Vodafone stands at a crossroads. The old maxim, “if you don’t know where you’re going, any road will get you there”, is no longer enough for long-term direction. 

“Vodafone has met or exceeded expectations, outperforming its competitors in an increasingly challenging marketplace. We have restructured the Group and updated our strategy and we will seize the opportunities provided by new technologies to continue delivering innovative services to our customers.”

Brave words from a man staring down the barrel of a loss for the last fiscal year of more than US$27bn. Yet Arun Sarin, the beleaguered CEO of Vodafone, could just about get away with it today. The red ink stems from a drastic writedown of goodwill and asset values, masking the firm’s underlying revenue growth of 7.5% to nearly US$44bn.

Still Vodafone remains beset by strategic and economic quandaries which fall variously into the categories of the good, the bad and the imponderable.

Petal power?
In a strange way, the imponderables are the easiest to nail down. True, they require decisions to be taken, and will put Sarin’s future in doubt if he fails to make those decisions, but if this is rocket science then it is of a distinctly short-range variety.

The long-standing smugness of Vodafone’s ‘pure-play’ wireless business model has unravelled at breakneck pace in the last six months. While rivals, mainly PTO-based mobile operations, consolidate in pursuit of ‘triple-play’ or ‘quad-play’ service packages, venerable Vodafone begins to look three petals short of the elusive four-leaf clover of 21st century converged services.

The sudden isolated aura around Vodafone’s service portfolio is alarming for the company’s shareholders and some analysts. Yet Vodafone’s scale – 170mn proportionate customers and counting – makes it impossible to ignore. Indeed, it’s hard to see how or why even its deadliest integrated telco rivals would resist its overtures for an MVNO-in-reverse converged service collaboration.

Likewise, it is by no means clear that Vodafone should embark on a hell-for-leather programme of unbundled loop business or, more implausibly still, the takeover of fixed-line rivals. This has been suggested in the case of BT, the dominant fixed-line carrier in Vodafone’s original ‘home market’ of the UK. Almost alone among major national operators, BT is bereft of a cellular business – but that would make it a natural partner for Vodafone, rather than a natural quarry.

At the same time, it is not certain that the much-hyped triple- and quad-play packages will work. They are fashionable just now to the point of faddishness, but that does not in itself dictate that Vodafone’s only option is to pursue the same end. Within reason, Vodafone can bide its time, cultivating cross-sector relationships with the fixed-line and broadband worlds while waiting to see exactly how this particular tide turns.

Strength in numbers
What is definitely to be filed under ‘good’ for Vodafone is the sheer scale of its global operations. More than 21mn new users were nonchalantly added to its worldwide customer base last year. Non-messaging revenue grew by more than 60% in the same period, albeit from a lamentably low base, to top US$1bn for the year.

Vodafone has also spent the last twelve months managing its portfolio of mobile assets with a certain astuteness. Sell-offs in Sweden (although it looked like the company had raised the white flag in one of the world’s leading markets) and Japan (long overdue) were offset by acquisitions in Czech Republic, Romania, India, South Africa and Turkey.

Critics will argue that this is not strategy, but opportunism. It certainly does not seem to have been carried through to any logical conclusion. Yet by hedging its bets in emerging markets while seeking to maximise its per-user revenues in mature markets where it has a significant foothold, the strategy is coherent if not conclusive.

Added good news surrounds Vodafone’s brand – perhaps the glue that holds together all of the aforementioned ambitions and challenges. Among wireless operators it is untouchable and it is hard to pick out a fixed-line or integrated carrier with anything like the same recognition. Even in markets where it plays second fiddle to an incumbent, it has a formidable brand presence.

Lurking dangers
So if Vodafone is merely taking the pain from a one-off financial hit, while able to plot a path into a converged services market and growing as fast as ever – what is all the fuss about? Well… it’s about plenty.

The first issue concerns the asset impairment calculations that holed the company below the waterline in terms of today’s results announcement. Anyone with more than a passing acquaintance of corporate accounting practices will know that this level of blood is rarely let in one go: there may be more to follow.

A second issue concerns dividends payable to shareholders. Vodafone is committed to increasing these where possible thanks to the proceeds of sales such as Vodafone Japan. This may be belated compensation for an underperforming share price, but it also cramps the company’s ability to re-invest in emerging market opportunities.

An extra concern is the ongoing debate over roaming charges. Thanks to its footprint, Vodafone earns more than most from this (at present) legalised form of larceny. To date, the subterfuge and sleight-of-hand over revised charges and the timing of their introduction looks unlikely to fool anybody except the company’s customers. With 3G still to make waves, this erosion of 2G cash-cow revenues could have a dramatic impact.

And then there is America. Any consistent strategy would see Vodafone get out of its US joint-venture with Verizon and leave the UK company at least US$40bn better off. Tax concerns, however, make it hard for Vodafone to exit with honour intact unless Verizon is prepared to bite a particularly hard bullet. It will, but not before the end of this year, and maybe not before the end of the next.

Back to the future
In the meantime, Vodafone has to work out just what it would do with a US windfall. This is another imponderable. It simply cannot take the cash, whether pre- or post-tax, and return it to shareholders. This would be a nice windfall for backers but it would also mark the end of Vodafone as a going concern with a long-term future.

This is a true imponderable for the company. This ‘global’ player has ceded markets in Latin America and Asia and is close to doing the same in North America. It remains strong in Europe and in many anglophone markets. It is seeking footholds in major emerging markets of unbelievable size like China and India.

But to which path is it truly committed?

Today’s financial results were accompanied by a ‘Strategy Statement’. Its five key points showed the vexatious position in which the company finds itself:
• reduce costs and stimulate revenues in Europe;
• deliver strong growth in emerging markets;
• Innovate and deliver on customers’ total communications needs;
• actively manage the portfolio to maximise returns;
• align capital structure and shareholder returns policy to strategy.

According to Arun Sarin, “Vodafone has a strong market position, outperforming its principal competitors. However we have been reviewing our strategy, given our continuing desire to meet our customers’ changing requirements. I am encouraged by the opportunity to broaden our range of services for our customers and our more focused efforts to drive cost reduction and revenue stimulation in Europe, while we capitalise on growth opportunities in our emerging market businesses. I believe we are well positioned to continue our success in a changing environment.”

Let’s see if that can be done.
Jim Chalmers