Vodafone's 'Long Term' hesitance

As the wireless industry presses ahead with plans for a next-generation wireless technology, one key player keeps dragging its heels. Indeed, on April 14, several dominant wireless companies agreed to a licensing framework for patents addressing the emerging technology, known as Long Term Evolution (LTE). The companies, including handset maker Nokia (NOK) and network equipment maker Ericsson (ERICB), join major wireless operators including Verizon Wireless and China Mobile as supporters for LTE, a technology widely seen as an on-ramp to truly speedy mobile Internet connections. If it lives up to its billing, LTE would make today's cable and DSL modems"”as well as the '3G,' or third-generation, mobile networks wireless carriers have spent billions to deploy"”seem downright snail-like.

But conspicuously absent from this LTE confab has been Vodafone (VOD)"”the world's largest wireless service provider, and thus the company that buys the most mobile phones from the likes of Nokia and strings the most territory with network gear from Ericsson and others. 'We announced a month ago with Verizon Wireless and China Mobile that we are going to press for development of the LTE standard,' Vodafone CEO Arun Sarin told BusinessWeek in a recent interview. 'But we have not said we are definitely going to LTE.'

And yet, Sarin wants to make two points crystal clear: Despite his noncommitment to LTE, Vodafone is not a technological-age laggard, and it is not blindly locked into serving Europe. Rather, the gargantuan wireless company is branching aggressively into emerging markets such as Latin America, India, and Africa. Of Vodafone's globe-leading 250 million subscribers, 40 million customers are located in these distant markets, and that segment of the customer base is growing by 20 million a year, he notes.

And though Vodafone has been criticized for not being a 3G leader in its native European lands, it's pushing the service in new regions. Because broadband Internet access has been slower to arrive in these emerging markets, 'most of the people there will feel and touch and play with the Internet on their phones as opposed to a PC,' Sarin says. 'So in the long term the size of the Internet market for us in these places is going to be at least as large as it is in developed markets.'

Here are excerpts from Sarin's conversation with Roger O. Crockett, BusinessWeek telecom correspondent and Chicago bureau deputy manager.

What evidence is there that your mobile Internet business is truly taking off‾

There are some interesting statistics: Our data business"”not voice, not text messaging, but data"”is now a $4 billion business growing at 40% a year. So if you compound those numbers, they start to get pretty heady for any size company. Even though our [revenue] numbers are in the $60-plus billion a year range, $4 billion is still a lot."&brkbar; So our data story is real and getting traction.

Vodafone and others have met criticism for investing a whole lot of money buying new wireless spectrum licenses for 3G networks. What sort of return are you getting‾

Let's put it right out on the table right up front. We would not pay $6 billion now for what we paid for in 2000 and 2001. We overpaid. There is no question about that. But that is behind us. The only question that is relevant is incrementally what are we investing in hardware and software and handsets.

 

We are completely convinced that on the incremental side we are doing great. But you can't ignore the fact that we paid 6 billion euros for a 3G license in Germany. And frankly, we wouldn't pay a tenth of that today.

Well, now plans for investment in the next generation, 4G, are upon us. Are you committing to LTE‾

We are headed in that way. But we want to get a lot of the technical and standards and intellectual-property rights issues resolved before we say we are ready to sign up for it. Frankly, in this particular instance we have a great advantage. We have deployed something called HSDPA [High-Speed Downlink Packet Access] which is 3.5G. So if you said there is no technology available to you before 2012, we at Vodafone are completely relaxed because we are riding the 3.5-generation wave. In fact our affiliate here in the U.S., Verizon Wireless, will need the fourth-generation wave faster than we do.

Explain for our readers why Verizon needs to get to 4G faster‾

They'll need to go to LTE because [their technology, EVDO] doesn't have a forward path that's nearly as elegant as ours. Our broadband path takes us all the way from [the current download speeds of] 3.6 megabits per second to 28 mbps. That's good enough for the next three to four years. So we are actually sitting in a very good position. In China they don't have any 3G. So they are saying, can I somehow skip a generation‾

When will you move to 4G‾

For us LTE is a 2011 or 2012 experience. For nobody is it an experience before 2010.

With all the cool applications out there"”music, video, location services, gaming"”don't you think consumers will demand greater broadband capacity sooner‾

What we can offer today and what Verizon Wireless can offer today is a good wireless experience which feels like a DSL experience. But if you try to do YouTube on it, it's kind of grainy. [As the technology progresses] YouTube looks good, everything looks good. That's a couple of years from now.

Are you saying Vodafone will be developing cutting-edge products on its own‾

Some of it we will do on our own. But we've got to get used to this notion of partnering and competing at the same time. It's a hard notion, but in the [Silicon] Valley it happens all the time.

Nokia is getting into the service game in a big way, which makes it a rival. How are you dealing with that‾

Of course it's more complicated. It was a straightforward customer-vendor relationship. Now it's a customer-vendor-competitor relationship. That three-tier relationship is harder than a two-tier relationship. My view is that if we can bake a bigger cake together, and that cake has smaller pieces of it, but net-net we still have more cake, that's O.K. with me.

What concessions do you have to make‾

As long as we are offering customers compelling services we don't have to fear who else is coming into the marketplace.

 

Google (GOOG) is in the marketplace. Apple (AAPL) is in the marketplace. Microsoft (MSFT) is in the marketplace. Nokia is in the marketplace. But if we have the 250 million relationships [with customers] here, let's make the best of it and get as much of the revenue as possible. And if there is a little bit of a spillover because somebody wants to do a Google search, well that's fine.

With so many new entrants into wireless, from Microsoft to Google, doesn't this apply more pressure to outmaneuver competitors that are known for aggressive and nimble action‾

Yeah, but Google is a search company. Good. Important. Relevant. But customers need a heck of a lot more than search from a service provider. They need everything that we do. Search is one component. My view is that we integrate them into our own portal, Vodafone Live."&brkbar; The Internet is not constructed in a winner-take-all format. Everybody has their own little niche. If you want a portal you go to Yahoo! (YHOO). If you want search you go to Google. If you want auctions you go to eBay (EBAY). It's a concept of 'bake a bigger cake.'

Let's talk about the push to open wireless networks to more outside devices and services. To what degree is Vodafone interested in offering or allowing cell phones based on Google's open-source Android software platform‾ What is your view more generally about open-source and open networks‾

I don't know how open Android is really. I'd love to see how open it is before Vodafone would commit to using Android. We want to know whether the back end is all Google. Open means the ability to go anywhere you want to go. It's not obvious to me that it's really open. It's open for Google. It's not open for the rest of the world. When you get into the mobile Internet you have to invite others to do cool things.

Finally, what is the fate for you and Verizon (VZ)‾ Will you ever sell your share of Verizon Wireless‾

We're married. It's a good partnership."&brkbar; Verizon Wireless is a company that has 65 million customers and multitens of billions of dollars in revenues growing at 15%, and good cash flow. I don't know anybody that doesn't want to be part of a machine that produces a billion dollars worth of free cash flow a month. This is a long-term partnership.

So Verizon Wireless CEO Lowell McAdam doesn't want the freedom of being fully independent‾

He would be the first one to sing all the songs about why he needs a partnership with Vodafone to get the size and scale and customer reach and all that. Even if you got him drunk he wouldn't say [he's eager for independence]!

Crockett is deputy manager of BusinessWeek's Chicago bureau .

Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.

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