The announcement this week that Vodafone has finally landed an ISP business in Spain, alongside one in Italy, means that yes it is pursuing at least fixed mobile convergence across its strongholds of Europe, and because it would only devalue those ISP if it did not continue to jump through all the convergence hoops, so this will inevitably lead to quadruple plays in each of the UK, Germany, Italy, Spain and through its joint ownership of SFR, in France as well.
But by acquiring the Italian and Spanish arms of Tele2, paying some €775 million ($1,093 million) without any outstanding debt, it is possibly time we looked at just what kinds of hurdles lie ahead for Vodafone and any other company that is currently a mobile only operator.
Vodafone is strongest in Germany, if the truth be known, with $11 billion in cellco revenues plus the $2.1 billion and rising in revenues from the fixed line business it acquired when it bought Mannesmann all those years ago, in what, at the time, was one of the most daring European takeovers of all time.
That deal made the overall international business, but also made the future shape of the company and gave it the one fixed line base under the brand of Arcor, that Vodafone has to experiment with for a quadruple play.
The UK is only a few $ billion behind the German operation, at $10.4 billion, but given that this is its headquarters and the country it feels it understands the best, Vodafone has managed to grow its business better here than in Germany and its last round of figures showed the German cellular business shrinking slightly, while its Arcor business added 47% in growth taking it to 2.2 million customers.
While there has been no overt move by Vodafone to buy into one of the handful of large ISPs left in the UK, and it says that it is quite happy in a partnership wholesale arrangement with British Telecom, this feels inherently wrong. Chief Financial Officer Andy Halford said in a September conference that the company would pursue broadband line acquisition using, ‘our own provision, wholesale and ULL,’ (meaning unbundled local loop).
Despite the mention of wholesale, as Vodafone becomes more and more competitive with BT (it has its own convergence plan using a Vodafone MVNO), we would expect it to look to acquire someone like Tiscali or the broadband offerings of Cable and Wireless to make up a matching set of offerings across its strong European markets.
Revenues for Vodafone in Italy were $8.6 billion and for Spain, even higher, at $9.1 billion and now it can immediately marry these incredibly strong customer bases with fixed line services through Tele2 Italy and Tele2 Spain which both provide nationwide fixed-line telecommunications and broadband services.
Tele2 Italy has 2.6 million customers, with just 400,000 on broadband (so the rest we presume are on dial-up and could be sold on or rapidly and aggressively converted). Tele2 Spain has 550,000 customers with just 240,000 on broadband.
Vodafone said that broadband markets are in growth in Spain and Italy, which is a bit of a misnomer, because as much as they may be growing, they won’t be anywhere near as profitable on their own existing cellco business, nor as profitable as they would be if those lines were working in a combination with cellular handsets.
Vodafone said that capex spend at Tele2 Italy and Tele2 Spain won’t change its numbers materially for the year, and that the deals will be neutral to earnings apart from the fact that it will have to write down the goodwill on the deal.
But both Italy and Spain have exceptionally strong incumbents, and all operators in both countries have difficulties reaching the rural parts of the country with broadband. Spain has something like 32% of the country that cannot be reached with ADSL lines due to the condition of exchange backhaul and the loop lengths.
Vodafone said that 44% of Italian and 57% of Spanish households will have broadband services by the end of the year. Despite the lack of capex issues the deal throws up Vodafone says that it will substantially increase local loop unbundling coverage in both markets over the next 12 months. The company also alluded to ‘cost synergies’ which we see as likely to be merged backhaul.
But the real benefit has to be in cross selling Vodafone cellular services to the broadband base.
If we just look at the deal in terms of broadband customers, it would be $1,708 for each one, but this includes 2.2 million dial up customers in Italy and 310,00 in Spain.
Neuf Cegetel bought Deutsche Telekom’s French Club Internet unit and AOL France, and each broadband customer was worth $800, so with the extra dial-up customers this looks to be broadly in line with other similar transactions, if not cheaper than some.
The move into Spain by Vodafone follows a disappointing deal with Ya, when Vodafone made the highest bid for the ISP, but was gazumped by a back door deal made between France Telecom’s Orange, who ended up with Ya, and T-Mobile, part of Deutsche Telekom which was selling the business. In the end it was bundled into a deal with Orange Netherlands, as it became part of T-Mobile.
Orange picked up the Deutsche Telekom owned ISP for €320 million, some $426 million. When the story first broke Vodafone was said to be paying more, around €400 million ($538 million) for an ISP with just 400,000 broadband Internet customers.
This is all part of the move towards fixed markets that began perhaps 18 months ago in Europe, for cellular operators. Each company is trying to shift their holdings across Europe so that they hold both wireless market share and a fixed ISP line business, so that the two services can be bundled.
For Vodafone experiments of this nature have been centered on the German subsidiary, with the feeling that if Vodafone can made a dual mode strategy work there, where protectionism in favor of T-Mobile and its parent is still a cause for concern within the European Commission, then it can make it work anywhere in Europe.
A year ago Vodafone launched its own kind of triple play around the Arcor business, but one without any form of TV service called ‘flat hoch drei’ (flat to the power of three) and includes unlimited DSL access, unlimited calls to German fixed-line phones and unlimited calls to Vodafone mobiles from the customer’s ‘home zone’ all priced at $64 per month. It also brought out a DSL-only package for €34.95 ($45) per month, which or Germany is quite cheap ‘ but among the highest prices even a year ago, in Germany.
Internet surfing on the mobile phone at home is included in the price, but at launch Vodafone was insisting on a 24 month minimum term.
Straight away we can expect Vodafone to turn to this kind of offering in each of Italy and Spain, and at some stage in the UK, cementing its key European markets with similar growth curves.
When we talked to Vodafone about our own Quadruple Play Report ‘ due out any day ‘ they told us that they were working first towards merging their help desks and billing for this type of dual mode deal, and that the addition of TV services for a full Quad play was something they would have to consider once they had completed the move. The implication was that someone as big as Vodafone found it hard to move fast, and that consumer experience would be fatally impaired if consumers had to call one help desk to ask about their home phone, another to ask about internet access and a third to ask about the various mobile services.
However we know that already Vodafone has an RFP out for encoding and IPTV services from Arcor, which appears to be the vanguard of its Quad play intentions.
There are very few mobile only businesses in the world, and fewer still as large as Vodafone and about two years ago investors began to talk about the ‘fixed line backlash,’ citing the British Telecom Bluephone project that emerged as BT Fusion. Fusion phones were the first in Europe to offer a home service which used cellular handsets with fell back to using VoIP over the home’s broadband line when in range.
Since then the entire UMA (Unlicensed Mobile Access) debate has kicked off, and Vodafone found itself ‘fixed line’ challenged. Orange is the notable success with UMA across Europe, moving fast to put the Wanadoo lines owned by its parent France Telecom, to work in its Unik service, and while BT in the UK had signed up just 40,000 users by June of this year, Orange said back in June that it had 140,000 subscriptions and had shipped over 200,000 handsets, across in France. By now it should have passed 300,000.
While the UMA trick is difficult, involving handoff between wi-fi and W-CDMA, the concept is easy, people have cellphones and when they are at home they don’t cost much to make calls, when they leave home, it’s back to the usual cellular rates. The Vodafone deal is very different so far. In effect it still attacks that problem of calls being cheaper at home, but in Germany this is done by nominating a base station to which each user is attached when calling at home, and giving cheaper calls from there.
Later we think this is likely to be replaced by Femtocell approach outside of Germany, making the area where calls are cheaper, far smaller.
Orange reports that only 15 to 20% of calls involve hand-off to the cellular network, which is a figure which suggests that people are happy to start a call at home, and keep on its as they wander out of home, onto a more expensive network. There were concerns that customers would use their mobile for cheap home calls, and mobile usage would suffer, but this hasn’t happened.
BT has plans to introduce more dual-mode Wi-Fi/GSM devices this year and will also launch a pre-paid version of the service and Vodafone needs broadband lines in the UK, and every one of its strong markets to prevent erosion from incumbents that can offer fixed line strategies that reverse the ‘fixed line backlash’ of dual mode access from incumbents.
But having bought these fixed lines, Vodafone will be pushed ever onwards, and we know that Telecom France will submerge its MaLigne IPTV brand at some point behind the Orange brand, and begin offering a full quadruple play.
Again Vodafone will have to follow, but it has many steps along the way. The likely first step is a hybrid DVB-T VoD service, identical to the one that British Telecom launched in the UK, called BT Vision, and similar in nature to plans laid by Deutsche Telekom and Telecom Italia for the regions outside their country of origin. DT has now abandoned that strategy in France and Spain, hence its sales of Ya.com and Club Internet in France, but it is likely that Orange and Telefonica will both fill out offerings elsewhere and that DT will continue towards quad play in Central and Eastern Europe, in markets where it is strong.
Vodafone will have to, at some point, devise a strategy where the markets which are ready for quadruple play, have some kind of TV offering with the Vodafone brand on it, while the less developed markets can remain cellular in nature. It will have a monumental job if it first decided that it needs to converge billing and helpdesk each to single systems before it can offer multiple services.
There are however some classic shortcuts along the way. PCCW for instance simply created one new helpdesk for all customers that wanted to take up a new converged quadruple play offer, and this helpdesk initially at least, worked with four separate service creation and management systems, and no single bill was created for each of them, just a few fields added to the existing fields to keep track of discounts associated with taking a bigger bundle.
Rogers in Canada did something similar, but says it has been ‘scrubbing data’ for 7 years, so that it can now offer a single bill, which takes in all of the cross service discounts. Scrubbing data is all about getting all the data in each of your systems consistent so that there is a single version of each piece of data.
For instance if a cellular billing system has an old address or a misspelled name, it is impossible, after systems are merged, to get a clear picture of what your customer and their family buys from you, and how profitable they are to your business. System, such as web help, also need to be merged so that if someone comes onto your system, correctly identifies themselves and tells you they are moving home, and to a new address, that all four accounts move, not just their pay TV account. Forcing your customers to do things four times over for four services is a sure fire way of losing customers.
Markets like Western Europe, with its exceptionally high penetration levels for cellular, in many cases over 100%, along with high take up rates for pay TV, and high broadband penetration lines, are the first markets that find that the quadruple play will actual yield real benefits in terms of new customer acquisition, higher ARPUs and lower churn rates, and as companies like Vodafone find themselves disadvantaged against fixed line incumbents, this drives the search for more and more ISP lines, and drives up the value of independent ISP operations as companies like Orange, Telecom Italia, and Telefonica look to broaden their own umbrella and squabble over who buys these key ISPs.