Vodafone's Q1 result shows Europe needs attention

OvumEurope is clearly the region where Vodafone is under the most pressure. But this is to be expected. Most of Vodafone’s European markets are now mature (the days of stellar growth are long gone) and it faces fierce competition. Add to this termination rate cuts and a lingering hangover from the economic crisis and it makes for tough conditions for all mobile operators.  

At one level Vodafone’s new “efficiency” strategy, announced in November 2008, is the right approach to meet these challenges. The target is for £1 billion ($1.64 billion) in savings by the end of the 2011 financial year and it is making good progress. It expects to be at 65% of that target by the end of March 2010. However, cost cutting alone will not be enough.  

Vodafone is doing well in attracting customers to its fixed services in Europe, which shows its integration strategy is appealing to customers. Fixed line service revenues grew organically 5.7% year on year. Mobile data is also growing strongly in Europe, up 18% on the same period last year. Nonetheless, combined they still only contribute 20% of service revenues in Europe. Growth in these areas is not compensating for the drop in mobile voice revenues.  

This is a major concern as mobile voice is the ‘bread and butter’ for mobile operators. Mobile voice revenues were just about stable in Germany and Spain, but fell dramatically in the UK from £822 million in June 2008 to £726 million in 2009. This in turn led to the negative organic growth in total service revenues seen in Germany, Spain and the UK.  

Worryingly the cause seems to be the loss of mobile customers as much as changes in termination rates. Vodafone lost over 1.5 million mobile customers across Germany, Italy, UK and Turkey in the quarter. It must focus on retaining its existing customers, while at the same time encouraging subscribers from its rivals to churn, if it is to stabilize mobile voice revenues in the region. Recent efforts, such as SIM-only offerings in the UK and its SuperFlat tariffs in Germany, are attempts to provide customers with extra value, but Vodafone needs to keep rolling out such initiatives or risk further declines in the future.  

On a global basis, India is the star in Vodafone’s results. It added over 7.6 million net additions and organic revenues grew by 23% year-on-year. Such results are impressive, but also expected from a high growth emerging market like India. Indeed, with further network expansion planned in India, continued strong performance is expected in the near-term.  

However, Vodafone needs to be careful not to place too much emphasis on in its Indian operation. Market growth will undoubtedly slow as competition increases and a drop in performance will be felt across the whole group. Therefore, strength in its core European markets will be required to balance the portfolio.

Raymond Yu, analyst at Ovum
 

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