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    HomeInsightsVodafone's European strategy explained

    Vodafone’s European strategy explained

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    Revenues up, costs down; sounds like a plan

    Vodafone’s European strategy is to reduce costs and to raise revenues. It will do the former through its ongoing One Vodafone process, and the latter through stimulating usage through a range of services and tariff changes. It will also increase its fixed-line presence and offer bundled DSL packages.

    Cost reduction – the Voda Plan

    • Outsource IT Application Development and Maintenance activities – projected saving of 25-30% over 2-5 years on current annual costs of £560 million

    • Centralise network supply chain management, saving a hoped-for 8% within two years on an annual spend of £3.3 billion

    • Consolidate data centres by region – save 25-30% of £320 million annually within three to five years

    • Group overheads reduced – meaning 400 people to go from corporate HQ.

    The upside

    • Move pre-pay users to contract

    • Introduce “family plans” to stimulate usage

    • Get more users onto the Passport roaming plan

    • Home zone tariffs

    The numbers

    In Europe, Vodafone is targeting “modest” revenue growth in the medium term, and wants to keep 07/08 opex flat against its 05/06 numbers, which it says will avoid £150-200 million of future spend.

    And by keeping capex to sales at its present rate of 10%, Vodafone says it will be reducing its 07/08 capex by £400-500 million compared to 05/06.

    Moving into fixed?

    Alongside the drive to reduce costs and up revenues, Vodafone also said it would be looking to take advantage of convergence technologies to dirve its presence across customers’ communications needs.

    This “Mobile Plus” strategy will see Vodafone launch bundled homezone  DSL products, starting with Vodafone Germany. The second is application integration between mobiles, PCs and the internet, and the third area is to introduce advertising based services and business models.

    The verdict

    Vodafone is clearly intent on capitalising on the results of its One Vodafone drive. But it is worth noting that the man charged with the initial delivery of One Vodafone, cto Thomas Geitner, is now the man heading up the “New Business” – ie all the IP/ convergence/ fixed line stuff.

    It is strange to see no emphasis on data services per se in the “add revenue” aspect of the plan. That said, the point of getting customers onto contracts, and family plans, and even roaming tariffs, is to be able to deliver them packages of services, within which will reside data services.

    The other aspect, the move into home zones and fixed line DSL provision, is a sign that although Vodafone says it believes in a mobile-centric view of communications provision, the spectre of quadruple plays from strong fixed line incumbents (with even stronger mobile properties) requires action.

    To play in this field any operator needs to be able to operate at extremely low cost, as margins are not high. Vodafone rightly points out that IP integration at the application layer, and HSDPA at the network, enable convergent, seamless services across different networks. The challlenge is to exploit those opportunities in a profitable manner.

    That said, albeit Vodafone has reported a £14 billion loss, which has grabbed all the headlines, the company is generating considerable amounts of operating free cash flow – £6.4 billion in the last year.