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Vodafone has produced another strong quarter of subscriber growth, with some 10.7m new connections to take its total to 221m, compared with 210m at the end of September. That quarter saw over 10m new connections too and it seems that management is placing more emphasis on this aspect of the business as penetration levels rise. As before, some care should be taken with the total: the 221m total is a curious hybrid of full and proportionate consolidation which does not take in to account Vodafone's significant associate companies. As before, Italy is included on a proportionate basis (76.9% owned) while Egypt (54.9%) and India (51.96%) are fully consolidated.

If the total was reported using a consistent approach, the total would be either 228m (taking Italy at 100%) or 199.95m (stripping out all minorities).

Two other numbers are reported at a headline level, which give another perspective on the Vodafone empire. The first is the proportionate total, adding in Vodafone's equity interests in its associates and investments. This now stands at 252.3m, up 11.8m on the prior quarter. The second is the overall venture total, which includes 100% of the bases in which Vodafone has any interest. This now stands at a massive 770m, or 23% of the global total - thanks, in no small part, to the inclusion of China Mobile.

The table shows Vodafone's progression over recent quarters, using its stated numbers but adjusting the geographical analysis the company uses reflect a more honest picture of the balance of the business (ie, including the Czech Republic, Hungary, Poland, Romania and Turkey in Europe not the meaningless "EMAPA" region Vodafone favours).

Locating the various Central and Eastern Europe business in their proper geography shows the customer base in a rather different light. The near 50:50 balance Vodafone reports vanishes to be replaced by a materially less attractive 70:30 in favour of the 100%+ penetrated markets of Europe, which in fact edges towards 75:25 if we include the two Asia Pacific developed world properties in this group.

The company clearly doesn't want us to see it in this light, but why not?

These numbers, presented in this way, show that Vodafone has much the largest footprint in the world's largest mobile markets. That it also has nearly 80m customers in emerging markets is a huge added bonus - other than America Movil, no other company comes close to this. The second chart shows Vodafone's net additions during the year, by country. We have shown the Indian number on a proforma basis for the same of comparison, but even allowing for this, it dominates the growth profile, with nearly four times as many net additions as Egypt the second fastest growing market in absolute terms.

With more than ten million organic additions in both of the last two quarters, it is tempting to conclude that Vodafone is going for growth at the expense of quality. However, as the following chart shows, this isn't really the case. The inclusion of Turkey in Q2 06 raised the European proportion from 65.6% to 67.6% and since then, it has hardly moved - despite the fact that the fastest growing markets in the region are those most heavily biased towards prepay. This has been possible because of marked improvements in the mix of the bases in Spain, the Netherlands and most particularly, Hungary, where the prepaid proportion has dropped from 76% to 56% over the past three years.

At the same time, the company has been looking to improve the quality of its mix by adding to its base of 3G users.

These now total nearly 25m, or some 11% of the consolidated total. After a disappointing performance in 2006, when the quarterly take-up failed to better or even match the 2.5m seen in Q4 05, the numbers have begun to rise. Q4 06 saw a total of 2.46m 3G adds and subsequent quarters have totalled 2.58m, 2.73m and, in the third quarter of 07, the level of 3m was reached. That additions dropped back to 2.8m in Q4 - when 3G handsets are more prevalent than ever before - must cause some concern, as this equates to barely more than a quarter of the total.

Moreover, while the number of business customers now taking 3G is beginning to rise, it is still at a very low level. In Q4, business users accounted for more than 20% of all additions for the first time to take their share of the installed base to 12%. Admittedly, the handset industry was slow to provide the necessary devices to encourage 3G take-up, but as Vodafone's licences are now in their seventh year, this has to be a major worry. By our calculations, Vodafone's pay-back to date on this spectrum is of the order of ten percent in Italy and well below that in both Germany and the UK, these being the most expensive licences it acquired. To earn a return in the remaining life of the concessions, Vodafone will need continuous mid to high double digit growth in revenues and, especially, data or other non-voice revenues.

We place this emphasis upon non-voice revenues, for two reasons. The pace at which voice usage grows can be encouraged by pricing and is subject to well understood elasticities and it is unlikely that any likely growth rate will prove sufficient to achieve the necessary return. So it has to be the new and growing market for non voice mobile services. Vodafone's disclosure about messaging and data is restricted to four of the 22 markets it includes in its consolidation, together with totals for the two geographic regions and a group average.

The next chart shows the trend in messaging revenues as a proportion of ARPU. While the UK and Italy have produced good results, with their proportions rising by 3.4% and 4.3% respectively, over the period shown here, Spain seems to be becalmed and Germany is in retreat, with a drop of over one percent. The group average has risen by just one tenth of a percent over the twelve quarters shown here, while the EMAPA proportion has dropped from 11.2% to 9.6%, though this reflects the impact of the consolidation of India rather than anything else.

The picture with respect to mobile Internet is better, with the group total up from 3.5% of service revenue to 6.6% and Germany moving into double digits, which more than offsets the decline in messaging. However, here it is not the trend that is the concern, but rather the absolute. Even Germany's 11.6% is way below what management had hoped for when these licences were bought. Why might this be? The answer isn't hard to find. Vodafone, along with virtually every European operator has done little to encourage take up of mobile data devices and nothing to encourage their use. Looking at the UK tariffs, we find that Vodafone offers a so-called "unlimited use" mobile data tariff for £25 per month. In fact, "unlimited" here means capped at 3GB, so there is a material premium for mobility, when this is compared with a DSL based tariff. As we write, we see that Vodafone is proposing to drop this tariff to £15, a 40% reduction.

However, the most shocking aspect of the tariff is the premium Vodafone charges for international roaming. It charges a staggering £10 per MB - or 1,200 times the UK rate, (2,000 times the new rate). H3G - the cheapest of the operators by far, when it comes to mobile data - is still hugely expensive at £3 per MB, but if we assume that at worst, Hutch is pricing this at cost (which it is not) then Vodafone is looking for £7 profit per megabyte. To be fair, we should also note that Vodafone has a £9.99 per day roaming tariff which offers better value, but even this seems excessive. Generally, we do not hold with regulatory intervention but this is an abuse that is crying out to be resolved. And who's going to benefit most from a price cut? Obviously, it will be the operators as by cutting rates, they can stimulate a market that they are currently stifling.

The four charts below show why they should do this as a matter of some urgency. The data we have referred to in the preceding paragraphs has mostly been proportionate. These four show the absolutes in Vodafone's four main European markets. Only Spain has seen increased expenditure in absolute terms and it is the smallest of the three. Total non-voice spend is up in three of the four (Germany is flat at €4.61) but in all cases, total ARPU is down. If Vodafone wants to reverse that trend, it will have to address the question of these exorbitant tariffs before Ms Redding does it for them.

Finally, a quick look at ARPU as a whole. This rather cluttered slide shows the trend in ARPU at Vodafone's main businesses (excluding India and Turkey, where the data does not go back far enough). Of the 16 markets shown here, only five have increased average spend over the past three years - Romania, Malta, Spain, Australia and the Netherlands. New Zealand is close to flat and would almost certainly have been up but for the post World Cup sulk that affected the country. But Spain (and possibly the Netherlands) apart, these aren't that crucial. The bulk of Vodafone's customers are in the UK, Italy, Germany, Greece, Portugal and Egypt and here, the trend is unidirectional.

Posted to the site on 7th February 2008

Posted to: www.cellular-news.com/story/29143.php