By Alan Burkitt-Gray
Vittorio Colao: European countries are slow to allocate LTE
spectrum. Vodafone has bought spectrum in Italy and in Spain,
but it's not yet available for use
Vodafone’s group CEO Vittorio Colao starts on a positive note before turning on European Union’s commissioner responsible for telecommunications, Neelie Kroes. “This is a fantastic industry that can deliver what the customers want. There are four things they want: security, ubiquity, convenience and trust. We operators are the ones that can deliver this,” he says.
Still being positive, his second big message is “the importance of the social role of what we do, and not just what we do but what we enable others to do”. He’s thinking in particular of mobile services for agriculture, health and education. “They are very important in emerging markets and I believe they should be taken more seriously in mature markets and not just in emerging markets. We are seeing some of it happen.”
But then Colao turns less positive — in particular about Europe. “The European market is in a phase of decline, not growth,” he says. “The investment is not good enough. We need a better regulatory environment. A friendly environment would help. There is still very good potential in Europe.”
The context of all this is that Colao is at Mobile World Congress in Barcelona, and only hours before the interview Kroes set him a challenge — by Twitter.
“Message to Vittorio and Vodafone: I call your bluff. I take the side of the Vodafone customer,” she tweeted, adding: “Remember, if consumers lose their fear of using their smartphones and tablets when travelling across Europe, operators will benefit as well.”
This was a response to a remark Colao made the day before, in his keynote speech to the congress. “Does Europe need employment or does Europe need rate cuts?” he had asked. “We should stop having this continuous intervention on prices and let the industry reinvest the money.”
Kroes’s decision to respond to his speech by Twitter was seen as nothing short of extraordinary within the Vodafone camp in Barcelona.
Colao shows his irritation with the European Commission’s wish to manage the rates that mobile operators charge, and with the position of the European market in general. But do the regulators — in the Commission and in member states — understand the importance of telecoms to their economy?
Rules of the past
He answers more positively than one might expect: “The European Commission understands the sector very well, and they have a European view of the need to have a healthy sector — and, if possible, a single European sector.” But sometimes, especially when they’re thinking about mobile termination rates, “they are applying the rules of the past”, he says.
The Commission’s desire to set limits on intra-EU roaming rates and termination rates makes no sense, he says. Out of every 10 cents of price reduction, the EU itself — says Colao — has estimated that only two cents end up in lower prices. “So it is not true that the customer pays lower prices, and 80% of the amount does not happen.”
A decade ago, when he was running Vodafone Italy, a mobile operator could control 100% of the price, he recalls, but much of it today is governed by the amount retained by the fixed operators. “They are not reducing the amount they retain,” he says. “This is the type of dialogue we need to have.”
He believes in competition, he says. “We always want to be competitive, and we respond to competition. We think it’s in the interest of the industry that we cooperate with different players.” He means, he says, content owners, newspaper publishers, and so on: “We think we can create a fantastic digital world.” There is still some growth in Europe, but “not huge”, he warns.
Earlier in the meeting, in the upper floor of Vodafone’s massive stand — a temporary building, in the company’s classic bright red — in the courtyard of Mobile World Congress, it’s made clear that there are some topics he’s unable to talk about.
His communications director Matt Peacock issues what he calls “a quick safe harbour statement”: Vodafone is in “a regulatory process” with UK operator Cable & Wireless Worldwide. That means — as was announced a week or two before our meeting — that Vodafone has said it is considering whether to make a bid for CWC. So, under UK takeover rules, he’s not allowed to say anything at all about it. Any questions on any possible bid will be deemed “inappropriate”.
Colao, with the bustle of day two of MWC through the window behind him, adds a rider. The afternoon before, while he was in a similar meeting, the wall of the building started to give way and everyone had to leave. “It has been demonstrated that it was inappropriate questions that caused it,” he smiles. “If there are any, this wall will start to give way.”
It will be four years in July since Colao took over as group CEO of Vodafone, though his association with the company goes back much further. Having been a McKinsey consultant on media and telecoms in its Milan office, in 1996 he moved across the city to dynamic mobile operator Omnitel Pronto Italia. He became CEO in 1999 and two years later Omnitel was bought by Vodafone in its first great expansionist phase.
He’s been with the group since then, except for two years from 2004 when he was CEO of RCS MediaGroup, an Italian publishing company.
Vodafone started out in 1984 as one of the first two mobile operators in the UK, but today it has expanded way beyond. It is present in 21 markets from Albania to New Zealand, and has partners — in which the company has a smaller or greater shareholding, or sometimes none at all — in nearly 50 more, from Austria to Uzbekistan.
Verizon Wireless stake
The company merged with early US operator AirTouch in 1999, but in the same year put AirTouch’s interests into Verizon Wireless, giving it a 45% share of what is now the biggest US mobile operator. Vodafone received its first dividend from that stake only this year.
In recent years the company has sold some of its holdings — its minority shareholding in China Mobile, for example, or its stake in SFR, some years after it gave up hope of turning that into Vodafone France. But in 2007 it bought Hutchison’s stake in an Indian operator, creating Vodafone India, and has taken a controlling stake in South Africa’s Vodacom — which has kept its own name but adopted Vodafone’s red colour, and is expanding into the rest of sub-Saharan Africa.
Over the past five years revenue has increased from £31 billion to £46 billion, though operating profit has grown less dramatically from £9.5 billion in 2006-07 to £11.8 billion in 2010-11. Net debt at the end of September 2011 was £26.2 billion.
Today the group has around 390 million customers. Germany is its biggest single market, contributing 17% of group revenue and 13% of operating profit. The UK accounts for only 11% of revenue and only 3% of profit — which implies revenue of about £5 billion and operating profit a relatively modest £350 million or so.
Colao comes back to the question of roaming — a big issue in Europe, partly because so many business people and leisure travellers move frequently from country to country and notice the charges for making and receiving calls and for consuming data outside their home countries; and partly because some smaller operators have been hurt by a fall in roaming revenue because of the recession and because of the EU’s limits on charges.
“I’m the first to say that roaming is too expensive,” says Colao. “But I think the industry is sorting itself out.” An increasing number of big companies negotiate monthly plans that include roaming, he says, and Vodafone itself has introduced a scheme called Passport that allows customers to roam on their normal monthly allocation of minutes for the payment of a €2 a day tariff when they are in another country, “which is very successful”.
Losing revenues and margins
But Colao has other issues about Europe, where the industry “is losing revenues and losing margins”, he says. Countries in Europe have also been slow to allocate new spectrum, he complains — especially for LTE services.
“LTE is a fantastic technology that in the US is delivering very high speeds,” he says. But in its European operations Vodafone has been able to launch LTE only in Germany, not in the other countries. The company also has LTE spectrum in Italy and in Spain, but those countries are not releasing it for another few years. “We pay, and we get the spectrum three years later,” he grumbles.
Meanwhile the US is powering ahead in the new technology. “Customers are getting 80 megabits per second and they are getting new phones,” he says. “They are two or three years ahead.”
Verizon Wireless now has more than 60% of the world’s LTE customers. Four years ago the company’s CTO Dick Lynch told Global Telecoms Business how he was collaborating with Vodafone’s CTO, Stephen Pusey, on the development of LTE.
But in Europe “I cannot get critical mass”, complains Colao. He cannot go to the terminal makers, companies such as Samsung or Motorola, and order LTE terminals in volume — because he does not have the volume to offer.
However, Europe is meanwhile worrying about how to deliver very fast broadband in rural areas. LTE is already being used in Germany for just that purpose, he notes. “When people say we don’t have enough money for fibre, I say let’s put LTE in rural areas. It’s much cheaper than fibre. Let’s put LTE there.” Put the fibre in the cities and LTE in rural areas, he adds.
Though he didn’t say so, Verizon Wireless is also using LTE for just such a purpose: rural broadband access in areas where fixed operators would find it uneconomical to install fibres. LTE is increasingly being seen as a substitute for fibre in as a way of allowing rural customers to get the same sort of broadband service as those in towns and cities.
There is an increasing blur between fixed and mobile, adds Colao, holding up an iPad and asking: “Is this fixed or mobile?” If all computers in five years’ time have a screen that can be separated from the keyboard, will they be fixed or mobile?
There’s a frustration that regulatory delays are impeding the development of Vodafone’s European development. The company is creating new business units to build new services, including mobile advertising and machine-to-machine services, “but in order to do it I need spectrum”.
Battle with regulators
There’s a constant battle with regulators, he sighs. “Every year we set the budget”, and then money has to be taken away because regulators take steps on such things as mobile termination rates. “One year it’s the Italians, another year the Brits, another the Germans. Eventually we’ll go to zero.”
And he clearly shows, again and again, that he resents interference from regulators who want to set rules. “Let’s not be dogmatic. A religion is not very good for designing networks. It’s good for other things. We need to bring broadband to human beings in whatever is the most efficient way. It’s obvious to me that if you are in a highly concentrated area, fibre is probably the most efficient way, and if you are rural Spain or Germany LTE would be the best way. Our objective is to deliver it, not to choose one technology over the other.”
And Europe needs the investment, he says, adding that broadband is good for business. “You get 0.6% growth in GDP for every 10 points increase in broadband. Everywhere we bring broadband and especially mobile broadband we improve the productivity of business.” At the same time reducing transport costs and pollution, he adds: some governments have recognised this and therefore see broadband as a priority.
Colao laments Europe’s loss of its former lead in mobile technology. “Europe was leading in the GSM days,” he says. “Now the US is leading with LTE.” They have the phones in their pockets. “We have lost the leadership.” Once he can use the spectrum, he can start offering the new services. Europe should see digital strategy as a priority.
Despite his sorrow that Europe has lost its lead in mobile, Colao puts a realistic interpretation on it. Europe just is not that important to Vodafone any more, it seems. “Africa and India have the power of demographics and GDP growth. You look at these markets with more sympathy when there is growth and good demographics. Europe is less of an appealing environment.”
Capital expenditure rise
Within Europe, Germany and Italy produce the best margins for Vodafone, “and that’s where we invest the higher amounts”, he says. “The two things are linked.” Vodafone spends an annual £6.2 billion on capital expenditure across the group, a figure that has risen almost 50% since 2006-07.
At the eastern edge of Europe, Turkey is a country “where the level of profitability is lower”, largely because taxes take such a high percentage, “and that might trigger some issues in capital allocation”, he warns.
It’s revealing that in almost an hour he says little about the UK market, where Vodafone is one of the biggest companies quoted on the London Stock Exchange. There’s no LTE yet in Vodafone’s UK network and profit margins are tiny compared with many of the group’s other operations. It would be remarkable if Vodafone decided to pull out of the market where it started — but the UK is clearly not that important to it any more. GTB
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