Project Spring, Vodafone 's newly-announced three-year GBP6bn investment programme, will benefit the UK company's operations across Europe through faster deployment of 4G infrastructure and services and increased capacity on legacy 3G networks. One market that has been singled out for intensive development is Italy, where Vodafone aims to take advantage of market uncertainties and disarray through strategic acquisitions on top of accelerated broadband infrastructure rollout. Although BMI welcomes the prospect of a stronger Vodafone Italia , we note that sectoral and economic weaknesses pose long-term downside risks to investment.
Vodafone Group will increase ownership of Vodafone Italia from 77% to 100% after it sells its US wireless business to Verizon Communications in early 2014, giving it free reign to sharpen its Italian strategy. Vodafone Italia is the second largest mobile network operator in Italy - behind incumbent Telecom Italia - and operates one of the largest alternative fixed-line and broadband networks in the country. Revenue and customer base growth has been slowing of late, partly due to market saturation, but mostly due to increased price competition wrought by its rivals as well as the uncertain economic outlook. To reinvigorate growth, Vodafone must broaden its service portfolio. To do that, it needs to increase its scale.
|Vodafone Needs To Raise The Bar|
|Italy Mobile & Broadband Forecasts, 2010-2017|
The capacity and reach of Vodafone Italia's 3G network is to be enlarged while the deployment of its new 4G platform is to be accelerated with all major cities and the majority of large towns brought under its 4G footprint by 2017. At the same time, the company will deploy more fibre in urban areas and extend fibre coverage to underserved regions, as necessary. This will enable it to reach more high-usage customers and enable it to justify investment of growth enterprise and unified communications service portfolios, including cloud computing, hosting, machine-to-machine (M2M) and IP-VPN. The aim is to offset declining income from traditional mass-market, low-margin mobile and fixed telephony services with attractive high value 'new wave' offerings.
Vodafone has been hit hard by Europe-wide cuts to mobile termination rates, tougher local regulation and moves by incumbent fixed-line operators to increase data throughput speeds on legacy networks enabling them to offer more bandwidth-intensive services such as IPTV and to support popular over-the-top (OTT) services such as Netflix and cloud-based gaming. In Q213, Vodafone Italia's fixed broadband market share contracted by 1.6% y-o-y while its mobile customer market share fell by 0.7%. Its consolidated service revenue shrank by 13.9% y-o-y.
Suggestions that Vodafone might acquire one or more of its Italian rivals as part of a defensive strategy are welcomed by BMI . The operator is an important part of the competitive landscape in Italy and needs a clear incentive to remain in this challenging market. With a war chest swollen with the proceeds of the US$130bn deal with Verizon, Vodafone could bid aggressively for a number of influential players that are also struggling to grow owing to lack of scale and finance. However, such targets might be emboldened to raise their valuations of their businesses, given that Vodafone will soon be flush with cash.
Broadband players such as Tiscali and Fastweb are likely to head Vodafone's acquisition list. Their fibre-optic backbones, IP-enabled switches and sizeable consumer end enterprise user bases would be highly attractive. But they are also loaded with debt and - like Vodafone - are facing increased competition from a newly-commercialised next generation access network (NGN) developed by the incumbent.
BMI 's forecasts for Italian mobile and broadband subscriber growth over the 2013-2017 period remain positive as customers continue to migrate to 3G and 4G services and demand for converged services products - including triple- and quad-play packages - increases. Vodafone can and will be part of that growth story, but decisions on infrastructure investments and strategic acquisitions made in the short term will determine how vibrant a contributor to growth it will be. Certainly, a bold move is needed to reverse or at least arrest the decline in revenues, as is shown by our current bearish forecasts for blended mobile ARPU.