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Analysis, Telecommunications - Written by Renai LeMay on Wednesday, July 25, 2012 10:48 - 40 Comments
How long before Vodafone hangs up?
analysis Vodafone Australia is spending hundreds of millions of dollars re-building its troubled 3G mobile network, boosting its customer service levels and trying to win customers back with attractive marketing offers. But the sad truth is that all of its efforts appear to be having little impact on its dismal future.
If you read through the half-yearly financial results presentation which Hutchison Telecommunications (the 50 percent owner of Vodafone Australia) released this week, it’s hard not to feel as though a note of cautious optimism pervades the document. Vodafone Australia chief executive Bill Morrow, who joined the company in March this year, gives the impression that the company is currently an absolute hive of activity as it attempts to rebuild its operations following the disastrous series of rolling network and customer service failures which hit Vodafone in late 2010 and early 2011 (commonly known as ‘Vodafail’).
Morrow starts off his presentation by acknowledging that Vodafone has failed its customer base (currently at around 6.8 million connections). “We have lost the trust and respect of many customers,” he says. “I will say here and now we owe our customers an apology for the past and a commitment for the future that we will rebuild our operations to prevent this from ever happening again.” But from there the executive moves into the many things going on within Vodafone to redress those past wrongs.
Vodafone’s capital expenditure on its network grew by a whopping 22 percent over the past 12 months (to close to $400 million), as the company ploughed money into multiple areas simultaneously. It is building a whole new network based on the 850Mhz frequency popularised in Australia by Telstra. It is adding 500 new mobile tower sites in metropolitan and outer metropolitan areas, taking the total number of new sites to 800.
It is increasing the speed and capacity of the backhaul transmission network which services those towers, and it’s also deploying new network hardware which will support higher speeds under the HSPA+ standard, eventually upgradable to the 4G speeds currently being deployed by Optus and Telstra.
“All this will be available to our customers by the end of this year!” says an exuberant Morrow. “Our customers can expect to experience improvements in the network and customer service throughout the remainder of 2012, and we will make further announcements on our 4G (LTE) plans for next year.”
The company is also investing in its contact centres – the critical contact point with many customers – and is attempting to “innovate and deliver a change in the way it interacts with customers across all segments”.
Now, there are some early signs that Vodafone’s eventual planned recovery is on the way. Customer complaints to industry body the Telecommunications Industry Ombudsman are down, and the numbers of Vodafone customers on monthly plans (post-paid customers) has remained relatively stable over the past six months, at around 4.2 million. These numbers have remained fairly similar since late 2010. If you’re on a plan with Vodafone, right now, odds are you’re remaining on a plan for now and not dumping the carrier for rivals Telstra or Optus.
However, in other areas, there are some stark signs that the Vodafail rot which kicked off in late 2010 continues to plague Vodafone, and will continue to do so for some time.
Although its post-paid customers have remained stable, Vodafone shed an astonishing 178,000 customers in the first six months of 2012. What this figure represents is the fact that Vodafone’s customer churn problems in the prepaid segment are not really changing. The company lost a virtually identical number of customers in the second half of 2011, and about 375,000 in the first half of 2011 (although some of those were losses on paper due to changed methods of accounting for customer numbers).
Consequently, because of the ongoing network investment and customer churn, Hutchison made a staggering loss from its 50 percent ownership of Vodafone; reporting a $131 million loss for the first six months of 2012, a figure which more than doubled from the same period 12 months previously (up 68 percent). Vodafone’s own figure would have been roughly double that.
It’s hard to exaggerate when speaking about just how bad Vodafone’s problems are right now. This is a company which is currently losing hundreds of thousands of customers per year. It is a company which is spending hundreds of millions of dollars trying to get them back, and is broadly failing in the prepaid segment, where customers continue to abandon the company in droves. In the post-paid segment for customers on plans, all of Vodafone’s efforts so far are only just keeping its numbers even.
These problems are having a stark effect on the finances of the company’s shareholders Hutchison and the broader global Vodafone Group – so much so that it is now standard practice for Hutchison chairman Canning Fok to be quoted at Vodafone financial results sessions as on the record as maintaining support for the ailing telco.
But these are only the short-term problems Vodafone faces.
The popular video gaming commentator Dan ‘Artosis’ Stemkoski has a favourite saying when it comes to the game StarCraft, which is played at a professional level in countries such as South Korea and the United States. As with Australia’s telecommunications industry, StarCraft is a game based around resource gathering. In StarCraft, there are only so many resources for players to gather and use to build their armies, just as there are only so many telecommunications customers in Australia for our major mobile carriers Telstra, Optus and Vodafone to fight over.
“When you’re ahead,” Artosis loves to say, “get more ahead.” And while Vodafone is struggling to even keep its current customer base from deserting it, the company’s rivals are doing just that.
Earlier this year, Telstra released results that showed it was adding on about 900,000 connections every six months. The company simultaneously revealed that it had more than 300,000 customers using its 4G mobile broadband network, which now extends to some 1,000 base stations around Australia. The network was switched on in September 2011.
Optus is not seeing anywhere near the same levels of growth as Telstra – in fact, it’s only seeing modest growth in its mobile business, adding on some 82,000 customers for the three months to the end of March. And it’s also quite a ways behind Telstra when it comes to the upgrade of its 3G network and rollout of its 4G network – it has only recently deployed testbed 4G infrastructure in Newcastle and the Hunter region, ahead of a planned wider deployment later this year.
But broadly, both telcos are accelerating away from Vodafone at the moment – adding on customers, rolling out next-generation network infrastructure and continuing to profit from their mobile operations, at a time when Vodafone is losing money hand over fist just trying to bring its network up to anywhere near the standard set by its rivals while simultaneously attempting to boost its customer service skills and keep the customers it had.
There are also other indications that Vodafone is falling further and further behind its rivals at the moment.
In an article published by the Financial Review this week, Vodafone chief Morrow revealed the company may skip entirely the next round of spectrum auctions held by the Federal Government, which are expected to be used by the telco to unlock the next generation of faster mobile broadband services.
To say this is a troubling development for Vodafone is an understatement. It’s yet another indication that Vodafone is having trouble just keeping up with its neighbours in the short-term – and may not have the funds or the capacity to prepare for the mid and long-term future ahead in the nation’s telecommunications sector.
When you’re playing StarCraft, if you follow Artosis’ philosophy, when you win a small battle, you don’t try and kill your opponent immediately after winning a small skirmish. Instead, you take the gains from that skirmish and hold onto them, investing your resources to continually accelerate your economic operation upwards. Eventually, your higher rate of acceleration will enable you to overwhelmingly crush your opponent’s forces, because your underlying scale will be so much greater over time than your opponent’s. You sacrifice a risky short-term win for a colossal and certain long-term triumph.
We can see this same dynamic at the moment with respect to Vodafone.
Right now, if it cut its prices significantly, the nation’s biggest telco Telstra could absolutely crush Vodafone, which typically plays at the low-end of the market. It could unleash a marketing campaign custom-designed to target Vodafone customers with special migration offers. It could force its competitors to shred their profit margins merely to keep up.
But Telstra doesn’t have to do that. Instead, as it controversially did last month, it can sit back and rise prices. It can rake in the cash and buy up all the available spectrum when the government auctions it off. It can reinvest its higher profits back into its network to make it overwhelmingly superior to that of its rivals. It can know that in two or three years’ time it will be able to execute that same campaign in a much larger and more powerful fashion. When Telstra has a 4G mobile network covering Australia nationally and Vodafone can’t even afford the spectrum to secure its future, that’s the moment when Telstra can pounce and crush the company with the aforementioned campaign – on a sustained basis.
That’s the beauty of getting more ahead – as you accelerate away from your opponent, the entire battle becomes much easier in the long term.
After the Vodafail episode, Vodafone doubled down on its network and customer service investment. It was a risky bet, but probably worth it – you don’t simply walk away from a multi-billion dollar investment such as a national mobile phone network at the first sign of trouble. But as time goes on and the customer bleed shows no sign of abating at Vodafone, one does have to wonder what timeframe that investment was made on. At what point will its owners put Vodafone up for sale, or substantially restructure it so that it’s no longer a viable competitor to Telstra and Optus? If the customer bleed continues, will it be in a year? Two years? Three? Because I don’t think it will be in five.
The next six months to a year may prove to be the decisive time that will set up Vodafone Australia for the next decade. Because if it doesn’t show some positive signs with respect to its customer numbers in that period, the entire industry will be very publicly questioning whether it has a long-term future at all.
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