the patchy 3G rollout will mean that, for several years, 2.5G will remain the primary mobile data technology for Vodafone customers needing high data rates.
Customer Service and Support Gartner Dataquest Perspective North America Rating: Positive Verizon's CDMA network in the United States is being upgraded quickly to deliver 1x higher-speed data services. All of its digital network already supports 1x. 1x typically provides higher data speeds than rgsm technology's GPRS service. CDMA technology gives Verizon a clear upgrade strategy toward even greater 3G functionality. But CDMA is not compatible with most of Vodafone's networks worldwide. Most use the GSM standard, except Japan. Vodafone and Verizon have recently announced that they will sell multimode CDMA/GSM PC Cards for international roaming. Japan Rating: Caution J-Phone has a stable personal digital cellular (PDC) network with reasonable quality of service, although its coverage is inferior to DoCoMo's. Customers have reported worsening congestion and outages on the J-Sky data service. J-Phone's 3G W-CDMA coverage is also inferior to DoCoMo's and J-Sky 2G services are not available on the W-CDMA 3G network. By contrast, DoCoMo's Freedom of Mobile Multimedia Access (FOMA) system can seamlessly access 2G i-mode content. The W-CDMA rollout in Japan will provide Vodafone with useful experience that can be exploited elsewhere, but our "caution" rating reflects the many challenges that the J-Phone network faces. Europe Rating: Promising Vodafone's stable European market share suggests that, although customer satisfaction may not always be perfect, it is not causing serious damage. The success of Vodafone live! will increase satisfaction in some demographic groups, hence our "promising" rating. North America Rating: Caution Verizon, like many other mobile service providers, has had problems with customer service and support, in particular high staff turnover within its corporate sales and support organization. Gartner believes the company concentrates too much on the consumer market. Recent upgrades to its customer-facing systems and continued consolidation of billing platforms will continue to improve its capabilities. Verizon is taking steps to improve its attractiveness to corporate users and is working on better training and management of its direct sales staff. Japan Rating: Caution Service and support for J-Phone consumer customers is considered adequate. But J- Phone lacks the resources to focus on supporting corporate customers. There are very few sales and support staff for the corporate market. Vodafone is a solid multinational operator in a much stronger financial position than most of its peers. Companies seeking voice and data services in Europe or the United States should evaluate Vodafone subsidiaries as national suppliers on the basis of their local pricing and quality of service. But Vodafone needs to focus more on business needs if it is to serve multinational companies well. 7
8 Vodafone Profits From Economies of Scale Gartner Dataquest Recommendations Vodafone must: Keep innovating with Vodafone live! to retain a competitive edge. Resolve its brand issue with Verizon to gain technical and business synergy across the group. Executeoneconomiesofscaleandmakeuseofglobalpurchasingand procurement to maintain its position. Prepare a corporate strategy for when mobile data is commoditized in the next five years. Key Issue Which vendors will deliver effective mobile and wireless technologies, devices, infrastructures, applications and content? This document has been published to the following Marketplace codes: TELC-WW-DP-0597 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-267770 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 117268