Mobile giant Vodafone Group plc has unveiled its plans to enter the highly competitive fixed broadband market, kept analysts guessing on its M&A plans, particularly regarding Verizon Wireless , and posted an annual net loss of £21.8 billion ($40.9 billion).
The company plans a cautious, low-cost entry into the DSL world, is reaping the rewards of its Verizon Wireless holding, and posted such an enormous loss because of asset write-downs that had already been flagged earlier in the year. In fact, the company's financials were better than expected, and Vodafone sweetened the new strategy pill with an even higher than expected dividend.
The fixed broadband move is just part of a much broader strategic rethink by the carrier that includes cutting costs, targeting developing markets, embracing new technologies, and ensuring relevance in a market that's moving almost too quickly for large traditional players.
Vodafone CEO Arun Sarin told analysts and investors that "the pace of change is increasingly rapid in our industry," with mobile users wanting to use multiple technologies, such as DSL, WiFi, and VOIP, to communicate. "We have to think about how we can include these technologies into the mobile company that we are."
He also noted that the growing popularity of services from the likes of Google, Skype Technologies and Yahoo means that "business models are changing. We need to make sure we don't get disintermediated from our customers… We don't want to get stuck in the middle" between a third-party service provider and the end user.
Inching into DSL
As expected, Vodafone is branching into the world of DSL so it can offer its consumer and business customers a combined fixed/mobile services package designed to encourage users to abandon their fixed voice services. Vodafone is just one of a number of major mobile players adopting a fixed/mobile service bundling approach.
Initially the operator will resell DSL services that it will buy wholesale from other carriers to keep upfront costs to a minimum, but may decide to invest in its own DSL equipment and unbundle the local loop at a later stage.
Vodafone will launch its first fixed/mobile service bundle in Germany in the third quarter of this year when it adds a DSL component to its existing "Vodafone ZuHause Zone" service, a flat-fee voice service designed to capture fixed line voice minutes away from the likes of Deutsche Telekom AG.
The company has also launched a similar service in Italy called Vodafone Casa.
In Germany, Vodafone has 630,000 ZuHause customers that generated 80 million ($103 million) in revenues in the past year, and has set a target for the end of the current financial year (ending March 31, 2007) of 2 million users generating Euros 240 million ($309 million) in sales.
Vodafone Germany will buy wholesale DSL services from its sister company, Arcor AG & Co. KG , a remnant of Vodafone's acquisition of Mannesmann in 2000.
The initial offer will be a simple service bundle, but Vodafone is also developing a single service delivery platform to ensure that "the services people love on their PCs are also available on their mobile phones, such as instant messaging," says Sarin. Ericsson AB and Nokia Corp. have previously been announced as Vodafone's convergence technology providers.
Thomas Geitner, head of Vodafone's "New Businesses and Innovation" division stated: "When we have accrued enough fixed broadband customers, then local loop unbundling might be economic in the long-term. We'll consider that on a market-by-market basis, and also look at the integration of other technologies, such as WiFi. But we don't need to build a full fixed-line infrastructure. The aim here is to target fixed-line substitution, add broadband access to the bundle, and develop a single service layer for converged services."
Verizon Wireless: Ball not in our court
CEO Arun Sarin also addressed the issue of M&A, in particular the speculation about the future of Vodafone's 45 percent stake in Verizon Wireless.
He said that, following the sale of the company's Japanese business, Vodafone will "look at which assets belong with us, and which belong with others. The U.S. business is performing very well, and its incremental revenue share is increasing. Every time we look at it, it has outperformed, and that trend is likely to continue. Vodafone is a very happy shareholder" in Verizon Wireless.
As for Verizon Wireless statements suggesting that the onus lies with Vodafone regarding any sale of its stake, Sarin stated: "I don't feel the ball is in our court at all. The board will always consider shareholder value."
He added: "We are very happy with the portfolio we have, and we don't have a big M&A agenda," but if there's a great opportunity to be had from an acquisition, "we'll take it."
Sarin and other executives talked about the potential growth offered by emerging markets, in particular the opportunities in Turkey, where the company recently acquired Telsim . Vodafone has also made investments in India, Romania, and South Africa. The CEO said that, in general, emerging markets were growing at three times the rate of developed markets.
And Paul Donovan, the executive in charge of emerging markets, noted that while average revenue per user (ARPU) is often lower in these territories, the margins can often be higher, and competition less intense: "There is great potential in these markets, especially where fixed telephony is weak or underdeveloped."
But future acquisitions will be tied to strict criteria, noted the CEO. They must enhance an existing local or regional presence, offer a clear path to overall control of the asset, and provide a return on investment within three to five years.
The big headline loss of £21.8 billion ($40.9 billion) was due to asset write-downs of £23.5 billion ($44.3 billion), which the carrier had warned about earlier this year.
But annual revenues, at £29.4 billion ($55.4 billion), and operating margins for the fiscal year to March 31, 2006, beat analyst expectations and the company's guidance, and the carrier announced it will return £9 billion ($17 billion) to shareholders later this year, with £6 billion ($11.3 billion) of that coming from the sale of the Japanese business. That's in addition to the annual dividend of 6.07 pence per share, higher than expected and nearly 50 percent higher than last year.
Vodafone also announced it is cutting costs by cutting 400 jobs from its headquarters -- mostly in marketing and group services -- and boosting its reliance on outsourcing various IT systems and data center tasks, a move it hopes will save it up to £200 million ($377 million) in operating costs by 2007/2008.
The carrier is also reengineering its backhaul capabilities, with the latter expected to save more than 10 percent per year in some countries. Vodafone currently spends £280 million ($528 million) a year on backhaul from its base stations to its core network.
And in addition to creating new services bundles to help boost revenues, Vodafone is looking to cash in on the growth of the online advertising market. "We'll be creating advertising revenue streams [to take advantage of] the emerging online advertising model" that has been successful for the likes of Google and Yahoo. "We intend to develop this over the next one to two years," said Sarin.