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WIKI ANALYSIS
Vodafone Group Plc (NYSE: VOD) is the world's largest wireless phone company by market capitalization, which stood at $166.67 billion as of March 27, 2008. The company provides a range of mobile telecommunications services, including wireless voice and data communications. It has equity interests in 26 countries and partner networks in another 32 countries. In the U.S., Vodafone co-owns and operates Verizon Wireless under a joint venture with Verizon Communications (VZ).
The wireless market is changing rapidly, presenting a number of significant challenges to Vodafone. Historically, Vodafone has seen its growth mainly coming from developed markets, particularly in Europe. With average penetration now around 100%, these markets are mature and have limited future growth potential. In addition, competitive pressures in these developed markets are increasing following recent new market entrants and greater competition from incumbents. These competitive pressures are decreasing Vodafone’s pricing flexibility and spurring “price wars”, which are expected to continue into the future. Lastly, the regulatory environment remains challenging with continued regulator-imposed interconnect rate reductions on incoming calls across many markets.
However, Vodafone's large scale in Europe gives it an advantage over competitors, allowing it to source handsets and equipment at lower prices. The firm can also develop a product in one country and roll it out to many others at minimal additional expense. Vodafone generally has done a great job of using these advantages to enter new markets, especially emerging markets such as India. Though emerging markets currently account for only one fourth of sales, they are expected to become the main driver of future growth. Finally, Vodafone aims to stimulate revenues with innovative developments in their 3G technology offerings and improve operational efficiency through cost reduction efforts.
History and Company Overview
The company was incorporated under U.K. law on July 17, 1984, as a subsidiary of Racal Electronics Plc. It became an independent company in September of 1991, at which time it was renamed as the Vodafone Group Plc. Between 1991 and 1999, Vodafone consolidated its position in the United Kingdom and enhanced its international interests through a series of acquisitions. As of March 31, 1999, the company had subsidiary mobile network-operating companies in six countries, as well as equity interests in a further seven countries and a proportionate wireless customer base of 10.4 million. Further acquisitions have since expanded Vodafone’s size and reach even further, making it a dominating force in the global wireless market.
Vodafone's principal mobile operations are located in Germany, Italy, Spain, the U.K., and the U.S., while the company's wireless networks also cover other regions around the world. In total, Vodafone maintains a mobile customer base of about 241 million subscribers as of September 30th, 2007.
In addition, Vodafone has numerous arrangements with other wireless companies that extend its presence to a further 40 countries. These “partner markets” enable Vodafone to market a range of products and services in that operator’s territory. The company’s strategy of partnering with regional wireless providers allows it to extend its brand reach into new markets and create additional revenue without the need for equity investment. Through arrangements such as these, Vodafone reaches another 630.3 million registered customers.
| Annual income data, in £ millions | FY2003 | FY2004 | FY2005 | FY2006 | FY2007 | H107/08 | |
|---|---|---|---|---|---|---|---|
| Revenue | £30,375 | £33,559 | £21,370 | £23,756 | $25,359 | £16,994 | |
| Operating expenses | £36,166 | £37,795 | £31,582 | £32,468 | £33,945 | £11,786 | |
| Operating income | (£5,791) | (£4,236) | (£10,212) | (£8,712) | (£8,586) | £5,208 | |
| Net income | (£9,055) | (£8,127) | (£13,752) | (£13,270) | (£4,325) | £3,327 | |
| Profit margin | -29.8% | -24.2% | -64.4% | -55.9% | -17.1% | 19.6% | |
Note: Vodafone's fiscal years end on March 31st of each calendar year (i.e. FY2007 ended on March 31, 2007).
Market operations
Vodafone's principal mobile operations are located in Germany, Italy, Spain, the U.K., and the U.S., while the company's wireless networks also cover other regions around the world. In total, Vodafone has equity interests in 25 countries. The total number of customers in these 25 countries amounts to 241 million.
In addition, Vodafone has numerous arrangements with other wireless companies that extend its presence to a further 40 countries. These “partner markets” enable Vodafone to market a range of products and services in that operator’s territory. The company’s strategy of partnering with regional wireless providers allows it to extend its brand reach into new markets and create additional revenue without the need for equity investment. Through arrangements such as these, Vodafone reaches another 518 million registered customers.
Network infrastructure
Network infrastructure is fundamental to any mobile operator’s ability to provide wireless services. Vodafone’s mobile network enables customers to place and receive voice calls and take advantage of various wireless data services. Vodafone offers its services over a traditional 2G GSM network, and in certain areas, over a more advanced 3G W-CDMA network.
2G
Vodafone operates 2G networks in all its mobile operating subsidiaries, principally through GSM networks, offering customers services such as voice, text messaging, and basic data services. In addition, all of the group’s controlled networks utilize GPRS technology, providing wireless access to the Internet and other data networks. Data transfer speeds over this type of network, however, are somewhat sluggish, with maximum download/upload speeds reminiscent of the days of 56K dialup modems.
3G
Vodafone’s 3G networks provide customers with broadband-speed wireless data access, allowing data download speeds of up to 384 kilobits per second (“kbps”). This more advanced network allows high-speed Internet and e-mail access, video and music downloads, mobile TV, and other data services, in addition to existing voice and data services. Vodafone has received licenses to operate 3G networks in all of its main markets, where it has achieved the leading position on 3G coverage and quality of service. Now the company is working to expand its 3G coverage beyond a few of its largest markets. No assurances can be given, however, that Vodafone will be successful in obtaining 3G licenses for other markets. Even with regulatory permission, implementing 3G coverage requires substantial updates of the company’s existing network infrastructure, etc. This can be quite expensive; in FY2006 alone, Vodafone spent £4 billion on 3G-related expenses.
Products and services
As mentioned before, Vodafone provides a wide range of mobile voice and data telecommunications services. These services are provided to both consumers and corporate customers using both pre- and post-paid plans.
Voice services
Voice services are Vodafone’s single largest source of revenue, accounting for a substantial portion of the company’s FY2007 revenues. As Vodafone’s core service offering, the group is actively trying to encourage growth in the usage of its voice services. Vodafone has made pricing more customer-friendly in several different markets. In many cases, these new price structures include large minute bundles, which have driven significant usage growth in many of Vodafone’s markets, although the per-minute revenue is declining.
In addition to revenues from outgoing voice traffic, Vodafone generates interconnect revenues from incoming traffic. Interconnect revenue is generated when a customer on a fixed line or another mobile operator’s network calls a Vodafone customer. Vodafone charges the other operator for the use of its network, and this income accounts for approximately one fifth of all mobile voice revenue. At the same time, Vodafone incurs an interconnect cost when one of its customers calls someone on either a fixed line or another wireless company’s network.
Non-voice services
Vodafone's non-voice services include the standard text and picture messaging services, as well as Vodafone live!, the company's integrated communications and multimedia service. Targeted primarily at the young adult segment, Vodafone live! has been launched in a total of 24 countries. The company has continued to develop Vodafone live! by offering a new range of handsets and service plans to complement the service.
The company launched an enhanced version of Vodafone live! for its 3G network in 13 different markets, with an initial portfolio of 10 devices. The high-speed 3G network provides customers with the capability to view news broadcasts, sports highlights, music videos, movie trailers, and other video content, at a quality approaching that of digital television. Vodafone has secured music from some of the world's greatest artists through agreements with EMI, Sony BMG Music Entertainment, Universal Music, Warner Music, and other independent record labels.
Operating efficiency
As a telecom provider, the majority of Vodafone’s accounting costs are government-regulated interconnect fees and depreciation of network capital expenditures. Vodafone launched a program in fiscal 2005 named One Vodafone, which aims to achieve greater operating efficiency. The program intends to leverage Vodafone’s scale and is focused around:
- network and supply chain management
- shared service organization
- centralized data centers and application development
- customer management
- more efficient procurement of handsets
- improvement in roaming fees
Operating efficiency could be negatively affected by increasing competition, as well as the costs associated with Vodafone's further expansion of its next-generation 3G network.
Trends and forces
Market penetration
Many of Vodafone’s key markets are mature and somewhat saturated, with penetration rates over 100% in some; this is largely due to customers who own more than one SIM card, which is, broadly, the company’s basis for defining a customer. The group’s estimated penetration rates for its principal markets as of December 31, 2005, is shown in the graph below. Though there is no Vodafone-branded service in the U.S., the company holds a 45% stake in Verizon Wireless, estimated to be worth $40-$50 billion, or about one third of Vodafone's market capitalization.
Vodafone has had tremendous growth over the past decade as a result of its expansion into various European countries. With average penetration now around 100%, these markets are more or less mature and have little potential for future growth. As growth in these markets slows, further expansion will have to come from emerging markets. In these regions, the average penetration of wireless service is substantially lower, as low as 30% or less. This provides the opportunity for significant growth as disposable incomes rise in these countries.
Revenue generation
The revenue from outgoing voice traffic for Vodafone (and any other telecom operator) is driven by the size of its subscriber base and the amount of revenue that each customer generates. This average revenue is expressed by the industry as Average Revenue Per User (ARPU), which quantifies the average monthly revenue any customer is generating. In fiscal 2006, Vodafone saw a decrease in overall ARPU due to increased competitive pressures, specifically in the mature markets of Western Europe. The rise in competition has limited Vodafone’s ability to price its services freely, as it has to toe the line between maximizing profits and losing market share.
The decline in overall ARPU was offset by a strong organic increase in the size of its customer base. As shown in the figure below, all of Vodafone’s major European markets showed strong growth in fiscal year 2006. As noted before, however, this growth is expected to slow somewhat as a result of the high wireless penetration rates in these mature markets.
In addition to revenues from outgoing voice traffic, Vodafone generates interconnect revenues from incoming traffic. Interconnect rates are fees that competing operators charge each other for the use of their respective networks when customers call outside the network of their own operator. These interconnect rates are regulated by government agencies; in many of the mature Western European markets, these agencies have been lowering rates in an attempt to make wireless service more affordable for the average customer. This can both harm and benefit Vodafone; it doesn’t have to pay as much for interconnect fees, but it doesn’t collect as much either.
Comparison to competitors
Vodafone's many markets have different regulatory issues and currencies. In most markets, it is the number-two wireless company, causing it to be the focus of competitors. Below table summarizes the main competitors of Vodafone in its key European markets.
| Key market | Main competitors |
|---|---|
| Germany | E-Plus, O2 , T-Mobile |
| Italy | TIM, Wind, 3 |
| Spain | Amena, Telefónica Móviles, Xfera |
| U.K. | Orange, O2, T-Mobile , 3, Virgin Mobile |
| U.S. | AT&T Wireless , Sprint Nextel, T-Mobile |
As Vodafone has a number of different competitors in each market, there are very few companies that could be considered "rivals" with Vodafone beyond one or two particular markets. As such, it's better to look at Vodafone's performance in each of its competitive markets and aggregate the results. As shown in the table below, key metrics include customer growth, ARPU, service revenue growth, and EBITDA.
With Vodafone's focus on its 3G offerings to increase (non-voice services) revenues, the company managed to outgrow its customer base compared to market averages and maintain a higher than average monthly ARPU. Only in Italy, where competition has continued to intensify with the mobile network operators competing aggressively on subsidies and, increasingly, on price, has Vodafone grown below market standards. Through continuous improvement in operational efficiency, Vodafone hopes to maintain its leading position in its principal markets.
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