Vodafone Unveils Convergence Plans

Mobile giant Vodafone Group plc (NYSE: VOD) today unveiled its plans to enter the highly competitive fixed broadband market, kept analysts guessing on its M&A plans, particularly regarding Verizon Wireless , and posted an annual net loss of £21.8 billion (US$40.9 billion). (See Vodafone Reports Annual Results.)

While that may all sound negative, the carrier's share price was up by 2.75 pence, more than 2 percent, to 122.5 pence ($2.30) on the London Stock Exchange this morning.

Here's why: The company plans a cautious, low-cost entry into the DSL world, is reaping the rewards of its Verizon Wireless holding, and posted such an enormous loss because of asset write-downs that had already been flagged earlier in the year. In fact, the company's financials were better than expected, and Vodafone sweetened the new strategy pill with an even higher than expected dividend.

The fixed broadband move is just part of a much broader strategic rethink by the carrier that includes cutting costs, targeting developing markets, embracing new technologies, and ensuring relevance in a market that's moving almost too quickly for large traditional players. (See Vodafone Unveils New Strategy.)

Vodafone CEO Arun Sarin told analysts and investors this morning that "the pace of change is increasingly rapid in our industry," with mobile users wanting to use multiple technologies, such as DSL, WiFi, and VOIP, to communicate. "We have to think about how we can include these technologies into the mobile company that we are."

He also noted that the growing popularity of services from the likes of Google (Nasdaq: GOOG), Skype Ltd. , and Yahoo Inc. (Nasdaq: YHOO) means that "business models are changing. We need to make sure we don't get disintermediated from our customers… We don't want to get stuck in the middle" between a third-party service provider and the end user. [Ed. note: Disintermediated? Is that legal in the U.K.?]

Vodafone inches into DSL
As expected, Vodafone is branching into the world of DSL so it can offer its consumer and business customers a combined fixed/mobile services package designed to encourage users to abandon their fixed voice services.

Vodafone is just one of a number of major mobile players adopting a fixed/mobile service bundling approach. (See O2 Confirms DSL Aspirations and Orange Juices Free Broadband Battle.)

Initially the operator will resell DSL services that it will buy wholesale from other carriers to keep upfront costs to a minimum, but may decide to invest in its own DSL equipment and unbundle the local loop at a later stage. (See Mobile Giants Size Up DSL.)

Vodafone will launch its first fixed/mobile service bundle in Germany in the third quarter of this year when it adds a DSL component to its existing "Vodafone ZuHause Zone" service, a flat-fee voice service designed to capture fixed line voice minutes away from the likes of Deutsche Telekom AG (NYSE: DT). (See Vodafone Takes on VOIP.)

The company has also launched a similar service in Italy called Vodafone Casa.

In Germany, Vodafone has 630,000 ZuHause customers that generated €80 million ($103 million) in revenues in the past year, and has set a target for the end of the current financial year (ending March 31, 2007) of 2 million users generating €240 million ($309 million) in sales.

Vodafone Germany will buy wholesale DSL services from its sister company, Arcor AG & Co. KG , a remnant of Vodafone's acquisition of Mannesmann in 2000.

The initial offer will be a simple service bundle, but Vodafone is also developing a single service delivery platform to ensure that "the services people love on their PCs are also available on their mobile phones, such as instant messaging," says Sarin. Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK) have previously been announced as Vodafone's convergence technology providers. (See Vodafone Selects Ericsson IMS and V'fone Picks Nokia IMS.)

Thomas Geitner, head of Vodafone's "New Businesses and Innovation" division stated: "When we have accrued enough fixed broadband customers, then local loop unbundling might be economic in the long-term. We'll consider that on a market-by-market basis, and also look at the integration of other technologies, such as WiFi. But we don't need to build a full fixed-line infrastructure. The aim here is to target fixed-line substitution, add broadband access to the bundle, and develop a single service layer for converged services." (See Vodafone Shuffles the Deck.)

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