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Vodafone Looks Beyond Europe

Shares of Vodafone Group plc (NYSE: VOD) dropped nearly 2 percent yesterday, after the operator emerged as the winner in the auction for Turkey's No. 2 mobile operator, Telsim, with a $4.55 billion bid. Investors may have been further spooked by Vodafone CEO Arun Sarin's comments that Telsim will require additional investment of $1 billion and that the deal will dilute Vodafone earnings in the short term.

They may, however, be missing the larger story, as Vodafone turns to the developing world for long-term growth in its mobile voice business.

After Vodafone's share price dropped 11 percent on the announcement of the company's first-half results on Nov. 15, Sarin hit the road to convince investors and analysts that the company's strategy for growth is sound, if not spectacular. (See Vodafone Suffers in Japan.) To offset slow growth in its core, mature market, Sarin says, the company will look at Telsim-like acquisitions in the developing world, including Asia, Africa, and Eastern Europe.

Earlier this fall, Vodafone purchased 10 percent of India's largest mobile operator. (See Vodafone Buys Bharti Stake.)

The developing world isn't the only element to bottom-line growth; in recent weeks the operator has unveiled advanced services to appeal to consumer and business users alike. (See Vodafone Launches Mobile TV and Vodafone Offers Email.)

Boosting Growth

With an eye on emerging economies, Vodafone earlier this year commissioned a London School of Business study that, according to an article in the current issue of Developments magazine, delivered some interesting facts about mobile telephony in developing countries:

  • An increase of 10 mobile phones per 100 people boosts GDP growth in the developing world by 0.6 percent a year.

  • Between 1995 and 2003, the number of mobile phone users in 55 of the 102 poorer countries in the study surpassed the total fixed-line subscribers.

  • In that same period, mobile phone penetration went from 0 to 36 percent in Albania, 0 to 30 percent in Paraguay, 0 to 21 percent in China and 0 to 9 percent in India.


"There are billions of mobile users signing up all over the planet, especially in developing economies," points out Gabriel Brown, chief analyst, Unstrung Insider. "Vodafone needs some of that. The trick is to get the properties where there is potential for growth and reasonable average returns per unit."

With access to fixed-line telephones effectively impossible in many of these countries, and the rate of mobile penetration continuing at rapid paces, many international development experts believe that mobile telephony could help build a ladder out of poverty for many Third World countries. Grameen Bank, for instance, the highly successful "micro-loan" provider in Bangladesh, now has a popular offshoot, Grameen Phone.

Within Range

According to the Developments article, the United Nations goal of providing 50 percent of the world's population with access to a phone by 2015 has already been achieved -- a decade early -- almost unheard of among ambitious UN development goals. Almost 80 percent of the people in the world now live within range of a mobile network. The actual penetration rate of mobile phones is probably half that -- giving mobile operators years of growth in non-saturated markets.

Recognizing this growth potential, some equipment providers have started finding creative ways to get phones in the hands of people whose monthly income is less than the average price of a handset. Last April, Motorola Inc. (NYSE: MOT) announced a contract to deliver 6 million handsets for under $40, signed with a consortium of mobile phone network operators in small developing countries.

Vodafone, of course, is not entering developing markets to help poor people out of poverty; it is trying to boost its business in the face of disappointing results in its core markets.

"Yes, growth is slowing down a bit, but longer term we still see good growth prospects," Sarin told Fortune in November. "Not double-digit growth like we saw in the year 2000."

If he's looking for more new markets, he might check out Lithuania. The former Soviet republic announced last month it will hold a "beauty contest" to award 3G licenses in the coming months. The only problem: with a little over 3.5 million mobile phone users, Lithuania already has more mobile subscriptions than people.

— Richard Martin, Senior Editor, Unstrung

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