Research Notes

Vodafone exits Japan, Sweden

where next ? ? ?

There has been a lot of press coverage the last few days about Vodafone selling their Japanese operation – this is the second time in just six months that Vodafone have given up and chosen to sell one of their operations having spent a great deal of time and effort trying to make that operation a success.

There are many reasons why Vodafone have chosen to sell off Vodafone in Japan, technological reasons, marketing reasons etc etc. But maybe one should ignore those reasons and examine the fact that Vodafone in Japan have not been able to ensure that a large mobile business – on one of the world’s largest mobile markets – has been the success that Vodafone’s management and shareholders had dreamed of.

Here at Strand Consult we see this sale of Vodafone Japan as just one more of many examples that the mobile industry is entering a paradigm shift – a paradigm shift that we have described in detail in our latest report “Mega Trends in the mobile industry – a question of life or death”. What Vodafone experienced in Japan is actually happening on many other markets and is basically the same scenario as the last time Vodafone chose to give up and leave a country – just six months ago in Q4 2005 in Sweden.

If you view the mobile landscape today there are very many similarities between the airline industry and the mobile industry – in fact there are so many similarities that it would take day’s to outline them all in a brief newsletter like this. The main points are that the airline industry thought they could compete against the discount airline companies like easyJet and Ryanair by offering business class products. But the reality was that companies like Swissair, KLM, Sabena and many others had to admit that their large organisations made it impossible for them to run a profitable business when competing against the discount players. They had to give up and those companies are today either non-existent or have lost their independence. A company like British Airways realised very quickly that there would only be one option in the airline industry – to adjust their costs and organisation to allow them to compete against the discount players that had entered the markets.

When you have been in this business as long as we have and delivered information to over 140 mobile operators worldwide, it is very important for us to be able to point out good business cases and markets, where operators have been successful with strategies that we helped them envision and implement. Today there are many good examples of operators that have focused on their costs and thereby had a much better chance of surviving than those operators that have focused on “business class” concepts, where the operators have retained responsibility for the total customer experience from handset, to services, to network operations.

Let us examine Sweden, the market where Vodafone also gave up and sold their business after having to write off millions of Euro in investments. In Sweden, Tele2 chose to switch to a discount concept, reduced their subsidising of handsets and instead focused on selling cheap voice minutes and SMS. The results speak for themselves. In the period Q4 2002 to Q2 2005 Tele2’s margin went from 53% to 44% – despite a price drop of over 60% and their MOU increased by 25% in 2005. Vodafone Sweden focused on their classic Vodafone concept and their margin fell over the same period of time from 39% to 14% and their MOU only increased by 7% in 2005. The result – just like in Japan – Vodafone chose to sell off their business and leave Sweden.

The same thing is happening in other countries. In Holland, O2 chose to sell their operation for just 25 million Euro. The management of O2 in Holland renamed the business to Telfort, reduced their costs as they changed over to a low-cost business model and focused on getting traffic through their network using deals with MVNOs. Just 2 1/2 years later they sold Telfort for 1.2 billion Euro! O2 believed in the business class concept – Telfort focused differently – and the sales price of Telfort reflects what the market believes the same business is worth before and after a change in strategy.

In Belgium, KPN chose themselves to turn their business around using their Base brand. The company had a negative bottom line, high debts and a market share of around 10% – three years later the company’s market share has doubled, profitability is excellent, their debt is gone. KPN have changed from being an operator with large problems to a successful operator with satisfied shareholders. The medicine needed was focusing on their cost infrastructure and using sub-brands and MVNOs to attract interesting customer segments.

In Denmark, Telmore succeeded with just 67 employees over 4 years to acquire almost as many customers as Orange – with their 1500 employees – had after 7 years! The result was that Orange Denmark – just like O2 in Holland and Vodafone in Sweden and Japan – chose to give up, sell their business and leave the country. That story about the Danish mobile market is legendary and in our report  “The Moment of Truth – A portrait of the Discount MVNO / Mobile Operators’ success” we describe in detail how Telmore and other MVNOs managed to achieve their enormous success that so many have since copied.

The list of companies that now have success with a cost leader / price leader strategy is long, companies that have realised that the business class model that many mobile operators and technology providers have believed in over the past 10 years is possibly becoming obsolete. The question is whether what has been happening in Denmark, Holland, Belgium and Japan will spread to other countries? Evidence that it will is already there: for example Vodafone’s current results in Germany speak for themselves!

We believe Vodafone will have to re-evaluate their global strategy and admit that if they continue to sell an operation every time they run into problems they cannot handle – they might as well sell their whole world-wide business tomorrow!

These are harsh words – but for Strand Consult the above events are exactly what we have been predicting the past 3 years and are part of the 10 Mega-trends we have described in our latest report “Mega Trends in the mobile industry – a question of life or death”

Judge for yourself: do you believe that a mass-market operator that focuses on a business class strategy will be more successful than a mass-market operator that focuses on a cost leader / price leader strategy? We believe that what has already happened in Denmark, Sweden, Finland, Holland, Belgium and that is now happening in Switzerland and Germany will spread across the whole rest of the mobile world. We are facing a huge paradigm shift that is even larger than the one we experienced after the 3G auctions in 2000… 
Mega trends in the mobile industry

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