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The cloud beneath your feet: why Vodafone bought C&W
02 July 2012
Joao Sousa and Beltran Simo look at the reasons behind Vodafone’s planned purchase of Cable & Wireless Worldwide. The move will enable Vodafone to manage data growth and boost its UK enterprise business
Cable & Wireless
Joao Sousa (left) and Beltran Simo: following Vodafone’s move, we may see more
M&A activity in highly competitive mobile markets
Global mobile giant Vodafone is to buy Cable & Wireless Worldwide for just over £1 billion. While CWW has a significant international presence, we believe Vodafone’s interest lies primarily in its assets and capabilities in the UK.
The CWW acquisition will double the size of Vodafone’s enterprise division, will strengthen commercial relationships with key corporate and government clients and will provide increased capabilities in the market.
Moreover, the acquisition will complement Vodafone’s own mobile network with more than 20,000 kilometres of fibre infrastructure within the UK. By extending its own fibre network, Vodafone UK will avoid paying transmission fees which according to Sanford C. Bernstein analysts could total more than £200 million a year.
While offering enterprise integrated services, increasing ICT capabilities and lowering transmission costs might seem logical enough reasons for the acquisition, we believe there are more strategic reasons for this move. There are three real reasons why Vodafone bought CWW.
1: To manage its mobile data growth
The world is witnessing an unprecedented explosion in mobile broadband usage on the back of new superfast technologies, HSPA+ and LTE. According to Cisco, global mobile data traffic is expected to increase 18-fold between 2011 and 2016.
The mobile data explosion is a double-edged sword for wireless operators — and Vodafone UK is no exception. Their pipes will continue to be used, but at the same time current wireless technologies — such as HSPA and LTE — may not be the most efficient medium to deliver the service. The naked truth is that fixed technologies deal much more efficiently with scale than mobile technologies.
Why? This is ultimately based on key differences between fixed and mobile data economics — density and spectrum.
While 3G base stations can only deliver high speeds — of 3 to 5 megabits a second — at very close distances, fibre-to-the-home can today deliver a gigabit or more with almost no degradation due to distance. Moreover, the coverage area of a 3G base station actually shrinks as the number of simultaneous users increases — a phenomenon called “breathing”.
As the scale of mobile broadband usage goes up, the average individual cell site coverage will tend to shrink, which means more sites and more capex will be required to cover the same areas.
In mobile technologies, data eats through spectrum capacity far faster than voice, making spectrum a key — and scarce — asset for wireless operators. Fixed technologies however have a major advantage as fibre-based transmission solutions are easy to scale and can provide almost any amount of bandwidth required.
This asymmetry in data economics together with the spectrum and capex constraints suggest the only way mobile operators will be able to serve the expected demand will be by relying — at least partially — on technologies such as FTTH, wifi offload and microcells.
Going underground may be a necessary move for mobile operators who want to live in the cloud.
In the UK all four mobile network operators have 3G spectrum in the 2.1 gigahertz band where, compared with lower spectrum ranges, it is significantly more expensive to provide mobile broadband coverage over a given geographic area.
However, Everything Everywhere also controls 2x60 megahertz in the lower 1.8 gigahertz range and could convert this — now used for 2G GSM — into 3G, thus gaining a cost advantage over Vodafone and Telefónica O2 in the UK. And that is why traffic offloading becomes particularly critical for Vodafone and O2. In comes CWW.
The CWW acquisition could give Vodafone, with a 25% UK mobile market share, the needed competitive lever to continue its data-intensive strategy and challenge both Everything Everywhere’s and O2’s market leadership — they have 35% and 29% respectively.
How? On the one side, Vodafone will be able to use its business footprint to offload mobile traffic onto wifi hotspots and microcells in office parks, business buildings and public areas at almost no additional cost. This is a substantial advantage when compared to O2, which despite having similar spectrum will face significant challenges in replicating Vodafone’s data intensive strategy without access to a fibre network.
On the other side, Everything Everywhere will have a bigger challenge to manage the data boom. Despite controlling wide 1.8 gigahertz spectrum, it is being used for 2G — and this means that to meet the mobile data demand the operator will need to engage in a substantial re-farming exercise to use this spectrum for 3G.
2: To re-sell transmission capacity to other mobile data providers
The expected future data demand will require substantial amounts of transmission capacity. Besides providing Vodafone with significant savings on this front, the acquisition of CWW will allow for two other key benefits:
First, the CWW acquisition will give Vodafone a future-proof technical and economical solution for transmission in the UK, through a fibre network with one of the broadest reaches in the UK, which will also allow for fast deployment of microcells and wifi hotspots.
Secondly, Vodafone will be well positioned to capture the value in fast growing mobile data segment — even the share of growth captured by other operators: CWW’s network could be used to offer offload wholesale solutions to competitors, which would allow Vodafone to maximise its share of the transmission business.
3: To build up its ICT capabilities
Why is Vodafone interested in building up its information and communications technology capabilities? In connection with the expected data traffic growth, ICT will be a key driver to secure the positioning in both the consumer and the enterprise and government segments. ICT will drive new services — such as cloud, smart city, smart campus/office/gated community — which will develop the connectivity business further and increase the number of high speed connections and share of traffic.
ICT is not so much about increasing revenue but more about driving the adoption of super-fast connectivity and cloud services across enterprise and consumer segments.
Building these capabilities organically has proven challenging for operators, forcing them to either partner with global players or acquire local companies with the required skills — skills that CWW partially brings to the table for Vodafone.
In a data-hungry, OS-driven, cloud-enabled world, only wireless operators with significant fibre-based fixed assets to manage wireless data growth, provide future-proof transmission, and drive connectivity business through ICT will have the opportunity to sustain long term competitiveness and challenge existing market structures.
Following this Vodafone move, we may see more merger and acquisition activity in highly competitive mobile markets where fixed assets seem to have become critical to sustain long term data strategies. GTB
Joao Sousa is a partner and Beltran Simo is a principal at Delta Partners, a telecommunications, media and technology management advisory and investment firm specialising in the Middle East, Africa, eastern Europe, emerging Asia and Latin America
The rise and fall of Cable & Wireless
Cable & Wireless provided telecoms links across the former British Empire. Most of
its cables made their UK landing here (above left) in Porthcurno, Cornwall. Above
right: CWW owns a global telecoms network using satellite stations and submarine
cables as well as UK infrastructure bought in 2005 from Energis
Investors form the Falmouth, Malta, Gibraltar Telegraph Company and the British Indian Submarine Telegraph Company, renamed the Eastern Telegraph Company in 1872
Radio inventor Guglielmo Marconi founds Wireless Telegraph & Signal Company, renamed in 1900 as Marconi’s Wireless Telegraphy Company
Telegraph and wireless companies merge to form Imperial and International Communications, renamed Cable and Wireless in 1934. Marconi’s manufacturing business remains separate
UK government nationalises C&W to own and operate telecoms services outside the UK, with UK-based assets going to the Post Office, later BT. C&W’s global assets include telephone and telegraph services across the then British Empire
UK government privatises C&W and awards its new subsidiary, Mercury Communications, a licence to compete in the UK with BT. Mercury launches residential and business services and payphones
C&W buys US long-distance operator TDX, which it renames Cable & Wireless Communications, later Cable & Wireless USA
C&W launches UK mobile operator Mercury One2One as joint venture with US regional operator USWest
Mercury merges with a number of UK cable TV operators to form another Cable & Wireless Communications — later absorbed into NTL and then into Virgin Media. Mercury brand abandoned
Deutsche Telekom buys Mercury One2One for £8.4bn, and later rebrands it T-Mobile
C&W sells Hong Kong Telecom to local company Pacific Century CyberWorks, now PCCW
C&W buys bankrupt US operator Exodus for $800m. Renames it Cable & Wireless America and sells it to Savvis for $155m in 2004
C&W sells its 52.5% stake in Australian operator Optus to Singapore Telecom
C&W buys UK operator Energis for £624m with Energis management taking over
C&W demerges fixed and mobile operators around the world into yet another Cable & Wireless Communications; C&W retains enterprise and long-distance operators and is renamed Cable & Wireless Worldwide
CWW shareholders accept Vodafone’s £1.04bn bid. CWC remains an independent company with operations in the Caribbean, Monaco, Macau and elsewhere
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