Vodafone boss takes aim at BT's G.fast plans as mobile operator's share price rises on service revenue improvements.

Iain Morris, International Editor

July 24, 2015

7 Min Read
BT Split Could Spur Vodafone to Invest in Fiber – Colao

Vodafone has held out the possibility of becoming a bigger investor in fiber access networks in the UK should regulatory authorities move to address BT's dominance by forcing the incumbent to spin off its infrastructure business.

Vodafone, which operates the UK's third-biggest mobile phone network, already channels some funding into fixed-line infrastructure but has not made investments in the rollout of high-speed connections into homes and small businesses.

In 2012, Vodafone Group plc (NYSE: VOD) paid £1 billion (US$1.55 billion) for Cable & Wireless Worldwide plc (London: CW), a telecom operator serving enterprise and government customers, and it recently launched a broadband service that relies on a wholesale deal with BT. (See Vodafone UK Enters Quad-Play Fray.)

Along with other UK operators, however, it has sounded increasingly unhappy about BT Group plc (NYSE: BT; London: BTA)'s grip on the communications market and is one of several players urging regulatory body Ofcom to break up BT in the interests of broadband competition. (See Split BT to Lessen Regulation, Says CityFibre, Ofcom Does Not Rule Out BT Carve-Up and Ofcom Could Still Make BT Do Splits.)

Vodafone's concerns have grown since BT announced plans for a £12.5 billion ($19.4 billion) takeover of EE , the UK's biggest mobile operator, earlier this year. (See and BT Locks Down £12.5B EE Takeover Deal.)

Reaffirming his position during an earnings call with analysts earlier today, Vodafone CEO Vittorio Colao indicated that appropriate regulation could even persuade him to start spending on fiber rollout.

"The regulator should have a serious look at the possibility of creating a true modern infrastructure company to serve the country," he said. "Vodafone could even be an investor in fiber if this was a genuine thing."

Colao also had a dig at BT's plans around VDSL and G.fast, a technology the incumbent is currently trialing that is supposed to boost connection speeds by extending the frequency range over which broadband signals travel.

"Going for VDSL and G.fast is a classic position that would strengthen their hold on the market and limit competition," Colao told analysts. "When you talk about the need for fiber that position indicates a low willingness to modernize."

BT has previously announced plans to provide 500Mbit/s services to most UK homes over the next ten years by using G.fast technology. But unless BT were forced to spin off its Openreach access business, rivals would still have to buy wholesale services from a retail competitor. (See BT Puts G.fast at Heart of Ultra-Fast Broadband Plans.)

Sky and TalkTalk , major broadband players that rely on wholesale agreements with BT, have recently complained that BT is able to squeeze them in the broadband market through a combination of high wholesale and low retail prices. (See BT Guilty of 'Under-Investment,' Says Sky.)

Those two companies are currently testing the waters of fiber investment, having teamed up on a fiber-to-the-home project in the city of York in partnership with CityFibre , an infrastructure company that has built gigabit-speed networks in a number of UK towns. (See TalkTalk Unveils Cut-Price Gigabit Service and TalkTalk's Small Fiber Beginnings.)

Colao has barely hinted that Vodafone might be interested in pursuing similar schemes but evidently believes the "structural separation" of BT is a prerequisite before it even considers taking the plunge.

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The Vodafone boss has also expressed concern about a £10.25 billion ($15.9 billion) takeover of Telefónica UK Ltd. , the country's second-biggest mobile operator, by Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY), which intends to merge the business with its Three UK subsidiary, currently the smallest of the UK's four mobile networks. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

Through a joint venture called Mobile Broadband Network Limited (MBNL), 3 currently shares network infrastructure with EE, while Telefónica UK -- which trades using the O2 brand -- has a similar arrangement in place with Vodafone through the Cornerstone Telecommunications Infrastructure (CTI) business.

Coleago Consulting, which specializes in spectrum issues, reckons one of those ventures would have to go following the takeover activity, noting that "whichever joint venture 3/O2 exits will put the jilted party at a financial disadvantage to the other mobile network operators."

Colao is obviously worried that if MBNL survives while CTI disappears Vodafone will be left fending for itself while BT, EE and a new-look 3 collaborate on network rollout.

"The UK should not allow re-monopolization through two deals of mobile and fixed data traffic, with potentially 75% of mobile traffic going into EE's network and potentially 90% of backhaul in BT's hands," he said.

Next page: Content gripes

Content gripes
Another regulatory bugbear for Colao is the situation regarding content rights throughout Europe, with broadcasters such as Sky paying exorbitant fees for the benefit of exclusivity.

Colao refused to rule out participating in what is likely to be a lucrative auction of rights to screen soccer matches from Germany's Bundlesliga next year, but complained bitterly about barriers to competition in the pay-TV market.

"It is clear throughout Europe that if someone holds rights and says I will sell right for a minimum guarantee... it's a clear barrier to good competition," he said. "Minimum guarantees are my enemy and we need to convince regulators they are anticompetitive, but I think the behavior of content owners will be under a lot of scrutiny in coming years."

Colao's comments came as Vodafone reported a 0.9% year-on-year dip in Group revenues, to £10.1 billion ($15.6 billion), for the April-to-June quarter.

Although headline sales were down slightly, Vodafone also claimed to have seen a 0.8% year-on-year increase in organic service revenue.

That followed the 0.1% improvement Vodafone flagged in the January-to-March quarter, which represented a return to organic service revenue growth in the period for the first time since 2012. (See Vodafone May Buy Content to Fight BT, Telefónica.)

Vodafone cited a strong performance in its emerging markets and said that trends in Europe showed signs of improvement, reflecting stabilization in the market environment, the effects of its Project Spring investment program and higher data usage.

Figure 1: Source: Vodafone Source: Vodafone

Operations in Germany and Spain received a boost from Vodafone's acquisition of cable assets in each market.

Like other operators in the region, the company is reacting to the growing interest in converged services and is eager to wean itself off dependency on wholesale deals with incumbents to provide broadband services.

Several weeks ago the operator confirmed it was in talks with cable giant Liberty Global about a possible exchange of assets in the European region -- with analysts speculating Vodafone might quit Germany in exchange for Liberty's Virgin Media UK business -- but Colao refused to comment on the discussions during his earnings call. (See Vodafone in Asset-Swap Talks With Liberty and Vodafone Could Buy Virgin Media, Quit Germany, Says Analyst

Vodafone's share price received a boost on the London Stock Exchange following the publication of results and was trading up more than 4% just after noon on Friday.

The operator does not disclose details of profitability on a quarterly basis.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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