TELECOMS MARKET Vodafone's Need for Speed

The British telecom has swallowed billions in losses, but its German subsidiary is performing well. The secret? An old hook that still sells.
Not too shabby. Picture source: Reuters.

It’s been a few days since a new, fourth power came onto the scene in the German telecoms market, and it immediately took aim at Vodafone Germany. The newest arrival, a fusion between mobile provider Drillisch and United Internet subsidiary 1&1, made it known that it strives to become less dependent on Vodafone’s network.

In turn, this will possibly hit Vodafone Germany’s sales and customer base: 1&1’s customers, after all, currently pay Vodafone for using its network. Vodafone Germany boss Hannes Ametsreiter, for his part, is not fearful of changes in the market. In fact, he praised United Internet’s founder, Ralph Dommermuth, as an “excellent businessman” in an interview with Handelsblatt. The merger of 1&1 and Drillisch was always a matter of when, not if, he said.

Mr. Ametsreiter’s relaxed attitude is largely due to Vodafone’s balance sheet for the business year 2016-2017, which ended on March 31. In short: things are going well. “It makes me really happy to present strong growth for the first time in six years,” he said.

These days, even marginal growth is interpreted as – and celebrated like – a victory for telecoms companies.

While the British parent group suffered losses to the tune of €6.1 billion on account of write-downs in India, Mr. Ametsreiter is all too proud to show off his numbers. Sales to mobile subscribers and landline customers grew by roughly 2 percent to €10 billion. Earnings before interest, taxes, depreciation and amortization (ebidta) increased by 4.5 percent to €3.6 billion, and the ebidta margin jumped from 32.6 percent to 34.1 percent.

Slightly worrisome is the fact that total sales throughout the past business year fell slightly by 0.3 percent to €10.6 billion and that the increase in the ebidta margin was attributable to marginally higher write-offs. What’s more, sales of 3 million new SIM cards also benefited competitors like 1&1.

But these days, even marginal growth is interpreted as – and celebrated like – a victory for telecoms companies. The market is cutthroat. Prices have fallen continuously throughout the past few years, and revenues have fallen with them. According to the annual report published by Germany’s Federal Network Agency, sales throughout the entire mobile communications network fell by 2 percent to €26.5 billion in 2016. With that, sales in the mobile market have shrunk faster than in the combined mobile and fixed line network markets, which overall contracted by 1.2 percent to €56.7 billion. This latter figure includes the telecoms companies’ internet services, which send data over the fixed line network.

Newly introduced regulatory standards have, in combination with increased competition, put a squeeze on the mobile communications sector. Roaming costs for calls made while abroad were first capped and then forbidden altogether. At the same time, telecoms companies aren’t allowed to charge each other as much for letting data pass through their respective networks.

To be sure, Vodafone Germany has an ace up its sleeve: the cable network. Kabel Deutschland, Germany’s largest cable television operator, was acquired by Vodafone in early 2014 and in the meantime has begun operating under the Vodafone name. The network of cables, which was originally laid to provide cable television in 13 federal states, now belongs to Vodafone. Thanks to technical improvements, data can now be sent via these cables – and at a much faster rate than can be done by chief competitor Deutsche Telekom, at least, throughout most of its network.

Services should be available everywhere and always in the same quality, especially in an increasingly connected and networked economy. Roman Friedrich, Partner, AlixPartners

Mr. Ametsreiter, a marketing whiz, focused on the speed argument to woo new customers – and the strategy seems to be working. The fixed-line business climbed by nearly 5 percent to about €4 billion throughout the past business year. The cable business, which itself increased by 8 percent, drove much of this growth. “Our networks offer the highest speeds,” explains Mr. Ametsreiter. “Speed matters – and demand for it is increasing.” Almost half of Vodafone’s cable customers choose to subscribe to faster internet – more than 200 megabits per second (Mbps).

The argument surrounding connection speed and available bandwidth has taken on increasing importance. According to figures from the Federal Network Agency, data volume delivered via fixed line networks doubled over a period of two years. The average monthly volume consumed per user presently sits at 60 gigabytes. The use of TV and video steaming services such as Netflix and Amazon Prime Video are the main drivers behind this increase.

Speed, however, isn’t everything. Connection quality is important, as well. “In times of increasing data consumption, it’s very important that network quality is tightened up,” explains Roman Friedrich, a partner at the consultancy AlixPartners. “Services should be available everywhere and always in the same quality, especially in an increasingly connected and networked economy,” he said. For applications that depend on connectivity – like networked cars and smart houses – connection failures or inconsistent network speeds can have far-reaching consequences.

Vodafone has some catching up to do here. In the most recent annual network tests carried out by telecommunications journal “connect” and network specialist P3 communications, Deutsche Telekom came in ahead of Vodafone “by a long way” for the sixth year running. To be fair, Vodafone improved in the areas of speech and sound quality and data, explained the testers, but fell behind its main competitor in terms of telephone services.

In order for Vodafone to close this gap, the company needs to invest more – and not only in speed but also to bolster its network coverage – even if, at first glance, this approach is less appealing from a marketing perspective.

 

Ina Karabasz is an editor at Handelsblatt's companies and markets team, covering telecommunications, IT and security issues. To contact the author: [email protected]