Round the world, mobile operators are facing the conundrum highlighted last week by Vodafone and China Mobile ‘ the more they build out 4G, the harder it gets to match that investment with higher revenues.
The largest Chinese operator has just awarded its next round of TD-LTE infrastructure contracts, including about 100,000 base stations, with a further 160,000 to be purchased later this year. This will come at a huge cost of about CNY110bn ($17.6bn) this year on mobile networks alone ‘ Mobile’s total capex, including wireline, will be about CNY225bn in 2014, up 20% on last year’s outlay. By the end of this year, Mobile will have about half a million TD-LTE base stations in action.
China Mobile rolled out 4G well ahead of its rivals, and late last year was granted the licence to convert its huge trial networks to full commercial use. Its speed of roll-out was partly to compensate for the challenges of its 3G deployment, in which it was forced to use the TD-SCDMA technology, inferior in ecosystem and performance to its competitors’ systems. Its aggressive moves are showing through in the subscriber numbers ‘ it had 4.8m LTE subscribers at the end of April, having signed up 2m in that month alone, though the figures are still tiny compared to China’s vast total mobile base of 1.26bn people. China Mobile’s own total base is 784.6m, or 62.4% of the total, and it reported net adds of 3.5m in April.
But the company is already cutting LTE prices ‘ by as much as 50% next month ‘ sacrificing the ‘honeymoon period’ of premium rates which a first mover might expect in the early, and most capex-intensive, months of its build-out. The operator’s chairman Xi Guohua told a shareholder meeting that the huge deployment was essential, despite its current heavy impact on profitability. ‘Our net profit can continue to grow for another two years if we don’t make investments in new business now. But then the company would be over,’ he said.
Mobile, like other operators, recently received the freedom to set its own pricing, rather than the government setting price bands. Its sharp drop in rates for its premier service indicate the pressures it is under, many of them shared with its peers round the world. It is facing rising competition, as MVNOs have just been allowed to enter the market, some of them carrying powerful brands such as Tencent and Alibaba. Mobile’s revenues from voice and text are under siege ‘ the number of SMS messages sent over its network fell from 163.8bn in Q113) to 153bn a year later.
All this, combined with the capital outlay, is weighing on profits. In unaudited results for the first quarter, profit attributable to equity shareholders fell by 9.4% year-on-year to CNY25.2bnm while EBITDA margin narrowed from 42.6% to 37.2% in the same period.
If that seems a poor reward for such intensive LTE efforts, the pain is felt by many other operators, which have no choice but to expand networks expensively in order to support rising data usage, but which see their profits squeezed by those bills, and by rising competition from peers, MVNOs and over-the-top players; and high subsidy bills.
Vodafone, in its last quarterly results statement, failed to translate growing LTE and broadband data uptake into increased revenues or profits, both of which were falling. Vodafone is forced to invest heavily to keep up in its ultra-competitive European home markets, but nearly all its growth is coming from newer territories like India, where it turned a profit for the first time.
Vodafone said that EBITDA earnings were down 7.4% in its fiscal year to March 31, to £12.8bn (€15.7bn/$21.6bn), and revenue was down 3.5% year-on-year. The revenue drop was sharpest in Europe, where sales fell 9.1% compared to the previous year, while there was a 6.1% rise in the AMAP (Africa, Middle East and Asia Pacific) region. The carrier made impairments totalling £6.6bn in recession-hit Germany, Spain, Portugal, Czech Republic and Romania and according to forecasts by analysts at Ovum, ‘none of Vodafone’s major markets will be growing revenues in the coming years, meaning that they need to squeeze more off what they have’.
On an adjusted basis, excluding the £45bn from selling its stake in Verizon Wireless, the company posted operating profit of £4.9bn, just under its target of £5bn, and free cashflow was down 24% to £4.2bn.
Nevertheless, CEO Vittorio Colao said he was ‘confident about the future of the business given the growth prospects in data, emerging markets, enterprise and unified communications’ ‘ even as he cut forecasts for the current fiscal year, predicting EBITDA in the range of £11.4bn to £11.9bn, down even further from £12.8bn. In another echo of China Mobile, one of the main factors in the reduced earnings forecast was the huge outlay on Vodafone’s Project Spring infrastructure upgrade, which includes LTE. However, analysts are generally positive that those upgrades will deliver growth in future and the share price was up slightly after the results announcement, indicating that the markets are buying the arguments which China Mobile has been trying to sell to its own nervous investors.
The acceleration of capital expenditure under Project Spring will also put pressure on free cashflow, but Vodafone said it expects adjusted cashflow to remain positive, before any acquisitions or spectrum and restructuring costs, and it is targeting a further increase in the dividend. Capex will grow to £19bn in the period 2014-2015, from £7.1bn last year, and Vodafone claims this will start to translate into better ARPU and lower churn from late this year, and into better sales, profits and cashflow in the longer term. Overall, it is targeting payback within seven years.
In addition, Vodafone will ‘definitely consider’ more acquisitions, said Colao, following its recent purchases of cablecos Kabel Deutschland in Germany and Ono in Spain, in the hunt for a quad play across Europe. It is not clear whether the firm will seek to launch a full fixed/mobile offering in its home market of the UK, which has a particularly competitive environment, although its economy is showing signs of recovery. Vodafone sits behind rivals EE and Telefonica O2 there, and also faces a fourth player, 3UK, plus a host of MVNOs and the likely re-entry of wireline incumbent BT into mobile services.
‘It is time to muscle up in Vodafone UK,’ Colao said on the earnings call. The firm aims to provide outdoor 4G coverage to 99% of the population by March 2016 and will decide on whether to launch fixed broadband in the coming months, it said.
One factor in that decision is likely to be the movements of BT, whose CEO Gavin Patterson told UK newspapers of plans to ‘shake up’ the mobile market ‘ as the once-sleepy incumbent has already done on the TV front with a powerful launch of sports content against Sky. According to comments made to the Daily Telegraph newspaper, Patterson wants to re-enter both the business and consumer markets. ‘Customers can see that we’ll be able to shake up the market, be that the business market or the consumer market ‘ They’ve seen what we’ve done in sport and see the potential for us to do something similar in the mobile market,’ he said.
BT exited the mobile space when it sold off its cellular arm, which was later rebranded O2 and then sold to Telefonica of Spain. Although it has offered limited mobile services via MVNO deals, the firm is said to be planning its own business services within the next three months, and a consumer proposition by next April. It will combine its own spectrum in 2.6GHz; a new MVNO deal with the largest cellco, EE; and its extensive network of 5.4m WiFi hotspots, to create a capacity level to rival the more established cellcos’ networks. BT is also reported to be upgrading its HomeHub product to incorporate an LTE femtocell as well as a WiFi access point, and it supports the ‘inside out’ model, in which residents leave some of their cellular or WiFi capacity open for passers-by to use. BT already has a partnership with homespot pioneer FON. Its own spectrum consists of 2x15MHz or paired and 1x20MHz of unpaired 2.6GHz frequencies and of course, it has a nationwide fiber network with which to backhaul its own base stations.
‘We’re combining those [technologies] all together to be able to create broadband services for customers that you can bundle with fixed so they can access the internet when they’re out and about with a very high quality service that really performs extremely well on things like video,’ Patterson said, with the kind of words that will make Vodafone wince.
The company in pole position in UK LTE is currently EE, which was controversially given a headstart when regulator Ofcom allowed it to deploy 4G in its 1.8GHz GSM spectrum, before its rivals had the chance to acquire their own LTE frequencies at auction (Vodafone and O2 have their GSM networks in the less favorable 900MHz, while 3UK is 3G-only). Last week, EE said sales of LTE contracts overtook those on 3G for the first time and that its 4G customer base had grown from 2.9m at the end of March, to 3.6m now, helping to drive a 66% rise in data usage over the past year.
‘Our mobile devices have effectively become mini TVs with video traffic already making up over half the data on our 4G network,’ noted EE chief executive Olaf Swantee, in a statement. The firm, which expects video to account for two-thirds of its traffic in another couple of years, recently founded the Mobile Video Alliance, which aims to build bridges between cellcos and the broadcast and content industries to cooperate on a common experience.
Vodafone strengthens African unit:
As Vodafone sees much of its growth coming from India, Turkey and key African markets like Kenya and South Africa, some of its M&A dollars are likely to be spent in these areas. It recently announced that its South Africa-based majority-owned venture, Vodacom, would buy Neotel, the second largest fixed line provider in the country.
Vodacom will pay Rand7bn ($676m) for Neotel, which is currently majority-owned by Tata Communications of India. Seven-year-old Neotel is the major fixed-line competitor to the incumbent, Telkom, and also has significant holdings of mobile broadband spectrum. This shows Vodafone’s quad play strategy starting to go beyond Europe and into its AMAP division.
Vodacom has already refarmed some of its 1.8GHz spectrum to lalunch LTE and now gains Neotel’s holdings in 800MHz ‘ useful for rural coverage and indoor penetration ‘ and in 3.5GHz, currently used for WiMAX but likely to become an international capacity band for LTE small cell access or backhaul in future.
‘This is good news for competition in both the consumer and enterprise sectors,’ said Vodacom CFO Ivan Dittrich. ‘On the consumer side the combined entity will be a stronger fixed player and will be able to offer a wider range of services. It will also help us to accelerate the provision of services like fiber to the home.’
Vodacom has been relying heavily on small business services to generate growth in its saturating home market, while also seeking expansion in other parts of Africa such as Mozambique and Democratic Republic of Congo.