Catastrophic Strategic Loss of Focus: Vodafone into Fixed

Imagine if Boeing in 1950 had said "no the future is not going to be these airplanes that we sell, we are going to shift into the trains business." Or more currently, if in the 1990s Microsoft had said no, this e-mail thing will not be significant to the future of the internet, we will now start to push fax on the web and into the Microsoft Internet Explorer/Outlook. That is the level of strategic blunder that the world's largest mobile operator Vodafone is now contemplating.

First the announcement. Earlier this week Vodafone signalled that it will shift from its previous position of a mobile-only offering, to include a fixed-mobile offering to its customers.

And why not? Their biggest European rivals like Orange/France Telecom, T-Mobile/Deutsche Telecom, and Telefonica of Spain all have major fixed network assets in their home markets and all are pursuing converged solutions around fixed and mobile telecoms. In Vodafone's home market, UK, British Telecom sold its mobile network arm, O2, which operated independently for a few years before being bought up by Spanish Telefonica. Meanwhile BT has come back into mobile by launching its own MVNO - Mobile Virtual Network Operator - business in the UK (on Vodafone's mobile network). But BT itself is one of the global innovators with its Fusion phone (a converged fixed-mobile technology)

Everybody is doing it. So why would it be wrong?

Vodafone should know better. First, there is a global trend, irreversible and unstoppable, from fixed to mobile. Today there are almost twice as many mobile phone subscriptions worldwide as there are fixed landline phone connections. In advanced countries all over households are abandoning fixed landlines altogether. Finland has over 40% of all landlines already abandoned, Portugal is at 30% etc. The fixed landline business is a dying market by users.

What of the future? Who uses landlines? Old fogies thats who. And those who are very poor. The young clearly prefer mobile phones for everything. So the future will be even more mobile-oriented than today. Vodafone KNOWS this. Better than almost anyone. They have a presence in many of the most demanding mobile markets, from Italy (Europe's highest penetration) to Finland (via Elisa their affiliate) to Japan (where they are divesting the underperforming Vodafone KK)

But its not only the users. Its the competition. Being a mobile network operator like Vodafone, brings very much protection in the competitive sense, from the physical limits of available radio spectrum. There is a real scientific limit to how many mobile network operators can operate in any one market. In Mobile telecoms, therefore, there are typically from three to six network operators in any market. But on the fixed line business, if you are willing to invest in some switching equipment and pull some cable (or set up wireless transmission systems) you can be in business with mostly just handing in a form to the regulator. Typically in the fixed landline markets, there are dozens of competitors in all mature markets, not a handful. It is a much more contested market in landline, while its a strongly protective market (for those with an existing cellular licence, like Vodafone) in mobile.

Then there is technology. Skype and other Voice over IP (VoIP) technologies like Vonage are slashing any remaining profits in fixed telecoms. Why why why why WHY would a mobile operator want to enter this dead market where there are no profits left?

Once fixed telecoms was the big brother of all telecoms. International calls sustained the industry generating from a third to even half of all revenues, and easily half of all profits. I know, I was there, back in the 1990s when I was the Product Line Manager for the Finnet Group's and Elisa's international call business. I even set a world record for taking market share from the incumbent in those heady days of big international teecoms volumes. But that time has irrevocably passed. Back in 1996 I led the project to design the world's first fixed-mobile telecoms bundle with what was then the little brother of telecoms, our mobile arm (called Radiolinja back then, the world's first GSM operator). Many laughed at this project saying it was pretty irrelevant, as mobile would never become a mass market.

But today mobile telecoms dwarfs fixed landline telecoms. Mobile telecoms still sustains global EBITDA margins ("gross profit margins") of 35%. Few industries in the world can sustain those levels of profits year after year.

Mobile telecoms is still growing dramatically. Mobile phones are the most pervasive technology on the planet - 33% of all humans now have a mobile phone, more than TV sets, PCs, internet connections, cars, or owners of credit cards.

Vodafone is the biggest mobile operator. I can understand that they sit on a war chest and want to spend it on something. But to go into fixed telecoms is totally focusing on the wrong battle. Who cares if Vodafone could come in and outperform the competition in this space. In some years it will be such a small niche that people simply won't care.

But the Vodafone managers who led this strategy will be remembered for severely bad judgement. Vodafone knows better than this.

If they have money, where should they go? There is convergence. The "growth" convergence. Not in fixed-mobile, but in the new convergence. Telecoms and internet convergence for a start. And yes, its a small industry (yes, the internet is a small industry when compared with mobile telecoms - the global internet industry ie adding up all the eBays and Googles and Amazons and Yahoos and AOLs is only about one tenth the size mobile telecoms) but one that is vibrantly growing, and obviously merging with mobile. Already 25% of all paid internet access is through mobile phones (with the majority of that in Japan, China and Korea obviously). Perhaps Vodafone Live could be seen as a step in that direction so Vodafone management probably thinks this part is covered already.

But more than that, there is the convergence of content and delivery, of telecoms/internet and media. Like Alan and I have been lecturing about it, the "Y of convergence" (three streams coming togther - like the letter Y - converging streams of telecoms, internet and media). Here we find the big opportunities. And Vodafone should know better. Let me show you:

The music industry says that the future is not music on the web, or music on iPods and iTunes - all which will show significant growth yes. But the music industry itself says that the future of music is on mobile phones. We see that future in Korea and Japan today.

The videogaming industry says their future is on mobile. Not on Playstation 3 or Xbox 2 or internet gaming - all of which will show a lot of growth. But the gaming industry executives themselves say that the long-terms future of gaming is mobile. And that future? Exists in Japan and Korea already today.

The television industry says their future is on mobile. Not on IPTV, not on web TV not on digital TV - all of which will show a lot of growth. Yet the executives in TV say that the future is - yes same pattern holds - on mobile. And that future? It saw its dawn last autumn, when digital set-top boxes were integrated into mobile phones, yes in Korea.

How about money? The biggest bank in Korea says their competition is not American Express and Visa and Mastercard, or the other traditional banks. Their competition is money on mobile phones. More people own mobile phones than own credit cards. If it takes an age limit of 18 years to get the first credit card, many teenagers get their first consumer credit when they get their first post-pay/contract mobile phone account. For many Europeans now the first phone is received at age 8. That is ten years before they are eligible to a credit card. Look at the success of G-Cash and Smart Money in the Philippines; of Felica in Japan. In Korea there are five separate mobile phone payment mechanisms and already over half of Koreans pay regularly using their mobile phones. I don't mean to buy the odd ringing tone or vote for Big Brother. I mean to pay for regular groceries in the supermarket, to pay for petrol at the gasoline station, etc.

Or even more, what of the future of advertising? Alan and I write about the emergence of the Alpha User - the super-influencer for any community. The ultimate target audience for any marketing campagin. The true influencer and evangelist. We trust the opinions of the members of our communities four times more than we trust the opinion of marketing communications from the brands we use. But like we write in the book, no other mechanism can identify Alpha Users automatically. They cannot be recruited accurately, and measuring internet traffic or fixed telecoms behaviour will not identify Alpha Users. But mobile networks can map Alpha Users automatically. The whole advertising industry will be revolutionized. A bigger change to that industry than the introduction of internet search. Imagine Google today? The moment Vodafone (and any mobile operators, obviously) have their Alpha User systems in place - they will totally control ALL advertising and marketing. Get into THIS space and dominate it.

If Vodafone wanted to invest in a future, and believed in convergence, there is a red herring story and a real opportunity. The red herring is the "backwards convergence" of fixed telecoms. It is as silly as me recruiting you, readers of this blog, to sign up for a mailed monthly newsletter. If I already have the readership here in the new media, why on earth would I ever bother to expend resources - and time - to try to fight in a media that is dying (print publishing of periodicals, that Alan and I have often blogged about here).

The real opportunity for Vodafone is the convergence of the future. Get into the future of internet, TV, music, gaming, credit card/money, advertising, search, messaging, etc etc of the future. That is where the growth is. Yahoo in 1995 was smart to understand search and e-mail would be big in the internet. They did not try to push fax or voicemail.

What Vodafone needs to do is to try to discover the new market spaces, like what Apple did with iTunes and iPod. No, I don't mean to try to re-invent music on mobiles. But with Vodafone's size and resources, certainly they could invent and innovate in the big future converging space.

Now as a final thought. For those operators who already own a fixed landline asset, whether its Verizon in the USA or TeliaSonera in Scandinavia, or SK Telecom in Korea etc, these of COURSE should build their fixed-mobile innovations, to maximise the utilization of their assets. I do not mean that fixed-mobile convergence is bad per se. Only that it should be limited to those operators who own a fixed asset already, and want to extract maximum performance out of it.

But for any operators that are pure mobile plays. You are already in the inevitable future. Don't waste one minute harking for the past. Fixed will never come back. Leave the VoIP/Skype battles to the dinosaurs and watch them price-war each others out into extinction. Invest all of your creativity and innovation in a truly mobile future, and you will be the winner.

Rather than Boeing attempting to build trains in 1950, they should go survey airline passengers to see what passengers (and airline carriers) want to enjoy air travel even more. To make BETTER planes. Or in the Microsoft example, rather than trying to push fax onto the web (and yes, dozens of such initiatives were launched in the 1990s to miserable success), Microsoft should have (and no doubt did) learn what early e-mail users want, and bring those into its intergrated office suite/windows/internet explorer/outlook package.

Vodafone. Please don't lose sight of the strategic goals. Stay true to your vision and become a winner in the big future: the one which is mobile. Ignore the fixed temptations.

Comments

[Paul Jardine]

While I differ on some details, broadly, I agree with you. Vodafone should be concentrating on mobile access. However they do have a significant fixed line player in Germany, which is a pretty large market. If Teliasonera should use their assets, shouldn't Vodafone use theirs? So, if they use their asset in Germany, how do they reconcile that with a group strategy?
The key to mobile is that you take your identity wherever you go, and with everything on IP, then the delivery mechanism (fixed, wireless, intravenous, satellite) is really not important. The current bunch of mobile operators own the mobile identity, if only they would realise how valuable it is. It's the dot in the centre of your Y!
I fear the current mobile operators are not dynamic enough to take advantage of the really big opportunities that are presenting themselves. They will be replaced by leaner, faster companies. It's still mobile, but not as we know it.

[Tomi Ahonen]

Hi Paul

Very valid points and I agree with both. Yes, wherever an operator (including Vodafone) has a fixed telecoms asset, they should utilize it to the fullest (including convergence). But also totally agree with you that the mobile operators are sadly too slow to capitalize on the huge range of oppportunities they now face. Thanks for writing Paul!

Tomi :-)

[Xen Mendelsohn (Dolev)]

this is a great example of the well known problem of major players in ANY field – their huge size doesn’t let them make quick and crucial (and risky) moves… [There are some advantages in being short, I tell ya' that ;-)]

[Paul Jardine]

Here's an example of Vodafone doing something right for a change! http://www.cellular-news.com/story/17054.php

[Tomi T Ahonen]

Hi Dolev and Paul

Thanks for the comments. I agree with you Dolev its very much a size thing. I'll take a look at the link Paul and see what good ole' VF is up to..

Tomi Ahonen :-)

[Dean Bubley]

Tomi

Sorry, but I have to completely disagree with you on this one.

Firstly "almost twice as many mobile phone subscriptions worldwide as there are fixed landline phone connections". This is misleading. The average fixed-line connection has considerably more than one user, while the average mobile user has considerably more than one subscription.

Vodafone is a "legacy mobile-only operator". It has only now started to grasp the idea that "mobile" and "wireless" are two distinct categories of communication. It has also (belatedly) grasped the idea that IP has taken root far faster in the fixed domain, and realised that "ethernet economics" will spill over into mobile via technologies like WiMAX.

Fixed communications is not going away, especially for data services. Fibre (or indeed copper) will always be less expensive per delivered megabyte (or terabyte), except in the most sparsely-populated areas. If anything, the gap is widening, 1Mb to 8Mb to 20Mb to 100Mb broadband speeds in an incredibly rapid time.

I would estimate that true, average, end-to-end speeds in the fixed-world Internet grow at 30% per annum, taking into account all links in the chain, including device, server & intervening networks. I think for mobile, it is closer to 20% per annum, not least because of the fundamental scarcity value of spectrum, and the slow progress of licencing it.

The world's interactive experience is dominated by fixed communications. There might be 2.1bn mobile subscriptions, but I would estimate that fewer than 10% of these use anything other than voice and SMS. Certainly if you strip out Japan and Korea, the figure would be well below 200m. Compare that with 200m broadband households, with (let's say) 2 users per home, plus many more who use broadband at work, school or public Internet facilities. Probably 500m - and that's just broadband users.

In my view, Vodafone is taking the right step, albeit 3 years too late.

[Tomi T Ahonen]

Hi Dean

Thank you for the very deeply considered, thought-provoking comments.

You make a lot of very good points, and probably points that many of our visitors may also have had. Let me address them each one by one.

1 "Misleading about more mobile than fixed." Why is this misleading? Because more use the fixed connection than use mobile? Have you seen modern usage in high-penetration mobile countries? NOBODY uses the fixed landline. It is not a family shared resource; it is an abandoned resource. Like the gas pipe in an apartment that switched its cooking and heating to electricity. Still exists but is unused.

I don't mean all fixed telecoms landlines are unused. I mean that INCREASINGLY they are. That for the young in the family, all studies show that the LAST phone they ever want to be caught using, is the family phone - because all family members can snoop on it. But their own mobile phone they can take to their own room, or go outside and talk in private - or best of all - to send text messages that the parents cannot even hear.

Note the stats from Finland and Portugal. 40% of all Finnish households that used to have a fixed landline phone, have totally abandoned it. Yes, remember Finland was always one of the most advanced industrialized countries in all telecoms, and all through the 1990s Finland had among the top 5 highest penetration of landlines and highest penetration of internet use, and highest penetration of mobile phones. In that battle, the mobile came to dominate.

All other countries are following the trend. Even in America already about 10% of all households have abandoned fixed landlines (according to the CTIA).

But if you don't like the user numbers, then how about usage? In 2004 more total revenues were generated by mobile voice than fixed voice. I think my point holds very well. The trend is inevitable. Growth in fixed landline users has stagnated and is expected to start to fall. Growth in mobile is continuing at incredible rates, most experts expect 3 billion mobile subscribers before the end of this decade. And if the majority of the money is also generated in mobile - and now we have all the added pressures of Skype etc to fixed telecoms - it is not the growth opportunity; mobile is.

2 "Mobile and Wireless are two separate categories?" Well, I think Vodafone has known this quite well for quite a long time. I have one of their 3G modems for my laptop and it has had the ability to use WiFi hotspots as well. I don't see the point of your argument. Mobile is a 625 billion dollar industry. Wireless internet is what, worth a couple of billion dollars - totally trivial business when compared with mobile? The WHOLE internet industry is worth less than 100 billion - thats broadband access fees and content fees and service fees internet advertising income all together.

3 "Fixed communications not going away" - fine, I'll grant you this. But it is clear fixed overall is not growing (only the proportion of broadband inside of fixed, is growing). All internet analysts got quite alarmed last year 2005 when they noticed the overall growth had stalled. It was in all the press. Mobile is growing at ever faster speeds. They sold 800 million handsets last year, and Nokia, Motorola, Samsung, SonyEricsson have all said this year they expect again a record year for mobile.

But yes, I'll be happy to grant you fixed will exist for a long time. Even so, it will have many times more competitors than mobile. Those competitors will have huge standards and price wars and squeeze profits out of the industry. They will be focusing most of the battle into the broadband internet space and offer to do it via copper, via fibre, via TV cable, via the electicity grid, via wireless like WiFi and WiMax and even via satellite. A huge slew of providers will JOIN this battle. Tripple play and quad-play from the cable TV operators, electicity providers (like recently Swedish electricity giant Vattenfall) etc. Yes, theoretically Vodafone could try to enter this battle, but it is a bloodied battlefield already. Why bother to be an also-ran in that battle, when Vodafone can see the next stages of virgin markets where there is no competition (as I explain in the end of my original posting)

So yes, fixed is not going away. It will see ever diminishing number of customers. Ever diminishing traffic in its traditional (eg voice) business. Ever diminishing revenues. Ever diminishing profits. All innovation in the fixed landline business will be around broadband internet. For that, there is a clear preference that broadband users also want mobility !! Whether it is through wireless like WiFi today and WiMax in the future, or through 3G today (like me with my laptop here in a cafe that does not have a WiFi spot here in London) or through 3.5G tomorrow.

So Vodafone can very safely take lucrative top-end slices of that battle, without joining the bloodbath elements of it where the various fixed service providers collide.

4 "estimates of fixed broadband vs mobile speeds". I can grant you that point, but it does not in any way alter my point. Yes broadband speeds get faster at a more rapid pace than on mobile. But users are not engineers, most users are lazy and want convenience. If we give them convenience on the mobile phone, they will take a lesser experience and use more of it, provided we do it in a "functions out of the box" type of setup. And it greatly helps if it works on the world's favourite gadget, the mobile phone, rather than what is seen as a complex device (by mass markets, remember, not by us engineers) the personal computer. My sister is a medical doctor. She says she'll send an e-mail to me, when in fact she sends an SMS text message from her mobile phone. That is the level of sophistication we have in the mass market.

Twice as many people (1.3 billion) use SMS text messaging as use e-mail (668 million e-mail users who maintain 1.2 billion e-mail boxes according to latest stats by Radicati).

So even if the fixed broadband speeds are faster, and keep growing faster (no argument), still the majority use mobile !!

5 "world's interactive experience is dominated by fixed communications" Here I TOTALLY disagree with you. The numbers are TOTALLY against you, sorry. The world's most used interactive experience is NOT your broadband with 200 million users. It is SMS text messaging which is used by over SIX TIMES more people - 1.3 billion - worldwide.

Come on, in China alone there are more users of SMS than all of the world's broadband users combined.

Why do you conveniently exclude SMS? When you look at the internet usage, do you eliminate e-mail? Do you think e-mail - the most used application on the web - is somehow "not internet"? Why then is SMS not an interactive messaging and data application on mobile? Of course it is.

And a huge one at that. Delivering 75 Billion Dollars of service revenues, SMS alone is bigger than all of broadband internet access revenues worldwide !! SMS is 15% of European mobile operator revenues and well over 40% of revenues with for example Philippines mobile operators Globe and Smart.

I am afraid Dean, that it was you, who was misleading with this statement. You cannot exclude SMS from comparisons of data usage on mobile and fixed. SMS is the world's most widely used data application - and from a business point of view, it is one of the few that is on a solid business foundation (it makes enormous amounts of money).

With all that, I think we have some common ground. I will agree with you that it is not a clear black-and-white proposition. Certainly if you are currently a fixed landline (only) operator, you HAVE to get into wireless and mobile (and they are distinct markets as you say). That is what AT&T did last year and BT two years ago, when they both acknowledged what a gigantic mistake they had made when they sold their own mobile arms, and returned to mobile.

If you are an existing incumbent with both a mobile and fixed network asset - then of course you should use both, and build convergence.

And I will agree with you, that it is a possibility for a pure-mobile operator, to go into fixed.

As a separate issue is the mobile operator launching a wireless data play. That is most prudent and almost all mobile operators are doing that or have done that. Vodafone has already done that. But wireless data is trivial in size compared to mobile, and will not provide the growth potential, so this is more of an option than a strategic direction.

The big question is what business and strategic potential is there in fixed (broadband) for a pure-mobile operator like Vodafone. I have argued that the customers are shifting away from this market. Young users detest fixed connections. They will be willing to pay incredible premiums for services that are totally mobile, and those can be provided by the mobile operators (only) with their licensed spectrum using technologies like 3.5G that is coming online now in 2006. The only ones who will hang onto their broadband connections are us "old fogies".

The handsets are replaced faster, are subsidised, and the user interfaces will improve. As an ever higher proportion of all internet access is via mobile (did you see the two related postings at this blogsite - 25% of all internet access is ONLY by mobile, and over half of all internet users use mobile in part for their web surfing, already today. Only about 40% are exclusively on PCs to access the web) - the content will migrate and soon all content is formatted for mobile.

In that future, Vodafone and other pure-mobile operators are by far best suited focusing all of their energy to the FUTURE convergence, that of media and telecoms, not on the old convergence of fixed and mobile telecoms.

I have enjoyed the discussion and hope you will return with further thoughts. I also noticed you had posted another comment also at our blogsite, I'll go read that too.

Thanks for visiting

Tomi Ahonen :-)

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[Lisa Strutton]

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