Vodafone Takes on VOIP

Global mobile giant moves on 3G with a plan to outmaneuver wireline phone providers

July 14, 2005

4 Min Read
Vodafone Takes on VOIP

Vodafone Group plc (NYSE: VOD) is taking advantage of low-cost 3G network capacity to launch a flat-rate national phone service that will take on providers of inexpensive VOIP over broadband, company officials told an investor and analyst meeting in Düsseldorf today.

Called "Vodafone ZuHause Zone," the service is being rolled out first in Germany [ed. note: you don't say!], but will later be extended to other countries where Vodafone Group operates, says chief executive Arun Sarin.

The "ZuHause" ("At Home") service offers 1,000 minutes of local and national calling for a flat fee of €20 ($24) per month, with extra charges for calls to mobiles and international lines. The subscriber device is a "mobile" handset that can be used to make and receive calls when the subscriber is located in their home-zone – defined as the user's local cell plus cells adjacent to their home, typically creating a service radius of around 2 kilometers.

The idea is to capture voice minutes currently made on regular wireline phones and to make sure those minutes don't migrate to VOIP providers such as Vonage Holdings Corp. "We have to move fast," says Vodafone Germany's chief executive-designate and current COO, Fritz Joussen. "If we don't, fixed-line usage might move to broadband."

The flat-rate €20 tariff is important, because Vodafone expects to make money through ongoing subscriptions, rather than on the razor-thin voice-minute margins that characterize the wireline market. It's "exactly the same strategic rationale" as Vonage's, says Joussen. "You have to get long-term customers, because that is where the profit pool is."

The service is currently offered as a separate subscription with a dedicated handset that doesn't work outside the subscriber's home-zone; but starting next quarter, it will be available as an optional add-on to existing mobile subscriptions. The user will then be able to make calls at the lower tariff in his/her home-zone, and then be charged regular mobile fees outside that area.

German mobile tariffs are among the highest in Western Europe, which is one of the reasons the service is being launched there first. Home-zone services are most likely to be rolled out in markets where there is a large difference in pricing between fixed and mobile calls, says CEO Sarin. In markets where the price difference between fixed and mobile is smaller, such as the U.S., extra minutes would likely be bundled with regular 3G subscriptions.

Vodafone Germany has also launched a home-zone 3G data-card service for a flat fee of €34 ($41), providing 5 gigabytes of data usage per month. When the subscriber moves out of the home-zone, the tariff is ratcheted up to the standard mobile rate of €1.6 ($1.9) per megabyte. 3G data-card services based on UMTS (Universal Mobile Telecommunications System) technology typically offer 384 kbit/s on the downlink and 64 kbit/s on the uplink, but often suffer from poor latency relative to wireline access.

Home-zone tariffs are a twist on the long-running trend of fixed/mobile substitution that has helped power growth in the mobile market for over a decade. The concept has already proven a modest success in Germany in the form of O2 Germany's "Genion" service.

What's different today is the existence of 3G radio access networks that use the wideband CDMA (code division multiple access) air interface and are more efficient than older, GSM-based 2G systems. As a rule of thumb, capacity on a 3G network costs about one-third as much as equivalent capacity on a 2G network, and this price is expected to keep falling for at least the next three or four years.

And now that many mobile operators have built out 3G coverage to substantial proportions of the population (in Western Europe, at least) they're eager to fill those pipes – and they don't much care if it's with data or voice traffic. Contrary to popular perception, 3G's success is not only linked to data usage, but will also depend on ongoing fixed/mobile substitution.

The availability of relatively cheap 3G capacity has negative implications for fixed/mobile convergence plays that are predicated on offloading cellular traffic to inexpensive IP infrastructure by way of an 802.11 wireless LAN (see BT Unveils FMC Service and AT&T: We've Got FMC Too).

"We are still underutilizing 3G networks by a lot," says Sarin. "We're much more interested now in pulling minutes."

— Gabriel Brown, Chief Analyst, Unstrung Insider

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