Vodafone 2008 Results - new CEO at the crossroads to Telco 2.0?
The Telco 2.0 team looks at operator results through a different lens to most analysts. Rather than focusing on the minutiae of data trends, we look for hints of changes in corporate direction and the pursuit of, or potential of pursuing, more sustainable growth strategies based around a 'two sided' business model.
It was with this perspective that we listened in on the Vodafone 2008 half year results call. Despite being categorized by some on call as being a "large, cumbersome beast", the Telco 2.0 team can see a possibility of Vodafone emerging as the Telco 2.0 poster child, just as it''s been the Telco 1.0 star. Here's why:
Vodafone will add the brain to the Pipes
It was heartening to hear a CEO of a major operator confessing that "there is nothing wrong with being a bit pipe as long as it is efficient bit pipe", even better was the caveat that Vodafone wants to convert the raw bit pipe, adding "billing, profile, and to a certain extent, location" intelligence.
This is a fundamental starting point of the two-sided business model: efficient bit delivery is not enough, adding intelligence creates the value and return on the network.
Another important step on the Telco 2.0 journey is the realization that you can't possibly serve every market niche with all their communications needs. Part of being a great retailer is picking your strengths.
The biggest take-away from the Amazon story presented by their CTO at our event last week is that it is possible to leverage your platform by using partners to improve the product catalogue and to stimulate traffic. (There's a detailed case study on the lessons of Amazon to telcos in our 'Two-Sided Telecoms Market Opportunity' sizing report).
Vodafone is quite explicit that it is targeting future growth in the SME and SoHo segments for customer penetration and with broadband, both fixed and mobile for product enhancements.
Differentiation at the Edge of the Network
The Telco 2.0 team also likes Vodafone's actions to differentiate itself through equipment. The lifetime exclusivity and joint development on the Blackberry Storm is probably the most high profile device. As important is the low-cost handset partnership with ZTE and the SoHo targeting convergent Vodafone Station with Huawei.
In the Telco 2.0 world differentiation at the edge of the network allied with an efficient intelligent pipe with wide geographical coverage is a killer combination.
Partner Network Model
Vodafone is the only Mobile Operator we know who has the strength of brand, products and customers to enable it to sign up partner networks - especially since the international demise of i-mode. This is a great innovation - expanding geographic reach and increasing the size of the footprint without the need to buy every asset in the world. In the recent quarter, Vodafone added the Russian/CIS operator, MTS, to the family. The Vodafone Journey neatly summarises the scope of the network.
Free Cash Flow - a key metric
In financial terms, Vodafone is expecting to generate an incredible £5.2bn - £5.7bn of free cash flow for the year. The Telco 2.0 team feel that Free Cash Flow and Return on Capital are the key metrics to measure telco performance. Some common measures such as EBITDA margin actually discourage some two-sided business models where margins are much smaller than typical voice services but which grow the overall absolute profitability and sweat the network assets.
All is not rosy
Vodafone is not firing on all cyclinders in the UK and Turkey. Implementation of two-sided business models could certainly help in the UK; but in Turkey the market leader is already implementing some of these techniques which will make recovery much more difficult.
UK moves into reverse gear
It must be incredibly frustrating for the worldwide mobile leader to be trailing the leader in its home market - the gap has probably grown wider with a 1.7% decline in revenues in the current quarter. The UK is now by far the weakest major European market in the Vodafone portfolio in terms of profitability and cash generation (UK generated £391m of operating cash flows in the first six months compared to Germany with £1,147m, Italy with £850m and Spain £391m.
Turnaround in the UK will be difficult for Vodafone. It is one of the markets that would probably benefit from in-market consolidation from the current list of five MNOs and countless MVNOs. There's also an over-penetration in the SoHo, SME and Corporate sectors. This was the market data when Vodafone UK presented its "Winning in the Market" strategy in March 2007:
The UK's new CEO, Guy Laurence, has a difficult task ahead. In his previous job, he made a success in the similarly difficult Netherlands market. The Telco 2.0 team would urge an examination of two-sided business models. One of the specific actions mentioned in the results call was the expansion of wholesale. There is much more that can be done beyond typical voice reseller arrangements (such as with Lebara and Asda). We would specifically recommend, as a starter, a trip across the pond to Verizon Wireless to bring its ODI open development initiative to the UK.
Not Quite Turkish Delight
Vodafone entered Turkey in May 2006 paying £2.6bn for the second operator, Telsim, with 12.2m customers. A mere two years later Vodafone has written off an incredible £1.7bn of that amount admitting that fixing the network and improving distribution is proving difficult. It is hardly surprising given the dominance of the market leader, Turkcell:
But Network and Distribution are just the first two hurdles for Vodafone to leap; Turkcell is a real innovator and has built a really impressive line up of value-added-products that provide extreme stickiness and anti-churn properties. Turkcell's Chief VAS Officer, Cenk Serdar, presented some of their payments and authentication services at last week's Telco 2.0 event. Vodafone will be playing catch-up for some time. Serdar is effectively the deputy CEO, which should tell you just how seriously they take this stuff.
The target Vodafone Business segments are currently highly penetrated. Turkcell will in all probability be more than a capable opponent.
Grounds for optimism
There was a wonderful section in the conference call where Vittorio Colao delivered his personal perception of the industry:
"In the context of turbulent times, we should not forget that we operate in an industry which continues to be able to generate strong and consistent cashflow, basically on delivering very compelling services that serve a fundamental human need. This to me is the crucial point.
"Some people believe that voice is increasingly a mature market in developed market, but there is the data opportunity and the data opportunity is strong..."The cost/benefit of ubiquitous connectivity is incredibly compelling"
"We can all see that delivering ubiquitous connectivity is basically a one way road - once you start using it you can't give it up, and for sure I'm sure that no-one will give it up for saving the price of a couple of drinks in a month...
The Telco 2.0 team heartily agrees - there is a fantastic opportunity in end-user connectivity, but the icing on the cake is leveraging this connectivity and adding services which allow upstream players to intelligently connect to the end-users. To achieve this there'll need to be some significant organisational and cultural changes at Vodafone.
[Ed. - Pieter Knook, Vodafone's new Internet Services Director hired in from Microsoft, has an important role to play in this. At the Telco 2.0 event last week he revealed for the first time publically his vision for a 'next generation open mobile internet platform' and the cross-industry activity that he's driving (starting, intererestingly, with China Mobile and Softbank). We'll be reviewing this in more detail in future posts on Vodafone.]