As service revenues fall in key markets, Vodafone is banking on its huge infrastructure upgrade, Project Spring, to support new offerings and boost profit and market share. The UK-based giant will add an extra £1bn to the budget for the project, making a total of £7bn ($11.2bn) to be invested by March 2016 ‘ a year earlier than the deadline set when the plan was originally unveiled in September.
This project, which will focus on LTE and fiber in Europe and selected other markets, is only part of a larger network investment plan, which will total over £19bn by 2016, according to CEO Vittorio Colao. The hope is that Vodafone will put clear water between its own network reach and capabilities, and those of competitors in pressurized territories such as the UK and Germany (where the firm has also acquired a wireline operation, Kabel Deutschland, to support a move into quad play services). Indeed, the focus is increasingly on Germany as being the heart of Vodafone’s new competitive strategy, which will rely on a full service offering underpinned by massive investment in advanced network technology. However, it will not be the only company spending big sums on an infrastructure differentiation ‘ Deutsche Telekom has already announced an even bigger capex plan to the tune of $30bn (see inset).
This represents the change of thinking which infrastructure vendors have been waiting for. After years when the European operators have been responding to recession-spooked investors by cutting costs and dragging out upgrades, they may now ‘ driven partly by recovery and partly by the sheer weight of data demand ‘ take the reverse approach. That will involve investing heavily in order to be in pole position to ride the recovery when it comes, and to have a suitable platform on which to build new revenue streams such as internet of things. Ericsson, in particular, has pointed to the start of a shift from low margin network modernizations and coverage expansions in Europe, to capacity-driven LTE projects which are far more profitable for the vendor and capex-intensive for the carrier. But the shift can deliver a network which is transformed, in terms of cost efficiency and the ability to support new services and user experiences ‘ not just marginally improved or patched-up, as with many modernization programs.
Other giants like Telefonica may still hesitate, but Vodafone and DT are increasingly head-to-head in strategy ‘ to be full-service wherever possible, buying fixed line units and making Wi-Fi alliances to fill gaps ‘ and in a resolution to spend big sums to achieve cutting edge networks.
Late last year, Deutsche Telekom outlined a $30bn, three-year capex spending plan that aimed to revolutionize its home network in Germany. In fact, about one-third of that budget was to upgrade its US mobile networks via its T-Mobile USA subsidiary, which has since been merged with MetroPCS. However, that still leaves a hefty $20bn for Europe, plus additional money DT plans to spend on acquiring fixed broadband assets in markets where it is mobile-only (see inset), a strategy that also mirrors Vodafone’s.
Most of the European network budget will go on DT’s home market, a reaction to the increasingly aggressive presence of broadband rivals Liberty Global and Vodafone, both of which have made strategic acquisitions ‘ Liberty of Kabel BW last year, Vodafone of KDG. The telco will also spend €4.1bn to €4.5bn on German broadband from 2014 to 2016, up from a previous average of €3.6bn.
Highlights of DT’s radical network plan include a new type of hybrid home base station featuring both LTE and Wi-Fi, with future models running on a single software defined radio. This mirrors the development of integrated Wi-Fi/cellular public access base stations for HetNets, but this is one of the first carrier roadmaps to include similar access points for indoor private use. DT may also harness these devices in the style of FON and allow passers-by to use surplus capacity on subscribers’ cells ‘ an approach seen at some carriers such as Free in France, and a good differentiator against cable even for fixed line customers.
Obermann said: ‘In the long run, we’d like to see routers to combine the two (LTE and Wi-Fi) and then provide even better experience for our customers. Then you combine the characteristics of a wireless network, the speed, but peak speed with the capacity of a fixed line network. So we’re working on this. The introduction date is not yet clear, but ‘ in the next 2-3 years.’
Also important is the fiber-to-the-curb wholesale strategy called VULA (virtual unbundled local access). CEO Rene Obermann noted that unbundled pricing pressure was going to be halted by the European Commission shortly, allowing for investments of this kind to be made profitably. Fiber-to-the-curb would allow for vectored VDSL, offering 200Mbps into a building and 90Mbps upload. This, he said in December, was the secret to taking on cablecos, given that cable may be able to beat the download speed, but cannot not match 90Mbps upload, thus pushing cable out of genuine cloud services. In parallel with this, DT will invest in Wi-Fi hotspots, and will lift the number it has in Germany to 18,000 in the next couple of years and offer them free to its broadband and cellular customers.
Being first to take the plunge into cutting edge broadband networks does not necessarily deliver instant results ‘ for Verizon it did, to some extent, but there has been a more delayed reaction for SK Telecom, Telstra and other operators which have not shied away from hefty upgrades. But most of those examples are now seeing significant gains in market share through differentiated services and QoS, while pursuing additional business models.
Ericsson and its rivals will hope that, if Vodafone and DT are making the leap in Europe, their competitors will have to follow, even though many are incumbents struggling with high debt levels and the eurozone crisis. ‘The clear, underlying message is that most companies in Europe are going to have to step up their capex in order to accelerate convergence to set off the challenges coming from Vodafone,’ Carlos Winzer, SVP of corporate finance at ratings agency Moody’s, told Bloomberg.
Vodafone is certainly keen to stress the speed and scale of its upgraded LTE plans. The operator also announced that it would start upgrading to some elements of LTE-Advanced in Europe from mid-2014. CTO Stephen Pusey said the first item from the LTE-A menu to be implemented would be carrier aggregation, which would be rolled out in every major city by March 2016 to maximize capacity and data rates. By then, Vodafone plans to have deployed 71,000 4G cell sites on top of the 11,000 it has switched on in Europe so far. More than half the new sites are covered by the Project Spring budget. ‘That is a spectacular build, and it will make a difference,’ Pusey said, adding that several suppliers were signed up, but there was a need to ‘highlight the increased volumes to them’.
Project Spring will also include investment in small cells and Wi-Fi to fill gaps in coverage or capacity, and in 3G and xDSL upgrades in emerging markets.
The infrastructure initiative is the first announced element ‘ apart from payments to shareholders ‘ of an expected spending spree once Vodafone completes the same of its stake in Verizon Wireless to its US partner. But while that $130bn windfall, from one of the biggest telecoms deals ever agreed, will be an important boost to the operator’s cash pile and expansion potential, the money will not last forever if Vodafone cannot also reverse declines in revenue.
Organic group service revenues, excluding currency fluctuations and M&A, fell by 4.2% year-on-year in the first half of Vodafone’s fiscal year, to September 30, missing analysts’ estimates at £20.04bn. Group EBITDA was down 4.1% to £6.6bn, which contributed to an 8.3% decline in adjusted operating profit to £5.71bn.
As in most quarters since the Eurozone crisis struck. Vodafone’s southern European markets were the biggest drag on its results. Organic revenue decline in the first half of fiscal 2013, including the effect of cuts in termination fees, was 15% in the southern region (Italy, Spain and Greece), and 3.9% in northern and central Europe. Service revenues at the AMAP (Africa, Middle East, Asia-Pacific) business grew by 5.8% to £5.89bn.
The operator expects the northern European economy to return to growth during this year and the southern area in 2014.
‘We expect that during the next three to five years, Europe will definitely improve,’ Colao said. ‘Therefore, we prefer to have a stronger, more performing and more differentiated operation by then so that we can come out at a higher speed than everybody else.’ Harnessing that theory, Vodafone will invest heavily in its most difficult markets to ensure it can ride the recovery when that occurs. It plans to double its investments in Italy to €3.6bn ($4.8bn) over two years, on top of the usual annual spend of €900m. The extra money will go on fixed and mobile broadband infrastructure, particularly to bring coverage to 25% of the population by 2016.
In other words, in Italy as in Germany, Vodafone will be using the Verizon windfall to do what some rivals will be financially constrained from copying ‘ investing mightily in networks and service bundles now, in order to reap the rewards when the economy picks up.
The Project Spring investment plan:
Mirroring other major capex plans, spanning fixed and mobile, notably Deutsche Telekom’s, Project Spring will have the following key elements:
Total budget £7bn ($11.11bn) during the next two financial years.
Europe:
£3bn ($4.76bn) to expand 3G coverage and roll out LTE ‘supported by single RAN and high capacity backhaul.’ The aim is to deliver ‘the best voice and video experience, using small cells and Wi-Fi to differentiate our network performance.’
£1bn in DSL and fiber access networks
An estimated $150m on Project Metropolis, to increase mobile masts in London by 30% and boost 3G and 4G indoor coverage by 98%. Vodafone has been criticized by the UK regulator for being the only cellco not to meet 3G/4G coverage targets across the country.
AMAP (Africa, Middle East and Asia-Pacific):
£1.5bn ($2.38bn) to extend 3G coverage in major cities and key regions.
£1bn to build DSL or fiber in key business areas to support fixed/mobile services.
Enterprise: £500m ($794m) to invest in systems and assets to support the enterprise services business, including machine-to-machine (M2M) capabilities, IP VPN coverage, data center hosting, and ‘traffic routing systems to build our carrier services business’.
Customer experience management (CEM): £1bn to improve online and mCare mobile app systems, accelerate deployment of mobile payment systems in AMAP and some European markets, and introduce ‘new and standardized systems to simplify Vodafone’s operations and improve the experience for our customers’.
GTS strengthens Deutsche Telekom’s eastern Europe ambitions
Operators in Europe see bundled services as the main way to increase revenue and market share in a region where competition is fierce, recession is still biting, and the prices of individual services are falling. So wireline-only providers are busily signing MVNO or carrier Wi-Fi deals, while mobile-only carriers are looking for fixed line acquisitions.
Vodafone is the boldest, especially with its recent purchase of Germany’s Kabel Deutschland. This pits it against incumbent Deutsche Telekom, despite a network alliance between the two, and against Europe’s leading cableco, Liberty Global.
And DT itself is on the look-out for fixed lines in markets where it only has airwaves. It plans to buy GTS Central Europe for €546m ($730m) from a group of private equity firms as part of its strategy to put eastern Europe at the heart of its growth. The transaction has been in the works since talks began in May and will bring DT fixed networks in Poland and Czech Republic, where it only has mobile operations.
DT is less enthusiastic than Vodafone or Orange about expanding in emerging markets in Africa or India, but aims to build on its existing presence, and regional influence, in the eastern area of the European Union, which still has better growth potential than the saturated west. However, this growth is becoming more about bundles and quad play than mobile, and in a strategy review earlier this year, the German carrier said the key issue was whether it should exit eastern European markets where it was cellular-only, or look to acquire broadband assets.
The answer in Poland and CR was clearly the latter, hence the acquisition of GTS ‘ a ‘further element for developing our integrated market position comprising mobile and fixed-line network services,’ as CFO Timotheus Hottges put it in a statement. He added: ‘Strengthening our position with business customers is also a core element of our strategy.’
GTS offers fixed broadband services to residents and business customers, and other enterprise offerings such as data center operations. In 2012 it recorded adjusted EBITDA of €87m on revenue of €347m. It also has activities in Slovakia but these will be retained by its current owners, a consortium including private equity firms Columbia Capital, HarbourVest Partners, Innova Capital and M/C Partners.
DT also holds fixed line investments in Croatia, Greece, The Netherlands, Romania, Hungary, Slovakia, Macedonia, Albania and Bulgaria and as well cellular networks in a wider range of countries.