The flipside of Telstra’s continuing expansion of its mobile customer base can be seen in the continuing erosion of Vodafone’s. Perversely, that could present an opportunity for the still-beleaguered distant number three in the mobiles market.
In Telstra’s December half results yesterday it disclosed an increase of more than 600,000 customers in its mobiles business in the half, which means it added about 1.2 million customers in 2012.
Overnight, Vodafone Group released its December quarter results, which included a 16 per cent fall in revenue within the Australian Vodafone business (a joint venture with Hutchison Telecoms) and another 64,000 fall in customer numbers.
That’s consistent with the loss of customers in the previous quarter but doesn’t properly reflect the implosion within the business as a result of the severe network degradation issues it experienced in 2010. In 2009 Vodafone had nearly four million customers in Australia. Today is has just over three million and the haemorrhaging continues.
Telstra has been the massive beneficiary of that exodus of customers, which coincided with its own decision to become more aggressive in its pricing.
With Optus more focused on protecting its margins and profitability than scrapping with Telstra for the Vodafone refugees, Telstra has not only picked up most of them but has also absorbed most of the growth in the sector to lift its revenue share to just under 50 per cent. Vodafone’s has slipped to just over 20 per cent, a dismal performance in a three-party sector.
That might appear an irredeemable position, but that isn’t necessarily the case. Vodafone turned to an industry veteran, and an experienced troubleshooter, Bill Morrow (the latest target for Stephen Conroy’s bovver boots), to fix the business and, with Hutchison, gave him a big chunk of capital with which to do it.
Vodafone is now well down the track of fixing its network, with an investment of about $2 billion in improving its reliability and extending its coverage. Morrow has also attacked the group’s cost base in the knowledge that he has to do everything he can do to create the potential for his shareholders to eventually get a return on the massive, and newly increased, investment in the Australian business.
Until that upgrade has been largely completed, as it will be later this year, there hasn’t been much point to Vodafone marketing or competing too aggressively for customers. Given the 2010 debacle, the network has to be ultra-reliable before Vodafone starts promoting its services.
Sometime in the second half of this year, however, Morrow will have a vastly improved network and a lower cost base to work with – and a lot of spare capacity on his network.
Telstra is aggressively expanding its 4G network to relieve congestion on its existing network, while Optus (which has an infrastructure sharing deal with Vodafone) is also investing heavily in its network for similar reasons. Vodafone ought to be able to offer consistent speeds and reliability precisely because it doesn’t have their customer bases.
The other thing Morrow has going for him once he decides to switch to a more aggressive posture is that Vodafone has already said it won’t participate in Conroy’s "digital dividend" spectrum auction (which might explain why Conroy isn’t keen on him). Telstra will almost certainly buy as much of the 700 MHz spectrum as it is allowed, while Optus, which has spectrum it acquired with Vividwireless that can be used for a 4G service, is still weighing up its options.
Apart from the cost established by a floor price that the telcos believe is extortionate, Vodafone has a lot of 1800 MHz spectrum that it could deploy for a 4G offering in metropolitan areas. Indeed, it has far more spectrum in the major cities than its rivals. Both Optus and Vodafone have an issue with their prospective 4G coverage in rural and regional areas, but Vodafone could pursue a metro-focused strategy, at least in the near term, if it chose.
Even with Telstra’s dominance and its continuing massive investments in its network, in a three-player market Vodafone should have something closer to 25 per cent of the market rather than 20 per cent.
Without the investment – around $1.5 billion – that participants in the spectrum auction will face, and with the cuts to its cost base and the synergies from completing the merger of the old Vodafone and "3" businesses and networks last year, Vodafone will be in a stronger position to compete.
Morrow has shown no inclination, so far, to pursue the prior strategy of competing purely on price, content to price his offers in much the same space as his competitors. He could, however, use his lack of size and scale against his bigger competitors, targeting their more profitable segments and could draw on Vodafone's parentage and their global experiences to implement differentiated pricing strategies.
They clearly, having committed the capital, are prepared to be patient and to give Morrow time to execute the turnaround of what was effectively a failed business. To do that he will have to devise strategies for turning Vodafone’s obvious weaknesses into competitive advantages. There’ll be a better sense of whether or not that is possible later this year and, more clearly, in 2014.